GWA Group Limited (GWA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GWA Group Limited FY '21 Results Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Urs Meyerhans, CEO. Please go ahead.

Thank you, Melanie. Good morning, everyone. Thank you for joining us on the webcast or conference call for GWA's results for the year ended the 30th of June 2021. My name is Urs Meyerhans, Chief Executive and Managing Director, and I'm pleased to present the results today. I have not had the opportunity to meet most of you individually just yet. However, I look forward to meeting many of you at least in a virtual capacity over this week and hopefully in person whenever that is possible. Joining me on the call today is Patrick Gibson, our Group CFO. For today's presentation, I will first provide an overview of our group results and key themes. That will include the summary of our continued focus on safety and sustainability across the company. Patrick will then detail our group financial results for the year, including P&L, balance sheet and cash flow. I will follow with an overview of our business performance, including my initial impressions since joining the company in March. I will also discuss how our strategy is evolving and provide a summary and outlook for the current year financial year '22. And then, Patrick and I will then be happy to answer any of your questions. On Slide 4, while financial year '21 was a challenging year, our operational discipline and improved detached residential construction completion activity enabled GWA to deliver an improved performance in the second half. This led to full year total revenue of AUD 400.7 (sic) [ 405.7 ] million and EBIT from continuing operations was AUD 68.5 million. For the second half compared to the first half, revenue was up 6%. And EBIT was up 13% with EBIT margins up 120 basis points. That expansion from revenue to earnings demonstrates the operating leverage we have in the business that markets improve. That also creates positive momentum in financial year '22. We continue to generate excellent cash flow, and our balance sheet remains strong. Operating cash flow increased by 16% while net debt is 28% below financial year '20, with a leverage ratio down to 1.4x. That strong financial position has enabled the Board to declare a final dividend of AUD 0.65 per share. bringing the full year dividend to AUD 0.125 fully franked. We continue to execute our strategy, which is focused on sustainable water solutions. Our relationship with merchants are driving core range expansion for both Methven and Caroma products. We have launched new products in sanitaryware and colored tapware. We also introduced a new GermGard, antibacterial glaze on sanitaryware products, which I will talk about shortly. We consolidated our New Zealand warehouse from 2 to 1. We also divested the Methven China plant in March '21. That will deliver annualized benefits of AUD 3 million from '22 onwards. GWA is very well positioned to leverage the expected improvement in market conditions. We continue to see positive momentum for detached housing in 2022, while renovation and replacement markets are expected to be stable to slightly positive. Our commercial order book remains strong and growing. We are targeting key growth subsegments such as education and health to partially offset the temporary slowdown in the commercial segment. Nonetheless, we remain well placed if the commercial segment recovers. However, there's an obvious significant degree of continued uncertainty because of the various COVID-19-related lockdowns, particularly in Sydney/New South Wales, the ACT and Melbourne and Victoria and the potential impact on construction market moving forward. Moving to Slide 6. Sustainability remains an ongoing commitment across GWA, and we have a particular focus on safety. During the year, we transitioned to ISO 45001, which is the global best practice safety standard. All GWA sites have been successfully accredited to this standard. This was a significant undertaking to standardize operating procedures to deliver consistent and measurable approach to safety across the group. Following a decline from financial year '18 to '20, we experienced an increase in total injury frequency rate from 0.9 last year to 4.3 in '21. Primarily, that was due to injuries relating to manual handling. This is a very disappointing result. We are renewing our focus on behavioral issues and have implemented customized training strategies to address the root cause to reduce manual handling injuries. I am pleased to be able to say that GWA recorded a medically-treated injury frequency rate of 0 for the financial year '21. We continue to make good progress and promote policies to encourage diversity and inclusion across the company. We conducted 2 audits of our suppliers with no ethical sourcing issues identified. We remain focused on those areas of sustainability where we believe it can make the most impact. For us, that means provide the innovative sustainable solutions for the built environment with a clear focus on sustainable water solutions. For example, over 80% of Caroma taps are 5 or 6 star WELS rated, while 95% of Caroma sanitaryware products are 4 star WELS rated. During financial year '21, we continue to roll out our intelligent bathroom system, Caroma Smart Command. It has now been installed in 127 sites, up from 49 just a year ago. I will now hand over to Patrick to go through the group financial results.

Thanks, Urs. Slide 8 presents the result first, on a normalized basis before significant items and then on a reported basis, which includes significant items. For FY '21, significant items were $9.5 million pretax. This includes $4.7 million related to the new ERP and CRM systems, which in line with the recent IFRIC guidance note, we have expensed instead of capitalizing. Other significant items are associated with the consolidation of the New Zealand warehouses, sale of the China plant and Methven integration costs. On a normalized basis, group revenue increased by 2% to $405.7 million, reflecting improved detached residential construction activity in Australia in the second half and continued sales momentum in our New Zealand and U.K. businesses, partially offset by the decline in the commercial segment in Australia due to delays caused by COVID-19. Normalized group EBIT was down 5% to $68.5 million compared to $71.8 million for the prior year. Primarily, that reflects the first half market decline and ongoing weakness in the commercial segment, partially offset by strong cost control. Normalized net profit after tax was $42.3 million, down 6%. And on a reported basis, NPAT for the year was $35.1 million, which includes significant items of $7.3 million after tax. As Urs mentioned earlier, our continued strong cash generation and robust balance sheet enabled an increase in the full year dividend to $0.125 per share fully franked, which represents a payout ratio of 78% of normalized net profit after tax and 95% of reported NPAT. On Slide 9, the waterfall chart we typically present sets out the key drivers of earnings over the year. These are normalized results. They exclude significant items I detailed earlier. Volume and mix were impacted by COVID-19, primarily in the first half and from the full year impact of negative sales mix from the continued decline in the commercial segment in Australia. The Commercial segment is generally a higher-margin segment for GWA. That was reflected in Australia with negative mix in sanitaryware, only partially offset by positive mix from good growth in tapware. Volume was positive in both New Zealand and the U.K. Price increases of approximately 5% were implemented from August 2020. FX, through our foreign exchange hedging, we were able to mitigate some but not all of the impact from the weaker Australian dollar compared to the prior year. Our average hedged Aussie-U.S. dollar exchange rate for FY '21 was approximately $0.69 compared to $0.71 for the prior year. Net cost changes reflect our continued strong operational discipline, which mitigated a significant amount of the earnings decline for the year. This includes successfully delivering $4 million in savings as part of the overall $9 million to $12 million cost-out program by FY '21 and $3 million in Methven synergies in the year. These were partially offset by cost increases of $3.5 million, including the increase in freight charges. As we disclosed previously, it also includes short-term cost reductions in the prior year, which were not repeated in FY '21. For example, these included wage subsidies received in New Zealand in the prior year and the filling of some key vacancies in FY '21. The final red bar represents costs for staff incentives accrued in FY '21, but not in FY '20. Adjusting for the staff incentives, normalized group EBIT margin in FY '21 was 18.7% compared to an EBIT margin of 18% for FY '20. On Slide 10, turning now to cash flow from operations. Once again, this is a very strong result. Cash flow from operations was $103.1 million compared to $88.6 million for the prior year. And cash conversion remains excellent with a cash conversion ratio of 117%, reflecting our capital-light model. While this is a very strong result, I would just point out that to ensure stock availability and customer service, we will build our inventory stock somewhat in the first half of FY '22. Capital expenditure and other investing was $8 million in FY '21, reflecting the timing of some projects given the continuing impact of COVID-19 restrictions and the accounting treatment of the ERP and CRM systems, which I mentioned earlier. Our capital expenditure program remains focused on growth initiatives to drive revenue-enhancing opportunities and cost efficiencies. This includes new product development and continued investment in Caroma Smart Command. Cash restructuring and other costs of $5.9 million relate primarily to the ERP CRM project, Methven integration costs and consolidation of warehouses in New Zealand, which will provide $3 million in annualized benefits from FY '22. GWA remains in a strong financial position. Net debt as at 30th of June 2021 was $104.8 million, which was 28% below the prior year's total of $144.8 million. And our credit metrics remain solid with an improved leverage ratio of 1.4x compared to 1.9x at 30th of June 2020. Total group facilities are $267 million comprising a multicurrency revolving facility of $227 million, which matures in November 2023 and a $40 million revolving bilateral facility, which is due to mature in October 2021. We expect to seek an extension of the bilateral facility by the end of quarter 1 this financial year. I will now hand back to Urs.

Thanks, Patrick. Slide 13 demonstrates the improvement in revenue in the second half. Overall, revenue improved by 8% in the second half '21 compared to the second half '20. Revenue was up 6% in the second half '21 compared to the first half of '21. In Australia, we saw a recovery in [ builds ] and merchant base in the second half. However, this was impacted by the slowdown in the commercial project segment, particularly in New South Wales and Victoria. In New Zealand, we benefited from the integration of our sales team and strong stock availability during most of the year. We also benefited from lapping the prior year, impacted by COVID-19 lockdowns. Sales for the year were up 14.5%. In our International business, we continue our sales momentum in the U.K. We continue to grow market share and improve our EBIT margins. Slide 14. GWA acquired Methven in April 2019. The continued delivery of integration synergies and enhanced geographical revenue and earnings diversification reinforces the success of that acquisition. Methven sales were up year-on-year with strong growth in the U.K., providing further earnings and revenue diversity and enhanced scale. Cost synergy targets have been realized with $3 million achieved during the year. That brings total synergies achieved during financial year '20 and '21 to over $6 million and exceeds the original targets. As we mentioned previously, the New Zealand distribution network was consolidated from 2 warehouses to 1, which will improve customer experience. The Methven China plant was divested in March 2021. Our center of excellence in New Zealand is building a strong pipeline of new products. The market lead in Methven shower intellectual property is being used in Caroma new shower launches this year. Moving to Slide 15. A key focus of our growth strategy remains product innovation. We have established a center of excellence in Auckland and Sydney to leverage our local technical design and sourcing capability in taps, showers and sanitaryware. Our [ Houghton ] hygiene and touchless solutions is important, especially in the current environment. For example, we launched GermGard, which is an antibacterial glazing to our sanitaryware and toilet seats. This is capitalizing on consumers' heightened concerns over safety and hygiene following the COVID-19 outbreak. Our local design and technology expertise continues to be a key point of differentiation for GWA. On Slide 16, our Innovation and Distribution Center at Prestons in New South Wales is a good example of the work we are doing to create truly innovative product and system focus on water solutions in the build environment. The picture you can see on this slide is of the new vertical and horizontal test rig. This enables our team to model the hydraulic impact of water in commercial buildings, which is assisting us to develop new water saving solutions and products. That, of course, includes our touchless intelligent bathroom system, Caroma Smart Command. The system has now been successfully installed in 127 sites across Australia and New Zealand, up from 49 installations in the prior year. While the commercial segment remains subdued, our commercial forward order book remains strong and is 14% ahead of the prior year. Given the temporary slowdown in particular segments such as retail and offices, we have continued our focus on areas which provide near-term growth opportunities, including education, health and commercial innovation and replacement. These categories now represent 38% of commercial order bank compared to 32% in the prior year. On Slide 18, I'd like to take a minute to provide an overview of my first impression of GWA. I joined the company in March initially as the acting CEO and then from 1st of July, as managing director and CEO. Since joining GWA, I've had the opportunity to meet with many of our staff, clients and some of our suppliers. My first impressions are very positive. GWA has an experienced and committed leadership team. I'm most impressed by the passion of our staff, not only for our products, but that of our customers and the service we provide. Even before joining GWA, I was aware of the strong brand and innovation capabilities. In addition, I learned about GWA's commitment to quality and ongoing customer service improvement. Our relationships with key merchant partners are strong and our leading position in sanitaryware will provide us with excellent leverage into other categories. Our foundations are solid and provide an excellent platform as we build and refine our next 5-year strategy to improve shareholder value. Over the next few slides, I would like to highlight how we are evolving the current strategy to grow the business. Turning to Slide 20. I would like to start by outlining the key elements of our strategy. Firstly, as a business, we are committed to making everyday water experience extraordinary today and for tomorrow. We respect water as a precious resource, with our long and demonstrated history in the delivery of market-leading innovation that has helped to support reduced water consumption in bathroom. We will look to further this commitment so that those experiences customers happily enjoy today can also help [ pay to ] preserve these results for tomorrow. In leading this commitment, our strategic mission is to confirm GWA as the respected and leading partner in the delivery of sustainable water solutions for bathrooms, kitchens and laundries. We have identified 5 key strategic pillars to deliver on this. On Slide 21. Firstly, and given it's at the heart of what we do, we start our strategic focus areas with the need to deliver great customer experience. Our customers want us to be easy to do business with. So we will be engaging in new approaches as well as digital tools and services to better enhance and enrich the purchase journey of our customers. Our second strategic focus respects the need to better connect with the industry group catering to our business [ the plumber ]. Commercial and residential plumbers are the link between our products and our customers. So we will be engaging in activities to strengthen relationships and improve our support in this key industry. As mentioned, GWA already had a strong [ held into ] innovation and we will continue to innovate through design and partnership, hence, our third strategic focus. We will not only use our internal expertise but also leverage the strong capabilities of our supply partners to offer advanced products in our markets. We also see increased opportunity in supporting customers with comprehensive aftermarket offerings. Our fourth strategic focus therefore involves leveraging current expertise and extending this to grow our support of products and services throughout the entire life cycle. Finally, we will look to accelerate our business growth by leveraging strategic opportunities that expand our capability and strengthen our overall market presence. I look forward to sharing the progress on this strategy to shareholders as we seek to deliver further sustainable value over the medium term. Turning to page -- Slide 23, and the outlook for financial year '22. We expect continued momentum in residential detached activity in financial year '22 from improved customer sentiment, increased building approvals, new housing loans, higher housing turnover and government [ builder ] such as the homebuilders. Renovation and replacement activities, both residential and commercial, is expected to be stable to slightly positive for the year. However, commercial completions are expected to remain subdued. As confidence in activity increases in the commercial segment, we remain well placed to capitalize on the improvement. The multi-residential segment is expected to decline further in financial year '22 as a result of lower net migration resulting from the international border closures and [ privatizations ]. However, there's an obvious significant degree of continued uncertainty because of the various COVID-19-related lockdowns, particularly in Sydney/New South Wales, the ACT, and Melbourne/ Victoria and the potential impact on construction market. We are continuing to closely monitor and adjust our business operations as required. We will maintain our focus on new product development in new bathroom ranges for Caroma and Methven showerware. Agreed business plans have been implemented with major merchants targeting enhanced product ranging in core categories. Our cost base was further reduced in '21 and an additional $3 million in supply chain savings will be delivered from '22. We implemented price increase of about 3% across Australia, New Zealand on 1st of July 2021, which together with expected foreign exchange benefit should largely offset the expected increase in freight costs for financial year '22. GWA maintained strong operational leverage to the market upturn, underpinned by ongoing operational discipline. On Slide 24, let me summarize the key points from today's presentation. While financial year '21 was challenging, our performance in the second half improved significantly on the first half, and that provides positive momentum as we move into financial year '22. Our cash flow and balance sheet remain strong to support ongoing investment and shareholder returns. We are continuing to evolve our 5-year strategy to generate sustainable shareholder value creation in GWA, maintaining strong operational leverage to expect the market improvement in financial year '22. Ladies and gentlemen, that concludes the presentation, and Patrick and I are happy to take your questions.

[Operator Instructions] Your first question comes from Mitchell Sonogan with Macquarie.

Just first of all, I guess I was just trying to get a little bit of sense on how you're seeing the specific markets. Obviously, you've talked about the touch being a bit stronger and good momentum there into '22 are also on the resi R&R and in commercial R&R. Can you maybe just give us a sense of how you saw that second half? And how we should be thinking about that into the full year? Because just the slide in the other presentation pack where you typically spell out how you're seeing the market isn't in there. So any information on these segments on a more granular basis will be fantastic.

Yes, Mitch, I'll try and cover that. So look, we obviously -- in terms of each of the segments, if you start with residential, we flagged back in February, we thought we'd expect to see an uptick in Q4, given the high level of approvals on the back of homebuilder. And look, that was the case. And given the scale of those approval numbers and to some extent, the relative scarcity of supply of trades, we expect the detached residential segment to be strong throughout FY '22, if that makes sense. Multi-res, we think, will continue to decline, as we've said before, until net migration comes back and borders reopen. That 1 is going to be challenging. The -- I suppose the good part of it is it's now only about 8% of our revenue. Look, in terms of commercial, as we said in the presentation, we remain very pleased with our order book being up 14% for the full year, year-on-year. That did come down a little bit since December. But look, obviously, it's the net of what flows in and what flows out, and we did see a few jobs happening at the back end of quarter 4. So look, we think we are very well positioned for recovery in commercial when it materializes. The challenge at the moment is that nobody really knows when that will be. And there aren't many new jobs starting and breaking ground. What we see at the moment is really jobs completing that were approved some time ago given the lag in that segment. Where we have seen a little bit of activity in commercial is probably more in the renovation space as people upgrade commercial buildings.

And what we can add, Patrick, if you look at commercial, we clearly see growth in Education and Health and that's partly offset by a decline, as you would expect, offices, hotel and retail as well as other activities.

And look, I think that trend is likely to continue for the -- certainly for the next 6 months. I mean the thing that's going to turn commercial around, Mitch, I think is going to be, frankly, business confidence and vaccination rates. And until that happens, it's going to be a little bit slow. But as I said, we've got a good order book. And then look, R&R as the final one you asked about, we saw some growth in R&R in the second half. And we would expect R&R to be stable to probably slightly positive in '22 as well. If you asked me that question 7, 6-7 weeks ago before recent lockdowns and interruptions, I probably would have been more bullish on it. So again, it's going to be affected a little bit by consumer sentiment and the ability to have trades in-house. But nonetheless, given the -- I think the fundamentals are strong for R&R, there's high saving rates, particularly during lockdowns, there's ready availability of relatively cheap credit. And people can't spend on overseas travel. So one would expect R&R to be pretty resilient during '22. But again, it's kind of linked to the current COVID situation. Does that help give you a flavor, Mitch?

I guess just following on with that last bit on the resi R&R, I guess just looking at how strong the ABS data has been over the last 12 months or so. I know there's a bit of a skew to more DIY stuff than that earlier last year, but some big jobs going through. Can you maybe just give us a sense of, I guess, for the last couple of months of the trajectory you've seen there? I guess it just sounds like you've been a bit conservative there given the lockdown impacts or potential lockdown impact, which is understandable.

Yes. Look, I'd say it was certainly positive for us in Q4. I think the -- and I agree with you, the approvals were very strong back sort of April-May time. I think the issue is there are also lags here and an approval doesn't mean a commencement and a commencement doesn't mean a completion. And then you add to that constraints on the supply side of trade is, I think we're going to see longer lags. But look, if the world returns to semi-normal, than I would have thought we would see an improvement probably towards the second half of '22 in R&R, but really very much subject to the availability of trades and people's confidence.

Perfect. And just a follow-on for me. I guess just thinking about the potential for different cost movements in '22, you put through another price rise there. I guess, can you maybe just quickly run us through the levers there, how you're hedging sitting [ on ] potential freight costs and how you see that balancing out into '22 from a margin perspective?

Let me take the first part of the question and hand over to Patrick in regard to FX. If you look at, I guess, freight, you really [ get often into ] quite a substantial increase, we would expect probably our freight cost to go up by about $6 million year-on-year. That's partly offset by some positives in regard to hedging and Patrick can talk about that and some of the savings we outlined in the presentation. But clearly, we monitor the market very closely. If we see further cost increases, we always have the option and we consider a second price increase maybe in the second half of this year. Do you want to comment on the FX?

Yes, look, FX Should be a little bit of a tailwind, Mitch. Actually at current time, we're at about 55% hedged of our requirements for FY '22 at $0.76. So versus current spot reasonably, reasonably good. I think, look, it's anybody's guess where FX goes, certainly versus the U.S. dollar. But look, overall, we would expect to see at least a couple of million probably year-on-year benefit, possibly slightly more, depending on FX. So that's for full year '22 versus '21. And then as you noted, we've got another positive with price increase of approximately 3% effective 1st of July across ANZ. So those 2 positives together should offset the freight $6 million that was mentioned as a year-on-year on cost. So look, overall, I think the best guide to EBIT margin at the moment for '22, we would, I think, expect to maintain the EBIT margin we saw in the second half of '21, which was 17.5% or potentially slightly improve it. But I think for significant improvement, we'll have to see the return of commercial activity. And at the moment, we're not forecasting significant commercial activity in '22.

Your next question comes from Lisa Huynh with Citi.

So I just had a question on freight costs. Given you've outlined the $6 million impact, and it's a bit lower than you'd expect just given at the last result, I think you said freight was 6% of COGS and freight costs are up 2% -- sorry, 2x year-on-year. So can you just give us a bit more color on whether you see you're getting a better contracted rate for freight or what's really driving that? And how much is hedged into this year as well?

Sure, Lisa. Look, you're right, it's approximately 6% of COGS. And look, when we last spoke about this, Lisa, we haven't completed our contractual negotiations for '22. So it really does depend on the mix of contracted volume versus spot. We have now completed those negotiations. So we have certainty that about 80% of our requirements will be at contracted rates with the remainder at spot. So basically, when you multiply that through, that's how we get to the $6 million year-on-year on cost. And I think last time we spoke about this, we flagged 5% to 6%. Given that we've now locked in the 80% of it. We're fairly firm on that $6 million. Now spot prices just to -- as a caveat, are much higher still at the moment, up to probably 3x where they used to be a year or so ago. So that's why you may be hearing different things in different places.

Yes, sure. That's helpful. And I guess in terms of sales momentum, I guess 1 trend with kind of things play out over U.S. earnings season is a lot of building products companies have called out weaker orders in the retail channel, because we saw a big boost in DIY last year. Now that things have reopened, people are spending that recreational dollar elsewhere. Just I know you don't expect any material destocking this year, but I'd be interested in whether you're kind of seeing any similar trends play out in that channel?

Look, it's an interesting one. We -- and to make sure I try and answer that for you. We've seen probably a slightly different shape in our sales into retailers in the second half than we saw in the preceding couple of halfs. As you may recall, there was -- this time last year, there was a significant uptick in that replacement activity, the DIY element. And obviously, this time around, everybody is lapping that, and a lot of walls have been painted in Australia and a lot of leaking taps have been fixed. So I think we're not seeing that same uplift anymore in replacement. I think on the positive side, though, in the second half, we have seen a little bit more of trade-focused activity come through some of the merchants and some projects. I did mention commercial reno earlier. So it's a bit of a mixed bag. So I wouldn't -- while R&R may have upside depending on COVID, et cetera, which we talked about earlier. I'm not necessarily -- I don't think we're going to see the same sort of DIY replacement uptick this year that we saw last year. Does that answer...

Yes. Yes, it does. It's helpful, Patrick. And I guess on the other side of that, we shouldn't see DIY completely fall apart, altogether either, is kind of what you're saying.

We don't believe that -- I don't think so. I think it's just going to turn to more sort of normalized levels.

[Operator Instructions] Your next question comes from Matthew Abraham with Credit Suisse.

My first question just relates to market share and quite a high-level question. Just wondering if you could just give a bit of color on market share movements in the Australia and New Zealand region, please?

Thanks, Matt. Probably from a market share, we just earlier discussed, we've seen clearly quite a lot of volatility in market size. And even if you look at some of the independent estimates, they have moved quite a bit. So for us, we felt if you look in the saving context, we don't have -- we have insufficient external data to accurately measure market data. If I go across the markets, we probably would expect in Australia, we will be sort of on par with previous year, maybe slightly down. But clearly, as you've seen both in New Zealand and the U.K., we have substantially improved our revenue [ in res ] expect that we are to gain market share [ we saw ] markets.