GWA Group Limited (GWA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the 2021 Annual General Meeting of GWA Group Limited. My name is Darryl McDonough, and as Chairman of the Board of GWA Group Limited, I'll act as Chairman of this meeting. As we have a sufficient number of members present by proxy, I declare this virtual meeting open. Each of the GWA directors being John Mulcahy, the Deputy Chair; Jane McKellar, Alison Barrass, Peter Birtles, Stephen Goddard; Urs Meyerhans, the Managing Director and CEO; and Richard Thornton, who is also the company's Secretary; together with our Chief Financial Officer, Patrick Gibson, are in attendance for this meeting as well as a representative, our Auditor, Trent Duvall of KPMG. You'll hear from us a little bit later in this meeting so that you may be provided with detailed insight into the performance of the group in FY '21. Today's meeting is being held online, which is clearly obvious. Shareholders and proxies have the ability to ask questions and also submit their votes. [Operator Instructions] I require that all resolutions today be considered on a poll, and the voting will be conducted by a poll on all items of business at the end of the meeting. The notice of this meeting was circulated to the shareholders registered on the 20th of September 2021. We will take the notice of meeting as read and deal with the items of business in the order that's set out in that notice. The first item of business is consideration of the company's financial statements. What I'll do, first of all, is I will address the meeting, and then I'll ask Urs Meyerhans, the Managing Director and CEO, to also address the meeting. And then obviously allow ourselves to be available to be -- to have the questions asked of us. So I just mentioned at the outset that we have received 3 questions from the Australian Shareholders' Association, which Urs will deal with as part of his presentation. In relation to my own, there are 4 matters that I wish to address. I want to just very quickly do an overview of our results. I want to talk about the issue of sustainability. I also want to mention remuneration and Board renewal. As far as the results are concerned, look, the reality is FY '21 was a challenging year. Everybody would accept that and due to the issues associated with the pandemic. However, your company did achieve revenue improvement of 6% with EBIT being up 13%, EBIT margin up 120 basis points. And that -- the EBIT margin was up in the second half by 120 basis points. That, I think, shows very strongly, GWA's ability to capitalize on improving markets. The operational discipline, together with synergies derived from the Methven acquisition or within Methven delivered $7 million in cost out in FY '21. In relation to cash flow, the FY '21 operating cash flow was 16%, with a cash conversion ratio of 178%. Net debt was 28% below FY '20 with a leverage ratio down to 1.4x. I'll just pause for a moment so that the slides can actually catch up to where I'm on. Here we go. So I'm just down into that second area under heading of cash flow and now into that third slash point there, the strong financial position enabled payment of a $0.065 per share dividend on a final basis, bringing the full year dividend to $0.125 fully franked. There's been growth with our retail-focused merchants, partially, though, offset by continued decline in commercial. Product innovation, the new product development tap shower-ware, the Germgard antibacterial glaze and [ safe hold ] has been very important to our business today. The New Zealand warehouse consolidation, the sale of our China plant is expected to result in approximately $3 million of annualized cost savings from FY '22. There's been positive momentum for detached housing in FY '22 so far. The repair and replacement markets are expected to be positive, something close to the issues associated with the pandemic. The commercial segment activity remains subdued. However, our order bank, in respect of projects, remains very strong, and we're very much very well positioned for a very strong recovery and once that segment recovers. We've realigned our cost base, and that's provided enhanced operating leverage to improvement in the building society. However, the ongoing effects of the COVID-19 lockdowns, particularly in Sydney, New South Wales and Melbourne, Victoria and New Zealand create a level of uncertainty, rig potential impacts on the construction markets going forward. If we move on then to the next slide on the issue of sustainability. Sustainability remains fundamental to the way we conduct our business. Our approach to sustainability continues to be based around the 2 central objectives identified on this slide. We 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 provide leading-edge products and systems that contribute to sustainability by making life better through sustainable water saving solutions for the built environment. There's a number of highlights during the course of FY '21. And you would have, I would have thought, already seen our sustainability report. And if you haven't had a chance to read it, I'd encourage you to do so. It's available on our website. The highlights include gender diversity improvement with female composition increasing 42% to 43%. Order efficiency focus with over 80% of Caroma taps 5 or 6 star wells rated, while 95% of Caroma sanity ware products are 4-star wells rated. There's been a consolidation of the distribution network in Australia and New Zealand, which has resulted in a reduction in water, waste and energy consumption. We've implemented a policy against slavery and trafficking in persons, and we completed 2 audits of major suppliers with no ethical sourcing issues identified. We continued our partnership with the Smith Family to support 60 disadvantaged children in drought affected areas in Australia with $125,000 being devoted to the Smith Family over the past 3 years. Moving then to remuneration. In relation to the executive remuneration during FY '21, they remain frozen. The executive team was eligible for short-term incentive payments to recognize their disciplined response to weaker markets in the first half of FY '21, but an improved financial performance in the second half of FY '21, together with successful execution of key business changes and general activities. In relation to the framework for remuneration going forward, for this and future years, your board has determined there should be a change in variable remuneration mix for FY '22 with a greater weighting being placed on long-term incentives, coupled with a continued focus on short-term financial targets and critical nonfinancial KPIs. This change applies to all members of the executive team for FY '22 to better align executive remuneration outcomes and long-term shareholder wealth creation. The FY '22 STI plan adopts EBIT as a single financial target. EBIT is an effective basis for STI financial targets as it is currently a key metric used in the business and aligns with the group's strategy. For FY '22, the Board decided to retain relative total shareholder return as a single performance measure under the LTI plan due to the ongoing uncertainty caused by the impacts of COVID-19, which has resulted in difficulty in accurately forecasting the business performance for the next 3-year period. That decision was taken after considering a whole range of alternatives and incorporating independent expert advice, which we have received. For the FY '23 LTI plan and in following years, the Board's current preference is to reintroduce a second performance measure of EPS growth in addition to retaining the relative TSR measure. More on that will become known as we progress through this financial year and get closer to the start of the FY '23 year. I then want to talk about Board renewal. The Board has commenced a formal review which will consider Board renewal and appointments. We've acquired external advisers, Hattonneale, to assist us in this process. The Board obviously will keep shareholders updated on developments as this as the process is progressed. I'll now hand over to Urs Meyerhans, the Managing Director and Chief Executive, to address the meeting. Thank you.

Thank you, chair. Good morning, ladies and gentlemen. I'm honored to have been appointed as Managing Director and CEO of your company. GWA is a company with a rich and long heritage and it's well positioned for future growth opportunities. Today, in my first AGM address, I would like to provide some further context to our financial year '21 financial results and an outline of our revised strategy to capitalize on that opportunity for growth. I will conclude with some commentary on our trading performance for the first quarter for this financial year and outlook for the full year. Let me begin with an update on safety across our workplace and some commentary about our continued progress with sustainability. First, in 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. Following a decline from financial '18 to '20, we experienced an increase in total injury frequency rate from 0.9 last year to 4.3 in financial year 2021, mainly that was due to injuries relating to metal handling. This is a disappointing result. We have renewed our focus on behavioral issues and have implemented customized [ safety ] strategies to address the root cause to reduce metal handling injuries going forward. As the chair indicated, sustainability remains a core focus for GWA. We continue to make good progress and promote policies to encourage diversity and inclusion across the company. We remain focused on those areas of sustainability where we believe we can make the most impact. For us, that means providing innovative, sustainable solutions for the built environment with a clear focus on sustainable water solutions. During financial year '21, we continued the rollout of our intelligent bathroom system, Caroma Smart Command. It has now been installed in 127 sites, up from 49% the last year. Darryl has provided a summary of our financial results. And I would like now to provide some additional detail behind the numbers. This slide presents the results first on a normalized basis, which is 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 our new ERP CRM systems and costs 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 activities 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 the delay caused by COVID-19. Normalized group EBIT was down 5% to $68.5 million, mainly 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 billion, down 6%. On a reported basis, net profit after tax for the year was $35.1 million, which includes significant items of $7.3 million after tax. Our continued strong cash generation and robust balance sheet enabled an increase in full year dividend paid to shareholders to $0.125 per share fully franked. This slide contains a waterfall chart to set out the key drivers of earnings over the year. These are normalized results. They exclude significant items that I detailed on the previous slide. Volume and mix were impacted by COVID-19, largely 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. Price increases of approximately 5% were implemented from August 2020. And through our foreign exchange hedging, we were able to mitigate some but not all of the impact from the weak Australian dollar compared to the prior year. Net cost changes reflect our continued strong operational discipline, which mitigated a significant amount of the earnings decline for the year. The final red bar represents costs for staff incentives accrued for in financial year '21, but not in financial year '20. This slide demonstrates the improvement in revenue in the second half across all of our markets. In Australia, we saw a recurring builders and merchant sales 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. In our international business, we continue to see momentum in the U.K. We continue to grow market share and improved our EBIT margin. Turning now to cash flow. This was a very strong result. Cash flow from operations was $103.1 million compared to $88.6 million in the prior year. Cash conversion remains excellent with a cash conversion ratio of 117%, reflecting our capital-light model. Our capital expenditure program remains focused on growth initiatives to drive revenue-enhancing opportunities and cost efficiencies. This includes continued investment in new product development. China remains in a strong financial position. Net debt as of end of June was $104.8 million, which was 28% lower than the prior year. Our credit metrics remain solid with an improved leverage ratio of 1.4x compared to 1.9x at the end of June '20. Our total group facilities of $220 million were successfully extended last week, and they provide sufficient financial flexibility to pursue growth initiatives. As shareholders will recall, GWA acquired Methven in April 2019. The continued delivery of integration synergies and enhanced geographical revenue and earnings differentiation reinforce the success of the acquisition. Methven sales were up year-on-year with strong growth in the U.K., providing further earnings in revenue diversity and enhance 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 target. As we mentioned previously, the New Zealand distribution network was consolidated from 2 warehouses to1, 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-leading Methven shower intellectual property is being used in Caroma new shower launches this year. A key focus of our growth strategy remains product design and innovation. We have established center of excellence in Auckland and Sydney to leverage our local technical design and sourcing capability in taps, showers and sanitary ware. Our focus on hygiene and touchless solution is important, especially in the current environment. For example, we launched Germgard, which is an antibacterial glazing for our sanitary ware and toilet seats. This is to capitalize on current [ humans' ] heightened concerns over safety in hygiene following the COVID-19 outbreak. Our local design and technology expertise continues to be a key point of differentiation for GWA. Our innovation and distribution center at Prestons in New South Wales is a good example of work we are doing to create totally innovative products and systems, focused on water solutions in the built environment. The picture you can see on this slide is of the new vertical and horizontal test rates. This enabled our team to model the hydraulic impacts 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, which I mentioned earlier. As I said at the beginning of my presentation, GWA has a significant opportunity for growth. And as we build and refine our next 5-year strategy to improve shareholder value. Over the next 2 slides, I would like to highlight how we are evolving the current strategy to grow the business. A shareholder question was received regarding this, so I will answer that now. Let me start by outlining the key elements of our strategy. Firstly, as a business, we are committed to making everyday water experiences extraordinary today and for tomorrow. We respect water is 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 bathrooms. We will look to further these commitments, so that water experiences customers happily enjoy today can also help better preserve this resource for tomorrow. In living this commitment, our strategic mission is to confirm GWA as the respected and leading partner in delivery of sustainable water solutions for bathrooms, kitchens and laundries. We have identified 5 key strategic pillars to deliver on this, which I will discuss on the next slide. Firstly, and given it is at the heart of what we do, we start our strategic focus area with the needs to deliver great customer experience. Our customers want us to be easy to do business with. So we'll 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 an industry group critical to our business, the plumber. Commercial and residential plumbers are the link between our products and our customer base. So we will be engaging in activities to strengthen relationships and improve our support in this key industry. We had a shareholder question regarding this pillar and what initiatives will be implemented. This will include increasing the number of plumbers that we are currently engaging with across both commercial and builder segment, engaging with training institutions to educate young plumbers and providing plumbers tools to make the job easier and introducing a form of loyalty program. As mentioned, GWA already has a strong heritage with 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. We had a shareholder question regarding this pillar and what initiatives we will implement. We get clear feedback from our commercial clients that there is a need for support for throughout the life cycle of our products. This will include spare parts and service arrangements so that our installations function and look as good in year 5 as on day 1. Finally, we will look to accelerate our business growth by leveraging strategic growth opportunities that expand our capability and strengthen our overall market presence. There was a shareholder question on this. And while I can't go into specific at this time due to confidentiality, I can say that it will include evaluating -- include evaluation of products and solutions that fit with our overall strategic mission to be the respected and leading partner in delivery of sustainable water solutions for bathroom, kitchen, laundry. Such opportunities could be in Australia and New Zealand and/or in our international markets. I look forward to sharing the progress on this [ slide with ] the shareholders as we seek to deliver further sustainable value over the medium term. Let me conclude with an update on our first quarter trading and an outlook for financial year '22. Moving now to the results from our first quarter trading. And we have certainly seen a challenging start to the financial year. Along with many of our customers, there has been a large impact resulting from ongoing restrictions to trading in Australia, with both New South Wales and Victoria facing prolonged treat -- had closures and many stores meaning to operate on a click and collect basis only. The situation was also heightened in New Zealand, with Auckland facing 5 weeks under Level 4 lockdown and only able to trade in strictly essential sales. The outcome of this has been a 32% shortfall in sales for our New Zealand business during quarter 1. Whilst a sizable impact has been felt across our market over this past quarter, our salient sales number still saw a gain of 6% on the prior corresponding quarter. Trade restrictions lifting in late September, we have seen strong momentum in sales, both in Australia and New Zealand and would expect to recover the shortfall in Q1 in New Zealand due to the lockdown in the course of the full financial year '22. Notwithstanding the challenges of various lockdowns and trade restrictions, for the group revenue for the first quarter of financial year '22 was flat compared to the first quarter of last year. Encouragingly, our commercial innovation and replacement sales strengthened in Q1, the project being drawn from our order bank. We expect our order bank will be in growth at the end of December '21 compared to June '21. In terms of overall market activity, we expect a continued momentum in residential detached in financial year '22 from the improved consumer sentiment, increased trading approvals, new housing loans, higher housing turnover and the impact of government stimulus flowing through to the building completions. Renovation and replacement, both on the residential and commercial side, is also expected to be positive. For the year, as approval convert to completion activities and as confidence and activity increases in this segment, we remain well placed to capitalize on that improvement. With regard to newbuild in commercial, this is likely to remain subdued. And multi-residential will continue to be impacted with lower net migration from international border closures and travel restrictions. Note that this segment represents only about 8% of our group revenue. As we put progress in year '22, our focus remains on strengthening revenues through new product development across our bathroom ranges for Caroma and Methven shower ware. We have also implemented a great business plan with major merchants targeting enhanced product ranging across our core categories in bathroom, kitchen and laundry. We continue to manage our cost base closely, and we expect to deliver $3 million in supply chain savings in financial year '22. Meanwhile, our supply chain remains robust, and despite some intermittent supply delays, we remain well placed to service our customers in financial year '22. There have been some increases to freight on the back of global supply interruptions. We will increase price around 4% in Australia from first of December related primarily to these freight cost increases. Overall, a challenging first quarter, given the restriction enforced, but we are seeing positive signs as the market starts to regain momentum. At GWA, we are well positioned to leverage as the margin improve. Ladies and gentlemen, that concludes my presentation, and I will now hand back to the chair.

Thank you very much, Urs. Ladies and gentlemen, we'll now deal with any questions from shareholders on the financial statements and any aspect of the business or management of the group or questions for the auditor. As I mentioned, there were questions from the Australian Shareholders' Association for which I thank them for submitting those before the meeting, which Urs has just dealt with in his presentation. But we're open, ladies and gentlemen, for any other questions that anybody would wish to ask. We have not received any written questions. So it's really a matter of anybody wishing to ask a question verbally. But the slide on the screen then just now sets out how you could actually do that. [Operator Instructions] Does anybody wish to ask any question? I'm assured by the technical people that nobody has even attempted to ask a question. Look, ladies and gentlemen, can I say to you that this is a less than satisfactory way to have an Annual General Meeting. The reality is that we must do it because of the reality that we face today. I can assure you that myself and all the other directors look forward to actually having a face-to-face meeting this time next year and not having to go through it like this because it is, I think, a very difficult thing, both for obviously, the shareholders but also from our point of view as well, too. Certainly, there has been some press coverage in relation to some companies amending their constitutions to enshrine the ability to have effectively virtual meetings going forward. That's not something that we currently intend to do. But obviously, we'll obviously make use of whatever technology is available in addition to actually having a face to face meeting. In view of the fact and I am aware because of the technology that there are only a very few number of shareholders that are present. I'm also aware, which I'll put up in a little moment the slides in relation to the proxy votes that have been received. And there is no doubt whatsoever that the resolutions set up before the meeting today are going to get passed. I thought what I might do is just giving people an opportunity, having spoken enough, to give you more of an opportunity to ask a question if you wish to. Please feel free to do so. And by all means, I'm happy to take questions on any of the items that are before this meeting, including the reelection of the directors, the approval of the performance rights. In respect to my own reelection, if there were a question to be asked, I would ask the Deputy Chairman, John Mulcahy to then take charge to the meeting whilst that was dealt with. So I, again, ask if anybody has any questions on any matters that there are before the meeting. I'll just pause for a second or 2. Now the indication is that there are none. So what I'll do is I'll ask our moderator if they could -- to go to the proxy results, which is Slides 32 and 33, just for the benefit of shareholders. That's the proxy results in respect of resolutions 1 and 2. As you can see, there is a significant number. And then to resolutions 3 and 4, which is the next slide, and 5, again, numbers are significantly in favor of the approval of those particular resolutions. I'm still informed that we haven't received any written questions or anybody's attempted to ask a verbal question. So I propose then that what we'll do is we'll move to the conduct of the poll in relation to each of the resolutions. If you're eligible to vote at this meeting, a new polling icon will appear on your screen. Selecting this icon will bring up a list of the resolutions with voting options on each resolution. To cast your vote, you simply select one of the options. There is no need to hit submit or -- in a button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare the voting closed. So what I'm going to do now is I'm proposing that I'll just leave the meeting open for about the next 5 minutes to give everybody an opportunity to vote. And I've just been asked -- that's right.

We have actually received a question from a shareholder. And the question is, why was the Methven China plant sold? So perhaps if I could ask Urs, if you could answer that question, please? Yes, thank you.

Thanks, chair. The reason we considered to sell the Methven China's plant for probably a number of reasons. First, we had concerns in regard to the health and safety in regard processes. Secondly, we saw great opportunities to consolidate some of our volumes with existing Caroma volumes, which will give us better product availability and product pricing.

Thank you, Urs, and thank you, Mr. [ Carr ] for that question. If anybody else wishes to ask a question, whilst we're doing the voting at the same time, please feel free to do so. [Voting]

Well, thank you very much, indeed, ladies and gentlemen. I declare voting closed. The results of the voting will be uploaded to the ASX platform later this afternoon. Look, can I just say thank you very much indeed for your attendance. I apologize that it is this way, but that's out of my control. Certainly, I look forward to seeing shareholders on a face-to-face basis next year for the Annual General Meeting. I thank you for your attendance and your ongoing support of the company. And I look forward to catching up with you. All the very best.