Breville Group Limited (BVILY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Breville Group Limited FY '25 Full Year Results Investor and Analyst Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Martin Nicholas, Group CFO. Please go ahead.

Thank you, and good morning to everybody joining today's call. I'll start by going through the financial results, and then I'll pass over to Jim Clayton, our CEO, who will provide an operational and strategic update. But I'd like to start our presentation today by acknowledging and paying respects to the Traditional Custodians on whose land we meet today. I'd like to pay respect to their elders, past and present and further extend that respect to all Aboriginal and Torres Strait Islanders joining us today. We celebrate their continuing connection to and custodianship of this country. Now turning to the results and starting on Slide 4. FY '25 was a solid year of performance with double-digit top line growth, delivering record sales of nearly $1.7 billion. Pleasingly, this number was supported by double-digit revenue growth in all 3 theaters and another strong performance from the coffee category. The group's full year EBIT of $204.6 million was at the top end of our guidance given in February as we successfully navigated the first wave of turbulence from the evolving U.S. tariff regime and successfully aligned our operating expenses to gross profits to deliver double-digit EBIT growth of 10.2%. Our pull forward of inventory in the U.S.A. pre-April 2025 before the significant increase in tariffs helped secure this result. Associated and incremental storage, transport and engineering and interest costs were all absorbed within this reported '25 delivery. Our underlying cash flow was healthy, allowing us to maintain a net cash position, notwithstanding the build in U.S. inventory and the first wave of CapEx investments in diversifying our manufacturing base, a move accelerated by the emerging tariff reality. NPAT grew at 14.6% with lower average borrowing and interest costs across the year. A fully franked dividend of $0.19 will be paid in early October with a full year dividend of $0.37, 12.1% above the prior year. So overall, a very solid year of performance against a rapidly changing backdrop. Turning to Slide 5, we see our key segment results. Here, the Global Products segment grew revenue by 12.3% or 11.4% in constant currency, with gross profits growing by 11.1% year-on-year. Our new products landed well with the Oracle Jet, the Luxe Brewer Thermal, the Smart Oven Air Fryer Compact and premium coffee accessories all performing strongly. As we announced at the half year, the exciting and potentially very large markets of China and the Middle East were also entered as new direct markets in the second half of FY '25. In category terms, coffee delivered strong double-digit growth across the year and indeed in both halves. Cooking achieved high single-digit growth, while food preparation grew gross margin but posted a small single-digit revenue decline. Gross margin in the Global segment was slightly dampened by the weaker AUD and elevated EMEA shipping costs, but gross profits grew strongly. Our Distribution segment fulfilled its strategic role by delivering strong gross margin growth and increase in gross profit of $7.7 million. Turning to Slide 6. Here, we see our geographic performances with all 3 of our theaters delivering double-digit revenue growth. In the Americas, our largest region, the U.S. consumer remained encouragingly resilient, whilst Canada rebased as Hudson's Bay left the playing field. Revenue grew 11.5% in constant currency terms with both coffee and cooking in double-digit growth. In EMEA, another strong coffee performance led to a 12% constant currency growth in revenue. Key countries -- our key countries all performed well, and our direct entry into the Middle East got off to a solid start, although the business model changeover created a transitional headwind for the second half in the theater. In APAC, we saw robust growth of 10.7% in constant currency, with ANZ delivering double-digit growth and South Korea continuing to move from strength to strength. As I said, our China entry shows early promise with the previous distributor change out acting as an expected temporary drag on reported second half growth. Turning to Slide 7. Here, we have a look at our EBIT growth drivers across FY '25. Pleasingly, gross profit grew at a more normal cadence, up 11.4% or $63.5 million on FY '24, allowing a 12% increase investment in operating expenses while still delivering double-digit EBIT growth. We increased our investment in employee expenses by $16.1 million or 8.2%, led by annual pay rises, geographic expansion and selective headcount growth in the key investment functions. Depreciation and amortization expenses increased in line with our plan by $7.5 million or 12.6% due to the acceleration in the rate of our new product launches. Our elevated FY '25 investment into diversified manufacturing and store in stores will start amortizing next year as assets are bought into use and is expected to lead to a further budgeted acceleration in D&A in FY '26. Marketing and advertising investment increased by $7.9 million or 14.5% behind key launches and initiatives. And finally, premises and other expenses were up $13 million, driven by temporary storage costs and engineering fees associated with the U.S. tariff mitigation as well as some foreign exchange losses. In aggregate, when we look at the total, we aligned our operating expenses growth to gross profit growth and delivered double-digit EBIT growth of 10.2%. Within this OpEx growth, the critical functions of marketing, R&D, technology services and solutions were prioritized and increased to 14.2% of sales from 14.0% in the prior period. Turning to Slide 8 and the balance sheet. It's a story of healthy underlying cash flow, delivering a net cash position, notwithstanding the necessary tariff-related of pulling forward inventory in the U.S. and investing in the first wave of CapEx related to diversifying our manufacturing footprint. The $93 million inventory growth here was led by this U.S. pull forward with inventory outside of the U.S.A. broadly flat as a percentage of revenue and in equilibrium. Receivables were normal with days outstanding in line with the prior year. In terms of fixed assets, FY '24 saw an increase in investment in fixed assets, all funded within a net cash position of $485 million at the year-end. The PPE increase seen here includes $21.4 million of tooling and assets associated with the acceleration of our diversified manufacturing footprint as well as $5.1 million related to store-in-store expansion with key retailers. Pleasingly, our capitalized development costs and software continued to grow, led by a healthy pipeline of new product development and solutions, now including specialty coffee projects. And finally, the movement in goodwill brands and licenses is accounted for by some foreign exchange translation effects as well as the purchase of an exclusive license to third-party developed technology that we plan to use in our future product development. Looking forward into FY '26, our balance sheet is healthy. We start the year in a net cash position, and we have unused debt facilities in place for our normal seasonal working capital investment as well as further investment in our diversified manufacturing footprint and funding other opportunities as they may arise. Now to Slide 9 and before passing over to Jim, a few remarks on the outlook for FY '26 and the potential impact of U.S. tariffs. I think we've covered FY '25, but just to reiterate: The bulk of the COGS impact from increasing tariffs was mitigated by the pull forward of inventory at pre-tariff prices. And the various costs associated with this tactical move were absorbed into the reported FY '25 delivery, which still came out at the top end of guidance. Looking forward into FY '26, most of our markets feel normal with macroeconomic headwinds weighing against Breville-specific tailwinds. The tariff turbulence and excitement is contained to one market. It's just that it's our largest single country. In the U.S.A., in the U.S., although the memories of the shock 145% tariff rate seem to have faded, we should be clear that the current fact set, the current rates that apply to China and now more generally to the world, represent a material onetime increase in input costs. This represents a structural step-up in input costs akin to a consumption tax that we now need to proactively manage, and we are proactively managing. We are working hard to mitigate the impacts of these new tariffs, including, as I've spoken about, diversifying our manufacturing footprint, which is going well, working on our FOBs, our unit costs from our suppliers, making distribution channel adjustments and taking price where appropriate. With so many variables, including, in my opinion, tariff rates by no means completely fixed and certain and price elasticity is still unproven, it is too early to tell how things will play out over the next 12 to 18 months and what the net impact of these changes will be. However, consistent with our normal practice, we currently expect to be able to give guidance with our first half results. I hope that, that outlines where we are with tariffs today, what we know and what remains uncertain as well as laying out how we have performed against a challenging backdrop to deliver very solid results in FY '25. And with that, I'll hand over to Jim.

Thanks, Martin, and good morning to everyone. Now that Martin has walked you through our FY '25 results, I'll talk you through an operational update, our manufacturing diversification program, new products and solutions expansion and geographic expansion. Turning to Slide 11. For any given product, Toaster, we have 2 core variants, 120-volt version and a 240-volt version. A 120-volt version is sold in North America and the 240-volt version is sold in EMEA, APAC and most of South America. From a manufacturing perspective, we are adding geographic diversification to our manufacturing footprint by transitioning our 120-volt variant, again, the one sold in North America, to Southeast Asia and Mexico. Manufacturing for our 240-volt variant will remain in China unchanged. This near-shoring exercise is a natural progression of growth in size. ERG Group's current scale enables production to be split in half. Years from now, when we are much larger, we'll likely split EMEA and APAC production as well. When we started this program, only 15% of U.S. gross profit dollars were derived from products not manufactured in China. Given that we are well into our diversification program and moving at pace, as of today, this number has increased to 65%. By the end of the first half of '26, we expect that roughly 80% of U.S. gross profit dollars will come from products manufactured outside of China. It takes quite a bit of effort and coordination to develop new manufacturing sites. While the team has made significant progress in a short period of time, this program will extend into the second half of '26 as well as '27 as we work through the tail of the U.S. product portfolio. On to Slide 12, now on to new products and solution expansion. Slide 13, see last month, we launched our new Oracle Dual Boiler in ANZ. Building off our battle-tested and well-respected Oracle platform, product team has launched our most advanced coffee machine to date. It delivers the automation of cafe quality at home for ultimate convenience, and it also gives you complete manual control for those who want to do it themselves. On Slide 14, with a simple swipe of the screen, you switch between fully automated to fully manual. In manual mode, you control the grind setting, the temperature, the pre-infusion time, the balloon time and the shot time. The Oracle dual boiler is WiFi connected and comes with a companion app. This app lets you start the machine from your bedroom in the morning, so the boilers are ready to go by the time you get to the kitchen. As with the Oracle Jet, the WiFi platform enables the pushing of new updated features to the product over its lifetime. On Slide 15, you'd see that in the second half of '25, we launched the new Luxe Brewer for batch brew customers. This product comes in the Luxe color range and delivers an SCA gold cup at the touch of a button, whether that be a single cup or 12 cups. It can deliver cold brew in as little as 30 minutes. In its custom setting section, the user has complete control over all the brewing steps to deliver unique flavor profiles from the coffee bean. Slide 16. This month, Baratza will be launching the Encore ESP Pro. This is a compelling step forward, leveraging the patent pinning ESP grind adjustment mechanism. The Pro offers stepless grind adjustments across a wide range -- across a much wider range, enabling you to perfectly dial in any coffee for espresso, coupled with deionization to minimize static. Along with its accessories that is designed to support any workflow from single dosing espresso to batch dosing for dirt coffee or cold brew. Taken together, the Oracle Dual Boiler, the Luxe Brewer and the Encore ESP Pro, these products extend our leadership in both home cafe and batch brewing formats, ensuring we meet consumers across the spectrum of price points, coffee preferences and experience levels. Slide 17. Smart Oven Air Fryer Compact brings the capabilities of our market-leading larger ovens into a compact footprint for smaller countertops. It leads with presets for typical snack foods as well as air frying. Most importantly, it's supported by the Breville+ companion app, giving hundreds of optimized guides and recipes to enable our customers to get the most out of their oven. Slide 18. The solution platforms made quite a bit of progress in FY '25. The Breville+ app added over 1,000 new recipes and quick guides, brought on Le Creuset as a new content partner and extended the service to the Canadian market. Beanz continues to expand globally with its entry into Germany and deepened partner integrations under the Powered by Beanz service model with Williams-Sonoma, Crate & Barrel, John Lewis and AeroPress joining in FY '25. On Slide 19, FY '25 was also a busy year for geographic expansion. The Breville brand went live in China towards the end of the second half of '25, and we're off to a good start. We launched our brand stores on the important digital platforms, and we have great partners supporting our execution. In EMEA, Sage went direct into the Middle East at the beginning of the second half of '25. All our platforms are now live in the region, and the handoff from our long-time distribution partner has gone well. Again, early days, but all looks to be on plan Slide 20. I'm showing a touch of futures here, but Baratza will be going direct in Korea in the first half of '26. And as a small update on our Korean execution, we recently launched our store in store in Shinsegae in Gangnam, the #1 department store location in Korea. That location is performing particularly well. Our Korean team also received the Experiential Store of the Year Award from Retail Asia, another validation point for the quality of our execution as a premium brand. Slide 21. Closing off, I'm quite proud of what the team accomplished in FY '25. In a challenging environment, including the first wave of tariff impacts in the U.S., it grew gross profit by 11%, at the balance sheet in a net cash position and continue driving progress across the 4 growth levers, another year of short-term tactics execution, coupled with steady long-term strategy execution. For FY '26, we will continue our metronomic execution of our long-term strategy while managing around or through near-term turbulence. With that, I'll now hand the call back to the moderator and open the call for any questions you might have about our FY '25 results.

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

We've noticed a bunch of your competitors have taken price over the past few months in the U.S. Just interested in when you're thinking of taking price and maybe the level or any kind of demand elasticity kind of thoughts that you have at this time based on where the tariffs are at the moment?

Sure. So we've already taken price on some SKUs. I think that happened maybe 3 weeks ago or 4 weeks ago...

Late, July, late July.

I think what you'll see across the competitive side is that this is a decision that's made at the SKU level. So across -- at least what we're seeing across the competitive sets, some SKUs have changed, some SKUs haven't. Same here. So this game of where and how you use the price lever really does come down to the individual SKU level and as well as your kind of midterm long-term strategy. Go ahead.

I was just going to say like when you have lifted, like what's the sort of demand elasticity? Is that within your expectations? Or does it temper your expectations around more price potentially as you as you shift the production to other countries where the costs are a little higher?

So I'm not quite sure I fully understand the last of that question. But the answer on elasticity is you find out. So you change price and then you watch. We learned quite a bit about elasticity on some of our SKUs during...

In the post COVID.

Yes. Well, it was actually the first Trump tariff regime that happened through some time back. So at least for the SKUs that were impacted then, we learned a little bit about elasticity. But basically, what you do is you take your best judgment, you make the change and then you start watching the data, and the data will tell you what elasticity is and then you've earned the right to make another decision as you see that play out. So I wouldn't say I have expectations because you shouldn't. It's more of a process than anything else.

And just to reiterate what Jim said, Tom, those indices that we took were in late July, so we've seen 3 weeks of unit sales, some are [indiscernible] some on, but it's too short a period to really judge it at this stage.

Your next question comes from James Leigh from Goldman Sachs.

Guys, can you hear me?

Yes.

Yes.

Awesome. Just a quick question on the U.S. distributor change. I know it was an impact into the second half '25. Is there any lingering impact we should expect into '26. And yes.

Okay. James, that may have been my language. It wasn't a distributor change. I talked about some changes in distribution channels, which means the weighting of some of our higher-margin channels we've lent into in some of our lower-margin channels we've gone lighter on as one of the ways to mitigate the tariff impact. So for example, some of our SKUs will be going only to pure-play online distributor customers, if you prefer. So it wasn't flagging an overall distributor change in the U.S. It was just saying a channel waiting we're going to change in '26 versus '25.

Sorry. And to clarify on China moving away from a distributor, was there any lingering impact into '26?

Sorry, I missed it. I thought you asked...

You said U.S.

U.S.A.

Sorry.

No, no, no. On China, you absorb it. All of that's absorbed in '25. We're direct now.

So that changeover is through.

Yes. Every time you go through a change in distribution, you have about a 12-month headwind while you cut off orders to the distributor, while you're lining up to go direct and then you go direct. So that's sucking sound, so to speak, for both the Middle East and China is buried in FY '25 numbers.

Your next question comes from Sean Chu from CLSA.

I got a question especially for China. So you might be aware that the national subsidy policy, including coffee machine from starting this year in China. That's a part of who applies trading and the consumption incentive program. My understanding is that's expecting to run until the end of the year, and most of your competitors a multi-international organization and domestic Chinese coffee machine brand are eligible under this policy. I'm just curious to know if any plan for you guys to join the program soon because I think -- a good brand image brand building in China, but also that's a quite big incentive in terms of the cash use. Please?

Yes. So what I can tell you, as of now, we've chosen not to participate. And that decision could change kind of over this period, but as of right now, and this is part of that because we just went live at the end of the second half, and so we need to let the team get settled at some level, and we're playing a much longer-term game as we enter new markets like China. So I'm less moved by some little near-term opportunity of a kick that I could drive through that program. So right now, we've decided not to participate.

Sorry, can I just get a quick follow-up? I understand this is a long-term play. But in the short run, I feel like this is very kicking. Is there any specific reason why we're not choosing -- you're not choosing to pursue these opportunities? Do we compliance or process? Or can we please give a little more color on this, please?

It's more of a long-term strategic market entry decision. So I don't want to go into too much detail. But we had the discussion, we weighted out the pros and cons, and we came to the conclusion that with what we want to get accomplished in our first year in China, we've decided not to participate.

Your next question comes from Craig Woolford from MST Marquee.

Can I just ask a question about the mitigants you're pursuing to obviously offset the tariffs? FOB reductions. Do you have any comments on what you're seeing there? And what I'm wrestling with is logical and sensible fundamentally to diversify that manufacturing. But will there be any sort of disruptions or wobbles or impacts on the P&L in that transition process?

So I try to internalize that, which is, does it flow through the P&L? Absolutely, right? So when you're diversifying, by definition, it's happening, we're in midstream of sorts, right? So there's 2 sides to the equation, which is, one, that the actual setting up of manufacturing itself. Martin mentioned some of the balance sheet impacts of that -- as that flows through of tools and fixtures and jigs and kind of all of the things that you do as a part of that process. But the hat trick to pull it off is if you want it, let's say, for any given SKU, I needed 100,000 units, let's say, in the first half of '26, this is a bit of the units are coming, obviously, originally out of China and something that's moving and then you need the next manufacturing location to pick up and go hand in glove between the two. And so it is a bit of a hat trick on each SKU to turn it off in China and turn it on in the new location and for the team in the U.S. to not see any difference on the flow end of their warehouse in that switch. So far, the team has executed flawlessly. And so every time we move a SKU, this thing is happening, and you're getting this seamless cutover, so to speak, of the SKUs coming moving from one location to another. But when that happens, you're moving from, in a sense that the China tariff level, to the target tariff level. Kind of within that construct, you're also moving from a China FOB, if you want to call it that, to the target FOB. And all to say, we've got a lot of moving pieces an understatement, but this is happening at a SKU level each time one of them moves. All of that obviously ripples through the P&L, the pluses and the minuses as it rolls through that cog line, assuming you keep volume consistent like you wanted, you're not touching that sales, but you are messing with that cog line in the transition. Martin, I don't know if you want to...

I'll agree with what Jim said there. You've got a tariff arbitrage. I think everybody is very clear on that. You're coming out of a 30% tariff regime or higher actually in China with the existing from into -- not low, but a lower tariff regime of only 20% or 19%. So there's that. When one moves manufacturing, which I think is maybe what you would dig in at, Craig, you can sometimes see a cost increase to begin with because the lines -- the new lines are less efficient or you have higher wastage or quality issues. We're quite pleased with how that's going. And the FOB reductions we are pursuing is really around localization. It's around -- if you're in Indonesia, can you get the parts locally because that will be cheaper than shipping some of those parts from China. So there's a localization play going on. And the bumpiness from change in location, in our case, is eased a bit by the fact it's the same suppliers. It's the same partner that were producing espresso machines in Indonesia that were producing in China. So you don't have that risk of new unknown supplier. But as Jim said, a lot of moving parts. But yes, as we move, we get price changes and then we look to optimize those price changes going forward, and that's one of our mitigants.

Yes. Okay. That's quite clear. And I understand some of those ripple effects that you're talking about or hat trick. And just on the FOB, like is China costs coming down? I'm probably asking that more for the other Rest of World, not U.S., but is that cost coming down as well?

Well, we're buying from the same branch that we would from before. So no, we're seeing it as an overall partner relationship, the prices out of the new plant, the prices at the old plant. So we're not driving down prices out of China at this stage. There may be some if utilization goes down, but that's not a key feature of my mitigant list at the moment, Craig.

I mean in '25, there was a small nick to that like at beginning right when Donald -- the Trump administration with whatever it was 10% or whatever it was that the first lever was obviously to go back to your manufacturers, and that would have been out of China.

And they came to the party in that first step.

After that, first step, they're done, right? And now you're moving on to doing it through actual work.

So I think, Craig, the biggest prize is having the new plants in Indonesia and Mexico up and running efficient and getting localization through those new plants. That's probably the biggest prize that we're chasing.

Your next question comes from Apoorv Sehgal from UBS.

Question for me. Just on the report announcement file, Page 5, you've talked about expecting significant cost increases in both FY '26 and FY '27 for the U.S. business. Obviously, '26 is pretty understandable. I was just wondering why FY '27 specifically was called out for a further step-up in costs?

I'm going to jump in. Not another further step up. I think what we were contrasting, Apoorv, was if we go all the way back to February, there was some kind of hope that by moving out of China, one would be moving into a 0 tariff location. So you circumvented the tariff by moving from a tariff location into a 0 tariff. Obviously, Indonesia, Mexico, not so much, but Indonesia has some existing tariffs on it now. So that cost step-up, that 20% tariff, 19%, this with you in FY '26 and in FY '27. It doesn't magically go away as you step into FY '27. But we're not calling a second step upward. It's that step up and hold and then manage normally.

Okay. And of that the 65% of the 120-volt production that's now outside of China, like is the mix, is it tilted towards Southeast Asia more so than Mexico? How do you think of the country-by-country mix of that 65% now?

I mean, look, this is a moving target, right? I mean in the sense of it's SKU by SKU by SKU. But I would say it would mix -- I mean, I'm doing this just in my head, it would mix more towards Southeast Asia right now. Yes. Yes. I would say around the initial round 1 will mix towards Southeast Asia and then Mexico will scale as a percent on a medium-term basis, I guess that would be the way to say it.

By the time it get to end of '26.

End of '26, Mexico will be standing much taller than it is today. .

Yes.