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

Good morning, everyone, and welcome to the Beacon Lighting Group results presentation for the period ended 27th of June 2021. [Operator Instructions] For opening remarks, I would like to turn the conference over to Beacon Lighting Group Chairman, Mr. Ian Robinson. Please go ahead, Ian.

Thank you, Erica, and good morning, shareholders. My name is Ian Robinson, and as the Executive Chairman of the company, I'd like to welcome you to the Beacon Lighting Group's results presentation for the year ending the 27th of June 2021. With me today on the teleconference is the Chief Executive Officer, Glen Robinson; and our Chief Financial Officer, David Speirs. It's been a year of ups and downs and plenty of uncertainty. However, thanks to our retail customers' continued support as they look for new ways to create a safe haven in their homes and to our trade customers, who we have partnered to deliver great service to their clients, we're able to deliver an outstanding year. Our appreciation goes to our teams really incredible adaptability, willingness to embrace change and getting on with the challenges that we've encountered. A redirection in spending from overseas holidays and working and schooling at home has resulted in a strong uptake of new lighting and cooling products. Further demand is being generated by house price growth and many customers choosing to move to regional areas. We now find ourselves in rolling lockdowns around the states, which creates further uncertainty. However, the macroeconomic indicators remain strong as does the interest in our products from our customers and maintain -- we maintain a strong financial position. We'll maintain our focus on the key growth areas of retail, trade, e-commerce, new businesses and embracing the changes. We're a dominant player in the lighting and selling market, and we're well positioned to deliver exciting sustainable future. On Page 2 of the presentation outlines what we'll be discussing today with Glen, our CEO, taking you through the results overview, followed by David, our CFO, presenting the financial results. He'll then pass back to Glen for the growth strategy and the outlook. After that, I'll direct any questions you may have. Now I hand you over to Glen to discuss the results overview. Glen?

Thank you, Ian, and welcome to shareholders to today's presentation. I would like to start on Page 4 and review the key highlights for the financial year 2021. The group during turbulent time was delighted to be able to achieve a record sales and profit result for the year. Despite border closures, lockdowns and general restrictions throughout the states, the trading continued strongly. With the redirection of expenditure from overseas holidays and our customers spending more time at home, renovation and updating activity, plus the growth in trade sales helped drive a 13.3% comparative sales increase. With the lunch of our new website and the requirement for many of our customers to purchase from home, online sales jumped a huge 60.3% during the year to $26 million. Beacon International had a very successful year, achieving sales of $12.3 million, representing a 45.3% sales growth. The group has had a significant focus on improving our partnership with our electrical, building and interior design trade customers. And this focus has seen a strong increase in trade club sales of 50.1% for the year. During the year, the group opened 4 exciting new stores in Virginia in Queensland, Camperdown in New South Wales; Belmont in WA and Tweed Heads in New South Wales, all within the first half with major refurbishments also completed in Albury and Waurn Ponds. The group also established a property trust with 50% ownership to acquire sites for Beacon Lighting stores. During the year, sites were acquired in Southport in Queensland, Traralgon in Victoria, Cannington in WA and Auburn in New South Wales. There's been a breakthrough year for Beacon Lighting. Without the considerable effort of every team member in Australia and around the globe and our valued customers, it wouldn't be possible to deliver these results. We will continue to excite our customers with the latest lighting, ceiling fan, electrical accessories and globes with a focus on partnering with our trade customers for the years ahead. On Page 5, you'll see the statutory result. There were two significant differences between the statutory result on Page 5 and the comparable result on Page 6. The statutory result includes the profit on the sale of the Parkinson Distribution Centre in the FY 2020 year results and also the losses of the closure of the Beacon Energy Solutions business in the same year. We'll jump to the comparable result on Page 6 as the more meaningful results to discuss. During the year, the group was able to achieve solid momentum in sales, improving from $250.4 million to $288.7 million, an increase of $38.3 million or 15.3%. This was off the back of good sales growth across the core of retail, online and trade and also in the international business and included significant periods of lockdown across the states. Gross profit margins were strong throughout the year, finishing at 68.4%, up from 65.3% last year. The growing gross profit dollar -- and growing gross profit dollars by $33.8 million or 20.7%. Operating expenses were conservatively managed given the uncertainty throughout the period. Expenses grew by just $7.6 million or 7.2%. As a percentage of sales, the business was able to achieve a huge improvement in expense productivity from 41.8%, down to 38.9% of sales. EBITDA was a significant improvement over the corresponding period, up $26 million from $59.9 million to $85.9 million, representing a 43.5% improvement. EBITDA as a percentage of sales came in at 29.8% versus last year at 23.9%. Net profit after tax was a real highlight for the year, showing the leverage that can be achieved through strong sales increase and careful GP and expense management. Net profit after tax increased from $20.4 million to $37.6 million, strong $17.3 million increase or 84.9% increase. Net profit after tax margin greatly improved from 8.1% of sales to 13% of sales. It certainly was a successful year where we built stronger relationships with our trade, grew our online presence and continue to introduce new and innovative lighting for our aspiring customers, who want to improve -- who wanted to improve their homes throughout the year. I'll now hand you over to David to go through some further financial information.

Thank you very much, Glen. Sales on Page 8. The Beacon Lighting Group achieved a record result of $288.7 million, which is an increase of 15.3% over financial year 2020. Company stores achieved an outstanding comparative sales increase of 13.3% in financial year 2021. For Q1 to Q3 financial year 2021, company stores achieved an outstanding sales increase of 22.1%. In Q4 financial year 2020 the first quarter of the COVID pandemic, Beacon Lighting achieved an unprecedented comparative sales increase. In Q4 financial year 2021, company store comparative sales remained very strong, but declined by 10.2% compared to Q4 financial year 2020. The Q4 financial year 2021 company sales were still 14.2%, ahead of Q4 financial year 2019 sales. All states and territories achieved comparative sales increase in financial year 2021. The best-performing states are Western Australia, Queensland, South Australia and New South Wales. The online sales channel, supporting our 115 Beacon Lighting stores had an increase of 60.3% to $26 million in sales. Beacon International with offices in Hong Kong, U.S.A., Germany and China continued to be a very exciting opportunity for the group. Beacon International achieved a sales increase of 45.2% to $12.3 million in financial year 2021. Gross profit on Page 9. The Beacon Lighting Group achieved a gross profit margin of 68.4% and a gross profit dollar result of $197.3 million in financial year 2021. The gross profit margin increased by 3.1% of sales, which is an outstanding result. What was also pleasing was improved margin which were achieved across both the core and emerging businesses. Gross profit margins were achieved through a combination of everyday pricing, improved procurement negotiations and an improved cost base with support of a strengthening Australian dollar. Introduction of more than 600 new products designed and developed in Australia also continues to excite our customers and support our margins. Operating expenses on Page 10. The Beacon Lighting Group achieved good productivity leverage with operating expense result in financial year 2021. Operating expenses as a percentage of sales have decreased by 3.6% from 42.5% to 38.9%. Significant product leverage was achieved for both selling and distribution expenses and marketing expenses. The group approached the uncertainty caused by the COVID pandemic with cautious expense management throughout financial year 2021, which helped contribute to the improved result. In addition, at no state, did the Beacon Lighting receive or apply for the JobKeeper subsidies. Cash flow on Page 11. Strong trading performance in the Beacon Lighting Group throughout 2021 has resulted in a record net operating cash flow of $61.2 million. This also included the tax paid on the profit made on the sale of the Parkinson Distribution Centre for financial year 2020. The Beacon Lighting Group also made significant investment of $15.2 million for a 50% share in a property fund, which purchased four large format retail properties to support the rollout of Beacon Lighting stores. Given the success of financial year 2020 and financial year 2021, the Beacon Lighting Group has paid out $12.6 million in dividends. The group has continued to reinvest in the future with $7.9 million in capital expenditure and $1.2 million in acquisitions. Balance sheet on Page 12. Throughout financial year 2021, the Beacon Lighting has been able to maintain a very strong cash position, finishing with a balance of $33.8 million. Despite the record sales result and some supply chain challenges, Beacon Lighting has been able to increase inventories by $4.9 million to $67.9 million, which does place the group in a good position leading into financial year 2022. Investment in associates of $15.2 million relates to the group's 50% investment in the property fund. This will be a very strategic long-term investment for the Beacon Lighting Group. The increase in the right-of-use assets and the lease liabilities reflect the opening of new stores, the acquisition of our franchise stores and a new lease on our distribution center. Strong results of financial year 2021 has enabled the Beacon Lighting Group to eliminate noncurrent borrowings to the value of $13.2 million. Dividends, Page 13. The Beacon Lighting Group Board of Directors are very excited to be able to declare a record dividend for financial year 2021. Fully franked dividend of $0.086 (sic) [0.088] share declared for financial year 2021 represents a 76% increase compared to a fully franked dividend of $0.05 per share declared for financial year 2020. The dividend payout ratio for the group was 52.2% in financial year 2021. The directors of Beacon Lighting will continue to target a payout ratio of between 50% and 60%. The Beacon Lighting Group dividend reinvestment plan continues to be suspended. Thank you. I will pass you back to Glen.

Thanks, David. If we move on to Page 14 to 18, we're going to review our strategic pillars of growth. On Page 14, you'll see a summary of the four core pillars of growth the Beacon will pursue this year and in the years ahead, which includes retail, trade, e-commerce and new business. If we move on to Page 15, we can review the first growth pillar, retail. During the pandemic, our #1 priority was to provide a safe environment for our team and customers. We took the approach that if we could open, we would open, providing as much certainty to our customers, team and landlord as -- landlords as we adapted to the requirements of the COVID-19 pandemic. By having a focus on safety-first, allowed the business to operate in a COVID safe way throughout the year. This approach then contributed to the strong comparative sales gain of 13.3% for retail stores despite significant store closures during the period. With a strong comparative sales gain, we took the opportunity throughout the year to expand into some amazing sites and increased our footprint by four more stores. These were all large stores, which will build on the rewarding experience our customers have come to expect from Beacon. Along with this, we had major refurbishments at Waurn Ponds, Albury and relocated our Underwood store. The store network planning research was also updated during the year and identified 184 potential markets that could support the Beacon Lighting store. This has increased from our previous research and provides for an additional 69 new store locations. Fortunately, being a completely vertically integrated business, we could quickly adapt to the changing retail conditions and demand on our products. 602 new lighting and ceiling fan items were developed here in Australia and new categories such as air purifiers and trade electrical accessories were introduced to the business. Throughout the year, we conducted 1,389 design studio appointments from our 33 premium design studios in-person or with the use of technology. This premium design surface resulted in over $5.8 million in sales and a strong pipeline for the year ahead. At Beacon, we have over 250 accredited lighting design consultants to support -- to provide superior lighting design services for our retail and trade customers. Trade on Page 16. The trade growth pillar is the #1 sales growth opportunity for the group. 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 Trade Loyalty Club has grown with members from 35,800 to 44,100 throughout the year. Trade Loyalty Club sales increased by 50.1%. The network of Beacon Lighting stores now opened at 7:30 a.m. to better service our trade customers with a focus around marketing to build awareness, product development and business partnering. The group believes the future, to provide our trade customers is so much more in the residential trade area, is a very exciting opportunity. E-commerce on Page 17. E-commerce has probably never been more important. We saw a massive uptake in online sales as 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 by 60.3% to $26 million, representing 9.8% of retail sales, which is a significant step up for the business. This was done with the launching of our new website in October, which also coincided with the largest ever month of online sales for the group. The group believes that by having a decentralized fulfillment model, by having the stores fulfill online customer orders, our customers receive faster and more personalized service, along with less cost for the business and the ability to handle peak demand during online sales and lockdown periods. Online sales to the trade also advanced by 98% and shows the potential to help our trade customers complete their projects more efficiently. New businesses on Page 18. The final strategic growth pillar is our new businesses. These emerging businesses offer the group opportunities to invest and grow the business outside of the retail and trade core. Each one of these new businesses could be significant contributors to the success of the group in time to come. Beacon International remains a standout former in this growth pillar. Beacon International leverages the items designed and developed for the Australian business and uses those products to generate sales in countries all over the world. Beacon International was able to grow its sales by 45.3% to a record for this business of $12.3 million. The success came predominantly from the Hong Kong wholesale business, which sells into many different countries along with the U.S. Beacon Lighting business, which mostly sells through marketplaces in the U.S. and Canada. The lift in sales experienced in the international business was a combination of new customers and current channels experiencing strong demand, similar to what we've seen in Australia. Custom Lighting had a successful year, servicing the high-end lighting market with its new lighting gallery showroom in Malvern, Victoria. During the year, the group also established a property trust structure, which is owned 50% by Beacon Lighting Group. The property trust secured sites in Southport, Traralgon, Cannington and Auburn, with 3 of those sites, which will be developed in the year ahead into Beacon Lighting stores. On Page 20, we can review the current outlook for the Beacon Lighting Group. Whilst the macroeconomic environment remains supportive around investing in your home with solid house price growth, a redirection from overseas holiday spending, more time spent at home plus lower interest rates, the rolling and heavy restrictions of movement during lockdowns through different states continue to affect sales during those periods. The trade strategy task force continues to innovate the way we partner with our trade customers and the benefits that we can bring to that partnership. This remains the #1 strategic objective for the group. This coming year will be the biggest year for trade marketing, product development, new Trade Loyalty Club, business partnering and sales for Beacon trade. The Property Fund will develop new Beacon Lighting stores in Auburn as a replacement for our Parramatta store, Traralgon in Victoria and Southport as a replacement for our current Southport store. We will open new stores in Ellenbrook in WA, Butler in WA and Melton in Victoria. And we'll relocate stores in Port Macquarie, Burleigh, Camberwell and Lake Haven to larger and more prominent sites. So in total, we'll have four additional new stores and six relocations to more optimized sites. The group has just launched the beaconlighting.us website, a direct-to-consumer website for the U.S. market, which will provide more access to the Beacon Lighting range for customers in that market. The group will also expand its online sales into the China market with the use of its Australian designed product range. There are many exciting opportunities at Beacon from growing and optimizing the network of stores, enhancing our online sales, building stronger relationships with our trade and growing internationally. We look forward to providing our customers with the most innovative lighting, ceiling fans and electrical accessories for the residential home. I will now pass you back to Ian Robinson to direct any questions. Thank you.

Thank you, Glen and David, for your very insighted reports there. Erica, we're opened for questions.

[Operator Instructions] We have our first question from Keegan Booysen from Jarden.

Great results. A couple of questions from me, if that's okay. Firstly, on current trading. I was hoping you can provide any additional color. You didn't give any quantitative guidance, and I appreciate that there's -- it's obviously a very volatile period and only a couple of weeks into the next period. But can you talk to how sort of trade and retail has performed over the last 3 to 4 months?

Yes. I think, Keegan, we've indicated probably in the sales slide, just what the Q4 performance was. And that's really to try to provide you guys with a bit of indication. Things are, as you said, quite volatile at the moment with 13-odd million people in lockdown across New South Wales and Victoria. And that's what we're working our way through at the moment. I personally think the future ahead will be easier than what we're currently experiencing right now, but we haven't provided any additional disclosures there around the current performance.

Would you make just a high-level comment just on trade and retail. Obviously, trade might be still doing fairly well, even though retail is falling away. Is there a big discrepancy in terms of how those two different channels are trading?

Yes, there is. Trade does continue to do well, probably not at the elevated levels that we've seen throughout the FY 2021 year, but we expect that to pick up again once we start to see more construction activity normalize so particularly in New South Wales, where they had the construction freeze for quite a few of those weeks, and that has lessened a little bit now, but there's still a bit of a holdup up there. So we would expect trade to pick back up to where we were previously.

It's quite interesting to see that the market is quite adaptive to the restrictions that are there, and the business continues to roll on. We need to adapt, our customers adapt and we're still enjoying reasonable sales. So we're pretty comfortable where things are.

No, that's great. Just second one as well, expanding on some of the gross margin comments that you made. Would you be able to split out some of the movements in GM, the 330 bps of growth, how much being attributed to sort of FX and pricing, et cetera, just so we can try and work out how to think about gross margins going forward? And then maybe also on that just around what your views on, what you're observing from a promotional standpoint as well. We've seen promotions sort of creeping back in. Is that what you're seeing as well?

Keegan, I think it's such a combination of all those things with gross profit margin. I mean, you can have an improving Aussie dollar, which certainly helps -- has helped. We've got a pretty long pipeline in our stock at the moment so the cost base in that stock will still be supportive for the first half without doubt. I think we've also been working very closely with our suppliers. We are, as I said, almost 100% vertically integrated. So we do -- we're constantly working with our suppliers and factory manufacturers to think about ways how we can improve the product range, bring out new and exciting innovative product. And that also, by changing and refreshing the product range, can also be supportive of the margin. So it is -- honestly, it's a combination of so many different areas to support the gross profit margin throughout the year. [indiscernible] help when you've got a strengthening of Aussie dollar.

Sure. That's great. And then last one for me. Looking at the international business, would you be able to give us what the EBIT contribution to the group would be in terms of how many dollars have fallen to the bottom line from that business? And then also how you're thinking about entering other markets with many of physical store presence, such as New Zealand or the U.S., et cetera? Or do you think there's enough opportunity in Australia for you guys in the medium term?

Yes. At the moment, we wouldn't be considering New Zealand. And the main reason behind that is it's quite a competitive market. There's two major lighting change over there with over 50 stores in that market, which for their population is quite a lot of stores. So we're not really looking at that particular area. Regarding international margins and profitability, it is a good profitable business now. And we've been working with that -- or building that business for near on 10 years now. It's good to see some good profits flowing through. But we haven't broken that out as an individual line item. We've broken out the sales. The margin is healthy because it is a -- sorry, the gross profit margin is healthy because it is predominantly selling the same items that we sell here in Australia, and sells at both a wholesale basis. So if you imagine a fairly healthy wholesale margin, and we also sell on an e-commerce basis which you get almost the same retail margin. So you can imagine that it's a relatively small business with relatively low overheads, and that's why it is quite a profitable business for us.

And it does experience good royalties on a patent that we have as well, which certainly supports the business. And that continues to assist the entry into different markets and supports the profitability.

Our next question from Sam Teeger from Citibank.

You guys have delivered a pretty positive outlook relative to what we're hearing from other retailers right now. Not many are able to guide to growth in FY '22. Just wanted to get a sense of in terms of this growth that you are targeting in FY '22, what are you assuming around lockdowns? And given what's happening in New South Wales and Victoria and other states right now, can you get the growth in the first half as well?

Yes. I think, Sam, when you refer to growth here, we're talking about growth throughout different parts of the business. Yes, we're always looking for growth. So whether that be trade growth, commercial growth, international growth, online sales growth that's what we're talking about there. We're not guiding to say that we're going to be particularly growing from the great profit results. So let's just be relatively clear with that. What we're seeing for the future, look, it's anyone's guess. We're what, 7 or 8 weeks into the new financial year. And I think cycling some pretty big numbers from last year, July was probably a little bit harder than what August has been because now August recycling Victoria in a major lockdown from last year. So things do move around pretty quickly. And throughout the July period, we had every state, except for I think it was Tasmania, in lockdown and maybe Canberra so some form of lockdown happening. So things can move very quickly. So you really just got to take a holistic sort of view on it. Is the last year going to be as disrupted as what the year ahead will be? I think we're getting to a position where we're starting to see good vaccination rates throughout New South Wales and Victoria. If that hopefully gets to a level where we're allowed to open up a bit more and maybe go into possibly stage 3 lockdown instead of stage 4 lockdowns where the stores are able to operate a little bit more normally. That could be quite a positive period for us, but it is -- we're 7 weeks into it. It's a long year ahead of us. And that's really why we don't really like to provide guidance too much when there's so many moving parts.

Yes. Well, what we can say, Sam, is that the stores that aren't restricted in their trading are trading very well. We're very, very happy with them. If we could have all stores unrestricted, we would be performing extremely well. I think we're going to learn to live with these lockdown. Last year, Victoria was closed for probably nearly half a year. So we've been living with lockdowns for quite some time. And the current lockdowns we're experiencing probably a little bit more severe in regard to the number, but the business is adaptive and the customers are adaptive as well. So it's not what you would normally expect that the amount of loss of sales would be there because you can't really service the market. You do adapt.

Sam, I think it was interesting, I think, it was on Tuesday or so Victoria marks its 200th day of lockdown. And when you think about that, going forward, do you think Victoria is going to be another 200 days of lockdown? I think with vaccinations coming through, that may not be the case. And there's a lot of money being pumped into the economy. So as I said, it's still very early days, but is the future going to be as bad as the past? So I'm not too sure. I think it might be a bit more freed up.

Yes. Okay. That's helpful. I just want to clarify. So on Page 3 of the annual report in the outlook section where it says the Beacon Lighting Group will continue to target growth both in Australia and international markets that we shouldn't interpret that as being saying you're going to be -- and then further down in the paragraph, it says the Beacon Lighting Group is planning further growth in FY '22. We shouldn't interpret that as you're giving sales already guidance for FY '22?

No, that's not. No. I think we're expecting growth in certain segments of our business and in certain markets. So I think we're very excited about international. I think we're excited about the trade opportunity. And I think we're optimistic about -- there's still trading performance in stores that aren't lockdown at the moment. Obviously, the New South Wales situation is very difficult when last year, we weren't in a lockdown situation. So I think that's all the context. We're confident about growing in some segments of the business.

All right. Okay. And I was kind of asked before but I'm going to ask it again, just to get a clearer answer. Have you guys been increasing discounting in July and August, given the sales are weaker? Or is it more of an issue that given the lockdowns there, people just won't spend. So even if you discount, it's going to make a difference?

Yes. I think the latter there, Sam. We typically have up to 50% off promotion in August. That's what we're currently running. We haven't added any additional campaigns to try to drive more demand. I think if our customers could get out and shop, they would get out and shop. And that's what we've seen, let's say, in regional Victoria where the release of restrictions eased last Tuesday, and the regional stores have done extremely well since then. Prior to that, the customers basically had to buy either online or through their trade customer. So once we do see the restrictions ease, you start to see -- or you see a pretty rapid increase in the sales.

[indiscernible] customers walk through the front door of our stores to transact. And obviously, when there's restrictions on doing that, it obviously has an impact on retail sales.

Got it. All right. And is this 68% gross margin you've just achieved. Should we be thinking that's a normal in FY '22? Or are there other factors that we should take into account as to why it make a difference?

I think there's a number of factors there, Sam. Is the Aussie dollar going to be strong this coming year as it was last year? It looks like it's a bit weaker at the moment compared to where we were. Freight costs probably going to add a little bit of cost to our product line and delays. So I think 68% was a great achievement. I don't think necessarily, you put that into your modeling.

Our next question is from Alexander Mees from Morgans.

I'm not going to press you any further on current trading, but I've got a couple of questions on trading online, if I may. Your trade business obviously had a fantastic year. Is there any reason that this part of your business can't target a similar rate of growth in FY '22, given what you put into the ground now?