Beacon Lighting Group Limited (BLX) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Beacon Lighting Group's results presentation for the first half of the 2021 financial year. [Operator Instructions] For opening remarks, I would like to turn the conference over to the Beacon Lighting Group Chairman, Mr. Ian Robinson. Please go ahead, Ian.

Thank you, Erica. Good morning, ladies and gentlemen. My name is Ian Robinson, and as the Chief Executive Chairman of the company, I would like to welcome you to the Beacon Lighting Group's results presentation for the first half ending the 27th of December 2020. With me today on the teleconference is our Chief Executive Officer, Glen Robinson; and our Chief Financial Officer, David Speirs. In a year like no other, the group has been able to achieve outstanding results. Our appreciation goes out to our customers for their support and our teams for their incredible adaptability and willingness to embrace change. The year has seen a new found love for the home. A redirection of spending on overseas holidays and working and schooling at home has resulted in an unprecedented uptake of new lighting and cooling products. While uncertainty still persists, the business is in a strong financial position. We will maintain our focus on the key growth areas of our core business and embrace the change on how we live and work. We're a dominant player in the lighting market and should expect sustainable growth into the future. Page 2 of the presentation outlines what we're discussing today with Glen, our CEO, taking you through the results overview, followed by David, our CFO, presenting the financial results. He will then pass back to Glen for the growth strategy and the outlook. After that, I'll direct any questions you may have. I'll now hand you over to Glen to discuss the results overview.

Thank you, Ian, and welcome to shareholders to today's presentation. I'd like to start on Page 4 and review the key highlights for the half. The group during a turbulent time was thrilled to be able to achieve a record sales and profit result for the first half. Despite border closures, lockdowns and general social distancing restrictions throughout the states, the trading continued very strongly. The group was able to significantly advance its previous net profit after tax record, finishing out the half with a net profit after tax of $22.2 million, representing a 132.8% increase on the corresponding period. Fortunately, for the group, throughout the disruption of the pandemic, sales never reduced to a point where JobKeeper was necessary. The group saw strong sales in the core business being the retail stores, online and trade sales with new records being set, along with great sales in Beacon International. Total sales for the half came in at $151.3 million, an increase of 23.5%. Group gross profit was very strong, improving 410 basis points to 68.5%. The group has had a significant focus on improving our partnerships with our electrical and building customers, and this focus has seen a strong lift so far in sales. During the half, the group opened 4 beautiful new stores in Virginia in Queensland; Camperdown, New South Wales; Belmont in WA; and Tweed Heads in New South Wales. This represents an increase in new store openings versus what we have seen in recent years, and these new stores are trading above expectations. The group undertook a significant upgrade to the Beacon Lighting website, which was successfully completed during the half and with some great improvements for our customers. The group also established a property trust with 50% ownership to acquire Beacon Lighting retail stores as they become available. In the half, sites were acquired at Molendinar in Queensland and Traralgon in Victoria. Like Ian, I just want to recognize the efforts of our team during this very unsettled period. They have adapted to the changes required to keep operating and exceeding with great willingness and energy. And a huge thanks to our customer base who have continued to enjoy shopping from an Australian-owned and operated business. Statutory results on Page 5. There are 2 significant differences between the statutory results on Page 5 and the comparable results on Page 6. The statutory results includes the profit on the sale of the Parkinson Distribution Centre in financial year 2020 results and the losses associated with the closure of the Beacon Energy Solutions business. We'll jump to the comparable results on Page 6 as a more meaningful result to discuss. Comparable results on Page 6. During the half, the group was able to achieve amazing momentum in sales, improving from $122.5 million to $151.3 million, an increase of $28.8 million or 23.5%. This was off the back of a good sale -- a good sales growth across the core of the retail online trade and international business and includes a significant closure in Victoria of the stores for 111 days during lockdown. What was very pleasing was that the increase of $28.8 million in sales generated an increase of $24.7 million in GP dollars. The GP margin increased from 410 basis points to 68.5%. Other income was within our expectations as a reducing number of franchise stores generating less franchise royalty income. During the half, the group acquired the franchise store in Ballarat and converted it to a company-operated store leaving only 2 franchise stores in the network of 115 stores. Operating expenses were conservatively managed given the uncertainty throughout the half. Expenses grew by $5.9 million or 11.6%. As a percentage of sales, the business was able to achieve a huge improvement in expenses from 41.4% down to 37.4% of sales. EBITDA was a significant improvement over the corresponding period, up $18.8 million to $47.5 million, representing a 65.4% improvement. EBITDA as a percentage of sales came in at 31.4% versus last year at 23.4%. Net profit after tax was a real highlight for the half, showing the leverage that can be achieved through a strong sales increase and careful GP and expense management. Net profit after tax increased from $9.5 million to $22.2 million, a huge $12.6 million increase or 132.8%. Net profit after-tax margin greatly improved from 7.8% of sales to a record high of 14.6% of sales. These results are exceptional and provides a base for the group to build on in future years. I'll now hand you back to -- over to David to go through some further financial information.

Thank you, Glen. Sales on Page 8. The Beacon Lighting Group achieved a record sales result of $151.3 million, which was an increase of 23.5% compared to last year. The sales highlight for the group was company store comparative sales, which increased by 24.9%, which included the Melbourne closure of the Melbourne stores for 111 days. The outstanding comparative sales increase was achieved across all states and territories with Western Australia leading the way. The Victoria stores were open to retail customers, these stores were also able to achieve outstanding sales increases. During the lockdown months of August, October, although sales were significantly down, it was encouraging to see the support that our Melbourne stores received from our online and trade customers. Growth in online sales have been very excited during half 1 financial year 2021. Online sales did peak during the Melbourne lockdown period, but there was significant online sales growth in each and every month. Overall, online sales increased by 111.1% to $14.4 million in financial year half 2021. Beacon International, with sales teams in the U.S.A., Europe and Hong Kong and China, continue to provide Beacon line with a significant opportunity for growth. Beacon International sales increased by 45.2% to $5 million. Gross profit on Page 9. The Beacon Lighting Group gross profit margin increased to 68.5% of sales or $103.6 million gross profit dollars. The group's exciting product range, assisted by less promotional discounting has supported the gross profit growth in the margin, which has increased by 4.1%. The group gross profit margin have also been supported by a decline in the product cost as a result of the improved AUD-USD exchange rate. Expenses on Page 10. The Beacon Lighting Group has achieved an outstanding operating expense result. Operating expenses as a percentage of sales have decreased from 41.4% to 37.4%. What was also very pleasing was that each category of expense has also decreased as a percentage of sales compared to half 1 financial year 2020. Directors and management have been very pleased to be able to pay a record bonuses to our store teams during a time in which everyone has had to do a little extra to help each other out. Overall, the management of expenses continues to be a priority for the Beacon Lighting Group despite the improvement in sales and margins. Cash flow on Page 11. Strong trading performance for the Beacon Lighting Group in half 1 financial year 2021 can be seen in net operating cash flow result of $38.7 million, which is an increase of 120.7% compared to last year. Group has also invested in 2 investment properties for the first time for a total of $8.5 million. The investment property has also been 50% co-funded by noncontrolling interest. Given the strength of the financial result, Beacon Lighting has continued to invest in the future of the group by investing in new stores, business projects and purchasing a franchise store. Beacon Lighting Group has been very pleased to be able to pay down $19.1 million in debt with the cash that has been generated by the group. Final dividend for financial year 2020 was paid in half 1 2021 for a total of $3.5 million after the dividend reinvestment. Balance sheet on Page 12. Throughout half 1 financial year 2020, the Beacon Lighting Group has maintained a very strong cash balance, finishing with the balance of $50.7 million. Given the strong cash position and the trading result, the group has been able to pay its borrowings down from $40.5 million to $21.4 million. At the end of half 1 financial year 2020, the group had a net cash position after debt of $29.3 million. Receivables have also declined as a result of the closure of Beacon Energy Solutions. Inventories have also declined given the strong sales results and some challenges associated with the supply of product. Overall, the Beacon Lighting Group balance sheet provides a very strong foundation for the group to support future investment opportunities as and when they arise. Dividend on Page 13. Beacon Lighting Group Board of Directors are very excited to be able to declare a record interim fully franked dividend of $0.042 per share. The total interim dividend for half 1 financial year '20 (sic) [ '21 ] will be paid in March for a total of $9.4 million. This compares to $0.026 per share for half 1 financial year 2020 and represents a 61.5% increase in dividends. Beacon Lighting Group dividend reinvestment plan has now been suspended. Thank you, and I'll pass you back to Glen.

Thank you, David. If we now turn to Pages 14, 15 and 16, we can review our strategic pillars of growth, starting with retail. During the pandemic, our #1 priority was to provide a safe environment for our team and customers. The large-format of our stores, direct access to car parking, extended trading hours plus social distancing measures, store hygiene practices, online and contact-free click and collect were some of the initiatives that brought comfort to our customers and our team. By having a focus on safety first, allow the business to operate in a COVID-safe way throughout the entire first half, this approach then contributed to the strong comparative sales gain of 24.9% for the retail stores, despite Victorian stores being shut to the general public for 111 days in the period. Fortunately, being a completely vertically integrated business, we could quickly adapt to the changing retail conditions and demand on our products. New lighting and ceiling fans were developed and new categories, such as air purifiers and electrical accessories were introduced to the business. I believe our customers enjoy the fact that we continue to push ahead with our product development despite the pandemic, with 321 new and exclusive items being designed here in Melbourne and released to our customers in Australia. Throughout the half, we conducted 730 Design Studio appointments in person or with the use of technology. This premium design service resulted in over $3 million in sales and a strong pipeline of future sales for the second half. Our lighting designers across the business are incredibly skilled and are building the business to be the authority on residential lighting design, a great service that we can offer our retail and trade customers. With a strong comparative sales gain and with many retailers reducing their store expansion targets, we took the opportunity within the half to expand into some amazing sites and increase our footprint by 4 more stores. These are all large stores, which will build on the rewarding experience our customers have come to expect from Beacon. During the half, the group also conducted new research with an external company to identify the potential of our store network. This updated research identified 184 potential markets that could support a Beacon Lighting store. This is an increase on our previous research and provides 69 opportunities for new store locations. Second pillar of growth is our trade customers. Our trade customers represent a significant portion of sales already for Beacon Lighting. They are important partners in our business and often make recommendations and referrals to their customers to use Beacon Lighting products. Our skill in vertical product development, pricing, store locations and sophisticated trade program will enable us to do so much more for our trade customers. Through better partnerships, service and range extension, we see the electrician becoming the prominent customer group into the future. The Beacon Lighting stores commenced early openings of 7:30 a.m. for our trade with specific marketing through radio ads and online communications. During the half, with the increased focus across the business on partnering with our electricians and builders to improve their business, we have seen a 50.8% increase in sales and an additional 7,000 club member sign-ups, a growth of 21% in club members, making our club just short of 40,000 trade customers. E-commerce on Page 16. E-commerce has probably never been more important. We saw a massive uptake in online sales in an effective way for customers to get the lighting and ceiling fan products they wanted, while still being able to socially distance. Online sales increased to a huge 111% to $14.4 million, representing 10.8% of retail sales, which is a significant step-up for the business. This was done on the background of launching our new website in October, which also coincided with the largest ever month of online sales for the group. A great outcome to test the strength and the user experience at the new website. New businesses, the final strategic growth pillar. These emerging businesses offer the group opportunities to invest in relatively small business opportunities and grow those opportunities organically over time. Each one of these new businesses could be significant contributors to the success of the group in time to come. Beacon International is an example of one of these businesses, where we have seen a 45% sales increase in the half to $5 million. This business is exceeding our expectations, both sales and profit, with sales predominantly coming out of Hong Kong, U.S.A. and Europe and leveraging the product development that we do here in Australia. Custom Lighting is another new business where we have invested in a very high-end lighting showroom with a brand-new site and fit-out in Malvern, Victoria. During the half, the group also established a property trust structure, which is owned 50% by the Beacon Lighting Group. The property trust secured sites in Molendinar in Queensland and Traralgon in Victoria. On Page 18, we can review the current outlook for the Beacon Lighting Group. Pleasingly, company store comparative sales have continued at an elevated level compared to the corresponding period. The trade strategy task force continues to innovate the way we partner with our trade customers and the benefits that we bring to the partnership. This remains one of the major strategic objectives for the group. Our new website is performing very strongly from a sales and user experience point of view. However, there are still many more advancements that are to be deployed in the second half, including faster fulfillment, more tailored trade area and more specification data sheets. In the half, we are hoping to launch the Beacon Lighting U.S. website for direct-to-consumer sales in the U.S. of our ceiling fan ranges. To continue to improve the customer experience, we will undertake major refurbishments of our Waurn Ponds, Fountain Gate and Albury stores. The property trust recently purchased a site in Beckenham in WA, which is currently tenanted to Forty Winks store and the Beacon Lighting store. The property trust will also develop sites at Molendinar and Traralgon into exciting Beacon Lighting stores, further improving the Beacon Lighting network. Certainly exciting time at Beacon, and we look forward to building on these great results achieved in the first half. I'll now pass you back to Ian to direct any questions you might have.

Erica, we're willing to take some questions. If you could just field those questions through to us, we'd appreciate it. Thank you.

[Operator Instructions] We have our first question from Sam Teeger from Citigroup.

Just the first question on the superstores. So I think there was around 28 in FY '20. I'm just wondering now, at the end of the first half of '21, how many superstores you have? And how many you think you'll have at the end of FY '21?

Yes. It's still a similar number, Sam, although some of those new stores that we've opened up in Camperdown, Tweed Heads, Belmont, they may transition into superstores. So we're just going to continue to evaluate the sales, but they've got all the features of becoming superstores.

I think 3 of those 4 new stores will become superstores. Plus there's others in train, which are larger formats that will certainly have the ability to do so. And we're very pleased with the way those stores have performed.

When you say 3 of the 4 will become superstores, is that when -- is that straightaway or in time?

Yes, pretty well straightaway. Their performances just jumped out of the box. It's been exceptional.

And as we mentioned, we're investing in Waurn Ponds and Albury. Albury stores actually doubling the size. So that's probably another one that will fall into that category as well.

Got it. And then gross margin super strong at the moment, potentially at record levels. Can I just confirm that the improvement in the half you just reported is pretty much as a result of less discounting, but all the currency benefits are still to come?

Yes, that's probably a fair assumption that there are still quite a lot of the currency benefits to flow through into the second half. What we do have to be careful of is, obviously, there are some price increases coming through out of the factories. And that is fairly typical at this time of the year, coming back from Chinese New Year. And freight costs are up at the moment. Now whether they stay elevated at this high level for a long period of time or not, that will need to be reflected into the costs of the product as well. But we are still going to see some benefit of the improving AUD to the USD in the second half.

But I think our increase in trade sales also will be slightly negative to the gross margin, but the A dollar is certainly going to help on the other side.

Got it. So what was the hedge rate in the first half compared to the second half?

Well, the current hedge rate in the first half was about 71.5%. And obviously, the hedges are above that in the second half.

David, can you be more specific if possible?

No.

Okay.

But they've been [indiscernible]

Sure. And then last one, and then I'll pass on to Jo. Have your discussions gone with your landlord since you've become a landlord yourself? And are you expecting rental reductions in all your negotiations going forward now?

It would be nice to get some, but in a lot of cases, the top-performing stores, unfortunately, they do get the intel that they are top-performing stores, and it's a little bit hard to get the -- any reductions. In other cases, we do get some reductions. But across the board, I suppose, the A-graded stores continue to cost us more, and the B- and C-graded stores tend to be a little bit more competitive on the rents.

We have our next question from Jo Little from Morgans.

Question was just around the trading update. Just a bit more context there, if you can. I guess you provided that relative to first half '20, can you give us some relativity to first half '21?

We are -- we're pretty consistent with our messaging for the first 7 weeks or so, Jo, from year-to-year. We don't usually indicate too much more than what we've said in that slide.

Okay. Got it. And I'm just on that beautiful net cash balance, but inventory was probably well down. How much of a working capital build do we need to assume in the second half? What do you think a more normalized net cash position would be?

Yes. I think we obviously feel we're a bit short in inventory. So I think once we -- eventually have to fund that, you might be talking another $10 million to $15 million in inventory. So eventually, that will come out of the cash.

Yes. Perfect. And just on the property purchases, I guess, how many stores do you think it's -- you can realistically buy of your current fleet? Is it 20%, 30%? I guess they have to be standalone, right? You can't buy your big box locations. And maybe can you just give us a rough kind of average rent per annum for the ones you've actually bought?

No, they all vary significantly. How many can we get? We have actually gone through that process and you're right. It's hard to buy, obviously, a center. Having said that, the site over at Beckenham, what we call it Cannington internally, that's 2 -- that's 3 stores together, and we picked up 2 of them. So this is like a small bulky goods center.

And a number of them will be like that whether we co-lease with other people as well. So I think 2 of the other sites that we purchased, we'll have other tenants in there as well as the Beacon Lighting tenants.

Yes. And the rents vary significantly across the board depending on the value of the property and the sites and what state they're in.

Yes. So I guess you...

There is a wide variance, Jo, in the actual rent fiscal year, I mean, [indiscernible] in a city, it was going to be a lot different from regional and even suburban.

Yes, maybe if you assume a 7% yield or something and most of these being cash purchase at the moment so you get that full benefit. And then if you have to debt fund them in the future, I imagine that half the benefit.

I don't know if you'll get your 7% yields. It could be quite [indiscernible] so I think that would be wishful thinking. Over time, you might get it.

Got it. And just to the direct-to-consumer website in the U.S., which is going to be pretty important litmus test for you. Did you say just fans in the first instance? And can you give us some idea on how many SKUs versus what you kind of sell in Australia and why you're not launching a larger lighting range at the same time?

Yes. So for every product that we sell in America, you have to go through the approval process to sell that product. So it's significant to try to convert 3,000 products that we have in Australia straight into the American market. It's 110-volt versus 240-volt. You need to get all those approvals. We're finding that we're getting good traction with the ceiling fan range that we have in the U.S. market. We believe it offers something a little bit different to our U.S. customers and U.S. competitors. So we really want to launch in that area. It's a reasonable category here in Australia, and there's plenty of hot states over in America, so we think we can do well there. And that's why we're focusing on that to start with, but that doesn't mean that we won't expand into lighting once we get some good traction. Obviously, in a B2C website, you need to have more resources on the ground because you're having to deal directly with the consumer. So you've got to have customer service and shipping logistics and all that sort of stuff on the ground. So we've got to ramp all that up over the coming months.

Yes. And I guess, once you're at that point, then you consider the physical launch of retail stores potentially down the track.

That's down the track. Yes, that's right. Yes. I mean, look, there's still a lot of uncertainty happening over there with the pandemic, and it would be good to see things start to settle down. But having said that, you can see from the international sales that just like in Australia, consumers overseas have also been spending on their home, and we've been the benefactors of that in Europe, throughout Asia and also in the U.S.

Okay. Great. And just further from Sam's question around the gross margin. Just interested in how much of the uplift was being a bit short on stock versus just trying to completely get out of the more regular discounting theme, I suppose? I guess the question is how much of this can we hang on to in a normal environment?

Yes. Look, we would love to be able to reduce some of those discounts that we felt were necessary over the last few years. And I think a lot of retailers are in that same position. You go through peaks and troughs when you're around using that tool to drive sales. So we'll hope to be able to have that stick. But I think like we've said in the past, the lighting category, most people don't know what the pricing is of lighting products because they shop it fairly infrequently. So as long as we're out there offering good value, and we can do that through the new products that we're bringing to market, we'll keep on trying to come up with new designs and new ideas for lighting and ceiling fans. That's the way that we're going to be able to continue to improve our gross profit margins.

Great. And just lastly. Sorry to ask so many questions. Just a reminder of the trajectory of sales, you've got a cycle in this second half, how you're thinking about that and the hurdle you've got over really the next kind of 10 months, putting into context housing markets and all sorts of things? And how you're planning inventory wise as a business looking for the next 9 months?

Yes. Well, I mean, look, who knows what sort of happens in the next 9 to 12 months. We think that there is still going to be a lot of our customers who would typically be traveling overseas, they won't be traveling. So I think that redirection of overseas spending will continue to be spent on the home. I think we've seen in the past when property house price increases -- do increase that we see an uptick in sales. I think also Beacon Lighting is not all that exposed in the high-rise development area, the high-rise and apartment living. We don't usually sell that many products into those type of buildings. And with a lot of customers either choosing regional areas or even just to move out further into the suburbs, and you've seen in new housing starts recently, that, that should be quite positive to our business for the foreseeable future.

I think the other part, Jo, will be working from home. That will continue. Maybe not at the same levels at the moment, but people will have the flexibility of either working from their holiday house or from their normal house. And that has changed things for quite some time into the future. So that's likely to hang around and support us as they have a look at what they need to be able to work in those locations and redecorate to make it more appropriate.

So yes, we do have some reasonable numbers to cycle in the final quarter comparative to last year. But I think there's quite a few things going in our favor as well for the short to medium term.

I think the third quarter, we're going to do pretty well. And if even we get close to the numbers that were outstanding results in the fourth quarter, we'll be delighted with the bottom line.

Our next question is from Keegan Booysen from Jarden.

The first question for me today is just whether or not you have much of a read on how many of the customers visiting Beacon come, therefore, for renovation activity and how many are more for detached housing new builds, if you have any read?