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 26th of June 2022. Further apologies for the delayed start. [Operator Instructions] For opening remarks, I would like to turn the conference over to Beacon Lighting Group Chairman, Mr. Ian Robinson. Please go ahead.

Thank you very much. Apologies to everyone. I think we've all experienced issues with COVID over the last 12 months, and this is just another one that continues to throw spanner in the works. Things that should happen just don't seem to happen the way they used to. Anyway, we've got some pretty exciting results, and we'll go through those shortly. So I'm Ian Robinson, the Executive Chairman of the company. I'd like to welcome you to the Beacon Lighting Group results presentation for the financial year ending the 26th of June 2022. With me today on the teleconference is our Chief Executive Officer, Glen Robinson; and our Chief Financial Officer, David Speirs. We are delighted to present our results to our shareholders. Despite many disruptions throughout the year, from lockdowns to floods, to flu and COVID, the business has been able to achieve outstanding results and many new milestones. Two of the most significant milestones for the group were the achievement of over $300 million in sales for the year and for the first time, achieving a net profit after-tax result of over $40 million. The business has continued to maintain its focus on the 4 pillars of growth: store rollout; Beacon trade; e-commerce; Beacon international businesses, thereby continuing to expand our diversification into these areas. The Board of Directors and I would like to thank you -- thank our wonderful team for their incredible commitment to our customers throughout the year, to thank our customers for their willingness to embrace new technology, new design trends materials in lighting, which I'm sure would have helped brighten many homes around Australia. Outlined on Page 2 of the presentation are the topics for the discussion today with Glen, our CEO taking you through the results overview, followed by David, our CFO, presenting financial results. He will then pass back to Glen for the growth strategy and the outlook. Before we conclude, I'll address any questions you might have. I hand over to Glen to present the results. Over to you.

Thank you, Ian. And again, apologies for the delayed start today, some technical issues there with the services we were provided with. So welcome, everyone, to today's presentation. I'll try to get through it relatively quickly, so we have plenty of time for questions. I'd like to start on Page 4 and just review some of the key financial highlights for the financial year 2022. As Ian mentioned earlier, for the first time, the group has been able to exceed $300 million in sales for the year, coming in with a record sales result of $304.3 million. This was despite many retail and trade setbacks due to COVID, state lockdowns, the flu, floods and supply chain disruptions. Through continuous product innovation and new releases, the business was able to increase gross profit margins by 50 basis points to 69.1% gross profit. In an inflationary environment, the group was pleasingly able to reduce its operating expenses to 39% of sales and also achieve a record $92.7 million in EBITDA profit. It is great to deliver a record $40.7 million in net profit after tax and declare a $0.093 per share annual dividend for our shareholders. On Page 5, we can review some of the operational highlights achieved in the year. The trade growth pillar continues to be the #1 focus for the business. Through new product introductions, greater marketing activity and by partnering with our trade customers to improve their business, we're able to grow our trade sales by 22.3%. The group continued to invest for the future in our store network across Australia by opening up 5 new stores and relocating 3 existing stores to optimize their performance. The group was very pleased with the store performances in the second half with store comparative sales increasing by 9%. Our online channels were extremely important means for our retail customers to continue to interact with Beacon, especially during the first quarter lockdowns and a very efficient way for our trade customers to get the supplies they need for their jobs. This helped our online sales grow by 31.3%. With new businesses being an important growth focus for the group, the Beacon Lighting USA business had another very successful year, increasing their sales by 51.9%. Moving on to Page 6. We can review the financial year 2022 results. The group went through the first half of financial year 2022 with relatively flat sales. However, moving into the second half, we saw some great momentum to bring together a strong sales result of $304.3 million, up 5.4%. Gross profit dollars were strong at $210.4 million, an increase of 6.2% over the prior year and a strong gross profit margin improving by 50 basis points to 69.1%. The group continued to manage expenses conservatively despite many inflationary pressures in Australia and in international markets to achieve a slight improvement in expenses as a percentage of sales, down 10 basis points to 39%. EBITDA improved 7.8% to a record $92.7 million and a strong 30.5% of sales, and net profit after tax improved 8.1% to a record $40.7 million at 13.4%. Net profit after tax margin, up 13% on the prior year -- up from 13%, sorry, in the prior year. I'd like to thank our dedicated teams for helping Beacon Lighting to continue to innovate lighting in Australia, providing the latest in technology, design, service and key trade products and retaining our position as Australia's leading specialist supplier of lighting, fans, globes and electrical accessories. I'll now hand you over to David to provide some deeper insights into our financials.

Thank you, Glen. Sales on Page 8. With total sales of $304.3 million, Beacon Lighting has been able to achieve a record sales result. Company store comparative sales was a story of 2 halves. In half 1 financial year 2022 significantly impacted by lockdowns, comparative store sales declined by 7.1%. Throughout half 1 financial year 2022, the number of trading days that were compromised by retail lockdowns were more than double the number of days similarly compromised in half 1 financial year 2021. In half 2 financial year 2022, while welcoming our customers back into our stores, Beacon Lighting was able to achieve a comparative sales increase of 9%. For the year, the best performing states were Victoria, Western Australia and Tasmania. Improving the life and businesses of our trade customers continues to be the #1 priority of the Beacon Lighting Group. Our trade customers have responded very well to our many trade initiatives, and the Beacon trade team has enjoyed the success. Trade sales have increased by 22.3% and online trade sales, which continues to be a very exciting sales channel, has increased by 67.6% in financial year 2022. During financial year 2022, many of our customers have turned to the online sales channel which increased by 31.3% to $34.1 million. Beacon International in the U.S. also enjoyed a successful year with a sales increase of 51.9%. Gross profit on Page 9. The Beacon Lighting Group increased its profit dollars to $210.4 million or 69.1% of sales in financial year 2022. Beacon Lighting continues to bring the latest fashion, innovative and energy-efficient lighting and fan products to market. Combined with the outstanding service from our store teams, Beacon Lighting has been able to continue to offer great value to our customers. The introduction of 492 new products from the Beacon Lighting product development team has continued to excite our customers with the premiumization of the product range and the introduction of many new trade products. The unique lighting and fan products that are only available at Beacon Lighting have continued to support the gross profit results. Operating expenses on Page 10. Other income has increased for the first time in a decade and it is expected to become more important in the future as the income from a large property fund -- large-format property fund will increase. At a time of increasing inflation, managing operating expenses has started to become a challenge. Beacon Lighting continue to be cautious from an expense management perspective, with operating expenses increasing by 5.2% to $118.7 million. There has been a deliberate recovery in the investment in marketing to support the growth strategies involved with Beacon Lighting stores, Beacon Trade and Beacon International. The investment in marketing increased by 10.8% to $14.5 million. With the continued opening of new stores, selling and distribution expenses have increased to $86.9 million or by 5%, which compares favorably to a sales increase of 5.4%. There has been a modest increase in general and administration expenses. Pleasingly, the significant operating expense productivity gains that were achieved in financial year 2021 have been retained in financial year 2022 with operating expenses being 39% of sales. Depreciation expenses have increased by 9.2% to $28.9 million, mainly the result of depreciation for new stores and store relocations. Cash flow on Page 11. Beacon Lighting has continued to generate strong cash flows from operation. There's been an increased investment in inventory, which has impacted upon the net cash flows from operating activities. Borrowing costs and income tax paid were very much in line with the same cash flows from financial year 2021. With the continued investment in new stores, store relocation and other business initiatives, Beacon Lighting has invested $9.6 million in new capital expenditure projects. Beacon Lighting has also invested $4.8 million in the large-format property group for a 50% share in retail properties at Modbury in South Australia, Bathurst, New South Wales and Mildura in Victoria. It is also very pleasing to be able to share with our shareholders the ongoing success of Beacon Lighting with a payment of $19.9 million in dividends. Balance sheet on Page 12. Despite the significant investments made by Beacon Lighting throughout financial year 2022, Beacon Lighting has been able to maintain a healthy cash position of $28 million. Starting the financial year with a stock balance impacted by COVID supply chain issues, Beacon Lighting has recovered the inventory investment to $93.1 million. The increase has been the result of higher purchase prices impacted by supply chain inflation, technology changes in product, the expansion of Beacon Trade range of products and the increased investment in Beacon International inventory for the Northern Hemisphere summer. The continued investment in the future of Beacon Lighting is reflected in a $3.7 million increase in property, plant and equipment. Beacon Lighting now has a $20 million investment for a 50% share in 7 retail properties owned by the large format property fund. At the end of financial year 2022, 4 of these properties were fully tenanted while 3 properties remain as development projects. Beacon Lighting has continued to have a modest level of debt with a borrowing balance of $19.6 million. Beacon Lighting still has significant balance of unused bank facilities to support future growth opportunities. Thank you. And now I'll pass you back to Glen.

Thanks, David. Moving on to Page 13, we can review our strategic pillars of growth. Our 4 pillars of growth continue to drive our business, and we stay committed to delivering on these consistently this year and in the years ahead. With our customers' needs always at the heart of everything we do, we continue to deliver rewarding experiences for our retail customers, build strong partnerships with our trade and commercial customers, empower online engagement and sales and pursue international business opportunities and growth. Let's dig a little deeper into the first growth pillar being retail. Having a truly national retail business and a great logistics infrastructure provided our retail customers with an engaging in-store experience, contact free click and collect or online shopping convenience no matter what disruptions may have occurred in the environment. We opened new stores in Ellenbrook, Bundaberg, Traralgon, Tuggerah and Butler, and we relocated stores to larger and more prominent sites in Port Macquarie, Burleigh and Camberwell. This helped us move closer to our target of 184 stores with the latest numbers coming in at 117 company stores and 2 franchise stores with many years of expansion opportunities ahead. Our lighting designers through the Beacon Design Service increased in projects won by 5.4% in the year. Our highly talented product development team based in Melbourne, designed and developed an additional 492 new and exclusive products to offer our customers the latest in technology, style and trade essentials. Last but not least, we're able to grow our VIP memberships to 928,000 customers during the year. Turn to Page 15, we'll talk about trade a little further. Trade remains the #1 growth priority for the group. By supporting our trade customers, we believe we can have a positive impact on their lives and their businesses. Beacon Trade sales had another strong increase with sales improving by 24% and total trade sales, including Commercial, Masson For Light and Custom Lighting increasing by 22.3%. Online orders continue to have great adoption for our trade, allowing our trade customers spend more time on the work site rather than in their car or in our stores and helping our trade online sales to grow by 67.6%. Beacon Commercial had a solid year servicing volume residential builders and other customers, increasing sales by 15.8%. We continue to educate trades people around the various benefits of the Beacon Trade Club that are designed to help not just grow their business, but also help their own customers. In financial year 2022, our Beacon Trade program welcomed 7,800 new members to become a 52,000-member strong community. Importantly, in December, we brought on board Damien Cummins, an expert in the electrical trade industry who joined the business as the Executive General Manager, heading up the Beacon Trade business. We implemented trade desks at all Beacon Lighting stores and began the process of rolling out trade rooms and trade walls in specific stores to better serve our trade customers. Our product design team are continuing to develop trade-specific ranges of lights, fans and electrical accessories to better meet the needs of tradespeople through our Beacon Lighting stores and commercial sales channels. The Beacon Commercial business completed over 3,400 lighting design consultations for the volume residential builders around Australia and grew the order pipeline for volume residential builders by 36.5%, forecasting good growth for the year ahead. The group invested in a record level in trade marketing using TV commercials, radio campaigns, social influencers, search ad words and trade giveaways to build exposure for Beacon Trade. Page 16, we have a look at e-commerce. E-commerce continues to be a critical resource for our customers and the business during the lockdown period. Online sales for the year increased a huge 31% to $34.1 million, representing a 12.9% of retail sales. We saw a great conversion to online shopping with our trade members. Our website saw trade customer visits increase 80%, while online trade sales grew by 67%. Online trade sales are now 9% of Beacon Trade sales. Meanwhile, we increased our presence in America by launching our direct-to-consumer website in the U.S., building greater awareness for the Beacon brand. The business also made significant and effective upgrades to the Beacon Trade, Fanaway, Lucci Air, Beacon International, Mammoth Fans and Connected Light Source Solutions websites. Most importantly, the group continues to invest in our online channels to deliver a seamless customer experience whether that be in-store or online. New businesses on Page 17. The final strategic growth pillar is our new businesses. These emerging businesses offer the group opportunities to invest and grow the business outside of its retail trade and e-commerce core. Beacon International remains a standout performer in each growth pillar. Beacon International leverages the items designed and developed for the Australian business and use those products to generate sales in countries all over the world. Beacon International was able to grow its sales in the U.S. by 51.9% and the total international business was able to grow by 27.9% to a record $15.7 million. The lift in sales in the international business was a result of combination of new customers and current channels experiencing strong demand. The group also established a new sales channel with Tmall Global, making an entry into the China market. Masson For Light, which is our high-end Australian-made architectural lighting business based in Melbourne was able to grow its sales by 32% and Custom Lighting, which is our high-end decorative lighting business was able to grow its sales by 29% over the prior year. Our Connected Life Solutions business, which mostly works in roadway lighting, was able to improve its sales by 23.8% during the year. Through the Large Format Property Fund, Beacon Lighting acquired 50% interest in sites in Modbury, Bathurst and Mildura, as David mentioned. Furthermore, the fund finished the development in Traralgon, opening up a new Beacon Lighting store in that area. Sustainability on Page 18. Beacon Lighting Group strongly believes that all businesses can have a more positive impact on the environment. And as Australia's leading lighting supplier, over the past decade, we've been putting operational steps in place to mitigate our impact on the environment. Whether that be through the use of large solar systems on 61 of our stores, and all our distribution centers and the changeover of all store lighting to energy-efficient LEDs or the continued elimination of polystyrene and single-use plastics from our packaging. On top of these direct changes that we've made in the way that we operate our business over many years, we have helped businesses and homeowners around Australia to make the switch to the most energy-efficient lighting and ceiling fan products available. In many cases, swapping incandescent and halogen light sources to LED alternatives, which are 80% more energy efficient. As a business, we're very proud to have been awarded the Sustainability Award in financial year 2022 from the Lighting Council Australia and the Outstanding Achievement Award in Sustainable Packaging from the Australian Packaging Covenant Organization as a recognition of our efforts towards sustainability. Together with our customers, we are switching to a less energy-intensive environment and choosing to look brighter and lighter on the environment. On Page 20, we can review the financial year 2023 outlook for Beacon Lighting Group. It was great to start out a new year without having the same impact that we did in the start of financial year 2022. We have been encouraged by the sales results so far. Our focus on improving the lives and businesses of our trade customers have seen the momentum that we have developed over the past few years continue on into the new financial year with good momentum across trade in stores, in Beacon Commercial and Trade Online. In the first half, the group will relaunch the Beacon Trade program with a much improved functionality for our trade customers and more rewarding trade membership. Designing trade-specific and purpose-built products will be the major focus of our Melbourne-based product development team in the year ahead. We'll continue to grow the product offering in our international businesses in the U.S., China and other Asian and European markets. The Large Format Property Fund will develop sites at Auburn in New South Wales and Southport in Queensland into flagship locations for the group. And the business will continue to invest in 5 to 6 new stores across Australia to provide convenient and exciting locations for our retail and trade customers. With many customers still using their homes differently to the way they did before COVID-19, along with our focus on retail expansion, the trade market, e-commerce experience and expansion and the Beacon International product offering, we expect the year ahead will be another exciting year for the Beacon Lighting Group. I'll now pass you back to Ian Robinson to address any questions you may have.

Thank you very much, Glen and David, for your presentations. Ladies and gentlemen, we have any questions?

Thank you, Ian and the team. [Operator Instructions] Our first question comes through from Keegan Booysen.

First question, just on Trade. You mentioned 37% growth in the volume residential forward book. Is this sort of the sole driver of your 25% growth target for FY '23? And then on top of that as well, if you could just remind us what Trade is as a percentage of your total sales base now, please?

Yes. We can, Keegan, thanks for the question. So the 37% growth is just the volume residential builders order book, so the future orders. Volume residential builders only go through the commercial sales channel. So it's significant, but it's not the most significant part of our trade sales. The trade sales through stores is the still much stronger section of that trade business. And trade sales as a total percentage of the business is 20...

25%. And that's consistent with the presentation, Keegan, that's our trade sales as a percentage of our retail stores, Masson For Light, Custom Lighting and Commercial sales.

Yes. That's fantastic. And then just secondly, I don't want to focus too much on the short term, but can you talk a bit more around the sales cadence and a bit of the outlook commentary. It sounds like Trade is outperforming retail by an expanding margin. And then also, do we take those comments to mean that the week-on-week momentum has persisted in dollar terms? Or is it just that the comps are getting easier in the PCP, please?

Look, I think there is great momentum -- as we mentioned, great momentum in the trade business. We certainly have the 1,169 team members talking about trade every single day, and we can see that coming through, particularly on a Monday to Friday sales with our -- through our stores with the trade sales being very strong. And we're doing a lot more marketing, obviously, around trade as well. You're correct. The PCP for the comp sales at the moment is pretty easy. But we have, as we've said, been very encouraged because we can look through what occurred last year in some of the non-impacted states, and we're still happy to go out there and say we're encouraged with the sales that we've been able to achieve so far.

Our next question comes through from [ Kieran Harris ].

Just in terms of the second half like-for-like resurgence there, could you give a bit of color on, I guess, the breakdown between Q3 and Q4? And I guess, where are you seeing the strongest sectors from an end customer perspective in terms of, I guess, new home builds, so that's the renovation market?

Yes, each month, actually, in the second half, we had positive comp results. So we were happy throughout really the whole of the second half with our results. And again, I think the sales trend continues. Our sort of strategy is obviously trade is growing very well. Online wasn't as strong as it was in the first half and we've got retail customers coming in the front door, which we're happy to serve.

Right. You guys don't have a lot of, I guess, visibility over what's driving that spend? Is it new home builds? Or is it...

We personally do. But I think it's in line with our strategies. We talked about trade being very strong. Retail -- online is still growing strongly and retail being well, being good.

We do have it broken down by sales.

Yes, we do.

We don't have that disclosed.

Sure. No worries. Just in terms of the gross margin, I thought it was pretty surprising, given you've talked about a bit of an artificial uplift from the weaker U.S. dollar. Could you just talk through some of the factors that are mitigating that currency impact? You've mentioned product premiumization. But any comment on the impacts from price inflation you're passing through or product mix?

Well, I think we -- as a business, we always, well, particularly being a vertically integrated business, we have to be very aware of what our costs are going into our goods and what's happening overseas from a manufacturing point of view, shipping costs and also promotional activity in Australia. So we have to balance all those things all the time. And we've been doing that for many, many years. And I think we've just been able to continue to navigate that throughout the last -- throughout the past year. That's just something we have got relatively used to doing and end up being a pretty good result. There is always movement. There's always movement in the Aussie dollar to U.S. dollar conversion rate. There's movements in the shipping costs and whether shipping is going to go up in the next 6 months or not, I doubt it. I think we're sort of seeing the top now, which means maybe some of the pricing is a little bit easier moving forward. But time will tell. I think we've navigated it pretty well so far over the last couple of years. There's been certainly a lot of movements, and we've been able to adjust to that. And it's by continuing -- that's why we mentioned that we design and develop products here in Melbourne, where you can respond, bring out new products. There was another 450-odd new products that brought into the market, which no one has ever seen before. They're great new materials. We used a lot of Alabaster and Brass this season. And that is that more premium-type product and our customers have been really excited by that product, and that's helped to achieve the margins that we have been able to achieve.

I think the strong sales also mean that you don't have to discount quite as heavily as what you would to drive your actual sales. That's helping us. Our long tailing in stock, for instance, we're selling stock that's 8, 9 months -- purchased 8, 9 months ago, first in first out. And there's been a fair amount of modernization in price increases overseas. So we think there's a stabilization of the inflation of the cost of products going forward. So all in all, many moving parts, and we've been able to manage it well so far.

No, that's really helpful. Just the last one. In terms of PPE investment tracking up a little higher, but obviously in line with the renewed store rollout. Is there anything to call out, I guess, in terms of cost inflation for new store fit-outs and refurbs?

They seem to cost more and more every time we look at them, and that's -- no, that's been happening for the last decade. I think building costs in Australia is pretty high. We always look for ways to be able to deliver fantastic-looking stores at a reasonable price, but they do seem to go up. But yes, we always manage that by not going -- we don't go and open 10 or 15 new stores a year. We're always pretty conservative. We focus on 5 to 6 new stores a year, trying to find the best sites in the right locations. And these are long-term investments for us. We generally don't move our stores very often. So they'll be in that location for the next 20 years, so we want to do it properly.

Our next question comes from [ Sue Anne Wright ].

Glen and David. Just 2 questions from me. International sales has been growing strongly, but just on a dollar-to-dollar basis, seems to have marginally declined in the second half in comparison to first half. Is there some sort of seasonality there that we should be thinking about? Or is it getting incrementally harder to drive sales in your international markets?

Because the international business is still a relatively small business. You can see the numbers there, $15 million. You can -- the sales can be lumpy. You can have big sales into 1 market and sometimes they might over-order and then you don't get many sales in the following 6 months. So I think you've sort of -- you've got to look through the current 6-month period and look to the trend over a longer period of time. It's still a very strong growing business, one that we're very much still excited about. And the reason why we're excited, $15 million in the global ceiling fan industry is tiny. It's still a very small player in a very big market. And we can -- by innovating our product range, showing that we've got something different, particularly for the U.S. market, I believe we can still continue to grow at a good rate in those international markets by doing something a bit different. But it can get -- as I said in the beginning, it can get a little bit lumpy just depending on who is ordering, when and what period it falls into.