GWA Group Limited (GWA) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, to the Annual General Meeting of GWA Group Limited. My name Darryl McDonough, and as Chairman of the Board of GWA Group Limited, I will act as Chairman of this meeting. All of the GWA directors, the Chief Financial Officer, the company secretary and our auditor are in attendance for this virtual meeting. I declare the 2020 Annual General Meeting of GWA Group Limited open. Today's meeting is being held online via the Lumi platform with our thanks to Computershare for providing this facility to us. This allows shareholders, proxy holders and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxy holders have the ability to ask questions and submit votes. Questions cans be submitted at any time. [Operator Instructions] Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on one topic, they may be amalgamated. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. At that time, if you are eligible to vote at this meeting, a new polling icon will appear on the right-hand side at the top. It's the third icon at the top of the page. If you select that icon, it will bring up a list of the resolutions and present you with voting options in respect of those resolutions. To cast your vote, simply select one of the options. There is no need to hit a submit or end a button as the vote is automatically recorded. You do have the ability, of course, to change your vote up until the time I declare voting closed. I now declare voting open on all items of business. A polling icon will soon appear. Please submit your votes at any time. I'll give you a warning before I move to close voting. The voting results will be posted on the ASX platform later today once they are available. I thought it was appropriate at this time to share with you the proxy results that have been received in respect of each of the resolutions, and they're now set out on the screen. In respect of Resolutions 1 and 2, which is the reelection of the 2 directors who stand for reelection at this stage of the game. The Resolution 3 is also now there on the screen, as is Resolutions 4 and 5. 3 is in relation to the remuneration report, 4 and 5 in relation to the grant of performance rights. You'll note in respect of the -- of each of the resolutions, there is a significant number of those in favor of those resolutions. The notice of meeting was circulated to shareholders who are registered on the 18th of September. I propose that we'll take that notice of meeting as read and deal with the items of business in the order that they're set out in that notice. The first item on the agenda is the consideration of the company's financial statements. The company's financial statements for the year ended the 30th of June 2020 with all relevant supporting documentation have been circulated to shareholders, and I'll take them as read. By opening -- by way of opening them for general discussion, I propose that I'll address the meeting and then also ask the CEO to address the meeting and then pause for any questions that anybody may wish to ask in respect of that, and then we'll move on to the other items of business. From my perspective, in my address -- there's 3 matters that I'd like to address with shareholders or to mention to shareholders. It may relate to the results, the issue of sustainability and remuneration. In respect of the results, there's 4 items that I wanted to just draw to your attention. Firstly, the operational discipline that was applied by the group has resulted in a mitigation of a significant amount of revenue decline from a weaker market and also the impact of the virus. Merchant -- we had really a year in FY '20 in 2 parts. In the first part, we were struck with a level of merchant destocking in the first half of FY '20. And in the second half, of course, the restrictions brought on by the virus, including lockdowns not only in Australia but more particularly and more recently in Victoria but also in New Zealand and also in the U.K., had a significant impact on our revenue. The good thing -- the good news is, though, we did, however, maintained our market share in Australia despite these challenging market conditions. The group EBIT margin of 18% versus 18.5% in FY '19 was an outstanding result having regard to the circumstances. In the end, the Board was able to declare a dividend of $0.035 per share, which was fully franked and which was paid on the 16th of October. The second discipline is where -- was the controlling of the controllables within the group. We've had a significant improvement in health and safety, and I'll talk about that in a moment. And Tim Salt, when he addresses us, will also address that matter as well, too. The integration of Methven remains on track. We've been able to manage $9 million to $12 million cost-out program. It continues to be on track with $5 million delivered in FY '20. We've also seen some short-term cost reductions in the order of $10.5 million delivered in response to the weaker markets. And there's been a consolidation of our distribution network in 4 distribution centers in New South Wales, Queensland, Victoria and WA to drive operational efficiencies during the course of this current financial year. The group has continued to execute its superior water solutions growth strategy. We've continued to invest in growth initiatives, both the Caroma Smart Command and new product development, which has been funded out of cost savings. We've strengthened the relationship with merchant partners. And in relation to Caroma Smart Command, it's been installed on 49 sites with a focus on sustainability and touchless hygiene solutions in commercial bathrooms. The commercial forward order book remains strong and in growth, and it's focused on the core segment opportunities included in Aged Care. Finally, from the point of view of the result, we're in a very strong financial position to be able to manage through the current market conditions. We've got a very solid balance sheet being maintained. Liquidity was enhanced in the second half of FY '20, and there are no significant near-term refinancing matters that need to be addressed. The next item that I wanted to address was in relation to the issue of sustainability. I would encourage all shareholders to read the sustainability report that has separately been circulated and is available for review on the company's website. Sustainability remains in our DNA. It's fundamental to the GWA's business. We look at sustainability from -- based around 2 central objectives. Firstly, we seek to operate in a sustainable manner across our business by managing our resources as efficiently as possible and by acting in a socially responsible manner. Secondly, we look to provide leading-edge products and systems that contribute to sustainability. We are making life better through superior water saving solutions for the built environment. A number of the highlights in FY '20 are set out there on this slide, 85% improvement in the total injury frequency rate. At the end of the day, the most important thing from the point of view of this business is making sure that we look after our people. That is absolutely paramount. It is the first item that is dealt with on all director meetings' agenda to make sure that we keep that front and center. We had a staff engagement score of 61%, which is above the median score for Australian companies. We had 0 medical treatment injuries for FY '20 across all sites, and we've seen continued improvement in diversity with female representation at GWA moving forward to 42%, up from 39% in the prior year. In relation to remuneration, you would have noted from the remuneration report that we found ourselves in what I'll say is a difficult position in having the uncertainty of the general economic climate but particularly how that's been impacted in our particular operating space. As a result of which, as a Board, we decided to do without the ROFE calculation as far as the award of the LTI under the LTI program because we didn't see that as a suitable measure having regard to the level of uncertainty. We did, however, of course, retained the total shareholder return measure in respect of the grant of this year's LTI rights. The matter, though, will be reviewed during the course of next financial year. And we would expect the next financial year will come back with either ROFE as an appropriate measure or alternatively another measure which might be, for example, a weighted average cost of capital plus a margin or something of that nature. There will be discussion amongst -- with the Board and also the engagement of independent people to give us assistance in determining the best way to deal with it. But as it is for the moment, we have decided to do away with ROFE as far as it being a measure and focus purely on TSR. I just would like to mention at this stage of the game that we -- prior to the meeting commencing, we received a question from the Australian Shareholders' Association, which touched on the issue of remuneration. The question asked what the rationale was in deciding to include the 20% reduction for the Board and senior executive salary in cost reductions for the business. Shareholders will remember that around about -- I think it was in April or May, a decision was taken to apply a 20% reduction to senior management salary, and the Board also took a 20% reduction. And that was really in support of our people, having regard to the circumstances that have arisen with the lockdowns that came about because of COVID. That obviously -- because that was, in its very nature, a cost reduction, it needed to be included in the cost reductions as far as our reporting was concerned. And it is, for example, dealt with at Page 22 of the annual report, where it said there, in addition, the Managing Director and the other executives took a pay reduction of 20% during quarter 4 of FY '20 to assist in managing costs during COVID. The fact of the matter is that was a temporary reduction, but it necessarily had to be included in the issue -- sorry, under the heading of cost savings. Having dealt with those matter, I thought I would now hand across to our CEO and Managing Director, Tim Salt, to ask him if he would address the meeting, please. Over to you, Tim.

Thank you, Darryl, and good morning, ladies and gentlemen. For today's AGM presentation, I'll first provide an overview of our FY '20 group results followed by a summary of the continued progress we are making on our strategic priorities. And I'll conclude with an outlook for the current financial year FY '21. Let me commence with our approach to safety. Darryl has already highlighted the importance of the health and well-being of our people as part of our sustainability agenda. That obviously includes safety in our workplace. We made substantial progress in FY '20 with significant reduction in injuries. The total injury frequency rate improved from 6.2 in FY '19.0 to 0.9 in FY '20. Safety will continue to be a priority at GWA. I want to spend a couple of minutes detailing the impact COVID-19 has had on our business and how we continue to respond to it. Our primary focus has been to ensure the ongoing health and safety of our employees and visitors to our sites while also ensuring the financial sustainability of our business. We have implemented enhanced safety protection, including sanitizer, masks, temperature checks and increased cleaning at our work sites. At our warehouses, we have implemented shift management and social distancing protocols, including staggered break times to limit personnel interactions. I'm pleased to report we had no positive COVID-19 cases across all of our sites, including the U.K. and China in FY '20. The shutdowns in New Zealand and the United Kingdom from April 2020 meant that we had to furlough 112 of our employees. All are now back at work. We activated business continuity plans internally and with our suppliers to minimize the disruption to the business and to our customers. As a result, we have been able to maintain continuity of supply for our customers during the pandemic. Finally, our financial position remains strong to support the business through COVID-19 and beyond. On Slide 14, this slide illustrates the impact of COVID-19 on our business in the final quarter of the year. In Australia, as we announced in April, third quarter revenue was broadly in line with the previous corresponding quarter. However, in the fourth quarter, revenue was impacted with sales growth in the consumer-focused channels, offset by declines in trade channels. In New Zealand, the sales growth momentum experienced in the first half stalled as the COVID-19 Level 4 lockdowns were applied in the fourth quarter. In our international business, United Kingdom sales were strong in the first half and up 9% in Q3 prior to the COVID-19 restrictions being implemented. And you can see the impact of that in the significantly lower revenue in Q4. And despite the impact of the lockdown in Q3, Asian sales were up 6% for FY '20 compared to the prior year. On Slide 15, you can see our FY '20 financial results on a pro forma basis. Pro forma simply means it includes earnings from Methven in FY '20 and in FY '19 as a comparison, even though we only owned the Methven business from the 10th of April 2019. Also, these are normalized results. They exclude significant items relating to costs associated with the integration of Methven. The revenue decline reflects the downturn in residential new build and renovation construction activity in Australia, coupled with merchant destocking and the COVID-19 impact. The market decline, COVID-19 impact and adverse net foreign exchange impacted our gross EBIT by $30.6 million on a pro forma basis. However, we were able to successfully offset $18.5 million of this EBIT impact through a continued strong focus on operational and cost discipline. These initiatives assisted GWA to maintain a normalized pro forma EBIT margin of 18% compared to 18.5% for the prior year, a resilient result in a challenging year. Net profit after tax was down 16.5% on the prior year on lower earnings and due to the increased interest cost on debt related to the Methven acquisition. The decline in ROFE reflects a combination of lower earnings and the increased goodwill related to the acquisition of Methven. While it is lower than the prior year, ROFE remains well ahead of the group's cost of capital. And as Darryl mentioned, our strong financial position enabled the Board to declare a final dividend of $0.035 fully franked. We implemented a dividend reinvestment plan for the final dividend with a 1.5% discount to shareholders. So turning now to cash flow from operations. Given the impact of COVID-19, we maintained a key focus on cash management in the second half, and that was reflected in the solid operating cash flow performance for the year. Pro forma cash flow from operations was $88.6 million compared to $107.7 million in the prior year. Our cash conversion remains strong with the cash conversion ratio from continuing operations at 96%. Capital expenditure was $12.3 million in FY '20, and that's towards the lower end of the guidance we provided at the half year result, reflecting our prudent approach to cash management. GWA remains in a strong financial position to manage in the current environment, and we remain well placed for growth as market conditions improve. We also have no significant near-term refinancing commitments. Net debt as at June 30, 2020, was $144.8 million, which is similar to the prior year total of $141.9 million. In October last year, we refinanced our syndicated banking facility. And while in April this year, we secured an additional $33 million in facilities, and this hasn't been drawn. We recently renewed the $40 million revolving bilateral facility, which is now due to mature in October 2021. Total group facilities are $283 million, and our credit metrics remain strong, as you can see on the slide. I'll now spend time on the next few slides updating shareholders on our strategy. Our growth strategy continues to be customer and consumer focused, underpinned by internal cost and capability improvements. It continues to evolve to support our purpose of making life better through products, services and technologies that create superior solutions for water. Our strategic growth drivers are focused in 4 key areas. We want to build our share in residential segment with focus on renovation and replacement in Australia and New Zealand. We want to extend our Australia and New Zealand leadership position in the commercial segment and to continue to lead the growth of smart water, connected bathrooms and buildings; and grow select overseas markets, leveraging our Australia and New Zealand commercial expertise. And I'll talk briefly to these points in the subsequent slides. GWA remains a strong, resilient business. While we've already been successful in addressing the challenges posed by COVID-19, our focus remains on implementing further actions to strengthen our ability to compete. In Australia, we will prioritize our investment and efforts behind our winning brands, Caroma and Methven, to maintain and build our market share. And we will continue to drive consumer digital engagement, reflecting the changing consumer and market dynamics we are witnessing. We will extend our already strong position in the commercial segment, leveraging our expertise to drive growth. In New Zealand, our focus is on leveraging the integrated business to drive market opportunities and share gains. We have established a tap and shower-ware center of excellence for the whole group in New Zealand, and we will use this to drive innovation, new product development, or NPD, and range extensions. Asia currently represents a small component of our revenue, but a significant opportunity. We will strengthen and simplify our foothold in the region and evolve our supply network to deliver further efficiencies. At the same time, we will continue to develop our local customer understanding to deliver growth in that segment. And finally, in the U.K., we will drive profitable share growth through the Methven brand while laying the groundwork for Caroma entry into that market in the future. So turning now to the 4 strategic growth drivers I mentioned earlier. Our strategy to build our share of residential, renovation and replacement in Australia and New Zealand is centered on enhanced consumer engagement, new product development and broadening our omnichannel presence. We are engaging with consumers more effectively through social media. Caroma website traffic increased by 23% in the second half of FY '20. And our combined social media reach is now around 800,000 hits each month. We have launched new product ranges in FY '20. These include the Caroma Elvire premium range, the Methven Turoa colored tapware, Nefa II and Fastflow II valves. And in FY '21, we are upgrading 3 core Caroma ranges with new colored tapware, refined sanitary ware, all with clean flush and with germ guard antibacterial glaze on all sanitary ware. This glams kills 99% of germs and is even more beneficial in a post-COVID world. In addition, we are leveraging Methven intellectual property into Caroma showers to take advantage of Methven's world-leading shower technology. And we'll be using common in-wall bodies to drive efficiencies and make life easier for plumbers. We are launching new shower and tapware ranges in both the United Kingdom and in Asia. We're broadening our omnichannel experience for consumers, and that includes increased focus on digital engagement and visibility across that outdoor and television. And we're continuing to leverage our flagship stores to engage with the market despite the impact of COVID-19. And for example, we rapidly shifted to live streaming events to engage with key audiences, including specifiers, designers, architects and consumers. Our position in the commercial segment continues to be strong. Our order book remains solid and in growth through continued strong traction in Aged Care and in health. We are leveraging our strength in sanitary ware to attach tapware in key projects and the Methven product portfolio is important in accessing that opportunity. We're also accelerating Caroma Smart Command installations, notwithstanding the limitations of COVID-19. And I'll talk about this on the next slide. The momentum behind our innovative intelligent bathroom system, Caroma Smart Command, continues to build, and we're very encouraged by the continued positive reception in the marketplace. The system has now been installed in 49 sites across both Australia and New Zealand. And we anticipate rollout into other sites during the second half of FY '20. However, this was delayed by COVID-19, particularly in shopping centers and in airports. However, there remains a solid bank of additional projects in the pipeline for FY '21. To date, 23 sites have been migrated to our new cloud data capture solution with further migrations expected. Importantly, this is the first small step to creating an ongoing fee-for-service solution. We continue to launch additional complementary products to further enhance the offering of this system. In the last quarter of FY '20, that included the Intelligent Shower that can be programmed for temperature and duration and an intelligent shutoff valve that can protect a water leak and instantaneously shut down the water supply if required. We have a strong new product development pipeline into FY '21 with a number of products, technologies and cloud interface enhancements in development. We're also working through international expansion options through GWA-generated leads and from leveraging Methven's footprint across Southeast Asia and China. On Slide 23, we acquired Methven in April 2019, and we were pleased with how the integration has progressed and the further diversification, scale and capability Methven brings to our business. We implemented our go-to-market strategy with a single integrated sales team in Australia and in New Zealand, each selling our total combined portfolio. That is resulting in ranging of Methven products in Australia merchant channels. Darryl mentioned earlier the consolidation of our distribution network to 4 key distribution centers in New South Wales, Queensland, Victoria and Western Australia. And that is enabling us to integrate Methven products into GWA systems and enhance customer service through single invoice and single order delivery in Australia. Our tap and shower-ware Center of Excellence in New Zealand is building a strong pipeline of new products, with the market-leading Methven shower IP to be used in Caroma new shower launches across Australia and New Zealand in FY '21. The addition of Methven provides us with enhanced geographic diversification, which continues to be a strategic growth opportunity for the group. Around 21% of our revenue now comes from outside Australia. In our international business, we are leveraging Caroma product to go to market with a whole of bathroom solution. We realized AUD 3 million in cost synergies in FY '20, and we remain on track to deliver ahead of the initial target of Methven of at least AUD 6 million in cost synergies by the end of FY '21. I'll now provide a summary and an outlook for FY '21. For the period to 28th of October FY '21, group sales declined by 5% versus the prior year. Australian sales declined by 8%, partially offset by growth in New Zealand, which was up 9%, and international sales, which were up 3%. In Australia, we are experiencing continued momentum in retail-focused merchant channels and growth in the detached residential segment, which has been offset by recent declines in multi-residential and continued delays in commercial completions. However, our commercial order bank remains strong. It was up 16% in June 2020 compared to the prior year and is now a further 7% up to October 28 FY '21. For the remainder of FY '21, as advised previously, trading is expected to remain challenging due to the weak construction market conditions, exacerbated by the general economic uncertainty across all regions. Our addressable market and revenue in FY '21 will continue to be impacted by the drawdown timing of our strong and growing commercial order bank; the extent to which the benefits of stimulus measures seen in detached residential new build in Western Australia, South Australia and Queensland are able to extend to New South Wales and Victoria; and also the speed of recovery in consumer sentiment driving increased residential renovation activity. GWA remains well positioned to take advantage of future market recovery. In FY '21, we will continue to execute our customer focus and consumer initiatives to generate profitable share growth. This includes agreed business plans with primary merchant customers targeting specific product and segment categories and ongoing collaboration with key secondary customers in core segments such as Aged Care. We will leverage our market-leading Caroma and Methven brands with new product development and range launches in shower-ware in the second quarter in FY '21, and we will continue to drive further growth of Caroma Smart Command in Australia and New Zealand and in international markets. We remain focused on maintaining cost discipline to control what we can control, and that includes the delivery of the $4 million of cost savings, bringing the total of our 3-year cost-out program to $12 million to assist margin management and the $3 million bringing the total Methven integration savings to $6 million as well as continued focus on all discretionary spend. We'll provide a further update of our interim results on 16th of February 2020. Ladies and gentlemen, that concludes my presentation. From myself and the executives, I'd like to thank you for your continued support of GWA. Notwithstanding the difficult market conditions, we've made significant progress over the past year, and we remain focused on implementing our strategy to deliver sustainable value creation to our shareholders. And I'll now hand back to the Chairman. Thank you.

Thanks very much, Tim. The issue of the financial statements, and for that matter, any aspect of the business or management of the group or any questions in respect to the auditor are now available to shareholders. We haven't actually received any questions. So what I propose to do is I'll move on to the next item on the agenda. But obviously, if anybody wishes to ask, please send that through, and we'll go back to that if we do actually receive a question. The next item on the agenda is the election of directors. Two directors are due to retire by rotation, being Jane McKellar; and secondly, Richard Thornton. If I deal with Jane's reelection first. She retired by rotation and the matter is properly before the meeting. Details in respect of Jane's profile is set out in the notice of meeting. And the Board, other than Jane, recommends shareholder support of the resolution. Again, there have been no questions raised in respect to that. So I propose that the resolution be put to the company and that a poll be conducted in relation to that with, as I mentioned earlier, the results being available on the ASX platform later. The second resolution deals with the appointment of -- or the election of Richard Thornton as a director, who retires by rotation and being eligible offers himself for reelection. His profile is also set out in the notice of meeting. And the Board, other than Richard Thornton, supports the resolution of reelecting him. We haven't received any questions with -- in relation to that, but I propose that the resolution be put to the meeting and that a poll be conducted in respect of it. The next item is the remuneration report, and that seeks the approval of the remuneration report for the year ended the 30th of June 2020. The resolution, as shareholders would be aware, is a requirement of the Corporations Act and is a nonbinding advisory resolution. The Board obviously recommends that shareholders support the resolution by approving the remuneration report. There was a question that was raised earlier, which I've dealt with from the Australian Shareholders' Association, which I think we haven't received any other questions. So I propose that, that resolution be put to the meeting and that a poll be conducted with the results being advised on the ASX platform later today. The next 2 items of business on the agenda are the approval of the performance rights issues to the Managing Director, Tim Salt, and also to the Executive Director, Richard Thornton. Both those resolutions are properly before the meeting. The Board, in both cases, with the exception of the individuals concerned, recommends that shareholders support the resolution. The matters are properly before the meeting, and I propose the resolutions to be put and that a poll be conducted in respect of each of those. This then brings us to the conclusion of the formal business associated with the meeting. In a couple of minutes, I'll close the voting system. Before I do that, can I just reiterate that there are -- you would have seen from an earlier slide that there were a number of proxies that were given in favor of the chair that were open. I intend to vote those proxies in favor of each of the relevant resolutions, just for the sake of completeness. The second thing I wanted to do is to thank all shareholders for their support in what has been a very difficult time for all of us from the point of view of the imposition of this COVID virus, which has caused a great deal of stress, I think, within the community and has caused us to rethink in relation to the way in which we approach our business. And that -- when I talk about that, I don't just talk about GWA. I'm talking about everybody. The support from our shareholder base has been absolutely fantastic for which, on behalf of the Board, I say, thank you very much indeed. I should also mention, I think, on behalf of the shareholders, thanks to the executive team and everybody involved in GWA Group for their efforts over the last 12 months or so and their continuing commitment to GWA. It has been a difficult time, but people have performed above and beyond, for which I thank them. On that basis now, I now declare that voting is now closed with the results which will be released to the stock exchange later today. This concludes the meeting, and I'd like to thank you all for your attendance, albeit virtually, and I formally close the meeting. Thank you.