Breville Group Limited (BRG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Breville Group Limited 2022 Half 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.

Good morning, and welcome, everyone. It's my pleasure to kick off our first half '22 results call. I'll start by walking you through the group's first half trading performance; and then Jim Clayton, our CEO, will provide an operational and strategic update as well as guidance for the full year. Turning to Slide 3 and the highlights of our first half. The business continued to move from strength to strength, underpinned by strong consumer demand across all regions and categories. Revenue grew 23.6%, notwithstanding some ongoing logistical challenges. Gross margins were well managed in a turbulent environment with selective price rises strained promotional spend and mix, largely offsetting the ongoing inflationary pressures in freight and product costs. As we look to the second half '22 and beyond, we will likely need to take additional price rises where appropriate to further protect our margins. With core overheads kept in check, we again strategically invested in the medium-term growth drivers of research and development, marketing and technology while still delivering an EBIT growth of 22.8%. With earnings per share of $0.558, a fully franked interim dividend of $0.15 per share will be paid, reflecting a 15.4% increase on the prior period. In terms of cash flow, we saw a normal seasonal outflow as peak receivables grew and some level of inventory rebuild was achieved, ending this period with net cash of $31.7 million. Lastly, our ROE remained healthy at 19.7%, reflecting continued good returns on our growth investments. In summary, the first half '22 was a positive, whilst operationally challenging period. Sales grew strongly, gross margins were well controlled, supply chain challenges were managed and we continued our investment cadence into the growth drivers of the business, a very solid start to the year. Turning to Slide 4, we see key segment performances. Our Global Products segment carried its sales momentum from 2021 into the first half '22, delivering 23.8% sales growth on a constant currency basis on top of the pcp growth of 39.2%. We saw broad-based regional and category growth despite some logistics disruptions, and our EBIT margins in the Global Products segment were maintained with headwinds and tailwinds largely netting out at an EBIT level. Our Distribution segment also grew top line strongly at 22.6% led by Nespresso in the Americas, lapping a weak pcp. This was partially offset by lower growth in APAC, where, in line with the segment's role, maximizing margin dollars was prioritized over top line growth. And importantly, the distribution segment fulfilled this strategic role by delivering nearly $1 million in incremental EBIT to reinvest in the Global Products segment. Turning to Slide 5. In terms of the Global Product segment sales by geography, here, we see the $141 million or 23.8% constant currency growth split by theater. All 3 of the theaters delivered healthy double-digit growth over a strong prior periods with gains across all categories. In the Americas, the group delivered 17.1% constant currency growth, but this does not reflect actual customer demand as the well-publicized L.A. port congestion, delayed inventory receipts into our warehouse and constrained our ability to satisfy retail orders. We will look to recover some of this in the second half of '22. In EMEA, the region performed strongly, delivering nearly 40% growth with strong sales in both the U.K. and Mainland Europe. In dollar terms, EMEA's product growth -- Global Product growth again outstripped the Americas and APAC. APAC itself continued to show strength over a very strong pcp, delivering 22% growth in constant currency terms. In APAC, inventory and our ability to satisfy orders has largely been normalized. As mentioned at the full year, it's noteworthy that in the Global Products segment, EMEA is now larger than APAC and together, they match the Americas, giving balance to our growth portfolio. For an additional perspective on the group's sustained growth, I've added a final column to this table that shows the 3-year CAGR in constant currency from the first half '19 to the first half '22. As you can see, all theaters have delivered strong growth profiles over the last 3 years. And it's noteworthy that over this 3-year period, the Global Products segment revenue has more than doubled, reaching AUD 734 million in this half. In terms of relative gross margins, nothing much to say. They remain similar across all theaters. Turning to Page 6 on funds generation and usage. You've seen this graphic before, which pictorially shows how we have reinvested our gains in gross profits into the growth drivers of the business while still delivering strong EBIT progression. Solid sales growth, coupled with a slightly weaker GM percent, where inflationary headwinds marginally outweighed tailwinds, grew gross profit dollars by approximately $51 million. With the objective of driving medium-term business growth, we reinvested $22 million of this incremental gross profit into our go-to-market capability and specifically our digital events, new product development and the corporate platform. Outside of these 3 strategic priorities, core overheads and OpEx were well controlled, growing approximately 11%, largely reflecting the operational costs of growth. Our resulting EBIT increased by $20.9 million or 22.8%. And in line with our tactical approach for managing through uncertainty, if our sales strength continues in the second half '22, we plan to further increase our investment in these growth drivers while still delivering solid full year EBIT growth. Turning to Slide 7 and the balance sheet. As you know, under normal conditions, the group structurally invests in working capital to drive growth, and we expect to see our working capital peak in the first half of any year. As we look at the balance sheet for this half, the good news is it looks markedly more normal than the first half '21. Last year, when I spoke to you, we reported working capital of $203 million, which I said was about $95 million below equilibrium. Adding these 2 together, you get a first half '21 equilibrium working capital of about $298 million. Our first half '22 working capital is at $334 million, which represents a 12% increase on this normalized level against the sales growth of 23.6%. So are we approaching a normal working capital level and equilibrium level? I think in dollar terms, I'd say, yes, we are, but drill down one more level and we get a slightly different answer. While receivables and payables are in line with business growth, our inventory position is still not where we want it to be. Too much or approximately 51% of our inventory is still goods in transit rather than our warehouse. It's primarily sitting on ships, waiting to get into the L.A. port. With the holiday shipping peak behind us, the logistics -- the global logistics flow may improve on the other side of Chinese New Year, allowing us to catch up in the second half. And to avoid a replay of this year's supply challenges -- half supply challenges in the next financial year, our aim in the second half of '22 is to get in front of any future supply chain problems by accelerating our inventory build in readiness for the first half '23. If we're successful, we should see a peak inventory number for financial year '22 this June and hopefully, less of this balance still sitting in transit. Our fixed asset increase reflects renewal of key warehouse leases, and our intangibles asset increase reflects our sustained strategic investment in new product development with projects flowing through the innovation funnel. Cash behaved as expected for this time of the year, coming off an abnormally high starting position in December '20 and June '21. Our underlying cash flow generation remains healthy, as do our funds through expansion with approximately $380 million of undrawn debt facilities and cash still available. As I mentioned previously, the group's ROE was 19.7%, and we had continued strong returns on our growth investments. Lastly, turning to Slide 8. I hope that this unpacking of our reported numbers has been helpful and which was -- in what was a solid year of continued growth and investments. And the key messages I'd like you to take away from this half year results are both revenue and EBIT continued to grow well in the half with sustained demand for our products somewhat constrained by logistical jams in the U.S.A. The gross profit environment is dynamic. We managed it well in the first half, and we'll likely see further price rises in the second half to protect margin. Growth in our gross profit dollars continued to be strategically reinvested in areas to support medium-term growth, namely marketing, product development and technology. And in line with our approach to managing an uncertainty, we expect to invest further in these areas in the second half, assuming sales momentum continues. Lastly, our balance sheet position is improving. However, as a hedge against further supply chain disruptions, we're planning to build inventory early for FY '23. I know that Jim will say some more in his section about our growth investments and our inventory development. So as the final comment that the first half '22 was a pleasing half of sustained growth on both the top and the bottom line, I'll pass to Jim Clayton, our CEO, to provide an operational and strategic update.

Thank you, Martin, and good morning to everyone. On Slide 9. Today, I'm going to take a different approach. Instead of talking about new products or new geographies, I'm going to talk about platforms. Why? In the past, I've talked about our acceleration program. New products and new geographies have their role to play for sure, but it's platforms that govern the pace of acceleration. In a multi-product, multi-geography setting, building something once and using it everywhere drives speed. After covering our digital platforms, I'll provide some commentary on the second half, our inventory plan and our outlook for the financial year. Turning to Slide 10. In our FY '21 year-end report, Martin presented the waterfall slide on the left showing we invested $49 million in the marketing, R&D and technology. As shown by the first half '22 EBIT bridge on the right, which Martin presented today, we spent an incremental $22 million in these areas in the first half of '22. Many of you have asked how we are spending this money outside of investing in new products. And today, I'm going to show you. Turning to Slide 11. The strength of FY '21 and the first half of '22 gave us the opportunity to accelerate investments in our digital platforms. I will walk you through each of them. Turning to Slide 12. In prior reporting cycles, I have spoken about our global platform. I continue to bring this up because it is the digital backbone of the entire global company. What makes this platform unique to most other companies in the world is its 2 core features: one, it is based on a software-as-a-service architecture; and two, we are running a single instance globally. The SaaS feature means we quickly roll to the most recent version of each component in the stack. This gives us added capabilities, leveraging the R&D investments of our vendors and it prevents the typical 5- to 7-year replatforming cycle of typical ERP implementations. Second feature, a single instance, drives efficiency and speed. As an example, when we enter a new country, we began by deploying our global template -- golden template, which takes about 2 weeks. At this point, the country is 90% deployed. The remaining 10% of the implementation covers whatever is unique about the transaction model in that country, along with connecting new trading partners. This platform defines our speed for new countries, new product rollouts and acquisition integrations. Turning to Slide 13. I appreciate I'm diving a little deep here, but I want to give you an example of the platform in action. We have a component of the platform called PIM, "Product" Information Management. It's a single repository that defines all our products in one place globally. All other systems in the stack consume a single version of the truth to do their work. In the upper left box, you see 2 images from our website. One is from the U.K., the other from Germany. This is driven by PIM. We define the juicer once then overlay the German translation. The same holds true for spare parts, both their association to a finished product, as well as their specifications. PIM also houses the coffee bean products from our roaster partners. Here, you can see the products populating both beans.com as well as breville.com. Define once, use everywhere, update once, update everywhere. Once we get the description defined in PIM, every other component of the stack pulls the pieces of information it needs to get the job done. Said another way, when we enter a new country, the SKU portfolio is already defined and ready to go, absent the possible addition of translation. Turning to Slide 14. Now on to our investments and our customer experience platform. Slide 15. What you're looking at is the redesign of our website, which will be deployed in the second half. We are rearchitecting navigation. This new design will make it much easier for customers to find what they are looking for or discover new helpful information. This navigation framework is possible because of the work we've completed to house our digital content, which I will cover next. Slide 16. Over the past 5 years, we've made significant investments in the high-quality digital content. The content, however, was scattered across the system making it difficult for customers to find what they needed with the fewest number of clicks. Turning to Slide 17. In FY '21, we embarked on a project to fix this, which we recently took live the Experience Hub. Our digital content now resides in a single, unified and structured framework. This will increase the ROI of our digital content investments and make it much easier for our internal systems, our retailers and our customers to use the content. Turning to Slide 18. But by solving one problem, we created another. Putting our content in one place has its advantages, but it can make it equally difficult for a customer to find what they're looking for quickly. We have over 200 pieces of digital content for coffee alone. To solve this problem in FY '21, we built My Breville, which recently went live. My Breville is the lens through which a customer interacts with the Experience Hub. In one dashboard, we bring together everything that is relevant to each customer. It's a personalized dashboard. The customer identifies the Breville products they own, and we surface the content for just those products. Customer can also see all information relevant to the purchase and ownership of Breville/Sage products. Turning to Slide 19. To complete our customer experience platform, we recently launched Sage Studios in the U.K. as our pilot location. Sage Studios bridges the gap between the physical and the digital. When a customer is shopping our website or looking for information to help them get the most out of their products, they can start a live video stream with one of our product experts. The customer and the product expert can jointly explore our website and all the digital content to help the customer find what they need. Sage Studios will also serve as a master class training location. This gives us a highly scalable platform for engaging directly with our customers. Turning to Slide 20, on to our solution platforms. Slide 21. I've talked before about our new Joule Oven Air Fryer Pro, a product we will launch in the second half of this year. With this offering, we are arcing from product to solution. In this solution, we took the IP and talent from the ChefSteps and Breville Kitchens and embedded them inside our market-leading oven. We've been beta testing this oven in customers' homes for the last few months. While making a rotisserie chicken, one participant said, I would buy this oven just for that chicken. This is exactly the point. With this solution, we are transitioning from selling world-class countertop ovens to selling a perfect rotisserie chicken in your kitchen, the outcome customers actually want. Turning to Slide 22. Underpinning this oven solution is our standards-based connectivity platform. This is the real asset. This cloud-driven platform is agnostic to the endpoint device. It could have been anything. Building a platform takes longer, but it means you can build it once and use it across multiple devices [Audio Gap] time to market. Turning to Slide 23, on to the ecosystem platform. Slide 24. As I watch the marketing efforts of various players in the coffee space, the phrases that are thrown around very loosely are Barista quality or cafe quality. So I thought I'd first define what Breville means when we say it. We all know what cafe quality looks like. When you walk into a specialty coffee cafe to buy your $5 flat white, you see the indicia of quality in the cup. There will be a multi-group head commercial coffee machine and large commercial grinder, a talented Barista working the machine and fresh specialty coffee beans. What you won't see is coffee from the grocery store, nor will you see a black box automatic coffee machine, and that's because neither can give you cafe quality in the cup. Turning to Slide 25. It is with this true definition of cafe quality that our product team designed and built our espresso machine range, enabling customers to replicate cafe quality at home. We define the 4 elements that are required to replicate this outcome; 18 to 22 grams of coffee in, pulled at 9 bars of pressure with a water temperature of 93C. And for milk-based drinks like a flat white, you need sufficient steam pressure to generate microfoam in the milk. These 4 elements are exactly what commercial machines use to deliver your $5 flat white. Turning to Slide 26. But having the right machine is just one element of replicating that perfect flat white at home. If the machine is the hammer, then specialty coffee is the nail. Put grocery store coffee in a capable machine, and you won't have a good outcome. Put specialty coffee in a machine that can't deliver the 4 elements, and again, you will not replicate what you buy at the cafe. Cafe quality coffee at home lies at the intersection of a capable coffee machine and fresh specialty coffee. This means that Breville does not deliver a cafe quality coffee at home. Instead, Breville gives you a machine capable of delivering cafe-quality coffee at home. While the machine is a necessary component, it is certainly not a flat white. Turning to Slide 27. To actually get a cafe quality flat white at home, it's a different 4 elements: one, a machine capable of doing the job; two, extra kit that you use with the machine; three, specialty coffee; and four, a Barista training you to get you pointed in the right direction. This would be an at-home cafe-quality coffee solution. Turning to Slide 28. Breville has been working on exactly this. We have the machine and we have the kit. About 18 months ago, we launched our master class infrastructure to cover the training component. What we were missing was specialty coffee. We solved this missing piece by launching beanz.com. With beanz, we pulled together a selective curated group of the best roasters in the country for our customers. This platform helps our customers find the absolute best coffee for them based on their taste profile and then delivers the fresh coffee to their house as often as they like. beanz.com is currently live in the U.S. and the U.K. We have the top 50 roasters in the U.S. spread across the country with over 200 coffees to choose from. beanz is also live in the U.K. with the top 21 roasters in that country, currently offering 60 coffees. If we stop here and take an inventory count against the 4 elements of cafe quality coffee at home, we have the machine, the kit, the training and the coffee. Now all that's missing is putting it together. Turning to Slide 29. So we did that, too. If you go to our U.S. website, you'll have the opportunity to buy the entire coffee solution, pick the machine that is right for you and the coffee that is right for you, and we'll send you everything you need then train you to make cafe-quality coffee at home. We'll be taking the coffee solution live in the U.K. in the next few weeks. Turning to Slide 30. The enabler underneath the coffee solution is an ecosystem platform, not unlike a Smart TV. Breville products are global, specialty coffee is local. The platform seamlessly brings the top roasters in each country into the coffee solution for the customers in that country. Because we designed it as a platform, we can reuse it with other ecosystems. We just chose to point the platform at coffee as its first implementation. Turning to Slide 31. To summarize where we invested the incremental dollars in FY '21 and the first half of '22, we continued the roll out and upgrade of the global platform; we centralized our digital content into the Experience Hub; created the My Breville Sage path for customers to get the most out of the site, launched Sage Studios in the U.K. and we're in the process of implementing the redesign of our website. We built Version 1.0 of the Connectivity Platform, which will launch in the second half with the Joule Oven Air Fryer Pro. And we built and launched Version 1.0 of beanz in the coffee solution in the in the U.S. and soon in the U.K. Net-net, we've been busy. While we are looking forward to leveraging each platform and our acceleration program, the important takeaway for the longer term is that the Breville team built them. This means we have the internal capability to roll out the platforms and improve them in the years to come. Turning to Slide 32. Now I'll turn to the second half and our outlook for FY '22. Turning to Slide 33. In our base case view of the second half, we expect the supply chain challenges and inflationary pressures to continue. We will manage the former with our forward planning process and the latter with price increases where appropriate. Consistent with prior years, in the second half, we will lean into our investments in R&D, go-to-market and technology to set the table for FY '23 and beyond. We will also be launching new products and entering new geographies. Finally, if possible, we will accelerate the time line for building inventory for the first half of '23 as a hedge against future supply chain hiccups. If we're successful, we will be reporting a lean forward inventory position at the end of FY '22. Turning to Slide 34. We spiked inventory once before in FY '19, which caused a bit of confusion in the market. To avoid the confusion this time around, I've included a couple of slides on inventory. Here, I have graphed our ending inventory at the half and year-end since FY '15, the green bars against what our inventory level would have been if we grew FY '15 in the first half of '16 at the same rate as revenue growth, the gray bars. The supply chain unpredictability during the COVID period has increased what should be equilibrium across the system, having enough inventory to deliver for retailers while absorbing supply variability. Our goal for FY '22 is to overshoot the COVID equilibrium line as a hedge against further supply chain unpredictability. Once the supply chain becomes predictable, we'll sell down to the pre-COVID equilibrium level. Turning to Slide 35. Few notes for context and transparency. First, Breville is not a retailer. In market reports, I often see us categorized with Australian retailers, and I've never understood why. Breville is a product company sitting one step back from the value chain. While inventory may be bad on a retailer's balance sheet, it is a good thing on ours. Our products do not go stale and price does not decline over time. In fact, we've been raising prices, ferrying cost is negligible. What's expensive in our business is stocking up. We will ultimately settle back into our normal equilibrium level for inventory once the unpredictability of the COVID period has subsided, but until then, we will try to position ourselves to minimize stockouts across the system. Turning to Slide 37. Given our performance to date, our current plans for the second half, inclusive of the amount of money we expect to invest into R&D, go-to-market and technology for future years, we expect our EBIT for FY '22 to be consistent with the market's current consensus forecast of approximately $156 million. This concludes my portion of the first half '22 presentation. I will now hand back to the operator to open the call for any questions regarding our first half '22 results.

[Operator Instructions] Your first question comes from Alexander Mees from Morgans.

Congratulations on a good result. I guess, restricted to one, I'm just interested in the guidance that you've given. It implies, I think, 28% weighting of EBIT for the second half, which is lower than history. I'm just wondering how to interpret that guidance, whether you're flagging increased investment or costs in the second half or whether there's something I'm missing.

Sure. It's a great question to start out with, which is what we're flagging as increased investments. So what I would say when you're kind of running the math, which is don't mistake the EBIT guidance we're giving for the second half as something that rolls straight up to revenue. In other words, revenue moves independently from EBIT driven by the amount of investment we expect to make in the second half into marketing, R&D and technology. The other thing I would say on this is, this pattern is one that we repeat basically every year. But we hold back investments so to speak from those 3 categories in the first half relative to what our budget is until we see how the hat drops. And with the first half behind us, we then accelerate investments into those 3 functions to arrive at from my perspective, what was the plan for the year. Martin, do you want to add anything?

I need to reinforce it. I think in these uncertain times, when we've been talking about how we manage through uncertainty, you're naturally going to see a swing towards a higher weight of EBIT in the first half versus the second half. So if you're going back over historical models and thinking this implies a lower weight to the second half, you're correct, but it's all about where we're placing the investment first half, second half rather than anything to do with sales or gross profits or other underlying costs.

Your next question comes from John Hynd from Wilsons.

Perhaps if we could focus on the -- I mean, you're talking to obviously been a significant amount of work that's gone into this, a lot of development costs. Can you give us some color on how long has this been, I guess, under the hood? How long you've been working on it and understanding of the scale, like the cost of scale and how do you expect this to drive? I'm assuming you're using it as a way to differentiate versus competitors. How do you expect it to drive market share, and I guess, into the future?

John, I'm sorry, we just lost the line at the very beginning. Can you just repeat the beginning of the question?

Sorry, I just wanted to focus on the replatforming of the company. The platforms obviously, significant work has gone into it. Can you give us an understanding on the timing and the costs and perhaps what sort of barrier, I guess, it creates versus your competitors?

So maybe let me take half of that, I'll set the table and then Martin can talk about the cost. So there's multiple elements to -- against what we've been investing on. So if I take the global platform itself, we've been doing this for, I don't know, the last couple of years as we've been rolling this thing out. The exciting bit is that Australia as a country as the last, let's call it, incumbent to go live, and we're taking them live, I think, in March. So when we get on the other side of March, we will have taken all incumbent territories live, which beyond that just means each time we add a new country, you then extend the platform. So from a global platform, let's call it 1.0 perspective, the good news is at the end of FY '22, we will declare victory on the rollout of that fundamental backbone. What's the purpose of all of it? The challenge at one level is that what makes us different, in a sense, from a lot of our competitors is we are young, not young in age, but young and where we are in the world. So we have to go into a lot more countries. Many of our competitors are already there. So what I want to be careful about is, well, if you go into more countries, your back-end cost grow exponentially because of the complexity that comes with that. So this was the beginning of this replatforming maybe 2 or 3 years ago was to make sure that we can very quickly get through the geographic element of our growth plan without costs on the back end, growing exponentially, and that's where a single instance and SaaS and those types of features solved that problem. So I wouldn't say it's -- grabs market share relative to competitors as more they're already there, it's just making sure that we can do this as quickly as possible, and we're going to get operating leverage across the company as we do it. And I would say that's the global platform side of the equation. As we move into the consumer experience platform, honestly, I don't think about it within the context of market share or anything else. I think about it within the context of what has always worked for Breville as an innovation company since the beginning of time is if we focus on delivering value to our end customer that we know very well, everything else seems to work out. And so the back end is coming up with new innovations to help them. What this digital platform is doing is, helping to arc the life cycle of the customer with that product. So part of it is the front end of which one should I get or is this the right one for me. They then buy it either from us or from one of our retail partners, they then get it home and the question is, did they get out of that product, what they expected when they bought it. So a lot of this investment is to facilitate, let's call it, post purchase experience for our customers to make sure that they got all the value that they were hoping when they bought it. Over the long run, that, I think, will bode well for our continued growth.

And John, I'll just add in terms of the spend or expensing of the money that we've invested in re-platforming the company, because of the change in [ SaaS ] accounting last year, this is all flowing through the -- essentially, all of it is flowing through the P&L. It's not building up as an asset on the balance sheet. So you've seen the numbers flow through the P&L. In terms of how much of that is contributing to the number I called out, which is the increase in investment in R&D, marketing and technology, not much, because as Jim said, we're coming towards the end of the program rollout. So we're not increasing our spend in this area. If anything, it's tailing off, allowing us to have funds for investment more in market-facing platforms. So it's all flowed through the P&L. It's not really contributing to the step-up in spend, but it is there at a base level, and will be, let's say, for another 12 months.

Your next question comes from Tim Lawson from Macquarie.

In terms of the inventory levels, can you comment on the shortfall in the inventory among your distribution channels, so amongst the [ potential ] retailers and what you think their sort of reorder intentions are in the second half?

So I'm trying to kind of think through this. So look, the way -- if the whole system is in equilibrium, then the retail channel has the inventory that they need to be able to smoothly re-pipeline their stores as they deal with the demand in front of them. Then in theory, Breville's behind them with a warehouse backstopping in the face of demand, right, which is that went higher than they expected. And then -- so if we get all that done and everybody has got the right amount, you would say that the system is back to flowing and in equilibrium. I think from a -- if I go across the markets, Asia-Pac feels like it's in pretty good shape on both the retailers and Breville within that construct. So we're flowing pretty smoothly in the Asia-Pac region. Obviously, you'll have a SKU here and there. But if I look at it the aggregate, I'd say Asia-Pac is probably in the best shape. If I look at EMEA, I would say it's not bad. There's a little bit of work there to do, but it's in pretty good shape, and we should catch up there relatively quickly. And if I kind of pick the problem child in the whole system, it would be the United States because of the L.A. port. Now at some level, the way to think about supply chain complexity, right, for us, it's just time. It doesn't matter where in the supply chain it happened. If it caused a 1-week delay, it's a 1-week delay. What we had in the first half was we had that delay increasing, so to speak, of the L.A. port kind of going up. But recently, I'm going to call this in the last couple of months, the L.A. port has been steady. I mean, steady at 100 boats, so to speak. So once you absorb that initial time lag, then you get back to flowing. So our inventory is flowing into our warehouse now on top of this, kind of 100 ships incremental inventories towards this reality we're in. And that's allowing us to start to heal up the retailers in the U.S. So I would say, we're not done in the U.S. There's still going to be more work to do. But then it also comes down to the retailers themselves, which is in this COVID world and so forth, how are they thinking about their inventory position where they want it to be. So there is some catch-up to do in the U.S. But I would say around the rest of the world, it's not material, maybe would be the way I describe it, Martin, anything else?

No, I agree with that position.

Your next question comes from Apoorv Sehgal from UBS.

Congrats on what looks like a pretty strong set of numbers. Just a follow-up question on the FY '22 guidance and specifically on that reinvestment into marketing, R&D and IT. In FY '21, you stepped up that investment by around $49 million, which I think at the time was described as sort of a pull forward. It sounds like in FY '22, that step-up will probably be at a similar level or maybe even above that $49 million mark. And I just want to check if I'm thinking about that the right way mathematically. And then sort of if I can extend the question and ask if that's sort of right. Just, could you just explain the rationale for, I guess, stepping up that level of reinvestment on FY '21, which is already relatively sort of like an elevated step-up in [ the year ] itself?

So let me clarify one piece, right, which is the pull forward was not the amount, the pull forward is what it got [ spent ] on. And what I mean by that is that as -- everybody is working from home, demand effectively was self-sustaining. So what we would have normally done in FY '21 is in a normal year, those go-to-market dollars would have been spent on launching products and supporting demand and all those kinds of things. So because that didn't make any sense at a time when we were hand-to-mouth on the inventory, all of those dollars got reallocated into projects that the marketing team or the go-to-market team would have executed over the next 3 years, so to speak, and this is the back end of the presentation today is what you see where we spent those dollars. One of the things that I've talked about since I got to Breville in FY '16 was this need to align the business model for kind of a long-term sustainable run, which is to make sure that we were spending at least 12% of net sales on marketing and our go-to-market and R&D. And if you look at FY '21, FY '21 was not 12%. It was less than 12%. FY '22, I don't know, maybe less than 12% as well, which means we're not there yet. So what we're really talking about, so in that construct, it wasn't a pull forward. It wasn't money we wouldn't have normally spent. We would to just spend it on something else. And the way the demand line was behaving gave us the opportunity to accelerate these investments into the digital platform. So what I would say from a forecasting perspective is, we still aspire to get to a point where we are spending at least 12% of net sales on go-to-market and R&D. And until we get there, we will continue to lean into this to get to that kind of stable business model. So then we're only debating what we spend it on, not that we spend it.

Yes. I'll back that up. The pull forward was about the pull forward of the things we were spending on, not a pull forward of the level of spend. We've still got ambition to increase our level of spend towards the 12% sort of target that Jim laid down some years ago. And when the top line of the business is growing [ nearly -- d*** near ] 25% every year, you're seeing extra spend being pulled in just to stand still. And if you compare to what De'Longhi or some of our other competitors are spending, I think our Head of Marketing Cliff would still say, not enough. So we're still looking to increase the spend. So I think our expectation would be we will see continued reinvestment in these drivers period over period, at least matching revenue growth, but hopefully going ahead of revenue growth, as we look to increase the weight of our spend.

Your next question comes from Tom Kierath from Barrenjoey.

Just a question on EMEA. Can you talk through how many SKUs or how many different products you've got in the different countries that you operate in there, maybe comparing the U.K. where you've been up for years and years now versus some of the newer countries that you're in?

Honestly, I don't know the answer to that question. And it's mostly because I don't look. So we run that entire geography as one idea, as opposed to looking at individual countries. From a metaphor perspective, I don't look at individual states in Australia or the U.S. either, meaning we just think of Western Europe as one thing. When I look at the total SKUs there, I would say there's still -- that range in total is still less than what we would have in North America. And I even think North America would be a little bit less than just from a portfolio perspective. So there's still room for us to expand it, but you've got to earn the right -- and not just kind of year-over-year, we tend to get range expansion happening in that geography.

Just what I'm trying to assess is, just how far through that development in some of the newer countries in Europe, you are and how many more years you've got of growth. So maybe if you could address that.

Yes. So -- I mean, look, I get the challenge. So if I pick on Australia, and look, it's a little bit of an overstatement, but it's actually true. It's been going for about 89 years. And so you get a sense of Australia -- I mean Asia-Pac and the growth rate it's delivering. So if you backed up, say, with North America in that sense, right? So both Asia-Pac and North America kind of bouncing around that 20% mark one way or the other, I think. I would expect Europe's got a ways to go measured in multiple of years before we ultimately settle down to what I would call steady state growing solely off the back of our new product innovation.

Yes. And in Europe, you've got -- obviously, you've got which stores you're ranged in. We get that fairly early in the piece. Then you've got the range of SKUs that are taken into those stores. There's still some expansion that can come there. And then you've just got the pure growth driver of velocity of the SKUs moving through the shelf or the strength of the brand.

And the NPD pounding on top of that.

And NPD coming behind that. So if you were to take Italy at the moment, one of the more recent countries we entered, have we got less SKUs on shelf than we do in Germany? Yes, probably. So there's some expansion to come there. But the biggest growth driver in Italy will be brand recognition and the speed of the existing, sort of, core range moving to the shelves with those Italian retailers. And you asked, do we see faster growth in younger countries than in the countries that have been in 4 or 5 years? Yes, we do. And it's a combination of all of those factors.

Your next question comes from Sam Haddad from Bell Potter Securities.

Well done on another strong result. Just a question on price increases. Can you sort of give some color on the level of prices that you're putting through and what the pipeline is for further price increases? And also, what you're seeing in your key competitors do? Are some competitors refraining from increasing prices and absorbing some of the costs?

So look, the good news for us is we play at the premium end of the market. Our products are physically small. And what I mean by that is you can put a lot of them in a 40-foot container. So freight as a percent of COGS is pretty small for us. So obviously, the freight costs went not for everyone. It just impacts us less than most companies. And given that we're premium that spreads across those devices. So that turned out to be -- is it something to deal with, sure, but it's not a big issue. Same on the -- we've seen input costs rise, again, not a huge issue. So within that construct, we've got on the other side, this continuing premiumization and so forth. So if you back off promotion because you don't need to and so forth, that's effectively a price rise all by itself on an average basis. So when we put through price increases, we're maybe luckier than most in the sense that they don't have to be that significant for us to effectively defend our gross margin. When I look across the system, you get different answers, a couple on the competitive front. Honestly, the second half will be a lot more interesting to watch because in the Northern Hemisphere, everybody's year-end is December, so you -- they might have a tendency to hold their breath a little bit. So we may see something in the second half, but what we did see generically definitely was a pullback on how much they promoted. We don't promote that much. So that's not a big number for us, but for some of our competitors, they promote quite a bit. So pulling back on that to get their price increase that way. We saw a fair bit of that, and we've seen some price increases as well. But it will be more interesting to kind of watch the field in the second half.

Some SKUs in some countries, we've taken price rises. It's not -- it never is a spread the peanut butter everywhere, same price rise across the board. It's not a cost plus approach, it's a premium value in market, which ones can command that price increase. So that's what we've done so far. But we're seeing continued inflation on containers, it seems to have at least calmed now. Are we seeing some inflation on FOBs ex China? Yes, we are. And therefore, I think you'll see us continue to take some price rises on some SKUs in some territories, but not an across-the-board approach, Sam.

And honestly, it helps us to be the innovation-driven company, right? Because it's like you can take price to whatever you want. It's a function of what elasticity does on the back side of that as to whether that ended up being a good idea or not. So this is back to whether you actually have the value to sell at the increased price. And because we're so innovation-driven, we tend to be able to do that. And obviously, it helps that the price increases are not big swings.

Yes. Are we constantly looking and evaluating price and margins in market? Absolutely, yes, all the time and then making decisions on a SKU by SKU market-by-market basis.

Your next question comes from James Casey from Ord Minnett.

I just wanted to touch on the working capital. At the FY '21 result, the working capital at the time was about $80 million below equilibrium. In your latest result, you've built your working capital by $130 million and yet you're still saying it's below equilibrium. Can you just explain the difference between those 2 amounts and how far below equilibrium you are?

Yes. Sure, James. I tried to bring that out, but clearly didn't bring out explicitly enough. We always see a high point in working capital in December as opposed to in June. So just one needs to be careful looking, are we looking at December versus December or June versus December. And what peaks are working capital in December of each year is high receivables following our peak sales month of October, November and December. So yes, we were $80 million below June equilibrium in June. And if you go back 6 more months, we said we were $95 million beneath an equilibrium in the previous December. We've almost caught those numbers up. So we could be $30 million or $40 million beneath where I think the run rate is with the caveat that we've now flagged that we're going to deliberately capable -- deliberately try and build inventory even higher for this June '22. So June '22 may, on the inventory side look a lot more like in December, but receivables will be lower again because it's a lower sales period. So I hope that helps. If you look at how much we were below June, you got to take the seasonality when comparing that to December.

I think the one thing I'd add is you need to be really careful looking at '20 and '21 because you're sitting here in COVID with supply chains ripped and so forth. So that's not a great year, period, for looking at data. I think it's dirty. If you go back to, let's call it, FY '19 and just take working capital as a percent of revenue, that will give you a sense of kind of notionally what does equilibrium feel like in this business when it's not in the middle of kind of this COVID mess that we're all dealing with. And so I would expect when we come out to whatever it is, the new normal '24, '25, '26, whenever that is, you expect working capital to ultimately settle back in to something closer to the pattern that you would see in '18 and '19, first half of '20 was clean. FY '20 as a year was dirty. So that would be guidance to help you figure out what it should be on a steady basis.

We apologize to the questions we couldn't get to today. That does conclude our conference for today. Thank you for participating. You may now disconnect.