Bevilles Corp Pty. Ltd. (MHJ) Earnings Call Transcript & Summary

Good morning, and thank you for joining Michael Hill International's company update. I'm Daniel Bracken, CEO; and on the call with me today is our CFO, Andrew Lowe; and our Head of Investor Relations, Anthea Noble. In 2020, the company set out its vision to elevate the Michael Hill brand to a more premium market positioning. This aspirational brand journey has been underpinned by our clearly articulated strategic pillars across brand, marketing, product, stores, digital and loyalty. Our customers have followed us on this journey and rewarded us with record performances over the last 2.5 years. Our 28% increase in ATV over the last few years is also a clear demonstration that the elevated brand strategy is resonating with our customers. Over the last 18 months, we have clearly articulated our capital management strategy for the business, we refreshed our dividend policy and have delivered record yields. Post the pandemic, our organic investments into stores, digital and technology have returned to historic levels as we continue to invest in the underlying growth opportunities in the core business. At the first half results, we provided further clarity on our investments into new organic plus initiatives. Our Renew platform has now been activated by the launch last month of our new Gold Recycling Platform with the Diamond upgrade program to be released later in Q4. I'm excited by the progress the team is making on the Michael Hill bespoke proposition, which will also be launched later this year. And in terms of our capital investment strategy, we were delighted with the success of our share buyback program last year, and we have continued to pursue acquisition opportunities. And this brings me to the reason for today's update. I'm excited to announce the company has entered into an agreement to acquire Bevilles, a highly profitable, family-owned Australian jewelry business with immediate growth potential. Bevilles is the perfect strategic fit for Michael Hill. We see meaningful growth potential and EBITDA enhancement opportunities embedded within the business, which we will unlock. The execution of our acquisition strategy has deliberately targeted the value and mid-market segment of the fine jewelry sector as Michael Hill focuses on the premium end of the market. Michael Hill has agreed to acquire the business and selected assets of Bevilles for a net enterprise value of approximately $45 million, representing a 5.6x expected FY '23 underlying EBITDA. Consideration will consist of cash upfront, adjusted for near-term working capital benefits and earn-out payments. Additionally, the CEO and family figurehead of the Bevilles business has been retained on a 2-year ambassadorial agreement to ensure a smooth transition and successful integration. The transaction is expected to be immediately EPS-accretive and is anticipated to complete in the current quarter, subject to the satisfaction of a number of condition precedents, and the consideration will be broadly funded from cash reserves. Bevilles is a successful family-owned jewelry and watch retailer, known for creating and selling quality products at accessible prices. The brand has a clearly defined market position, targeting the value to mid-market sector. In recent years, the business has achieved notable growth and profitability, supported by the opening of new brick-and-mortar stores. However, the store distribution to date is limited principally to New South Wales and Victoria. Additionally, there has been a strong focus on digital and growth with expansion into third-party marketplaces as well as the launch of a pure-play watch retailer, Watches Galore. The brand also has a loyal customer base with 88% of sales over the last 12 months coming from loyalty members. And currently, there are over 1.1 million loyalty members. Bevilles is expected to generate $60 million to $65 million in sales this year and an adjusted underlying EBITDA pre-AASB 16 of between $7.5 million and $8.5 million. Bevilles and Michael Hill have a clear and distinct brand, product and customer offerings. As mentioned, Bevilles operates in the mid-market jewelry category, offering transactional and gifting product with a much lower ATV, focusing on gold, silver and watches, whereas Michael Hill operates in the premium jewelry category, offering products celebrating lifetime moments with a higher ATV and a product offering that focuses on diamonds. Bevilles has a long-standing loyalty program with over 1 million members that, to date, is relatively untapped. We have identified further supply chain distribution opportunities and service propositions that are ready to be leveraged. The clear opportunity lies within retail distribution. While Michael Hill has a mature network in Australia, the opportunity is clearly available for Bevilles to grow its distribution significantly. Both businesses operate in similar footprints with similar operating models. And from a product perspective, the brands are highly complementary. 61% of Bevilles sales are derived from gold, silver and watches, whereas the majority of sales at Michael Hill come from diamonds. Bevilles has a well-established multi-brand watch strategy, and Michael Hill focuses on own brand watches. 60% of the sales are below $500 at Bevilles, whereas 75% of sales are over $500 at Michael Hill. In summary, there are significant growth opportunities for the Bevilles brand. Starting with the store rollout, we believe that the current 26 stores could expand to 80 to 100 stores in the next 4 to 5 years. With the current average store turnover of circa $2 million, this would generate significant sales growth for the group. And beyond the obvious store expansion, Bevilles is making good progress in lab-grown diamonds, but we believe this category could be rapidly expanded. Bevilles currently offers a limited repair business and care plan program. And with Michael Hill's expertise in both these service propositions, there is a clear opportunity to further scale these channels. Bevilles already has a well-established third-party brand portfolio within the watch category. However, we also believe there is further scope for expansion across watches and jewelry with additional wholesale brands. And the business has made good roads -- good inroads into establishing a strong digital proposition, however, it is in the early stages of an omnichannel strategy where Michael Hill is far more advanced. And from an efficiencies perspective, there are also opportunities to be gained with Michael Hill having more significant vendor relationships. There are clear opportunities to improve supply terms, product costs and margins as well as supply chain and logistics benefits from a larger portfolio. As we learn more about the business, we are confident that synergies exist across shared services, our landlord relationships and consumer credit. And we also see significant benefits from leveraging Michael Hill's investments in technology, incentive management, staff training and digital, driving improved margins and top line sales as we have demonstrated in the Michael Hill brand over the last 3 years. With the continued repositioning of Michael Hill, the addition of the Bevilles brand and the planned launch of our new bespoke diamonds business later this year, the group will then offer a compelling brand proposition in all segments of the fine jewelry market. Coupled with already identified organic growth initiatives, the Michael Hill Group is now clearly positioned for significant growth across multiple platforms. That brings us to the end of our presentation. And before we move into Q&A, I'd like to acknowledge the Michael Hill team that have worked tirelessly on this project. Without their efforts, today's announcements would not be possible. And I would like to thank you again for your continued interest in Michael Hill, and we are now happy to take any questions. Thank you.

[Operator Instructions] Our first question comes from Kieran Carling from Craigs Investment Partners.

Can you hear me okay?

Yes, yes.

Just first question from me. Looking at the store rollout profile for Bevilles, obviously, the company has seen some reasonable growth in recent years with the 9 new stores over the past 5 years. However, just looking at that rollout profile of adding 10 to 15 stores per year and getting to 80 to 100. Optically, that seems like quite an ambitious target. Are you just able to perhaps talk about how you came to those figures, I guess, just -- particularly given the macro environment and also the fact you're facing, I guess, an outlook of reduced store count amongst your flagship brand?

Great question, Kieran. I think if you go back by probably 10 years, Michael Hill was rolling out stores at a rate of 10 to 12 per year in Canada when we moved into that market in a significant way. And so we certainly have confidence that we have the ability and the experience to roll out that volume of stores. We've identified already a core team that will be dedicated to the store rollout because we clearly see this as the best near-term growth opportunity. With Michael Hill at a more premium positioning when I joined the business 4 years ago, we had close to, I think, Anthea, about 170 stores in Australia. And you're right, we've edited that number down to sort of high 140s today, most likely probably land more somewhere between 135 and 140 for the brand. That, for me, demonstrates a clear pathway for a lower positioned brand to have significant scale. There are 2 other brands that Bevilles currently goes head to head with at that mid-market end, both of which have over 200 stores in Australia. So we absolutely see this 100 store target as a completely appropriate and doable number. In terms of the market conditions, yes, everyone has a view that market conditions will continue to be challenging. But we also see that this end of the market will be more resilient in a more challenging economic environment. And we are also confident with our landlord relationships, which we have significant relationships with all of the landlords or all of the major landlords in Australia that we are confident that we can identify the right stores at the right time with the right financial models to satisfy that plan.

All right. I guess just as a follow-on, are you able to comment on the required CapEx to meet that store rollout profile? I assume it will go beyond the $25 million to $30 million annual CapEx spend that's been previously outlined?

Yes, we have built in an appropriate capital requirement to support that growth strategy in our cash flow forecasting. We haven't shared that today. And we haven't shared the amount of capital because, to be totally honest, it's going to be very much subject to those relationships and those deals that we make with our landlords. We see a very exciting dialogue that we're going to be able to have with our landlords over this growth opportunity. If you flip, in fact, on the other way the dialogues we've been having with landlords over the last 2 or 3 years, even post COVID or during COVID, was one of shrinking our footprint to now suddenly go on the front foot and be talking about growing our footprint. We're pretty confident that we can get good deals and good contributions to the capital profile of that rollout.

Great. Just another question on the earnout. Are you able to comment on why it has been structured the way it has based on the Michael Hill share price rather than on the performance of Bevilles post the acquisition?

I might have Andrew jump in to put further color on this, Kieran. But quite simply, the ownership model of the vendor, of the Bevilles business now and the Michael Hill ownership, they don't have direct control over the successes of that business, but they do very, very clearly have a like-minded view of what this does for the Michael Hill Group and the opportunity that it presents for the Michael Hill Group. So through our negotiations, we were actually completely aligned with the vendor that it made more sense to tie, if you like, their incentive model to the future successes of the group rather than their individual brand within the group. Andrew, do you want to add anything to that?

Yes, probably, Daniel, just a couple of nuanced comments. I think it's clear that we certainly hold a view that the transaction itself and the synergies that can be extracted and the value that can be added will benefit the Michael Hill share price, and the Bevilles acquisition will be a contributor to that. So there is, I guess, an alignment there with the Michael Hill share price. But equally, we want to ensure that Michael Hill shareholders equally benefit directly from the success of the Bevilles investment. So I guess, as the Michael Hill share price lifts, existing shareholders would also see that benefit flow through.

Our next question is from Alexander Mees from Morgans.

Congratulations. Just a few from me. Just firstly, with regard to the target for 80 to 100 stores for Bevilles. Just wondering how many Michael Hill stores flipping into Bevilles are likely to be included in that number? And what will determine your decision to flip a Michael Hill store into a Bevilles?

Great question, Alex, and thank you. It's been a big effort by the team to get this deal over the line. So we've currently got penciled in probably 8 to 10 stores that we could flip from Michael Hill branding to Bevilles branding. That's obviously got some level of subjectivity to our relationships with the landlords involved in those sites. You'll recall, and I touched on it earlier, that we've closed a number of stores over the last 2 or 3 years. In every case, it's been on the basis that it isn't offering a profitable model to the group. We believe in these, let's say, secondary locations that we've closed in the past and some of which we would be closing in the future, but for this opportunity, as the Michael Hill brand elevates that product proposition and that price proposition and that brand proposition doesn't necessarily align to the customers in those tertiary centers, whereas some of the lower-tier competitors in those centers are doing very well. And we see this on a regular basis where we underperformed in these lower tier centers, and we see a very, very clear pathway to dropping the Bevilles branding in place of Michael Hill or in addition to or without Michael Hill being in that center as a really great growth opportunity for us and a really strong competitor to those existing, if you like, mid-market brands. So probably 8 to 10. But...

And can I just...

Yes, go ahead.

Sorry, go ahead.

No, good. All good.

Okay, cool. I was just wondering whether there's an implication that there's going to be a change in the pricing strategy for the Michael Hill brand, whether you might look to increase the gap in the ATV between Michael Hill and Bevilles?

What a great question. I think what it affords us to do as we get scale behind the Bevilles brand is consider that. I think today, with only 26 stores and in the next 12 months, let's say, 35 to 40 stores, we're still significantly stronger distribution with the Michael Hill brand. But it certainly does allow us to feel more confident in elevating the Michael Hill brand now that we have an alternative brand in the portfolio that can, if you like, hoover up those customers that would have been potentially moving onto another brand in the center.

And then just finally, I'm just wondering if there's any incremental CapEx that you're likely to incur in terms of refitting the Bevilles stores as they currently exist? Or are they in good shape now?

Yes. Look, it's -- I mean, the newer stores, so the sort of 9 -- 10, it might be 10, 9 or 10 stores. They literally opened a store in Eastlands in Victoria about a month ago. There's a couple of other relocations happening this year. But the sort of, call it, 10 stores that opened in the last 4 or 5 years are all in very good condition. But we do have an allowance in our CapEx profile to go and provide some level of refresh, if you like, to the sort of other 15 stores in the portfolio over the next 12 to 18 months, subject to having the right terms and deals in place with the landlords. But it's relatively minor, Alex, in the grand scheme of things.

Well done again.

Thank you.

There are no further questions at this time. I will now hand back to Daniel.

Well, thank you all once again for your interest in Michael Hill Group as we will now talk about it forevermore. And thank you for following us. Thank you for dialing in today, and we're looking forward to providing exciting updates on the growth strategies, as we've articulated them this morning. So thank you again and talk to you all very soon. Good morning.