Breville Group Limited (BRG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the 2020 Virtual Annual General Meeting of Breville Group Limited. I'm informed that a quorum is present, and I declare the meeting open. My name is Steven Fisher, I'm the non-Executive Chairman of the company. I would firstly like to introduce you our Board of Directors who are with us today. Lawrence Myers, the independent Director and Chairperson of the Audit and Risk Committee; Tim Antonie, Non-Executive Director; Peter Cowan, Non-Executive Director; Sally Herman, Non-Executive Director; Dean Howell, Non-Executive Director; Kate Wright, Non-Executive Director and Chairperson of the People, Performance, Remuneration and Nominations Committee. We're also joined today by Jim Clayton, Chief Executive Officer; Martin Nicholas, Group Chief Financial Officer; Craig Robinson, Joint Company Secretary; and Sasha Kitto, the Joint Company Secretary. I advise the meeting that [ H. Chandran, ] who represents our auditors, PricewaterhouseCoopers, is present and available for any questions you might have relevant to the audit of the Breville Group for the auditor's report. Today, our items of formal business comprise the receipt and consideration of the financial year '20 annual report and thereafter to seek shareholder approval to the adoption of the remuneration report, the reelection of Tim Antonie and Dean Howell as Non-Executive Directors of the company; and finally, the ratification of the prior issue of placement shares in May 2020. Before we go any further, I would like to invite Craig Robinson, our Joint Company Secretary, to acquaint you with the procedures and processes of this -- of first virtual AGM.

Thank you, Mr. Fisher. As the Chairman mentioned, this is our first virtual AGM. So I'm going to detail the procedures and processes to be followed today. Firstly, voting. The Chairman will call a poll on all resolutions to be put at this meeting. The results of the poll will be released to the ASX and will be displayed on the company's website as soon as they are available and after the close of the meeting. A representative of Link Market Services, who'll act as returning officer for the purposes of conducting and determining the results of the poll. Please note that shareholders who are not able to virtually attend today's meeting have had the option of appointing a proxy to cast their votes. The results of these votes will be displayed on screen via the virtual online platform, following the discussion of each proposed resolution. Shareholders and proxy holders who are eligible to vote at today's meeting should have registered for a voting card by following the instructions provided in the BRG virtual online guide 2020. If you have not already done this, please click on the get the voting card button at the bottom of your screen. This will bring up a box to register. If you're an individual or joint securityholder, you will need to register and provide validation by entering your securityholder number and postcode. If you're an appointed proxy, please enter the proxy number issued by link in the proxy details section. Then click, the submit details and vote button. Once you have registered, your voting card will appear with all of the resolutions to be voted on by securityholders at the meeting as set out in the notice of meeting letter. You may need to use a scroll bar on the right-hand side of the voting card to view all resolutions. Securityholders and proxies can either submit a full vote or a partial vote. The Chairman will advise you when it's time for you to complete your electronic voting as the meeting progresses. If you need assistance completing your electronic voting card, please call Link Market Services on 1 (800) 990363. Secondly, regarding the topic of questions. After the resolution for each item of business has been put to shareholders, the Chairman will answer any questions submitted on the day or in advance through the online platform. Only securityholders are eligible to ask questions. [Operator Instructions]. Questions can be submitted at any time during the AGM. Comments or questions relating to a particular resolution at hand will be addressed at the time considering the resolution. Comments or questions of a more general nature can be submitted throughout the AGM. And will be addressed by the Chairman after all resolutions have been covered. A representative of Link Market Services will act as a moderator for questions and put them initially to the Chairman who may answer them or redirect to another Director, a company representative for the auditor. If anyone still needs to register for a voting card, I suggest that you attend this now. Finally, on the screen, you will see 2 presentation windows. The one on the left side shows the live stream of the speakers, whilst the one on the right-hand side of your screen shows the presentation itself. Should you wish to enlarge either window, please hover over right on the tip at the window and click to expand. I will now pass back to the Chairman, Mr. Steven Fisher.

Thank you, Craig. Before we turn to the formal business of the meeting, both our CEO Jim Clayton and I would like to take the opportunity of addressing you. As Craig noted, any questions on the following presentations are most welcome. I'll address these at the end of the formal business after resolution #5. In the 2020 financial year, the group continued to progress up the curve of our acceleration program, with strong sales growth and double digit EBIT. On a normalized basis, these encouraging results were delivered in the face of a series of challenging events, including Brexit uncertainty, U.S.-Chinese tariffs and, of course, the global pandemic. Under the leadership of our CEO Jim Clayton, the group navigated these challenges and continue to successfully innovate and geographically expand, launching the Sage brand into Spain, France and the Middle East. Group's business trajectory remains healthy, whilst the balance sheet has been strengthened to provide resilience against near-term turbulence as well as funds for future growth. Jim will talk further on growth and the group's expansion strategy in his presentation. In terms of key numbers, the group delivered a 25.3% increase in revenue to $952.2 million, with strong revenue growth in the core Global Product segment increasing in constant currency by 20.1%. The Distribution segment revenue for the year also grew strongly at 26.9%. Group EBIT on a normalized basis adjusted for both abnormal expenses and savings, finished at $113.1 million, 14.3% higher than the prior year. Net profit after tax on a normalized basis increased by 11.2% to $75 million. Earnings per share on a normalized basis increased by 10.6% to $0.573 per share. The Board increased the full year dividend for the year by 10.8% to $0.41 from $0.37 in the prior year, with a fully underwritten dividend reinvestment plan or DRP, activated to preserve cash and to allow future flexibility. Net cash at June 30, 2020 was $128.5 million, which included the net proceeds of the capital raise completed in June 2020 of $100.7 million. This compared to net cash at 30 June 2019 of $9.8 million. More recently, you will have seen that Breville completed the strategic acquisition of Baratza, a designer and distributor of premium coffee grinders on the 2nd of October. The acquisition was funded by a combination of both cash and issuing ordinary shares to the vendors. The group remains with a strong cash position post the acquisition. I would like to take this opportunity to express our gratitude to Jim Clayton and his talented, motivated and passionate team members across the globe. We've shown exceptional nimbleness and resilience in this turbulent year. We are privileged to have such an exceptional group on the Breville Sage team. I would also like to express my appreciation to my fellow Board colleagues and our shareholders, customers and suppliers for their continued support in these unprecedented times. Lastly, thank you all for attending the virtual meeting today. Prior to moving to the business of the meeting, I will now hand over to our CEO, Jim Clayton, to present his review of operations.

Thanks, Steve, and good morning to everyone. As an update on our progress, I'll walk you through our FY '20 performance, show you the new products we'll be launching in the first half of FY '21 and finish with a discussion on our migration to a solution vendor as well as our outlook for FY '21. Overall, we reported 25.3% growth on the top line. A reaction to COVID hitting in March led to a series of abnormal expenses and cost savings. After normalizing out these one-off puts and takes, our EBIT grew 14.3%. Our dividend for the year grew 10.8%, tracking our normalized growth in NPAT. Top line growth was driven by comparable performance across both the Global Product segment, which grew 20.1% in constant currency and the Distribution segment, which grew 26.9%. Disaggregating the global segment, all geographies delivered double-digit growth. The North American performance is showing the impact of the COVID lockdown process in the U.S. as well as Amazon pushing Prime Day from July in October. ANZ delivered a growth rate north of its typical performance, which is reflective of consumer behavior during the COVID lockdown, increased spend on household-related items. Europe posted another solid result, and rest of world bounced back off a weak comp from last year. The balance sheet reflects the story of the impact COVID had in the last quarter of the year. Demand, both sell in and sell out, again running at a pace beyond our forecast, leading us to sell-through our inventory buffer. This resulted in an inventory number basically flat to last year, even though the business grew 25%. Thus, the working capital release you see in our net cash, which also includes the impact of our equity raise, is temporary. Once we catch up to demand, our growth in working capital will more closely track the trajectory of the overall business. I'll now move on to the new products for the first half of FY '21. This year, we will be adding Oyster Shell and Black Stainless steel as additional core colors across our product range. We started our color program a couple of years back. And our experience to date is the addition of color has driven incremental demand across our products. With globalization comes the complexity of language. This was particularly challenging for products like our oven and microwave range because of the number of features offered in those products. The problem was simple to describe: How do we offer the same number of descriptive choices on the same LCD screen in multiple languages? Other companies have used icons to represent a feature, but consumers have trouble remembering what the icon stands for. The Breville team went to work on the challenge and came up with an innovative solution. While we, too, adopted an icon approach, we also added a ticker tape section that describes the feature in the local language when the option is chosen. This has enabled us to offer the same level of choice and convenience across the products regardless of language. To help give you a better understanding of this feature, the short clip will show how language is expressed across the LCD screen. A couple of years ago, we launched the Bambino Pro, and we are now launching its little brother to Bambino. This is the most compact espresso machine we have ever made that delivers the same mandatory elements of true cafe-quality coffee that we deliver with the Dual Boiler. It has the same almost instantaneous heat up time as the Bambino Pro with PID temperature control, pressure control and a powerful steam wand capable of delivering microfoam for latte art. This will be the perfect entry product for customers who want to experience the taste of Third Wave Specialty Coffee but have limited benchtop space. And it's the perfect pairing with the Baratza Encore or Virtuoso grinders, products from our recent acquisition. Updating our commercial range. We are launching the HydroPro and HydroPro Plus, the most advanced commercial sous vide products in the market. Both are waterproof, with higher wattage to shorten the time to target temperature, have an intuitive touchscreen display with an onboard cooking guide and can control temperature to 0.1 degree C. In addition, the HydroPro plus automatically records core temperature readings during the cook cycle to make it easy for chefs to comply with health and safety reporting requirements. As I mentioned in our FY '20 year-end investor presentation, we will be launching the Joule Oven Air Fryer Pro. We're very excited about this product because it will combine the cooking content from ChefSteps.com with the most advanced oven we have made to date. With this combination, consumers will be able to do phased cooking, a feature we call Joule Autopilot. As an example, one of the recipes is croissants. You put the raw croissants in the oven, it will first proof the dough, then cook the croissants, then keep them warm, all in a single continuous cooking cycle. The oven will also be voice-enabled, so you can drive it with Alexa or Google Home or simply use the app. I'll spend a bit of time talking about our migration of the product value curve. In FY '16, we had food thinking, we expanded this in FY '18 to category thinking. And in FY '20, we began our migration towards solution thinking. A solution typically includes products, content and services, a supporting ecosystem and an underlying platform that ties it all together. In most buyer/seller transactions, one party is the solution provider, which tends to be the buyer. Maybe an example will help. To get the doghouse you wanted, you need a hammer, a saw, nails, wood, paint and the skills to put them together. Stanley sells a hammer, Behr sells the paint and the tradie sells the service. Assuming you picked up the piece parts at Bunnings and hired a tradie, that makes you the solution provider. We have a similar doghouse problem with coffee. All our customers ever want is a perfect cup of coffee. But to have this, the consumer, as the solution provider, needs to get their coffee machine of choice, add a grinder, find some specialty coffee they like and then learn how to put all this together to get the cup of coffee they were looking for in the first place. Any chance we could make this easier? One piece of the puzzle is to make sure we have the hammer they need. We recently announced the acquisition of Baratza based in Seattle. Baratza is a leading provider of commercial-grade coffee grinders for consumers in the specialty market. With the breadth of their range, combined with ours, we have the appropriate grinder for each consumer. Baratza is an outstanding addition to Breville. Together, we now have a grinder range that matches the breadth of our coffee machine range. But while we have the tools, we are not yet at a cup of coffee. In addition to an expanded product portfolio, we have recently added a content and service portfolio. Last year, we launched our Masterclass series, with the goal of getting leading baristas to teach our consumers how to make a perfect cup of coffee. COVID has given us the opportunity to virtualize this service. We are currently running virtual masterclasses in all of our markets. We've also recently launched a specialty coffee marketplace in the U.S. beanz.com. To date, we've spent our energy telling customers what not to do: do not buy coffee at the grocery store. Now we turned our efforts to launching a platform to easily connect Third Wave Specialty Coffee Roasters with our customers. And in some instances, these are the same roasters who are running the masterclasses. And lastly, one of the steps you need to take over time is maintaining our equipment. We're making this easier for our customers by enabling them to sign up for a subscription service that automatically sends them the cleaning products they need, when they need them. Put all of this together on top of the new infrastructure we're rolling out across Breville, and you've got an end-to-end coffee solution for our customers. We do all the heavy lifting, and they just enjoy the coffee. We're obviously on the front end of this journey. We have much to learn along the way, and we will be making improvements and additions as we go with a simple goal of making the experience as easy as seamless and as pleasurable for our customers as possible. Before moving on to our outlook for FY '21, I'd like to start with a caveat. We have never before given an outlook statement at our AGM, and there's a good reason for that. We do not have true visibility into how the first half has gone until the end of January. We can see the incremental sell in over the months of October, November and December. But we can't see the sell through for the half as well as how retailers are behaving until we get into January. This is why we've always waited until February before giving guidance for the year, but this is a COVID year. And I know investors are looking for anything to hold on to, to get a feel for which way the winds are blowing. With this backdrop, we are breaking from precedent and providing an early read on our outlook for the year. My expectation is that because of our limited visibility, this will not be repeated in future years. With that caveat, the first bit of news I can give you is that we have continued to experience a healthy demand for our products across geographies year-to-date. Assuming no significant change in market conditions, we expect our EBIT for the full year of FY '21 to be consistent with the market's current consensus forecast range of $128 million to $132 million, with spending on marketing, R&D and infrastructure projects consistent with our commitment to continue executing our long-term strategy for the company. Lastly, I'd like to thank everyone for joining our virtual AGM meeting today. And I'd like to thank the entire Breville Sage team for their perseverance and continued focus on our customers during this most challenging time. I'd like to welcome the Baratza team to our Breville Sage family. And I'd like to thank the Board for their continued guidance, patience and support. With that, I will now hand back to Steve.

Thanks, Jim. Okay. We'll go -- move on to the ordinary business of the meeting, starting with the annual report. Unless there are any objections, I will take the notice of meeting as read. As detailed by the company's secretary before vote is taken on each resolution, I will display on screen the total number of valid proxies cast for that resolution and the manner in which they have been directed. These figures have been determined at closing time for receipt of proxies, which was 10 a.m. Australian Eastern [indiscernible] on Tuesday, the 10th of November 2020. I would also like to advise the meeting that all eligible undirected proxies given to the Chairman with certain voting exclusions with regards to Resolutions 2 and 5 will be voted in favor of all the resolutions. I now turn to the first item of business to receive and consider the annual report. There's another requirement that the annual financial report and reports of the directors and auditor for the year ended June 30, 2020, be formally adopted. However, all shareholders have had the opportunity to receive and consider them, and I now will now answer any questions relating to the annual report. Please note that our auditors are also available to answer any questions you may have. I'll briefly pause to allow any questions to be submitted. Thank you. Remuneration report, the adoption of the remuneration report has been made -- the remuneration report has been made available or provided to shareholders together with the annual report. I would remind shareholders that the vote on this resolution is advisory only and is not binding on the Board or the company. There are certain voting exclusions that apply to this resolution. To ensure compliance with these restrictions, the company will disregard any votes cast on the resolution by key management personnel, whose remuneration is included in the remuneration report and closely related parties of key management personnel unless the vote is cast: a, by person as proxy for a person who is entitled to vote on this resolution in accordance with the direction of the proxy form or by me as Chairman as proxy for a person who's entitled to vote on this resolution in accordance with a direction on the proxy form to vote as I decide, even though the resolution is connected to the remuneration of a member of the company's key management personnel. Proxies have been lodged with respect to the resolution displayed on the screen. 87,722 undirected proxies, excluding those from shareholders who are not entitled to vote on this resolution have been given to me as Chairman, will be directed by me in favor of this resolution. Again, I will pause to allow any questions not yet submitted to be asked.

Mr. Chairman, there are no questions for this resolution.

As there are no questions, I now direct the poll for adoption of the remuneration report for the year ended 30th June 2020 be taken. Please fill in your electronic voting card in respect of the adoption of the remuneration report The election of Non-Executive Director, Tim Antonie. Tim Antonie in accordance with clause 24 of the company's constitution and ASX Listing Rule 14.4 retires and being eligible of himself for reelection. Mr. Antonie is an experienced Non-Executive Director sitting on public company boards in retailing, financial services and entertainment. He has more than 20 years' experience in investment banking and formally held positions of Managing Director from 2004 to 2008 and Senior Advisor in 2009 at UBS Investment Banking. He has expertise in large-scale mergers and acquisitions and capital raisings in Australian retail, consumer, media and entertainment sectors. Mr. Antonie is based in Melbourne and is currently principal of Stratford Advisory Group. During the last 3 years, he has served as a Non-Executive Director on the following other listed companies: Premier Investments Limited, Village Roadshow Limited, Netwealth Group Limited. Proxies have been largely respect to the resolution as displayed on the screen. 214,052 undirected proxies given to the Chairman will be directed by me in favor of this resolution. I will now pause to allow any questions on Mr. Antonie's reelection to be submitted.

Mr. Chairman, there are no questions for this resolution.

As there are no questions, I now direct that the poll for reelection of Tim Antonie be taken, please fill into electronic voting card in respect of the reelection of Tim Antonie. Reelection of the Non-Executive Director, Dean Howell. Dean Howell in accordance with clause 24 of the company's constitution and ASX Listing Rule 14.4 retires and being eligible, offers himself for reelection. He has got commercial and advisory experience. He was the former senior partner of the Melbourne firm of chartered accountants, national and international Boards. He's also a Director of the Peter MacCallum Cancer Foundation. In 3 years, he has not served as a Director on any other listed company. The Board reviews Mr. Howell's independence in accordance with the company's definition of independence, as outlined in the company's policy, criteria for setting independence of directors as well as his tenure with the group and reconfirm that Mr. Howell remains independent. Proxies have been lodged with respect to this resolution as displayed on the screen. 214,052 undirected proxies given to the Chairman will be directed by me in favor of this resolution. I will now pause to let any questions on Mr. Howell's reelection to be [ submitted ].

Mr. Chairman, there are no questions for this resolution.