Breville Group Limited (BRG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Breville Group Limited FY '25 First Half 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 to everybody joining today's call. I'm the Group CFO, and it's my pleasure to welcome you to the presentation of our first half 2025 results. I'll walk you through the group's financial results; and then Jim Clayton, our CEO, provide an operational and strategic update. I'd like to start our presentation today by acknowledging and paying our respects to the traditional custodians on whose land we meet today. I would like to pay respect to their elders, past and present and further extend that respect to all Aboriginal and Torres Strait Islanders present today. We celebrate the continuing contribution of their food culture and their connection to and custodianship of this country. Turning to Slide 4 in the pack. We start with an overview of our first half results. In the first half '25, we delivered double-digit revenue growth of 10.1% against a backdrop of resilient consumer demand with sales for the half of nearly $1 billion, led by the Global Product segment growing at 13% in constant currency terms. We held our gross margin percentage steady at 36.7% and delivered 10.3% gross profit growth or an extra $34.3 million. Period-on-period OpEx growth was aligned to this gross profit increase, yielding an EBIT growth of 10.5%. NPAT grew faster at 16.1%, with reduced interest costs arising from our strong cash flow in FY '24. Net debt was comfortably below the prior period at $55 million. This was slightly higher than originally planned as we made the tactical call to pull approximately $60 million of second half '25 inventory into the U.S.A. earlier than normal as a hedge against potential U.S.A. tariffs. To be clear, this is inventory we always plan to buy and that we need for our second half '25 sales. We just shipped it earlier than normal before any potential tariff rate changes. A fully franked dividend of $0.18, an increase of 12.5% on the PCP, will be paid in March. Overall, a very solid half of performance against the resilient consumer backdrop. Turning to Slide 5. You can see the key segmental results. Our Global Product segment grew revenue by 13% in constant currency, with gross profits growing at 10.9%. Coffee continued its positive trajectory, delivering strong double-digit growth. Cooking recovered to post high single-digit growth and food preparation showed a small single-digit decline although sellout for food preparation actually grew period-on-period, a signal that it is about to find its footing. NPD, or new product development, contributed strongly to growth in the half with sales of the premium Oracle Jet exceeding expectations. New geographies, those entered since COVID, also continued to outperform at over 36% growth. In gross margin percentage terms, in the Global Product segment, the number was slightly dampened by elevated shipping costs into EMEA and the strong U.S. dollar. But the Distribution segment fulfilled its strategic role delivering strong double-digit gross profit growth, driving an increase in gross profit of $4.9 million. Turning to Slide 6 and a deeper dive into the Global Product segment. Here, we show our geographic theater performances. First half '24 saw revenue growth of 13% in constant currency, with all 3 theaters in double-digit growth. The Americas grew revenue by 10.9% in constant currency, with both coffee and cooking in double-digit growth, slightly suppressed by a single-digit decline in food preparation, although as noted sell-out growth was also positive in this category. Coffee growth was strong across our key SKUs, including the entry point Barista Express and the premium Oracle Jet. Of note, the U.S.A. grew more strongly than the theater as a whole, with Canada rebasing as Hudson Bay left the playing field. In APAC, APAC delivered strong across-the-board growth of 16.3% in constant currency over a weak prior period, including the bounce back of distributor markets into growth. Coffee delivered strong double-digit growth, with all other categories also in growth. South Korea continued its move from strength to strength again surpassing New Zealand in gross profit dollars in the Global segment. In EMEA, strong coffee growth led a 15.4% overall revenue growth in constant currency, with good growth in key retail partners alongside our DTC, direct-to-consumer channel. Within the overall number, solid growth from EMEA distributors helped offset the temporary headwind caused by the FY '24 changeover from a 1P to a 3P model with Amazon in our direct markets. Across all regions, consumer demand proved resilient in the half, resilient to cost of living pressures, although consumers were consistently more active during peak promotional areas. Turning to Slide 7. Here, we see our EBIT growth drivers in the first half '25. Steady gross profit growth was again key in generating funds to drive business development and EBIT progression. Good volume growth and FOB savings, somewhat offset by shipping cost increases and consumers' propensity to buy in promotional periods, all flowed through the half, generating a 10.3% or $34.3 million increase in gross profit. Approximately 40% of this gross profit increase flowed through to EBIT with 60% or $20.5 million reinvested into operating expenses. G&A expenses increased in line with plan by $4.6 million or 16% period-on-period due to the acceleration in the rate of new product and solution launches. Employment expenses grew by $5.9 million or 5.6% due to annual pay rises and geographic expansion with like-for-like headcount relatively stable. Marketing and advertising spend increased $6.3 million or 20.9% behind key first half '25 launches and initiatives. And lastly, other expenses were up $3.7 million or 9.7%, mainly due to the foreign exchange losses and logistics costs associated with the tactical inventory build in the U.S. Not shown on this chart, the NPAT grew by 16.1% in the half due to reduced finance costs, down $4.4 million or 34% from the PCP, this arising from the strong cash inflow in the last 12 months. Turning to Slide 8 and the balance sheet. Here you see our normal seasonal picture overlaid with the tactical pull forward of inventory into the U.S.A. This play largely drove the $63.4 million inventory increase you see here with inventory outside the U.S.A., held broadly flat as revenues grew. Receivables seasonally peaked in December at $479.1 million or 6.5% above prior year, with debt to days slightly better than the prior year. The increase in the PPE balances over the prior period reflects the beginning of our tooling investment into alternative manufacturing sites as well as our ongoing store-in-store investments. The development of new products and solutions remains a key driver of our growth and is reflected in the balance sheet as capitalized development costs and software. As more new products are developed and they're launched, capitalization increases and with a lag, so does amortization. The intangible balance shown here is, therefore, a good leading indicator of future growth with the growing balance signaling that we have a number of product -- projects moving towards launch were recently launched. With strong underlying cash flow, our December 31 net debt position improved by $42 million over the prior period to land at AUD 55 million. Moreover, in January, as peak receivables were collected, the group moved back into a net cash position of $18.7 million as of the 31st of January 2025. At 0.2x the last 12 months EBIT, the group remains conservatively geared with significant unused debt and cash facilities providing flexibility for further expansion. Turning to Slide 9. Before concluding my review, there's a few key points I'd like to reinforce about our first half performance. Our overall growth was very solid at 10.1% with the Global Product segment growing 13% in constant currency against a resilient consumer backdrop with revenue nearly touching $1 billion in the half. All 3 theaters were in double-digit revenue growth led by strong coffee growth across the group. Despite inflationary pressures, freight and a strong U.S. dollar, our gross margin percent held steady with gross profits growing 10.3%. Expenses were aligned to this gross profit increase and EBIT grew by 10.5%, with NPAT at 16.1%, benefiting from lower interest costs. As noted, we tactically pulled forward some second half '25 inventory into the U.S. with all other countries held broadly flat as a group. And lastly, our low leverage and strong underlying cash flow provides funding flexibility for further expansion and investment. Overall, a very solid set of results. And with that, I'll finish my section of the report out and hand over to Jim.

Thank you, Martin, and good morning to everyone. Now that Martin has walked you through the scoreboard for the half, I'm going to give you an update on our Beanz service, highlight our new geographies, touch on new products and talk a bit about the second half and our outlook for the year. Slide 11. Admittedly, we've been fairly quiet about the Beanz service since we launched it, but I'm not ready to give you an update on where we are. First, a reminder of what it is and what it isn't, and basically how it works. Beanz as a service aggregates and curates roasters and coffees for end consumers. Once an order originates either by BRG or otherwise, Beanz validates the order, passes it back to the relevant roaster who then ships the coffee to the customer. Beanz monitors the order throughout the process and clears financial flows between the counterparties, this is a 100% drop-ship model, Beanz and BRG never touch the coffee. On the economic front, if BRG is the originator, Beanz makes a retail margin on the sale. And if a third party is the originator, which I'll discuss more fully in a few slides, then Beanz makes an order processing fee. On Slide 12, I've given you a snapshot of the service. To date, we have shipped over 1.3 million bags of coffee to over 145,000 customers. We have partnered with over 100 of the world's best roasters across 4 countries. Looking at the growth rate of the service in the first half of '25 over the first half of '24, it grew 71%. In the month of December, the service averaged 1 ton of coffee per day. We've got a long way to go, but we're encouraged by the service's performance to date. One footnote that is central to the business model is to date, we have spent $0 marketing to Beanz service. Instead, it naturally drafts behind the sale of a new coffee machine. Slide 13. I'm now going to walk around the elephant and describe the service from different angles. First and foremost, Beanz is a fundamental solution component for our customers experiencing cafe-quality coffee at home. The first step in cafe-quality coffee at home is using the same coffee they use in the cafe. This was the primary reason for building the service in the first place. Slide 14. Beanz is also the first global coffee service. At an individual country level, there are various coffee marketplaces. We, however, as a coffee machine company, have a solution problem in every country in which we sell. This naturally has Beanz following the coffee machine side of the house. As with all other technology plays at BRG, Beanz is a single platform, which we turn on country by country because the supporting ecosystem is necessarily local. To date, the Beanz service is live in the U.S., the U.K., Germany and Austria. Slide 15. The Beanz service is also an enabler for bringing a different business model into the coffee machine category. Just as carriers bundle Apple or Samsung phones with their mobile service, BRG now bundles specialty coffee with any new espresso machine in countries where Beanz is live. To be clear, this is not a promotion. This is an always on offer, which we branded the Fast Track Barista pack, the ultimate goal being to help our customers experience cafe-quality coffee at home by helping them save a bit of money along the way. Slide 16. Beanz is also an ecosystem platform, something we call Powered by Beanz. If we have the problem of selling hammers with no nails then so to do others. To accelerate the growth of the specialty coffee vertical, we have decided to let others leverage the platform for the same purpose. To date, Seattle Coffee Gear, Williams-Sonoma, Crate & Barrel, John Lewis and AeroPress are using the platform. John Lewis and AeroPress in the final stages of implementation and will go live in the next few weeks. In this use case, the Beanz service plays the role of an order processing platform on behalf of third parties. By opening the platform to others, we're making it easier for consumers to gain access to freshly roasted specialty coffee regardless of the coffee machine they decide to use. It's a rising tide lifts all boats play. Slide 17. So what is the Beanz service? It's quite a few things at the same time. It's an efficient path for our customers to get fresh specialty coffee. It's a global coffee service executed locally. It enables a new business model in the coffee category with the always on bundling program. It's an ecosystem platform that retailers and other companies can leverage to solve the same problem, and it's a service that fundamentally removes customer friction, which facilitates acceleration. And ultimately, it's a semi-recurring revenue stream for BRG. Slide 18. Now back to the hardware business and geographic expansion. Slide 19. Last month, we switched to a direct model in the Middle East, both Breville Sage and the Leader Direct, Baratza has a particularly effective distribution partner, so we're pulling them into our regional go-to-market. The minor footnote here is that Israel is still served through a distribution partner because products in that country have a unique plug. Slide 20. Disclosing just a bit about the future, Breville Sage will be moving to a direct model in China in the second half of '25. The team is heads down on this project, and we expect to launch before the end of the financial year. To be fair, this is not a small country. So we'll only be working on this one for quite a while. That said, it's been on to-do list for quite some time, and we're happy to be putting it in the given column. Slide 21. Here, I've taken a shot at doing the math for you, building off the analysis we shared in the FY '24 Macquarie conference in May. In our direct model, we left FY '24 growing in economies with $35.7 trillion in disposable income. With the addition of the Middle East and China, that number has now grown to $48.2 trillion, a 35% increase. Obviously, lots of work in front of us. Slide 22 on products that we launched in the first half of '25. Slide 23, the first is the Oracle Jet, which Martin spoke about. First launched in the second half of last year, but we continue the geographic rollout into the first half of '25. It is performing exceptionally well. I have one at home and unconditionally recommend it to anyone who's looking to upgrade. Slide 24. We also launched our premium accessories range, which is also performing well. These accessories have a particularly large TAM because they work with new products as well as our entire espresso machine installed base globally. Slide 25. Right at the end of the half, we launched our new Metallics range with Williams-Sonoma, the juxtaposition of brass against various product colors gives a very premium feel. And with this launch, Williams-Sonoma will put our product on the front page of their catalog, hard to believe, given how long we've worked together, but this is the first time that has happened. Needless to say, Williams-Sonoma is bullish on the joint opportunity. Sell-out to date has been impressive. These products are also currently available in Australia. Slide 26. On the second half thoughts and the outlook. Slide 27. On the whole, the customer and retailers are stabilizing. Sell-out curves look normal and retailers are flowing better, meaning the bull whip effect on the back of COVID has dissipated. Our retailers entered the second half in a good inventory position, meaning they sold out what we sold in during the first half. No surprise, coffee continues to lead. Ovens are performing well and other subcategories are finding their footing. We'll have more NPD launches in the second half as expected. And as previously mentioned, we'll be going direct in China. The unknown that we're working through is how and when U.S. trade policy might further evolve with various trading partners, particularly China. As we have already discussed, the project to move 120-volt production out of China is in full swing, and we tactically put forward second half inventory in the U.S., continue to adapt and adjust as facts on the ground change. Slide 28. In an effort to prevent spending the rest of our discussion time on U.S. tariffs, I've included this slide, which I hope will answer most of your questions. We're 3 weeks into the new U.S. administration, and there have been discussions about tariffs on Colombia, the U.S., China, Mexico and Canada. Out of all of this, to date, only one has lined up for execution though it could still be suspended, but that's the incremental 10% tariff on goods imported into the U.S. from China. This tariff, if implemented, will apply to goods produced after February 1 or those that don't arrive in the U.S. before March 7. This 10% tariff is a tactical problem which begets a tactical solution. If you recall, back in FY '18 and '19, we managed through tariffs of up to 25%. To get to the punch line, we do not expect this incremental 10% tariff, if implemented, to materially impact our FY '25 reported results. This is because of the combination of our second half '25 inventory pull-forward decision, our goal post model for running the business as well as any tactical adjustments we may make to an individual SKU in the U.S. In this tactical game, there are 5 degrees of freedom: one, the manufacturer absorbs all the part of the increase; two, adjusting the SKUs distribution in market; three, adjusting the promotional plan for the SKU; four, adjusting the price; or five, doing nothing or any combination of these levers. Focusing in on the China-U.S. trading pair, the structural solution is moving the production of the 120-volt variant of products outside of China. This is a project we started 3 years ago, and it is in full swing and on plan. The last time I spoke about this, I said the project would be 80/20 by the end of December '25. This has created some confusion about what exactly this means. To anchor you, just in case U.S. trade policy with China continues to evolve, let me say it in a different way. On July 1, 2025, the beginning of FY '26, approximately 40% of BRG Group's purchases are exposed to this trading there. By January 1, 2026, we expect this to drop to roughly 10% of purchases with further incremental reductions in the second half of '26. Slide 29. For the year, we expect EBIT growth to be between 5% and 10%, with the range reflecting a small hedge to account for remaining uncertainty around how U.S. trade policy might evolve in the second half as well as the normal uncertainty noted in the 3 bullet points. To be clear, I mean something other than the incremental 10% tariff for goods arriving from China, which has already been accounted for. With that, I'll now hand the call back to the operator who will open it up for any questions you may have about our first half '25 performance.

[Operator Instructions] Your first question comes from Tom Kierath with Barrenjoey.

Just a question on the profit contribution from going direct into China and the Middle East. How long do you think that might take? Is that part of the reason that you're kind of flagging I suppose, softer profit growth in the second half as you invest in those markets before delivering some profit?

Tom, it's Martin. No, that's not the driver of that range that we've given. The driver of that is, as you expect, uncertainty over U.S. trade tariff policy that may be announced or may not be announced over the coming weeks. As Jim just said, if things stay as they are in the unlikely case that things stay exactly as they are today, then we'd be guiding towards the top end of the range and not the bottom end of the range. Arabia and China are relatively small in the short term.

And so when are you kind of thinking that they might be profitable? Like is it a couple of years or...

Yes. A year -- who knows, depends how fast we grow. Arabia, we're taking over from a distributor Middle East. So immediately, I would say, China may take a little bit to find its footing for a couple of years, something like that.

Your next question comes from Lisa Deng with Goldman Sachs.

On the Beanz business, can we talk a little bit about like what's the gross transaction value we've realized to date? And again, how should we think about how this materializes as an opportunity going forward? And where is this reported? Will we report separately?

Sure. So I haven't disclosed this on purpose because I don't want you to factor it into its model -- into your model. And what I mean by that is there's kind of, let's call it, Phase I and Phase II. We're in Phase I, which is something that you wouldn't include in your DCF, so to speak. And when this ultimately evolves into a Phase II, which will be years from now, then that will scale up and start to be material. And Martin, maybe you can talk about where it shows up, but it's...

Yes. Just echoing what Jim says at the moment, its primary role is to drive hardware sales. So it shows up in stronger hardware sales. But where do we actually report the Beanz, we report the commission or our margin on the Beanz as sales and as gross margins. So it's relatively small at this stage, Lisa.

Your next question comes from Ben Gilbert with Jarden.

Just on the guidance, and Jim, I fully appreciate your comments, you've got a lot of control and you're typically looking at your earnings 2, 3 years out based on the life cycle. But the tariffs notwithstanding that the implied for the flattish EBIT at the midpoint of the second half looks relatively light in the context of new product launches to FX gains and just the fact that the exit rates across most markets look pretty good. Are you factoring in a significant step up in development or anything like that in the second half? Or it just feels as a relatively conservative lens, particularly around topline and what flows through to EBIT in that second half, not withstanding the smaller half.

So I think the important thing here, and you'd have to go back to earlier report-outs that we did is what we mean when we say the goalpost offense for running the business, which is EBIT from our perspective is a fixed cost like rent. So when we give guidance, I'm signaling you where I think that fixed cost is going to happen. So if the second half grew by 100%, my guidance on EBIT would be unchanged. If it grew 10%, my guidance on EBIT would be unchanged. So the flex is above the EBIT line. So there's no signal and never has been in the half-on-half forecast of EBIT guidance.

So considerably there's a scenario where you have stronger topline in the second half and so to your point the goalpost...

Yes, in other words, if we have stronger topline in the second half, we will invest more into the engine of the business to where we end up at guidance. Martin, maybe you want to clean that up.

And just to repeat, there was a slightly wider range in guidance, 5% to 10% rather than the last time we had a 2.5% range in guidance really just to account for the uncertainty in U.S. trade policy at today's announcement, what's actually been announced to put into market today would be towards the top end of the guidance. We've got a range just because it feels quite uncertain world out there.

Your next question comes from Apoorv Sehgal with UBS.

A specific question on -- just related to Slide 6 on the EMEA result. You said that the overall that is lapping the changeover from a first party to a third-party model with Amazon. Could you just explain what you mean by that and why that decision was made? And has that headwind fully played out in the first half '25 EMEA result? Or is that a headwind you're expecting to feature in the current second half '25 period?

It will feature in the second half. So it's going to play through a little bit like bed bath in a sense. So what happens in a 1P model, Amazon is the buyer. So when we sell and ship to Amazon, we would book the revenue, and that's what's happening in all prior years in EMEA where Amazon is just a retailer like any other retailer. In a 3P model, the 3P, you're a marketplace, you own the marketplace. So it's much more -- feels like DTC. So within that construct that is -- the headwind that gets created is twofold, which is one, on the day you made that change, amazon 1P had inventory. And so Amazon will continue to sell that inventory out through 1P before 3P ever turns on, right? And then once all of that inventory is sold through, that creates that air pocket. Then you come up the other side and you start. The 3P model, which is more like B2C in a sense on how it looks. And that's what creates that air pocket. The reason that it will stretch across the second half is you do this transition one SKU at a time, I guess the way to describe it. The first SKU that went, I think, was around November 1 of prior year and the last SKU that went was June 30. And this is why I've said we're going to have this kind of bed-bath like event playing through in this cutover from sell the inventory model to a direct model.

And Apoorv, you didn't really see it or feel it in the first half numbers because there is an offset where the distributors we've talked about them previously as being low growth. They bounced back to normal growth. And therefore, looking into the second half, you're asking whether the effect is there. The effect is definitely there, whether you'll see it in the numbers is a different question.

The way to internalize that is that the run rate of EMEA as reported is understated.

Yes.

Because of its denominator. But it should be clean -- it will be clean in '26.

'26 should be a clean.

Yes. It will be a clean year-over-year in '26.

Your next question comes from Craig Woolford with MST Marquee.

Can I just clarify the various FX exposure that Breville has? And I'm referring to both the trends transaction exposure with purchases as well as translation of earnings. How should we think about that over the next 6 months?

The biggest transactional one, Craig, is that we purchase the vast majority of our goods in U.S. dollars. And then we sell in a number of currencies around the world, be it Australian dollars or euros or pounds. So that's the main transactional exposure. The translational ones are the obvious ones that we've got P&Ls in different currencies and assets in different currencies, balance sheets around the world. We take -- we have a hedging strategy. So we take -- we have a natural hedge in that we have a U.S. dollar business, which offset the U.S. dollar purchases, and then we have an overhang for which we buy foreign exchange certificates. So we hedge that gap. So we have foresight, we have visibility of what exchange rate we'll be experiencing about 12 months in advance. So we, in the past, have said we're insulated against the exchange rates. We're not insulated. We just have time to move. We get 12 months forward visibility by that natural hedge and by taking those FECs about 12 months in advance.

Your hedging is on purchases?

It's on the transactions. Yes, we don't hedge the balance sheet or the P&L. Yes, translational will just flow through. And that's why we often anchor you to look at constant currency global segment growth because that takes that translation noise out at least to the topline, but the transactional exposure is the one that we hedge, the actual purchase exposure.

Yes. I mean the only thing I would add in the way this plays through is, in a sense, EBIT is clean. It's one of the reasons I guide on EBIT, which is that translational stuff is playing through the top. And you've got the hedge. The natural hedge of the business as well as the incremental hedge that the finance team put in. So EBIT is a no excuse line but you can have noise above that line as the puts and takes across FX play through the P&L.

So when we set the budget around April or May of each year, we have good visibility of what exchange rate environment we'll be living in and we shape our costs to that. And then fluctuations during that financial year are pretty much insulated.

Understood. So just to clarify, there was other expenses around $3.7 million, mainly due to FX losses. So that's just the mark-to-market on that.

On those hedges, yes. Correct. And there were storage and other logistics costs in there because we pulled forward some inventory into the U.S.

Your next question comes from Tim Lawson with Macquarie.

Can you just clarify exactly sort of the inventory strategy for calendar year '25? Obviously, you've got the -- they're trying to adjust the geographies where manufacturing is? And related to that, can you talk about how long and how material that PP&E will be related to that change in geography?

So the PP&E, to be clear, Tim, is the investment in tooling in new dies and molds and cast which we need as we move each SKU or set up an alternative manufacturing site, SKU by SKU. So that will continue to run through FY '26 through Christmas and probably into the first part of calendar year '26 as well. That was the first part of your question. I think your second part was how long until the projects are up and running. Was that right?

Yes. And then also just your inventory policy, strategy and inventory for maybe the calendar year?

Inventory, we made the tactical play when we thought we could get and successfully did get a bunch of inventory in before tariffs. Now we're back to just normal purchasing from whichever is the suitable location that we purchased from. So we're not going to build up or run down inventory from this point. That was a one-off tactical play for the second half of '25.

And maybe the regions where you expect, based on current plans, the manufacturing will be at the beginning of, say, 2026?

So again, it depends by SKU, but the generic regions, some will be in Mexico. It's really Mexico and Southeast Asia are the 2 locations for alternate 120-volt production. So what that means on the other side is that for every SKU that has a second location, you can either produce it in China or you can produce it in the second location.

Okay. So it won't be interchangeable Southeast Asia, Mexico?

No, it's SKU by SKU. In other words, I'm not going to have 3 locations. I'm going to have two. So some will be China, Southeast Asia, some will be China, Mexico.

Your next question comes from Olivier Coulon with E&P Financial.

The Canada's Hudson Bay impact, I mean, is there any quantification of what that did at Americas segmental level?

No, I mean, other than it's an overhang, right? So if the Americas is, I don't know what it was, 10-point something.

10.9.

That means that the U.S. as a country was faster than that and Canada as a country was slower than that. But once it rebases then Canada will bounce and won't be an overhang.

Yes. And do you expect -- I mean, obviously, you probably haven't fully offset the impact of when that happened in the U.S., right, we've target. But like is there something similar in Canada where you can expand distribution amongst the remaining retailers or how is looking at medium term.

As a $1.5 billion company, Canada is too small to matter.

They're not material.

Yes. I mean if I'm the GM of Canada, I'm doing what I'm going to do, right? But within -- from Martin's chair, he's like, okay, let's go do that, that would be great.

Yes. And then just on China. I mean, so it sounds like the initial upfront expenses isn't all that material. Do you have a view as to what, I guess, the medium term might look like in terms of the contribution there? Like is there any market data that you can see as to how large the espresso category is in China? Your peers seems to have reduced their disclosure more recently and removed their country-by-country disclosure as to how big China was in their sales?

So it's bigger than a bread box. So yes, it is significant and material. So now it's just a function of how well we do, right? So obviously, we've got Excel spreadsheets flowing around, but I think of them as interesting planning documents. You'll know when you get there. I mean same with Korea, like we had spreadsheets for Korea and then we have what actually happened in Korea, and I look at all new countries that way, which is it is a material market. It's worth doing. We're doing it, and then the actuals will be the actuals, and then we'll know what our run rate is and what our slope is.

Your next question is from Sam Haddad with Petra Capital.

Just on gross margins, just the moving parts there and what you're seeing for the second half on the Global Product? And do you expect the distribution business to continue to offset that in the second half and at the group level, what the outlook is?

It feels -- gross margins feel okay for the second half, Sam. So I'd expect them to be similar to the first half with the overall headwinds and tailwinds also being pretty similar. So shipping into EMEA is still above where we expected it to be. We have achieved some FOB reductions out of China, still seeing consumers. We're not promoting more. We're not promoting more deeply, but consumers tending to buy more in promotional periods. Put that all in a wash, and I expect second half margins to be similar to first half.

Okay. Can I ask a quick second question. Have you considered manufacturing within U.S.A.? Does that make any financial sense like just given the continuing change in landscape in terms of tariffs going into the U.S.? Is that because some of your peers do have manufacturing capabilities in the U.S. Is that being considered or on the cards?

So I'll just kind of talk about this systemically, which is I want to have the context that this decision was made 3 years ago, and it was a question about whether it be good for BRG to diversify its manufacturing base? And that answer was yes. So the U.S. administration if whatever -- if Kamala Harris had won, we'd be doing exactly the same thing we're doing right now. So the idea, which -- I don't notionally buy the idea that what happens in the next 2 years is going to be the U.S. for the next 15. So you have to separate structural decisions for the company versus tactical decisions because of one administration over one period of time. And so we're basically looking through all of that. The challenge with our vertical, and it's because it's a very small vertical relative to like coming from LG. It's a little one. It's not where -- it's not just, well, gosh, where is assembly because that doesn't even get you made in. It's where there are all of the subcontractors that make all of the pieces that then go into the piece. And that effectively the challenge that all players in this vertical have, which is -- there is one location for every one that has multiple tiers of the supply chain to support the volume of this small vertical, and that happens to be China. And so when you pick up and move somewhere, it's not about moving assembly, that can be anywhere. It's -- you've got to move the back end of the supply chain as well to satisfy the test. And so that's one of the things we're looking at systemically. Could it happen, surely it could happen. But again, this is manufacturing partner by manufacturing partner, SKU by SKU. It's a complex project. And we'll see when all the dust settles, where all the pieces are. But at a fundamental level, I'm just making the decision to diversify the supply chain.

Your next question comes from Wei-Weng Chen with RBC Capital Markets.

Just wanted to ask a question on the guidance. I just wanted to confirm that 10% at the top end, does that include or exclude the planned China tariffs?

It includes.

And then...

Sorry, just to cover, it includes those that have been announced to date, which is 10% incremental on Canada. That's included in our view of the top end of guidance.

And just one other piece to that just so kind of everybody gets it. So everybody -- anyone who understands how our short-term incentive works and this goalpost offense and so forth, which is if we end up reporting 5%, STI will be 0.

Yes. Okay. And that was actually going to be my next question, about 5%. So yes, at the bottom end, 5%, that implies that the second half actually goes backwards in the order of about 8%. Just wondering if that's actually kind of a possibility that you're planning for? And what would actually happen -- what practically in the world at that point?

So I don't know if you've been watching the news, but we're 3 weeks into the new administration. And last week, if you went to sleep in the steel business, everything was normal and fine, and you wake up on Monday and it doesn't feel that way. So for them, they go, wow, something kind of material happened over the weekend that you have to deal with. And so that's the range, which is the unknown unknown, so to speak. Now we are hedged against that to the extent we pulled the inventory forward. It's really do we have the inventory that we need to deliver revenue in the second half already in the barn, right? To the extent that already happens, nothing can happen, right? To the extent we have further purchases to make to be able to deliver revenue in the second half, those are the only purchases that have any risk associated with them on the second half. But if you're asking me to predict the behavior of Donald Trump and what he might do on every -- any given day, I don't have it. So I've just opened up the reins a little bit to say, well, goodness, I guess anything is possible.

Yes. No, fair enough. And just a question to follow up on the comment that you guys would be diversifying supply chain irrespective of who won the presidency. But it seems like since Donald Trump has won, you guys have accelerated this program. So just wondering if there was any comment you could make on the costs associated with accelerating the program and maybe the cost of the program overall?

What I'd say is the cost is the same, the timing.

It's a capital cost in molds, tooling, dies, stamps and we'll just be laying down some of that CapEx a bit earlier than we would have done if we were going at a slower speed. But the quantum is the same. It's just probably more of it is going to hit second half '25 and first half '26 than on a more steady relocation.

So maybe -- and we're down at the detail level, but just so you get it. So let's pick -- I don't know, I'll pick a kettle. So we invest in tooling in that kettle. And that tooling is good for, I know, 100,000 stamps. So with all the products that we make, we're always having to go back to existing products to go, oh, that's run out, we need to retool. And that's what naturally shows up kind of in the CapEx number is this construct. So let's take that kettle and say, well, you're at 40,000 stamps, and we decide to move 120-volt production, right, to another location. Well, the 240-volt just keeps going. It's like, oh, I got 60,000 more stamps to do the 240 before we have to replace, so since that's pushed out, but I pulled forward another set of tooling that starts making the 120. So I think in the end, in the end, you kind of get this wash out, but you get this pull forward of anything that wasn't on its last stamp for 120-volt where you go, oh!

100% agree. It depends on your time frame. If your time frame is what's going to feel like in the next 12 months, CapEx for tooling is going to be higher. If your time frame was how much we're going to be spending on tooling over the next 5 years, it would feel normal, just a little bit of a hump at the beginning and then it evens out towards the end, there will be lower retooling later in the piece. But that's what you'll see pull forward in the next couple of report outs.

Your next question comes from Sam Teeger with Citi.

I just wanted to ask about how differently are you approaching new markets such as China and the Middle East compared to other countries that you've entered previously?

Not at all, other than kind of the difference in the market itself. And so I've said this before, so the Middle East, normal market. And I mean it's a physical market. So the question is, is this country physical or digital? If it's physical, meaning there are retailers, you're going to go put it on the shelves and all that kind of stuff, then that's no different than Australia. So the Western world is primarily, let's call it, a physical market. So the Middle East would go down no different than Portugal or Mexico or Italy or Germany. When you get to China, China is mostly a digital market without physical. I think the number is pretty crazy, but it's like 98% of the products in our little vertical are sold digitally. We've gone into one country that is a very digital country, and that's Korea. And that's why I put Korea first, having lived there for 6 years, which is I wanted the team to learn, well, how do you go into a country that is heavily tilted toward digital. There's no Harvey Norman to run over and talk to a buyer. And so we did that in Korea. The team has learned from that. And within that construct, China will be very similar to the Korean experience versus Germany.

Your next question comes from Joseph Michael with Morgan Stanley.

I just had a question around competition, which I guess has got a lot of airtime over the last 6 to 12 months, and it doesn't look like it's having an impact. U.S. constant currency sales up 11%. My question is, is there any evidence of your thesis playing out that more competition could actually be a good thing for coffee penetration, markings brand and driving awareness for the category. Keen to hear your latest thoughts there?

Yes. So I'd say there's 2 kind of pieces to that, which is, one is the construct of competition, meaning are we feeling head-to-head, should I get this one or that one and within that construct much like ovens and other things that play through, I think, same help for Dyson, which is we don't -- I don't feel competition within that construct. But having more marketing dollars in the category is a net positive for everyone, right? You decide which one is right for you, but a lot of the front of the funnel activity. We felt the same thing, honestly, when this is sometime back, but when De'Longhi did a big push with their campaigns, a lot of the front of the funnel stuff. Everybody benefited, including them. So I think within that construct, it gets more cut through to the category, and I think everybody benefits the more front of the funnel work gets done in marketing dollars.

We're certainly happy with the coffee growth across all sorts of SKUs that we're seeing, Joe, in the U.S. and the U.K., which is probably where we would have felt the most head-to-head. We can see that new entrants have taken some market share, but they haven't taken it from us. So that plays into that thesis of more noise, more marketing dollars appears to be growing the market and we're holding our share or growing our share within that bigger market. So that's -- so far, that's a healthy place to be.

And that does conclude our question-and-answer session and teleconference for today. Thank you for participating. You may now disconnect.