Breville Group Limited (BRG) Earnings Call Transcript & Summary

[Audio Gap] And their continued connections to and custodians of our country. I will now introduce your Board of Directors who are with us today: Chairman elect, Tim Antonie; Managing Director and CEO, Jim Clayton; Deputy Chairman, Lawrence Myers; Peter Cowan; Sally Herman; Dean Howell; and Kate Wright. We're also joined by our Group Chief Financial Officer, Martin Nicholas; and Joint Company Secretaries, Craig Robinson and Sasha Kitto. Aish Chandran, who represents our auditors, PricewaterhouseCoopers, is also present. Today, we have 7 items of formal business. There are 4 items of ordinary business, being the receipt and consideration of the FY '21 annual report; shareholder approval and adoption of the remuneration report; the reelection of Peter Cowan and Lawrence Myers as Non-Executive Directors of the company. We also have 3 items of special business, being the participation of our Managing Director and CEO, Jim Clayton, in the Breville Equity Incentive Plan; approval of potential termination benefits to Mr. Clayton; and an increase in the aggregate fees payable to the nonexecutive directors. As today's Remembrance Day, if we're still meeting at 11 a.m., we will pause the meeting and observe a minute of silence. Before we go any further, Craig Robinson, our Joint Company Secretary, will acquaint you with the procedures and processes of this online meeting.

Thank you, Mr. Fisher. As the Chairman mentioned, the AGM will once again be conducted online. However, this year, shareholders have the option to listen and ask questions by telephone. I'll now detail the procedures and processes to be followed today. Firstly, voting. The Chairman will call a poll on the 6 resolutions we put to 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 after the close of the meeting. A representative of Link Market Services will 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 attend today's online meeting have had the option of voting online or appointing a proxy to cast their votes. The results of these votes will be displayed on screen via the online platform following the discussion of each of the 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 Virtual Meeting Online Guide 2021. If you've not already done this, please click on the Get a Voting Card button at the bottom of your screen. This will bring up a box to register. If you're an individual or joint security holder, you will need to register and provide validation by entering your security holder 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 the security holders at the meeting as set out in the Notice of Meeting. You may need to use the scroll bar on the right-hand side of the voting card to view all resolutions. Security holders and proxies can either submit a full vote or a partial vote. The Chairman will advise you when it is 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 1800 990 363. Shareholders joining us by phone will be able to follow proceedings and ask questions that will need to also join us online if they wish to vote by following the instructions provided in your Notice of Meeting. Secondly, moving on to the topic of questions. After the resolution for each item of business has been put to shareholders, the Chairman will answer any questions submitted either during or in advance of the meeting. Questions can be submitted during the meeting through online platform or the telephone facility. Any security holders 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 of 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. For questions submitted online, a representative of Link Market Services will act as a moderator and put them initially to the Chairman, who may answer them or redirect to another director and company representative or the auditor. For questions raised by telephone, the speaker will be introduced to the meeting by the Link Market Services operator. If anyone still needs to register for a voting card, I suggest you attend to this now. Finally, on the screen, you will see 2 presentation windows. The one on the left-hand side shows a picture of the speaker by [indiscernible], 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 the right-hand pit of 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 7. If I'll try and assess the financial view of 2021, I believe that it's been an outstanding year for the group against the backdrop that none of us could have anticipated. During FY 2021, the group continued to successfully execute its acceleration strategy, delivering strong top line growth and double-digit EBIT growth while tactically navigating the unpredictable trading environment caused by the global pandemic impacting our consumers, our customers, our supply chain and our Breville Sage team. Our CEO, Jim Clayton, and his global team successfully faced these challenges whilst continuing to invest in our long-term growth drivers of NPD, marketing and continuing our geographic rollout, and in France, Portugal, Italy and Mexico, to the territories in which we have direct operations. In terms of key numbers, the group delivered record sales of nearly $1.2 billion, a 24.7% increase over prior year, with revenue in the core Global Product segment increasing by 37% in constant currency. Group EBIT for the year of $136.4 million represented a 39.6% increase on the prior year after funding increased investment to R&D, marketing and our IT platform and capability. Net profit after tax increased by 42.3% to $91 million, whilst earnings per share increased by 34.8% to $0.658 per share. The Board approved a full year dividend of $0.265, in line with the previously announced decision to reduce the target payout ratio to 40% in order to enhance the internal funding of numerous growth opportunities on a sustainable basis. Net cash at 30 June 2021 was $129.9 million, largely in line with the prior year. As I've said, the group had a very successful FY 2021. I would now like to take the opportunity to express our gratitude to Jim Clayton and his exceptional Breville Sage team across the globe, who once again showed nimbleness and resilience in delivering these results. 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. As for myself, after 17 years on the Board, I've decided not to seek reelection today. I'm extremely proud of the team at Breville. They have built a truly international company recognized amongst our peers as one of the leading SDA brands in the world. The executive team that Jim leads across the globe is world-class. And I'm sure that their passion and unity will deliver continued growth and success as Breville cements its foothold on the world stage. I have thoroughly enjoyed my journey with Breville. And as I pass on the baton, I'm confident that the company is well placed for continued success. Tim Antonie has been a director since 2013, and I'm very confident that he will guide the group from strength to strength. Finally, I thank you all for your attendance at today's AGM. Moving to the business of this meeting, I will now hand over to our CEO, Jim Clayton, to present his review of operations.

Thank you, Steve. I'd like to welcome everyone to Breville's AGM. Thank you for taking the time to join us. Turning to Slide 7. Today, I'm going to walk you through our FY '21 year-end results, give you a short update on the first half of FY '22, relay the foundation for our migration to solution offerings, show you a video clip for the new Joule Oven Air Fryer Pro and end with some concluding remarks. Turning to Slide 8. Given we've reported these numbers in August, I will focus on the highlights. FY '21 was a dynamic and challenging year as we need, like some of other companies, wrestled with the second and third order effects of the global pandemic. Throughout the year, we chased a resilient demand line, enabling us to report $1.187 billion revenue, a 24.7% increase from the prior year. Crossing the $1 billion mark has been a goal of ours for quite some time, so it feels good to finally reach it. The strong demand flowed through to a strong gross margin of 34.8%, resulting in an EBIT of $136 million (sic) [ $136.4 million ], a 24.1% of increase over the prior year on a normalized basis. Turning to Slide 9. Breaking down the revenue across the 2 segments, the Global Product segment grew 37% in constant currency, and the Distribution segment grew at 8.4%. Turning to Slide 10. All 3 areas delivered solid growth numbers in the Global Product segment. The Americas grew 27.6% in constant currency. EMEA grew 58.4%, and Asia Pac grew 37.4%. This growth is a reflection of the global nature of the pandemic effects as well as the flexibility and adaptability of our supply chain processes. Turning to Slide 11. The EBIT bridge between FY '20 and FY '21 shows we have generated an incremental $93.1 million in gross profit driven by both sales growth and margin improvement. Of this, we invested $49 million in the growth drivers of the business, spent an incremental $17.6 million on other functions and dropped an incremental $26.5 million to the EBIT line. During our year-end reporting, we stated that we pulled investment projects forward into FY '21. I'll have more detail to share on this topic in February when we report our first half for FY '22. Turning to Slide 12. The balance sheet tells the story of FY '21. Net working capital is basically flat across FY '20 and FY '21 despite the business growing 24%. The inventory is lower than it should be because of a demand line well above our original plan for the year. Receivables is lower than it should be driven by the shutting down of the Yantian port in the back half of the year, which prevented us from moving products into the theaters and selling them on to our customers. Taken together, this left us with slightly more cash in FY '21 than we had in FY '20. To state the obvious, this is not an equilibrium balance sheet. This is the balance sheet of our company chasing demand. Supply chain permitting, we hope to remedy some or all of this by the end of FY '22. Turning to Slide 13, a quick update from the front lines on our experience thus far in the first half of FY '22. Turning to Slide 14. Demand from consumers and our customers continues to be solid. On the supply side of the equation, our forward planning processes have helped us avoid the lion's share of parts and manufacturing-related shortfalls experienced by so many others. For us, the challenges have been primarily logistics related across the supply chain. Logistics staff that used to take 1 week, can now take up to 4 to 6 weeks. In all countries except the U.S., our in-country inventory positions are enabling us to absorb most of these delays and continue deploy with our retail partners. In the U.S., because of the L.A. Port delays, we are running more of a real-time offense across some SKUs. When the containers are delivered to our warehouse, they are unloaded and immediately sent out to retailers. Forward planning, coupled with hard work and agility, has kept us on plan year-to-date. The team's focus for the rest of the half will be moving product through the system to our retail partners to meet end consumer demand. Solid demand line with a dynamic supply chain has caused us to move our planned inventory rebuild to the second half of '22 with the goal of calming down the supply chain and preparing for the peak season of FY '23. It may differ at the detail level, but at the aggregate, first half of '22 is unfolding in line with our expectations. Turning to Slide 15, now on to the solution discussion. Turning to Slide 16. As Breville matures into a global company, we are increasing the sophistication of our offense, getting closer to the customer with each step. This slide shows our migration of the customer value curve, and we are now learning how to execute on solution assets. Turning to Slide 17. In FY '19, we acquired ChefSteps. The core thesis behind the transaction was the Joule Oven Air Fryer Pro. The Breville team innovates through hardware with the goal of helping our customers achieve greater success in the kitchen. ChefSteps had the same objective, but they use content as their tool. In truth, both were right. The real magic for customers comes when we put them together. This is where our Solution platform enters the stage. As I hope you will see in the video clip, by seamlessly weaving hardware innovation, content, service and software, we're able to help our customers achieve outcomes in the kitchen they didn't think they were capable of, thus enabling them to master every moment. Turning to Slide 18. With that set up, let's get over to the video clip. [Presentation]

Turning to Slide 19. The Joule Oven Air Fryer Pro down payment on our migration to selling solutions. The oven is currently in beta in customers' homes, and we are getting really positive feedback. We're looking forward to climbing the learning curve with our customers on our new connectivity platform. To close, I'd like to thank our customers and our partners for the support and flexibility they have shown during what was a challenging year for everyone across the entire value chain. I'd like to thank every single employee of the company, both new and old, for the relentless focus on our customers and the exceptional teamwork that they showed in FY '21. It was mateship at its best. It has been the toughest at times, the true colors are shown, and I could not be prouder of what I saw throughout the entire year. I feel privileged to be a part of this team. It is with a heavy heart that I wish our departing Chairman, Steve Fisher, the best of times. While I did not have the privilege of working with Steve for all 17 of his years, I was fortunate enough to get 6 of them. Steve was an outstanding Chairman for Breville. One need only look at the share price performance over his tenure to see the value he added. On a more personal level, Steve has been an invaluable mentor. He provided Sage advice and direction when I needed it and support when it was warranted, a perfect balance. I will miss the South African humor in the room, but after 17 years, has surely earned the right to pass the baton. Steve, may your drives be long and straight, at least off the first few when everyone is watching. Know that you will be missed. Likewise, I'd like to welcome Tim Antonie to his new role as Chairman. We have worked together closely for over 6 years, and I look forward to continuing Breville's globalization efforts under his guidance. Thank you again to everyone for joining us today. I will now hand back to Steve for the rest of the agenda.

Thank you, Jim. I will now proceed to the formal business of the AGM. Unless there are any objections, I will take the Notice of Meeting as read. As detailed by the Company Secretary, before vote is taken on each resolution, I will display on screen the total number of ballot proxies cast for that resolution and the manner in which they have been directed. These figures have been determined as at closing time for receipt of proxies, which was 10 a.m. on Tuesday, the 9th of November 2021. I would also like to advise the meeting that all eligible and directed proxies given to the Chairman with certain voting executions with regards to resolutions 2 and 5, 6 and 7 will be voted in favor of all the resolutions. I'll now turn to the first item of business, to receive and consider the annual report. It's not a requirement that the annual financial report and reports of the directors and audited for the year ended June 30, 2021, be formally adopted. However, all shareholders have had the opportunity to receive and consider them, and I 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 will now briefly pause to allow any extra questions to be submitted. Are there any questions from telephone participants on this item?

No questions have been received for either BRG or the auditor.

Thank you. I'll now take questions submitted online.

No questions have been received for either BRG or the auditor.

Thank you. Remuneration report, the adoption of the remuneration report. 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. Please note that both the exclusions apply to this resolution as set out in the Notice of Meeting. Proxies have been lodged with respect of the resolution as displayed on the screen. 1,163,309 undirected proxies, excluding from those shareholders who are not entitled to vote on its resolution, that have been given to me as Chairman, will be directed by me in favor of this resolution. Again, I will pause to lay any questions not yet submitted to be asked. Are there any questions from telephone participants?

No questions have been received.

I will now take questions submitted online.

No questions have been received.

Good. As there are no further questions, I now direct the poll for adoption of the Rem report for the year ended 30th June, 2021, be taken. Please fill in your electronic voting card in respect of the adoption of the remuneration report. [Voting]

Now I'll move to reelection of Non-Executive Director Peter Cowan. Peter Cowan, in accordance with Clause 24 of the company's constitution and ASX listing Rule 14.4, retires and, being eligible, offers himself for reelection. Mr. Cowan has been a Director of Breville since 2018 and is currently Chair of the Board Sustainability Subcommittee. The Board considers Mr. Cowan to be an independent director. Mr. Cowan has over 30 years' experience leading and building globally respected FMCG organizations and brands, including [ considerable Asia ] experience. He served as both Chair of the Board and CEO in key developing markets for Unilever, and has held Managing Director roles at Lion Nathan and the New Zealand Dairy Board. Mr. Cowan has also held senior positions at Alberto Culver and Johnson & Johnson. The Board, excluding Mr. Cowan, unanimously recommends that shareholders vote in favor of Resolution 3. Proxies have been launched through respect of this resolution as displayed on the screen. 1,163,439 undirected proxies given to the Chairman will be directed by me in favor of this resolution. I will now pause to allow any question on Mr. Cowan's reelection to be submitted. Are there any telephone participants on this item?

No questions have been received.

Any questions submitted online?

No questions have been received.

Thank you. As there are no further questions, I now direct that the poll for reelection of Peter Cowan be taken. Please fill in your electronic voting card in respect of the reelection of Peter Cowan. [Voting]

Reelection of Non-Executive Director, Lawrence Myers. Lawrence Myers, in accordance of Clause 24 of the company's Constitution and ASX Listing Rule 14.4, retires and, being eligible, offers himself for reelection. Mr. Myers has been a Director of Breville since 2013. He's lead independent director and was appointed Deputy Chairperson in August this year. He's also Chair of the Board Audit and Risk Committee and a member of the People Performance Remuneration and Nomination Subcommittee. Mr. Myers has over 20 years' experience as a practicing chartered accountant. He is a registered auditor and the Managing Director and Founder of MBP Advisory Pty Limited, focusing on corporate advisory and mergers and acquisitions. Mr. Myers is current director of VGI Partners Asian Investments Limited and VGI Partners Global Investments Limited, as well as a member of the Foundation Board of the Art Gallery of New South Wales. The Board, excluding Mr. Myers, unanimously recommended shareholders vote in favor of Resolution 4. Proxies have been launched in respect of this resolution as displayed on the screen. 1,163,439 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. Myers' reelection to be submitted. Are there any telephone participants on this item?

No questions have been received.

I will now take questions submitted online.

No questions have been received.

As there are no questions, I now direct that the poll for reelection of Lawrence Myers be taken. Please fill in your electronic voting card in respect of the reelection of Lawrence Myers. [Voting]

Special business, the participation of Managing Director and Chief Executive Officer in the Breville Equity Incentive Plan. Jim Clayton joined the Board as Managing Director of the company on 18 August 2021 and has been CEO since 1 July 2015. Under ASX Listing Rule 14.14, shareholder approval is required for the acquisition of securities by a director under the employee incentive scheme. Approval is therefore being sought for Mr. Clayton's continued participation in the long-term incentive and deferred remuneration schemes under the Breville Equity Incentive Plan. It is proposed that Mr. Clayton be granted a long-term incentive of 73,326 performance rights with a 3-year performance period. Number of performance rights that ultimately vest will depend upon the extent to which the performance conditions are satisfied over the performance period. It is also proposed that Mr. Clayton granted a total of 65,561 deferred share rights before tranches as part of the fixed remuneration component of his employment package for the 2023, 2024, 2025 and 2026 financial years. The number of deferred share rights that ultimately vest will depend on Mr. Clayton completing the relevant service period associated with each tranche of deferred share rights. Full details on how the number of rights to be granted was calculated together with the terms of each grant are contained in the Notice of Meeting. If Resolution 5 is passed, the company tends to grant the performance rights and deferred share right to Mr. Clayton within 1 month of the date of the meeting. The Board, excluding Mr. Clayton, recommends that shareholders vote in favor of Resolution 5. Please note that voting [ executions ] applies to this resolution as set out in the Notice of Meeting. Proxies have been launched in respect of this resolution as displayed on the screen. 1,163,309 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 the resolution to be submitted. Are there any questions from telephone participants on this item?

No questions have been received.

I'll now take questions submitted online.

No questions have been received.

As there are no questions, I now direct that the poll for the participation of the Managing Director and CEO in the Breville Employee Incentive Plan be taken. Please fill in your electronic voting card in respect of the participation of the Managing Director and CEO in the Breville Employee Incentive Plan. [Voting]

Item 6, the approval of potential termination benefits. As announced on 5 October 2021, our Managing Director and CEO, Jim Clayton, has entered into a new employment agreement with the company. Under the terms agreed with Mr. Clayton, he's entitled to receive certain payments and benefits should he cease his executive role with the company. Those benefits could include fixed cash remuneration, deferred remuneration share rights, performance rights and entitlement under the company's short-term incentive scheme. Full details of the potential payments and benefits that may be given, including the circumstances under which they may occur, are detailed in the Notice of Meeting. In accordance with Section 200B of the Corporations Act, the company might only give a person a benefit in connection with that person ceasing to hold managerial or executive office. It's an exemption applies or if the benefit is approved by shareholders in accordance with Section 200E of the Corporations Act. The company is seeking shareholder approval for potential termination benefits to be given to Mr. Clayton in accordance with this section of the Corporations Act. The Board, excluding Mr. Clayton, recommends that shareholders vote in favor of Resolution 6. Please note that voting exclusions apply to this resolution as set out in the Notice of Meeting. Proxies have been lodged in respect of this resolution as displayed on the screen. 1,169,975 undirected proxies given to the Chairman will be directed of being in favor of this resolution. I will now pause to allow any questions on this resolution to be submitted. Do we have any questions from telephone participants on this item?

No questions have been received.

Any questions submitted online?

No questions have been received.

As there are no questions, I'll now direct that the poll for the approval of potential termination benefits be taken. Please fill in your electronic voting card in respect of the approval of potential termination benefits. [Voting]

Item 7 is the increase in Non-Executive Director fee pool. The company is proposing to increase the total aggregate amount of director fees payable to the nonexecutive directors from $1.4 million, as approved at the 2016 AGM, to $1.8 million. Under ASX Ruling 10.17, shareholders must first approve any such increase. Therefore, if Resolution 7 is passed, the fee pool for nonexecutive directors will increase by $400,000. This is intended to provide flexibility to attract and retain directors having regard to the company's growth and global focus. In addition, as previously announced [indiscernible] and appoint a suitable additional independent director this financial year following my retirement from the Board. Please note that voting exclusions apply to this resolution as set out in the Notice of Meeting. Proxies have been launched in respect of this resolution as displayed on the screen. 1,169,975 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 this resolution to be submitted. Are there any questions from telephone participants on this item?

No questions have been received.

Have there been any questions submitted online?

No questions have been received.

As there are no questions, I now direct that the pulp or the increase in nonexecutive director pool -- fee pool be taken. Please fill in your electronic voting card in respect of the increase in nonexecutive director fee pool. [Voting]

Before I close today's virtual Annual General meeting, I would like to remind everyone to complete the electronic voting cards. And if anyone experiencing voting difficulties, please call Link Market Services. Voting will end in 5 minutes after the close of the meeting. At the conclusion of the meeting, a red bar with a countdown timer will appear at the top of the webcast and slide screens advising the remaining voting time. If you have not submitted your vote, should do so now. At the close of the meeting, any votes already placed will automatically be submitted. I now wanted to take the opportunity to answer any questions of any of today's presentation that you may have submitted and have not yet been answered. Are there any outstanding questions from telephone participants?

No questions have been received.

And the moderator, please advise me of any outstanding questions submitted online?

No questions have been received.

Excellent. Thank you. I would now like to wrap up by again thanking our shareholders for their support throughout the year and indeed in my time as Chairman. And again express my appreciation to my fellow directors, management and staff of the Breville Group for their contributions over this time. That concludes the formal business of this year's Annual General Meeting. I declare the meeting closed. Thank you very much.