Breville Group Limited (BRG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Breville Group Limited 2020 Full Year Results Investor and Analyst Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Martin Nicholas, Group CFO. Please go ahead.

Thank you, and good morning, everybody. I'm Martin Nicholas, Breville's group CFO, and it is my pleasure to welcome you all to our FY '20 full year results call. I'll start by walking you through the group's 2020 trading performance; and then Jim Clayton, our CEO, will provide an operational and strategic update. So turning to the presentation that's been posted on ASX and Slide 3. Here, we see a summary of our full year results. And in summary, we are delighted with FY '20's results, which were delivered against a turbulent backdrop of U.S. tariffs, Brexit uncertainty, exchange rate volatility and latterly, of course, COVID-19. Our top line growth and profit has largely landed as we planned at the beginning of the year with our results continuing to show an accelerating multi-year trajectory. So starting with revenue. We saw continued strong growth across the second half with the full year growth of over 25%, including our successful expansion into Spain and France as well as the continued translation impact of a stronger U.S. dollar, which added about 5% to our reported growth number. At a gross profit dollar level, we grew at 18% year-on-year, with gross margins pretty steady across the year after absorbing the dilutionary impact of the strong U.S. dollar and the impost of U.S.-China tariffs. However, below gross profit, there was a fair amount of noise in the results in the second half, so this year, we are showing both statutory results and normalized results, which adjust for both abnormal expenses and abnormal cost savings, which are unlikely to repeat in FY '21. I'll give more detail on this in a few slides. Our normalized EBIT grew by 14.3%, after excluding the 1-year benefit of AASB 16 or by 16.2% with AASB 16 included. Our statutory EBIT grew by 3.7%. Normalized NPAT grew by 11.3% (sic) [ 11.2% ], and normalized EPS, including a small impact from our capital raise, grew by 10.6%. Our confidence in this normalized performance has allowed us to declare a final dividend of $0.205, up 10.8% on the prior year, which will be 60% franked, however, a prudent desire to preserve cash in the current environment as that is to activate a fully underwritten DRP. Our net cash at $128.5 million finished the year higher than we planned due to some unexpected positive working capital movements, again, more later in the presentation. And importantly, this cash balance, when combined with $361 million of undrawn peak at facilities, we now have both the prime buffer against future turbulence in place as well as funds available for growth acceleration. I'm now turning to Slide 4, where we see key segment performances. Our Global Product segment revenue continued double-digit performance, delivering 20% growth on a constant currency basis in both the first half '20 and the second half [ '20 ]. The second half saw Breville's products prove, I would say, more than relevant to the working from home reality that faced many of us, and we saw consumers increasingly find us via online channels. Of note, the constant currency 20% second half growth was achieved despite our inability to meet total demand in May and June because of sporadic stock-outs as well as the impact of delayed Amazon Prime Day, both of these events pushing some FY '20 orders into the first half of '21. Turning to our Distribution segment. We also saw revenue growth well into double digits, driven by strong sales in Australia, including the successful launch and ongoing performance of the Breville Air range. And of course, most importantly, the Distribution segment fulfilled its strategic role by delivering an incremental $4.4 million in EBIT for reinvestment in the global segment marketing and R&D. As I mentioned just a little while before, our percentage margins were moderated in FY '20 by the impact of U.S. tariffs on Chinese imports, which was felt most heavily in our global segment ovens range and the persistently strong U.S. dollars. If we now turn to Slide 5. Here, we see global product geography, global product sales split by geography. When comparing regional performances, I would just remind everybody that these are our sell-in figures and as such, have been impacted by different country lockdown patterns, by individual retailer behaviors and by our ability to deliver against demand in each geography. Our sell-out figures or sales to the end consumer have remained remarkably solid across all regions. So turning to the regions. In North America, we again achieved double-digit growth despite the hard retail lockdown despite Amazon's retreat to supply essentially only essential items and the previously mentioned delay to sell-in for Prime Day. In ANZ, we saw strong sales across the second half, supported by physical retail largely staying open and an increasing adoption of online channels. Very strong sales in early Q4 led to some stock shortages later in the year with a number of orders pushing into July. In Europe, we saw continued strong growth supported by country rollouts and robust sales in the existing European markets, supported by well-established online channels. And finally, the rest of the world segment bounced back from the temporary sell-in decline flagged last year with our sell-out growth steady across both periods. So now I'm going to turn to Slide 6 and our normalized results. As I mentioned, we incurred some sizable abnormal expenses in the second half '20 and equally made some one-off cost savings, which we don't plan to repeat. So as we set our dividend payout for FY '20 and indeed our budget for FY '21, we have looked through both these pluses and minuses to base our decisions off a normalized FY '20 EBIT of $113.1 million. So in terms of specifics and walking through the bridge, firstly, COVID-19 has seen heightened credit risks in our key markets with some of our retailers facing bankruptcy and global insurers reducing coverage limits. As you know, Breville has consistently taken a prudent insurance approach to receivables, but against an increasingly uninsurable backdrop, I've taken a step increase in our doubtful debt provision of $13.6 million. This means that 95% of our receivables book is now either insured with customers who don't need insuring or is provided for. And I don't expect a charge of this scale to repeat next year, and we certainly didn't see a charge of this scale in FY '19. Similarly, as a group, we've really faced impairment charges of any magnitude, but this year, we have chosen to move on to a single standards-based IoT platform, which has necessitated the write-down of our in-house developed proprietary IoT platform at a cost of $9.6 million. Jim will talk more to this in his section, but this is definitely an abnormal expense for Breville. On the other side, in terms of cost savings, as we disclosed at the time of our capital raise, in the face of COVID uncertainty, we cut back expenses hard in Q4 to create an expense buffer and to explicitly protect jobs. Some of the cost cuts are sustainable, but the salary reductions, which range from 10% to 40% and the suspension of the short-term incentive program were designed to be temporary. Salaries have been restored to normal levels as of July and depending on performance, a short-term incentive may be paid in FY '21. So we cannot, therefore, count these savings, savings that actually were delivered as normalized in our FY '20 earnings. Equally -- and the fourth point, equally, we cut back on marketing spend below normal levels in the fourth quarter. So we've added back $3.3 million into the normalized spend on which we are now basing our budget for FY '21. These 2 cost savings -- these 2 streams of cost savings were delivered but are not within our normal run rate, so we have not accounted them in our normalized EBIT. You will all, I am sure, form your own opinions on our underlying performance, but we regard $113.1 million as our normalized EBIT performance in this unusual year, and I have included a full reconciliation table in both the appendix to the ASX announcement and at the end of this presentation. Turning to Slide 7 and the balance sheet. Again, probably more noise than normal in this year, but fundamentally, a strengthened balance sheet, a balance sheet that is resilient to possible turbulence and ready for growth with our both ROE and ROA continuing to show strong returns. The key year-on-year movements in the balance sheet, you can see, reflect, firstly, working capital levels temporarily below equilibrium, an ongoing acceleration of investment in R&D to sustain -- to deliver sustained product innovation and growth; the impact of the abnormal impairment and doubtful debt provision I just spoke about; and the cash impact of our capital raise. So working through the balance sheet, firstly, working capital and inventory. Here, the slower-than-normal ramp-up of supplier capacity post-Chinese New Year, combined with strong second half sell-in, has seen inventory levels finished flat year-on-year. I had expected to report to you on the unwind of our tactical Brexit and U.S. tariff inventory buffers, but this reduction has gone beyond that level. We are below equilibrium, and inventory will be rebuilt during FY '21. Turning to receivables. Our flat receivables balance is also skewed by the take-up of the doubtful debt provision as well as lower sell-in levels late in the second half, partially caused by our inability to meet total demand. In terms of debtor days, we've seen a slight overall lengthening of debtor days, but within this average, we have also moved to tighten terms with what we regarded higher risk retailers. In contrast to inventory and receivables, our reported payables grew in line with business expansion, and so the net result was a $22 million cash flow -- cash inflow from working capital, which I largely regard as a timing issue. Moving down the balance sheet. The increase in intangibles by $36.8 million is driven by acquired goodwill for ChefSteps of $28 million. This includes the deferred earn-out amount but was equally suppressed by the $9.6 million IoT write-down. So on an underlying basis, you will see the intangibles continue to grow but are growing more slowly than revenue. And I expect them to continue to expand as we sustain our investment in the key growth enablers of NPD and for at least the next year, our IT global platform. Finally, and I've mentioned this before, our cash balance of $129 million net cash balance, includes the net $101 million proceeds of our capital raise and the above-mentioned temporary inflow from working capital. But this balance of $129 million when combined with $361 million of undrawn peak debt facility gives us the desired buffer against turbulence that we planned as well as funds in place for growth acceleration. That's been a little bit of an unpacking of our reported numbers, and I hope that's been helpful. If you turn to Slide 8, I give some key points. I hope that's been helpful in what could only be described as an unusual reporting year. And the 4 key messages I'd like you to take away are: number one, both top line growth and gross profit growth have remained strong across the year with our diversified portfolio proving resilience; number two, there's been an unprecedented degree of noise in this year's results, but on a normalized comparable basis, we delivered over 14% EBIT growth; number three, and I've made this a number of times, our growth trajectory and our strengthened balance sheet puts us in a good position for both sustained growth and to navigate any possible turbulence; and lastly, probably an obvious one, but a watch out that given the current turbulence in the economies in our markets, although we are very well positioned for growth and for future -- and future projections, projections remain tricky, I think a thoughtful balancing of both risks and opportunities is needed when projecting into the future periods. On that note, I'll pause, and I'll pass over to Jim Clayton, our CEO, who will provide an operational and strategic update. Jim, over to you.

Thank you, Martin, and good morning to everyone. On Slide 9, now that Martin has covered our FY '20 performance, I'll update you on the progress of our geographic expansion efforts and talk a bit about our evolution and how we're approaching new products. Moving to Slide 10. We are live in France. Going live during the COVID lockdown was an interesting process for sure, but as you can see, it has not slowed us down. While we may add a couple more retailers, in general, we're transacting with all the retailers we expected to be working with prior to our entry. So net-net, France is on track towards first Christmas. On Slide 11, we're deep enough into the rollout of our direct model in Europe to begin judging the success of our decision to flip to a direct go-to-market model in Western Europe. Focusing just on the countries we have flipped to a direct model, through FY '17, we went to market through 3 distributors selling under their own brands, 3 different brands across 6 countries. From FY '18 through FY '20, we've transitioned these countries to a direct selling model under the Sage brand. The bar chart at the bottom shows the net sales performance of this limited geography in constant currency, meaning the U.K. is not included in these numbers. From FY '11 through FY '17, the geographic performance was basically flat. In FY '18, we started the migration and I flagged the headwind in that year from the flip of Germany. Comparing the average revenue from FY '13 through FY '17 to FY '20, the regional net sales performance has improved by 117%. Of note, FY '20 is the year we absorbed the headwind of France. While not large, it means France is a net negative in the FY '20 number. Slide 12, continuing with the strategy of regional unification under the Sage brand, the Middle East, a distributor market, is transitioning from the Breville brand to the Sage brand. The rationale for this change is the Middle East uses the same plug as the U.K., enabling our partner to source product from the U.K. warehouse instead of Hong Kong. Israel is the exception and will remain Breville branded because Israel has a unique plug. Flipping the Middle East to Sage will help us increase the inventory velocity in our U.K. warehouse. Slide 13. By going to market as Sage, our distributors can pull mixed containers from our local warehouse versus ordering full containers from Hong Kong, reducing their working capital needs, enabling them to expand their range and accelerating revenue by launching new products when we do. Transitioning them from ordering full containers from Hong Kong to mixed constrainers from our local warehouse is the first step in improving their performance. In prior discussions, I've mentioned we are rolling out a new corporate-wide IT platform, which is now live in Europe. This new platform has enabled us to move on to Phase 2 in our distributor market territories, which is extending our digital go-to-market capabilities to our partners, and our Middle East distributor is first in line. Our Sage website recently went live in the Middle East, which you can see at sageappliances.ae. When a Middle East customer purchases a product through the website, the order is sent to our distributor for fulfillment. Technically, the website is Sage. The cart, however, and everything after is run and managed by our distributor. Once we stabilize the architecture and the integration layer, we will begin rolling this out across our distributors. This means when we launch a new product or add or change product content, the distributor's website will automatically update. At one level, this is go-to-market 101, but for Breville, it's an improvement on the current state of play. As COVID makes online more important, a premium digital experience becomes all the more critical. While many of our distributors are great at what they do, this does not necessarily translate into a best-in-class digital offense. Slide 14. This is a similar look back evaluating the success of our strategy to unify our regional distributors under the Sage brand. In FY '16, we sold the same products and 4 -- under 4 different brands across several countries. As of FY '20, all distributors within reach of the U.K. or Prague warehouses now go to market with the Sage brand, excluding Israel as mentioned before. Looking at the historical performance from FY '15 through '19 in constant currency, we see flat performance until we get to FY '20, where we see a 47% improvement to the average net sales across FY '15 through '19. The distributor geographies perform a bit differently than direct geographies because there's more of a lag when we flip the brand. They have existing inventory of the old brand, so they phase in Sage product by product as they stock out of the old product. Each flip brings its own headwind as the distributor stops ordering 40-foot containers from Hong Kong, which later transitions into a tailwind as they expand the range and begin flowing with Sage-branded products. Given the number of flips, the headwinds netted out against the tailwinds through FY '19. In FY '20, we began to see the breakout. The net of this slide is we can materially improve the performance of our distributors by allowing them to leverage our warehouses in region. The next phase will be to further accelerate their performance by extending our digital offense as we are doing in the Middle East. Slide 15. Moving on to geographic expansion. Our goal for FY '21 is to add Italy, Portugal and Mexico to the mix. Italy and Portugal will complete our push through Western Europe, adding the final 2 countries, which we have not sold into previously. Italy and Portugal may have been expected. Mexico may be a bit of a surprise. For Breville, Mexico is an obvious expansion country because the SKU is the same SKU we sell in the U.S. and Canada, enabling Mexico to be fed from both Hong Kong and our L.A. warehouse. To facilitate this efficiency, we are transitioning all SKUs in North America to a single 3-language format: English, Spanish and Canadian-French. Mexico represents an important milestone for Breville. To date, we have added many countries, but they have all been in Europe. Our European team has learned how to execute the playbook for entering a new country. We have now taken our new country knowledge and experience from Europe, absorbed it as a global capability, and we are now rolling this into a 3-theater offense, with all 3 regions moving independently at their own pace. The Americas are striking first with Mexico. As an aside for the analysts on the call, this slide is a foreshadowing of what is to come. Currently, we provide global segment revenue breakout for North America, Europe, ANZ and rest of world. With the transition to a 3-theater offense in the first half of FY '21, we will move to a regional breakout for the Americas, EMEA and Asia Pac, meaning the rest of world cut will disappear. The good news is this 3-theater structure will be stable for quite some time. Slide 16. I'll now transition to talk about the learning curve we are climbing with our new products. Slide 17. In FY '16, the company's mantra was food thinking, an individual product-centric lens. In FY '18, we announced we were moving up the value curve to category thinking, developing a range of products that meet customer needs in the subcategory. While category thinking continues, we are migrating up the curve once again to solution thinking. Slide 18. A solution typically includes 4 components: a product, content and/or services, an ecosystem that feeds and extends it, and a platform that ties it all together. In my experience, in almost every transaction, one of the parties is the solution provider. In the consumer space, 9 times out of 10, the solution provider is the consumer. Maybe an example. A hammer is a product, but if you think about it, no one ever bought a hammer because they wanted one. What they wanted was a dog house. Combine a hammer with some nails, wood and a [ tradie ], and you've got a dog house. Bunnings sells you the Stanley hammer, which is not what you wanted. In this instance, the customer is the solution provider, not Bunnings nor Stanley. While there are exceptions in general, Breville has historically provided the product in the solution framework, much like Stanley with the hammer. The next step up the value curve is moving closer to delivering a dog house, which, to be fair, is a wholly different kind of problem. Slide 19. To date, I've not talked much about the rationale for the ChefSteps acquisition, but now I'm ready. If we look at what ChefSteps offered at the time we acquired them, it was a solution. They, like Breville, built an outstanding product, the Joule Sous Vide. But in addition, they had invested tens of millions of dollars in the content of chefsteps.com teaching consumers how to cook. Roughly 20% of this content was related to sous vide cooking. They then built a proprietary IoT platform that combined their exceptional content with the device through which the ChefSteps team helped customers achieve perfect results in their kitchen every time they use the sous -- the Joule Sous Vide. They then wrapped an ecosystem around the solution to facilitate the continued evolution of the content. This is why we bought them. As I said to the team when we acquired them, the Joule Sous Vide is a fantastic pilot. It's hard to make money as a content company, but content embedded in a device can be priceless. For anyone with an iPhone, how much of what makes it indispensable to you is the hardware? ChefSteps had best-in-class content and the ability to make more of it. As luck would have it, Breville just happened to have a few products sitting around. Put the 2 together, and you're moving up the value curve from a product to a solution. Slide 20, and that is what we're doing. In FY '21, we will launch the Joule Oven Air Fryer Pro. Given that we have not launched it, I will limit my discussion to the solution topic. From a product perspective, it will be the best-performing oven we have ever made. But the true difference will be the combination of the ChefSteps content relevant to ovens, roughly 15%, along with quite a bit of Breville content that has never seen the light of day. We will merge these 2 pieces into a seamless user experience through a standardized IoT platform, enabling you to execute a recipe through an app on your phone or with Alexa or Google Home. Surrounding this will be the ChefSteps existing ecosystem, individual chefs as well as user communities that formed around the Smart Oven Air. The Joule Oven Air Fryer Pro chassis is the same as the Smart Oven Air, meaning they share the same thermodynamic properties. This means all the content we combine with the Joule Oven will also work with the Smart Oven Air, though it will be manual. This will be the first time Breville has delivered content for a new product that is equally optimized for an existing product in the market with a large customer base. If you look at the little box on the right side of the slide, this is something the ChefSteps team is putting at the bottom of each oven-related recipe on the website, which tells Smart Oven Air customers how to get the exact same result the chefs are getting at ChefSteps, rack position, temperature settings and time, perfection every time. This will be Breville's first self-developed connected product. When I started at Breville, I was often asked if we would launch a connected product, and I replied only if we have to. Connectivity alone is not a value proposition. A solution is a value proposition. By combining the outstanding content from ChefSteps into a seamless cooking experience with the Joule Oven, we will deliver our first true solution to customers. And because it is connected, our customers will continue to get added content and features throughout the life of the product, another first for Breville. Slide 21. From a technology platform point of view, this means Breville currently has 3 separate IoT platforms: the proprietary Joule platform we got through the acquisition of ChefSteps, the proprietary platform we've been building over the last few years to use with other products, and the standardized platform we will use when we launch the Joule Oven. This multi-version reality is what happens in every technology market prior to standardization. Anyone who wants to get going before standards form is forced to build their own. Then once the standards arrive, everyone converges to the standardized platform, which is what we will do. The platform we are using for the Joule Oven will be our go-forward IoT platform. When we launch a new version of the Joule Sous Vide, it will converge to this platform. We are doing the same with the Breville products that we're going to use Breville's proprietary platform. This convergence decision has led to the onetime write-down in our FY '20 numbers. The rationale is simple. If we invested $3 million per year in an IoT platform, with 3 platforms, that would be $1 million each. If we converge to a standardized platform, all $3 million will go into a single technology platform, which is being improved by the standard bearer, benefiting all products connected to that platform. The last point I'd like to touch on is the little box that says acquired IoT product. If, in the future, we acquired a company that has an IoT product, in addition to integrating the company itself, porting the acquired product to our standard platform will be a required step in the integration process. Integrating the company should happen relatively quickly, but the IoT platform convergence will typically be aligned with the launch of a new version of their product, which will take more time. Slide 22. I'll end the presentation with some reflective thoughts on the back end of FY '20. As a team, we're happy with the numbers we delivered for FY '20. We posted a solid first half and carried this run rate through the second half. Not to take away from all the hard work that went into making this happen, I think it's important that we also recognize that, in the second half, Breville was more fortunate than most. Other than the manufacturing delay coming out of Chinese New Year, none of our manufacturers have had to shut down since then, and they all made it to 100% operational capacity relatively quickly. Overcoming the operational challenges caused by the Chinese New Year delay was made easier by our excess inventory position in the Northern Hemisphere as we entered the second half. We were able to quickly optimize our manufacturing capacity against the SKUs and markets that needed them most. And lastly, COVID drove governments to impose quarantines with businesses flipping to a work-from-home model, making our products more relevant, which meant, so far, we avoided the steep fall-offs in demand that so many other businesses are having to navigate. Watching Breville as well as the entire value chain in consumers, it feel like we have transitioned through the initial shock of COVID and are now settling in to this being the new normal for now. The absolute unpredictability and uncertainty are still there, but the associated anxiety has lessened. FY '20 has presented quite the gauntlet, managing Brexit risk, the falling Aussie dollar, U.S. tariffs and COVID. This has tested every dimension of the company, our processes, information flow and collaboration infrastructure, decision-making model and our team. We traversed these challenges. Our transaction processes and associated decision-making processes are flowing in near real-time, while our strategic projects are methodically moving forward, unaffected by all the dust kicked up on the transactional side. Leveraging our collaboration backbone, our global functions quickly aligned with in-country teams to adjust to this new reality. We've worked on laying this foundation for the last 5 years, and this is exactly the type of situation where you discover what's working and what isn't. We have found opportunities to improve both efficiency and effectiveness, and we have augmented our processes with tools to facilitate decision-making at velocity. The asset coming out of this COVID period will be a hardened and tested platform, which provide a compelling foundation to build upon over the next 5 years. That's the end of the prepared presentation. I'll now hand back to the operator to open the call up for any questions.

[Operator Instructions] The first question comes from Apoorv Sehgal with UBS.

Guys, congrats on a good result. Obviously, a pretty good revenue performance. Sounds like some inventory shortages drove growth to be around sort of 15% over May and June compared to sort of 30% over Jan to April. Can you just talk through the materiality of stock-outs in May and June and what this means for revenue growth in first half '21?

I mean, look, I'll take a shot at. Martin, you can clean up. I think the other thing you've got to remember is one of the other differences in June -- May and June was also that Amazon Prime Day got moved from July to October, which means the sell-in to Amazon is in the prior year, but it is not in this year, which means that 15% growth was actually sitting on top of a prior year that had Amazon Prime delivery in it. So that's kind of one piece of it. So look, we did have stock-outs, different SKUs, different regions that pushed into the first half of '21. What are we going to do in the first half of 21? No idea within that construct. So yes, it pushed forward, but if we're sitting here, and I mean this from my perspective, if we're running at 25% kind of first and second half, that feels like a pretty solid clip by itself. So yes, we have pushed into some orders into the first half of -- or really into July. And August, we'll keep chasing a little bit, July and August of this year. But the real question about what this year is going to look like is what does October and November look like, which we're not going to know until we get there.

Yes, sure. And then maybe moving to cost out. So you've excluded $11 million of sort of temporary cost out from your normalized EBIT number. If we go back to the last trading update, you were sort of indicating $5 million plus per month over March to June, which just theoretically would suggest around $20 million of cost out. So just wondering how much cost did you end up sort of taking out over those last 4 months of the period? And how can we think about implications to profit margins over next year?

So Martin, you want to...

Yes, I will, Jim. Yes. First thing I'd say is I think $20 million, we didn't get going really until April, so it was 3 months rather than 4 months in terms of where -- if you actually track back and see when the COVID alert hit, yes? So I'd say more that we had 3 months of savings. And if you compare that to what we've normalized for, you'll get a feeling for what we're carrying forward.

Got it. Okay. Maybe just a final question for me. Just on cash flow, just appears to be quite strong. Looks like over 100% conversion if we exclude interest in tax. Martin, can you just sort of talk through that, please, and just expectations over the next year as well for cash flow?

Yes. I thought I was at some pain in the presentation to try and communicate that the strong cash flow conversion, a big chunk of that is at least temporary because inventory levels being flat year-on-year for a business that is growing at 25% on the top line is not a natural position, and that's manifested itself a little bit in some of the stock-outs that we've just referred to late in the half, yes? So it's flattered a bit by that rundown of inventory, flattered a little bit by the shape of receivables in the year, so I think it was a little bit richer than it was in an underlying basis. So if you look at the comments we've made about what we think was underlying, I think you'll see that the cash flow was stronger than we expected. We expected the unwind of the Brexit, the unwind of the U.S. tariffs, the unwind, if you like, of the unconstrained inventory holding in Europe. We didn't expect it to be flat year-on-year.

The next question comes from Callum Sinclair with Macquarie.

Just maybe one quick one around the reported revenue growth. Obviously, strong in FY '20, but given the commentary around the divergence between sell-in and sell-out with the end customer demand [ at least ] ahead of your results, so can you just share maybe just how wide that divergence is?

Look, I mean we haven't really talked about how wide it is. It's a fair question. But I think ever since really -- I mean, certainly, April, I mean, when we did the equity raise, we said that sell-out is trending faster than sell-in. And I think that is not just happening for us. I would expect it to be happening for anyone kind of in our vertical that's behaving like we are. So that reality still continues for us, and this is -- the chase is on, so to speak, which is we have been confronted in some geographies that with the demand pattern that was more than we expected. And by definition, that means you're going to be overselling and you're going to be chasing. So we've got an adaptive S&OP model to do this, but it takes time in a sense to catch up. So that's basically the posture we're in, is trying to get caught up to that and in front of it. We're in decent shape. It's a decent shape at the end of August. By the time we get into September, we're getting -- we're kind of there, but now you're into the Christmas sell-in pattern again. So I think -- I don't think there's anything unique, I guess, is what I would say for Breville, the fact that sell-out is trending faster than sell-in. So we've got a couple of things as we roll into the first half, which is that pattern continues, and we got caught mostly in June on the inventory side. So we're trying to catch up there as well.

Yes. Appreciate that.

Jim, I'd just add to that, I think it's fair to say that our belief is that not only our inventory level is a little bit below equilibrium, but the inventory in the trade is also probably a little bit below equilibrium with the strong sell-out in some markets.

Yes. No, I appreciate that. Maybe just one on the unusual nature of this environment. I mean what are the key changes for Breville and the category as customers shift purchasing behavior to online channels, maybe around display, promotion, shelf space and the importance of online reviews on your business but also the category?

Yes. I think, look, this is -- the good news is that we've been working at this for 5 years. So we actually aren't having to do anything different. So we've kind of done that. That's kind of a 101 digital offense that we've been running for a while. So I think the bit that's different in a sense -- I mean our warehouses -- I mean our operations teams are -- what I say, there's instead of moving pallets, they're moving more to individual items, right, as our own e-commerce fires up. And then same with our retailers, which we're kind of indifferent to that. That's theirs to manage. I think what you -- what is different, and this was a pivot that I think everybody did back in March and April, is if I was planning on a particular mix of my marketing spend between physical and digital, as I said there in February, if you looked at that mix in June, it would be very different, right, which is we are certainly weighting our spend more in the digital direction to align with this kind of COVID world to help consumers find a place where they can get the product that they want. And so I think we will continue to support the physical, like this is just a function of country by country and all this other bit, right, especially on countries that we're going into that are new. But we really -- we are driving a hard digital offense right now, I assume, like everybody else. It's -- that's not rocket science. But the good news is, for us, we haven't had any -- do anything new. Like it hasn't driven a change that says, "Oh, my goodness, now we have to go do this." It's literally just about turning dials and say more of this and less of that.

The next question comes from James Barker with Morgan.

Just a couple of questions for me. Could you just talk about the -- in terms of Italy and Portugal, the retailer dynamics over there and maybe [ expected ] sort of launch dates, please?

So we will launch in FY '21. So we have not called the date. We're just putting it out there that we expect to get both of them done this year. And I would -- I described those markets. They are mostly centralized, which is directionally a good thing. That makes it easier. So I think, in general, both of them are centralized markets, so it'll go down more like -- it's more France and less Germany, I guess, is the way I would describe it. So it's more of a French offense. And when you look at Portugal specifically, there's a lot of overlap between the retailers in Spain and the retailers in Portugal. There's a couple of Portugal only, but in general, if you're trading with them in Spain, it's a short putt to add Portugal. And at some level, the same is true with Italy given that we're now trading across all of Western Europe. So we're getting a lot of retailer overlap with these final countries.

Okay. That's great. Just in terms of the Amazon Prime Day, are you able to sort of maybe give some sort of rough quantification of how big that could be? And then should we think about FY '21 as effectively getting, I guess, 2 Prime Days in the same year depending on how it plays out?

So that's the right question, and we have no idea. And I say this because the idea that Amazon's going to have a Prime Day in October and then turn around in November, right, and all of a sudden have a Cyber Monday, I don't know, like it's honestly going to be really interesting just to watch it happen. And it's not like things have gotten better in the U.S. So I've got to assume that Amazon is still dealing with a tremendous amount of pressure in CPG, which means they don't have a lot of room in their warehouse. So I'm not quite sure what Prime Day is actually going to be. It's certainly not going to be a Prime Day like -- well, I'd say certainly. I'm throwing the dart at the board. I don't see how it's going to be a Prime Day like what they would normally do in July. And then I have no idea how that is going to interact with Black Friday. Is the demand really that separate being that close together? So I don't know if it's just kind of like a 4-week blob or kind of what that is, but you're right in the sense that we're going to have a really odd pattern in FY '21, and let's call that a retailer promotional pattern. So you've got Amazon's trying to slide Prime Day into October. Then you've got -- and I'm just here in the U.S. right now, but just listening to the U.S. retailers, Black Friday is not going to happen. So the last thing retailers want is 80,000 people descending on a store with social distancing would be laughable. So they just like, "We can't do it." So Black Friday may just not happen. Then you've got Cyber Monday, okay, that one can happen. And then depending upon how all of this other -- you're really forecasting futures at that point, but depending on what the second half looks like in a COVID world, will Amazon get caught up and have the CPG demand back off of them enough to then actually be able to have a normal Prime Day in July? If that -- if all that's true, then technically, you've had 2 Prime Days in the same year, though I'm not quite sure what the first one is really going to be, but it means that it's a very confused year. And that's going to be your prior year comp going into '22, which is basically a retail promotion pattern that will never happen again. Then they'll try to straight it out in '22. And I just -- I don't know. It's going to be -- we're really in a wait-and-see approach because it's just not real clear how this is going to flow through. But in theory, right, I mean, you've got -- if I sit there and look at an uncertain future of how is '21 going to play through and we don't know, there's a couple of variants around that, which is, okay, little tailwind/cushion of the orders that pushed from '20 into '21. Okay, that's there. Then you may have kind of 1.5 Prime Days or however that works. But you lost Black Friday, but you picked up Cyber Monday. And somehow, that's all going to sort out into FY '21 results. But maybe you've got a demand pattern in May and June to finish the year. Maybe you don't.

Okay. Got it. Just in terms of the customer payment terms that I think you extended some of them in April, could you just talk about is that going to be a thematic that plays out through this -- through the first half of '21? And will that impact sort of, I guess, balance date at the first half end?

So yes, I'll take that one, Jim. We saw tensions pulling both directions. We absolutely saw some customers pushing and receiving extended payment terms. And equally and I mentioned this in the commentary for some retailers that we regarded as higher risk, we've pulled their payment terms into the shorter terms. By definition, the ones that have lengthened are a bit larger than the ones that have shortened. So yes, net-net, there is a lengthening of payment terms. That will play through in the second half, definitely. But what moves second half receivables is clearly the volume of sales and the shape, whether we have a big October, a big November or a big December as to which ones is still receivable at the time we hit the December balance sheet date. But yes, some lengthening in terms, but I think the shape of orders during the second half will almost be a bigger impact on that receivable balance than the actual lengthening of days.

The next question comes from James Casey with Baillieu Stockbroking.

I wanted to ask a question with regards to your North American business. The run rate there in sales was a little lower than the group sales growth rate and also a little below what's historically been achieved in North America. Could you just provide a bit more detail on the disruption during the post-COVID-19 period and whether that's returned to normal now?

Yes. So you're right, and we talked a bit about this in April as well, which is, of all the geographies, the U.S. went through one of the tougher kind of lockdowns if you want to call it that because you had -- and I mean this at the, let's call it, at the premium end of the market. So all of the physical retailers shut all doors. Some of them were prepared to deal with a quick pivot to online. Others weren't. So they needed some time to catch up. So that's one piece where if I compare it to Australia, where I think it was Myer was the only one that, if that's right, shut doors, everybody else is open. So the U.S., imagine, Harvey Norman's closed, JB Hi-Fi's closed, everybody, no physical anywhere. And then you have Amazon, which is a meaningful player in the U.S., just stepping out completely, which is online, off-line, everything, they're out, right? So all through this kind of this March, April and kind of into May, Amazon was crickets. Like they -- there was no place to put anything. So they stepped out of the market completely at the very same time that all of the physical stores shut. So the level of disruption compared to what happened in Australia is a tsunami compared to what Australia went through. As we swung around kind of June and then you're coming into July and August, it's starting to, let's call it, be more normal or better. It's like everybody's kind of that caught up with that full mess. They've opened some stores, and now you've got all the stuff going around all the different states. But in general, they started to open up, and we're kind of getting back into a world of -- I wouldn't describe it completely normal because I think Amazon is still under the gun on their warehouse space and logistics being stretched and all that kind of stuff, but they are transacting with us and they are selling stuff. So they're trying to get out of just CPG. So I think we're approaching a world that is more Aussie like in the retail format as we sit there and kind of June, July, August feels a little bit more like Australia, where March and April probably felt like Italy.

Okay. And then just a quick one on your capital structure. Obviously, you're significantly net cash at the moment. Do you see that as just being a temporary situation given the uncertainty and then you'll return to what I might describe as a more normal capital structure, a more efficient capital structure?

Yes. So this is -- it's obviously a judgment call, and it's one that I'm making and sticking to it. So if -- and this is the way I explained it internally, which is, as I listen to the economists, and they talk about Vs and swooshes and all these different patterns, I basically did the math that said, okay, if I believe what I -- I'm going to call the consensus of economists of when we got out of this mess and I compare that to a marathon, we're basically at the 4 -- we're about at the 4-mile marker of a 26-mile race. So when I'm at the 4-mile mark, I want a lot of water because I don't know what's in front of me. If I get to the 18-mile marker, I can start to see the finish line. But right now, because the uncertainty is so extreme and it's no different than Victoria shutting down and then New Zealand doing this and this in the states and not over there, we're going to be in this kind of whack a mole game for a while. And so while we have been relatively efficient -- let's call it, efficient in our balance sheet over the last 5 years, right now, I think the best posture for this company is to optimize its balance sheet strength, and then when you get confident that you can predict the future, then you can go back to moving the metrics that you want to optimize against.

The next question comes from Ash Chandra with Goldman Sachs.

Just a couple of quick ones. I don't know if you covered this off earlier. Apologies if I missed. But at the end of each year, you usually give your sort of R&D and marketing spend number and how that's tracking. I fully appreciate you've indicated that marketing spend was wound down to reflect the uncertain environment. But is there any sort of comment you can give in and around sort of where that's tracking and what you think that could be in '21 relative to the sort of...

Yes. So let me make a comment, and then I'll hand it over to Martin for the details. So when we went out with our capital raise, what I told everyone was that I'm putting a pause on that metric for '20 and '21, meaning it's not a metric I'm driving to or at because I'm playing the -- based with facts on the ground -- on the marketing side, right, the NPD just keeps doing what it does because that's a kind of 3- to 5-year mark. So product is effectively untouched. But marketing is a very tactical game that we are playing on a monthly basis across all geographies. So what that means is that the number that we report at the end of the year is whatever that tactical [ game burst ] and as opposed to it being a thing that I'm trying to get to. Now when we were in February, we were on track to deliver, I think it was -- I think we were going to come in at around 11.5% or something just short of that. That was the plan. And then this little COVID thing happened, and everything went off the rails. And so just -- this is why we haven't disclosed it. It's because it's not a metric I'm tracking. As an objective function, it's going to be more of a result of the facts on the ground. And with that context, let me hand it to Martin, and Martin, whatever. I actually haven't even looked at that number. So I don't know what the answer is because I'm just not looking anymore. But Martin, I don't know if you looked at -- if you did the math or not.

Yes. Sorry, I just dropped off for a minute. Jim, dropped off the line, but I'm back in now. So would you mind just quickly repeating the question for me? I'm sorry about that.

No, no, problem, Martin. It was just in and around the usual metric you give around how you're gradually upping your sort of R&D and marketing each year. And obviously, Jim's explained that you're not technically worried about that for the next year or 2. But if there's any sort of framing of how you might think about it in broad terms for fiscal '21 onwards, any comment would be appreciated.

That's fine. That makes sense. Thank you. So I think I heard Jim say that we were on track for the 11.5% as we sort of ran into the COVID period, which is absolutely correct that we would have been in a position to report a step-up on the way to the 12% initial target. We've clearly come in a little bit beneath that, and I've talked about the temporary cuts to marketing expenditure. That's one of the levers we can pull when we need to. But even with that, if you normalize that back in and if you normalize the salary cuts back in because some of that hits NPD, then we'd certainly be running at a higher percentage level than last year. Probably not as high as you wanted to get to, but we'd still be above last year. So I think I'd say that we may or may not report this metric running into FY '21, but it certainly will remain on strategy to keep stepping up our investment in NPD and marketing. So it knocked us around a bit and so much normalization going on that. I don't like really reporting metrics, which have normalized or normalized in there. But if you do that, yes, we're running ahead of the percentage level that we had last year.

Okay. Terrific. No, that's helpful. Another question I just had, maybe a minor one, but your sort of warranty expense that's been running through the P&L had been on a sort of declining trajectory, and sort of this year, it looks like it's come out at sort of 3.8% of revenues versus 3.4% for the last couple of years. Is there anything -- yes. Is there anything particular that's maybe sort of driven that in the other direction for the first time in quite a while?

Yes, good pickup. Yes, nothing particularly apart from, I'd say, in the period that we had post-COVID, we did feel that we were having a normal customer experience in a sense that we -- customers were able to -- consumers were able to buy our products, but there wasn't a normal environment for which, if they had a quality problem, they could return it. So we went very prudent -- not very. We went prudent in our provisioning for potential returns that could come back after stores reopening, after social distancing, after normal movements. So if you like, we have lengthened the period in which we expect to see our peak returns. So we've got a fairly prudent provision in there. In terms of actual run rate returns, no, there's been no change to that number.

Okay. Great. That's helpful. And Jim, when you talk about the fact that your NPD just continued to tick along in terms of that investment, you're certainly not sort of starving that of any capital. Is there anything that's different about the launch cycle of the sort of NPD pipeline that's moving around a bit just given maybe geography-to-geography sort of demand environment is also quite fluid? Or are you just going to sort of continue at preplanned points in time that product A, B and C are hitting the market irrespective of solutions?

Yes. So maybe 2 bits to it. So let me first touch the market side. When a product is ready, we will release it. So there's nothing about -- and I think this is in a sense what we've seen in the second half, which is customers are finding our product. So no matter what retailers are doing and shutting down and all this other kind of stuff, they are finding our product, whether it'd be our own website or someone else's or how else they're doing it. So the customers are kind of pushing through that friction to find our product. So within that construct, if I have a new one, then let's get it out there so that they can have access to it because they're proving, if we're running at 25% in the second half, we're -- that's fine, like that's a good run rate. Where NPD actually is impacted a bit by COVID is our inability to be co-located with our manufacturer. So as we're in the innovation cycle and learning together about that worked, that didn't work, hey change that, see what that looks like and that kind of stuff, all of that is having to happen through Zoom and leveraging our local team in China, our NPD team in China, which is not quite this -- they were working on OPD projects as opposed to what I would call the high innovation projects in Sydney. So I think the team is doing the best they can, but there is definitely a little slippage that we're going to eat, I think, along with every other product company in the world about the efficiency that you get by being co-located. And it's interesting because as a company as a whole, I think all companies are learning what is doable in this virtual environment and a lot of things have gotten more efficient in the business by being virtual. This is the one nick that goes the other way, which is, in an innovation company, there are times when it is better to be co-located. And so I think within that construct, NPD is affected. But when NPD rings the bell and says this one's ready to go, then we will launch it.

Terrific. And if I could just squeeze in one last question. Sorry to everyone else on the call. The incremental cost of Mexico, Italy and Portugal, I mean it doesn't sound like it's going to be very much at all. Is that an incorrect way of thinking about it?

Yes. That's not...

Not right. Okay. I'm sorry if I missed it...

This is the -- the beauty is that like when we announce a country, the first question you need to ask is, is that country being fed by existing infrastructure. If it is, it's a marginal expense, right? If instead we're having a little bit like when we went into Germany, where we're having to lay the entire backbone to make it happen, that's when you've got a different kind of feel about what that's like on the expense side. But when it's just leveraging existing infrastructure, these become kind of marginal step-outs basically, which is why you end up getting the kit coming back a lot faster because the incremental cost to do it is low.

And then just on the timing of the launches, sorry, if I missed it, but Mexico, Portugal, Italy already like basically open or within 6 to 12 months? Is there anything you -- apologies if I missed it.

All 3 within FY '21.

All 3 by -- okay.

[Operator Instructions] The next question comes from Sam Haddad with Bell Potter.

Congratulations on the result. Just one question for me. I'm just interested in the direct-to-consumer channel, the like breville.com, sageappliances.com. That was a channel that's done very well through COVID. There's still a single-digit percentage of sales, I imagine. What's the opportunity in that channel? And how do you -- how can you grow that channel? And can you talk about the margin benefits as that becomes a greater percentage of your sales across the business?

Yes. So look, we do make more margin when we sell through our own channel, so obviously, that's a good sale. I think the thing to be a little careful about is that what -- I think what we have proven and what everyone has proven is that when governments put the state of Victoria into a hard lockdown where you can't leave your house, consumers will transact online more often. So everybody is getting the benefit of that. And so within this construct up in this COVID period, when I can't leave the house or I don't feel safe leaving the house, if I pick Los Angeles where I'm at, for whatever reason, right, so when these forces drive you into the corner, then you will transact online. My question is when we're done with that and we get on the other side and we get into a thing where consumers have the same level of choice that they had before, will they go back to a normal transacting model where I want to touch it, feel it talk to someone about it, like what's going to be the overhang. So I think there is a -- opportunity is not the right -- maybe it's an opportunity. I don't know how you want to say it, which is, right now, everybody needs to be pivoting digitally, period, because that's how consumers are interacting with companies because they need to. I don't know what will happen when they want to, the difference between the need and the want. So within that model is our dot-com. Are we put -- posting stupid year-over-year numbers? Sure, we are, right? But that's also the law of small numbers. I see a lot of people disclose percents and stuff. For me, it's whatever. Like this is -- the question for me is, if a customer wants our product, have we given them as many possible paths or the lowest amount of friction to getting that product? And if we have, then that's great. If they picked us? Fine, right? We made a little bit better margin. But I also want my retailers to be happy as well, right, because they're the ones that have the big fixed cost and all that kind of stuff. So this is about -- when I say 25% growth, what makes me happy is that means rising tide lifts all boats, right? That means everybody did better in the value chain. So how do we do it? It's the same offense that we've run before. So we're not so much changing -- we're changing our offense a little bit in the sense of doing these virtual masterclasses, like we did them in person and now we do virtual masterclasses to teach you how to do what they are or whatever it is. So within that model, we're still trying to extend the same service and the same knowledge sharing to a customer. We're just doing it digitally. If that ends up creating an engagement, which then turns around and creates a transaction, okay, like so be it, but the whole driver is to just keep doing what we were doing before physically and now replicate that in a digital environment. The cool bit is that means we'll have those assets when we get on the other side. So to the extent consumers do want to interact and learn with us digitally, we will have all of these assets to facilitate that as opposed to having to do it. So I'd say what do you -- what do we do differently to facilitate this whole thing, is turn our physical execution into a digital execution across [ the customer ] engagement.

So related to that, obviously, it's rely on brand awareness, people going to -- direct to those platforms. What are you seeing in terms of brand awareness, particularly in U.K. with Sage and how that could be -- how you can project that going to -- across Europe? Are you seeing any encouraging signs there?

Sure, like -- but you have to be careful, right, because if the number of customers coming to my side is going up, then you're kind of seeing that percentage increase going, wow, that's working within this construct. But I think everyone is seeing that within that model. Now obviously, they had to type it in. So something happened before that typing moment to make them decide to go here, and it maybe because so and so retailer was stocked out. Well, maybe I'll go to the brand, and they'll have it, right? So we may be their second stop after where they tried. And then as long as we can take care of them and fill that demand, then we've got another customer so to speak. So look, I think all of -- at some level, Sam, I think the numbers speak for themselves, right, which is 89 years of work across lots of different geographies in different states burst the second half. And when I look across the other players in the space and the numbers that I can see, we are continuing to grow at a very solid clip compared to the other folks in the market, which means we're doing something right. Can I put my finger on exactly what it is? Maybe not, right? But the offense that we're running and our ability to convert that to digital appears to be working if I just look at the numbers that we're posting and chasing.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.