DGL Group (ASX:DGL) CEO interview

September 20, 2022

DGL

DGL Group

We spoke with DGL Group CEO, Simon Henry, about the company’s strategy to grow it into an integrated chemicals manufacturing and logistics company, and some of the challenges he is facing finding good companies to acquire.

See the full transcription below.

 

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DGL Group (ASX:DGL) CEO interview 1

 

 

Transcription

 

Stuart: Hello, and welcome to Stocks Down Under. my name is Stuart Roberts and I’m one of the co-founders of our publication. And joining me this morning on Monday, the 19th of September from Auckland in New Zealand is Mr. Simon Henry, founder of DGL Group. Simon, good morning.

Simon: Good morning, Stuart.

Stuart: Simon, you took your company public on ASX last year, and I fear that you’re regretting it because the market has not really treated you all that well since the listing. You came on the boards at about $2.50 a share if I recall. Stocks [crosstalk 00:00:35].

Simon: No, I came on, on a dollar.

Stuart: Ah, sorry. Yeah, I’m confusing my stories here. Yours did well for a while. The last 12 months… Well, at least six months haven’t been so pleasant from a share price perspective.

Simon: Correct, yeah.

Stuart: But in the meantime, business continues to be very good. You are one of the leading providers, both of a chemical manufacturing service, but more importantly, warehousing and distribution. You’ve spotted in the Australia and New Zealand region, a big opportunity where you could write a one-stop shop for a whole range of products in an industry that is very fragmented from a service and product level perspective. Talk to us about some of the steps you’ve taken on the journey to realizing that there’s a big opportunity for DGL.

Simon: Thanks for that introduction. You know, if you look across our industrial landscape or our commercial landscapes, everything’s changing all the time. And sometimes they change in a manner that supports a business or hurts a business. But when you look at chemicals, at every level across Australia and New Zealand, the regulations for compliance of how those chemicals are managed intensify year on year, and the penalties for getting them wrong keep rising year on year. So, we simply have positioned DGL on the right side of the wall to be able to embrace and comply with the intensification of regulations regarding how these chemicals or chemicals are managed as a whole. And that’s where our strength in our growth comes from.

Ten years ago, five years ago, you could be a general warehouse operator and have some chemicals in the corner. You can’t anymore. Insurance and compliance doesn’t let it happen. So, simply, we are joined at the hip to the increasing regulation and compliance required to manage chemicals.

Stuart: Right. Now, given that strength, which is growing stronger with every acquisition you do, what impresses me is the margin improvements you’ve had in the last little while. So, big margin expansion with some of these new businesses you’ve bought in. That led to a little bit of a problem. You reported great FY22 set of numbers, where you come in with revenue of $370 million, EBITDA of about… lemme check the number, $66 million.

Simon: Yeah, that’s it.

Stuart: And you were ahead of guidance that you’d given a few months ago, and yet the market punished you because you were honest enough to say that maybe this year’s growth trajectory wasn’t as fast as the other one. Now, you are like every other company in the world supply chain pressures, cost of doing business keeps going up. What are the challenges that you are facing that could take the shine off the growth you’ve enjoyed in the last couple of years?

Simon: Well, look, when I look at the challenges that face the business today, the biggest one is the cost of labor or the inability to find staff. And that’s a challenge for almost every business that I can think of, including government agencies, and the military and so on. So, that’s the biggest challenge. So, what you do there is you pay more, you look to pass through those costs, and most of the time we can, and you want a culture and a company that’s exciting and vibrant and growing that attracts talent. And we are very good at it. We’ve never lost a senior manager in the life of the business.

Stuart: Right. Some of your critics might think you over-capitalized. And what I mean by that is, you’ve got something like 50 sites around Australia and New Zealand, and most of them…

Simon: 60.

Stuart: 60, there you go. And most of them you own, and there’s no way you’re [crosstalk 00:04:30]…

Simon: No we don’t. I only own about a third of them. I only own the strategic ones.

Stuart: Got it. So, obviously, the kind of facilities you own or lease are specialized. How do you decide which ones to hold onto and which ones to lease from someone else?

Simon: Oh, it’s quite simple. I come from a property background, and we look to own properties that other people want. So, that’s the kind of the guiding principle. We only own properties in growth corridors. We’re thinking Sydney, Melbourne, Brisbane, bits of Perth, and Auckland. You know, these are the growing population centers where there is phenomenal appreciation and pressure on property assets. I think we own a third of our sites. I understand that the recent valuation puts them in about $160 million, and that was $30 million higher than the previous valuation that was carried out just before the IPO. So, our approach works.

Stuart: Okay, now you’ve got an additional challenge at the moment. The price of key agricultural commodities or chemicals inputs into the agricultural sector have shot through the roof, thanks to events in Europe and elsewhere. That kinda makes it difficult to acquire in an area, you know, reasonably well, at least right now.

Simon: You mean to acquire the chemicals or the businesses?

Stuart: Like to the businesses. A lot of businesses are riding high on the hog in this current environment. Right?

Simon: So, they’re enjoying tailwinds on the back of it. So, 30% of our revenue or 35% of our profit comes from ag chem. Yes, certainly there’ve been significant increases in the cost of raw materials, like glyphosate. You’re looking from $3 to $14 and back to $9, all within about 18 months. So, all over the place. We pass those costs through. So, we buy it on the back of an order. So, we’re not actually… Well, we’re technical, we are the owners, but we’re not buying it, sticking it in a warehouse, waiting for someone to ring us up and sell it. Someone’s given us an order, so we’ve gone and bought the raw materials and we pass it all through. So, we make a good margin out of it, we carry the stock and that’s how the business works.

Stuart: Okay, so in terms of where we’re going to you mentioned glyphosate and a lot of the viewers this morning will recognize that name. Obviously, Monsanto herbicide that has been implicated, I think, wrongly as a potentially a carcinogen in various stuff. This is an example of your strength, right? You’ve got specialist skills that know how to handle that chemical in a way to keep the regulators happy, keep the customers happy and, you know, keep the lawyers at bay if I could put it like that. So, what are the risks to that strategy? Obviously, you know, anything can go wrong in any time in usage.

Simon: So, glyphosate is a widely used herbicide that kills weeds prior to direct drilling of cereal crops. In the olden days used to plow up your paddock, in doing that, you release all the moisture and you kill all the worms and you burn a lot of diesel to plow. So, glyphosate allows a farmer to spray and then direct drill their seeds. So, you have significantly lower costs of production which flows through to more affordable protein and you do considerably less damage to the environment using glyphosate. Now, where glyphosate’s getting a bad name is when you’ve got a school caretaker who’s working on a, you know, in a backpack, spraying the weeds down the side of a fence, and probably hasn’t been trained in how to handle it safely.

Stuart: Yeah. He’s probably giving himself some exposure that the professionals wouldn’t have.

Simon: Oh, no. When it’s done properly in scale it’s… Look, there are other alternatives to it, but it would cause a loaf of bread to probably be worth $10. So, it ain’t gonna be introduced anytime soon. That’s fine if you live in, you know, South Yarra, but most people don’t.

Stuart: Right. No, I prefer my bread at much more reasonable prices. So, yeah, I mean, the strength for you is knowing at an expert level, how to move that stuff around storage, etc.

Simon: Right back to regulations, heavily regulated.

Stuart: Right, you’ve been a big acquirer of other people’s businesses in the last 12 months. What’s your basic approach when you’re talking to a potential business that you wish you acquire?

Simon: So, we know most of the owners of the companies that we have bought for, we’ve known them for some time, we’ve been alongside them and the time is right for them to sell, to retire, or for them to sell and come into the group and prosper on the back of our, you know, shared services and capital and so on. So, we are looking to acquire companies that have a strategic value, but no interest in spending a dollar to get a dollar. We’re looking for a company that’s got licenses or customers or territory that we can then exploit and populate with our existing business. So, we’re looking for a multiple, well and above, or a return or tangible benefit from owning the assets far in excess of what we’ve paid.

Stuart: Right. Now, I mentioned at the start of this interview where the market was not kind to you post the results, even though the numbers were pretty good. You’ve got some opinions on that. You’ve been a recent on-market buyer of stock as has one of your directors, Denise Brotherton. That’s telling the market something, right?

Simon: I think many people higher up in the company have bought shares. Actually, you’d be hard-pressed to find one that hasn’t.

Stuart: Now for investors who dunno much about you, you told me an interesting fact about yourself when we were talking before. You started your career, like another famous Kiwi, Sir Ed Hillary, as a beekeeper. [crosstalk 00:10:50].

Simon: That’s correct. Actually, I’m often asked if there’s any connection, but sadly there wasn’t.

Stuart: So, Ed Hillary contended himself with just conquering Everest, you’ve got financial mountains to climb. How does one go from being a beekeeper in Western Queensland through to one of the more successful Kiwi entrepreneurs?

Simon: Well, look, our family has connections to bees and my mum was a bee research scientist, and they do exist. And so I’m very interested in it. And of course, the magic of bees is that you produce honey, but you don’t have to own the land. So, if you get it right, and you’re a good beekeeper, you can get a 100% return on your capital in one year. So, it’s quite magical because, you know, I grew up in the rural south of New Zealand where everyone dreams of owning a farm. But farms are…you know, they look nice but they’re hopeless at yielding income. You know, life’s multimillion-dollar lifestyle assets.

Stuart: Yeah, that and being an All-Black with the two ambitions of most Kiwis and in [crosstalk 00:11:52].

Simon: You know, I resist the way New Zealanders put together the right to own a farm. It’s not dissimilar to a lot of rural Australia. And I did that, but I got tired of getting kicked around by droughts and all sorts of things. Like, the Americans had the honey loan program where they paid a minimum price to beekeepers for honey regardless if anyone wanted their honey. They ended up with a mountain of honey and then they changed. President, I think, Reagan came in and they dumped all of them…

Stuart: Yeah, Reagan decided to empty the honey pot. Yeah.

Simon: Beekeepers had actually morphed from beekeepers to going to Mexico to get food-lined drums. There was more money in supplying the drums to store the honey than there was that making the honey. And I got sort of tired of getting kicked around. So, I sort of started picking around at properties and that sort of thing. And my father had done a bit of it and it’s a, you know, and I, you know, was… I can’t say that I was successful, but I’m gonna say I did right out of it. And I sold my bees and kept buying properties, but then I got a bit bored with that because I wanted operating businesses so, I sort of morphed into this.

Stuart: All right and the good part of being Simon Henry is you’re not anywhere close to retirement age.

Simon: No.

Stuart: So, this journey still a little bit longer to go.

Simon: Oh no, no. I’ve subscribed to the mantra of my favorite painter, Lucian Freud, and he said he is gonna paint himself to death and obviously gonna work myself to death, and I do that out of pleasure or some sort of sick obsession with enjoying what I do.

Stuart: Well, Simon, thanks for joining us here on Stocks Down Under. It’s been great hearing some of the thinking that goes behind what is turning out to be a pretty strong growth company. So, keep up the good work.