GWA Group Limited (GWA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GWA Group Limited FY '22 Half Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Urs Meyerhans, Managing Director and CEO. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us to hear GWA's results for the half year ended 31st of December 2021. My name is Urs Meyerhans. I'm GWA's Managing Director and CEO. I'm pleased to present the results to you today. Joining me this morning on the call are Calin Scott, GWA's Group CFO, who was appointed in January; and Craig Norwell, our group executive responsible for sales. We look forward to talking further with many of you over the coming days and weeks, and hopefully in person, if that is indeed possible. For today's presentation, I will first provide an overview of our group results, our continued focus on safety and key themes. Calin will discuss the group financial results for the year, including P&L, balance sheet and cash flow. I will then provide an overview of our business performance, including our performance in key end markets. I will also discuss how our strategy is evolving and finishing off in providing a summary and outlook for the second half of financial year '22. At the end, Calin, Craig and I will be happy to answer any of your questions. If you're moving to Slide 5, let me begin with a summary of the results. Overall, we have delivered a solid result amid challenging conditions during the first half of the financial year. In a period which included construction site shutdowns, merchant closures, global freight disruptions and the 5-week New Zealand shutdown, we delivered a 2% lift in revenue and an 11% increase in normalized EBIT. We continue to generate excellent cash flow and our balance sheet remains strong. That strong financial position has enabled the Board to declare an interim dividend of $0.07 per share fully franked. This is up by 17% on the prior period. Our improved financial performance provides good momentum into the second half. The outlook for our key segments remain positive. And subject to any potential further impact of the general economic environment, we expect group normalized EBIT in the second half of financial year '22 to be higher than the first. Finally, we have made good progress in establishing the groundwork on the core priority areas of our strategy. I will talk about this in further detail later in the presentation. In summary, I'm pleased with the way our team has proactively managed our response to the ongoing challenges in the first half of financial year '22. That has placed GWA in a good position to further improve our performance in the second half and beyond. Moving to Slide 6. Safety remains our #1 focus. I'm pleased to report that we recorded an improvement in the total injury frequency rate during the half. As you know, we experienced an increase in this rate last year, and that was largely due to manual handling injuries. We've implemented customer training strategies predominantly to address the root cause of the injuries, and that has resulted in a decline of the rate down to 0.9 at the end of December '21. We continue to enact our COVID safety management plans across the business, including working from home where practical. At our sites, we have introduced practices, including rapid antigen testing, split break times and restricting nonessential service access to sites. I will now hand over to Calin, who will go through the group financial results with you.

Thanks, Urs. Slide 8 presents the results first on a normalized basis before significant items, and then on a reported basis, which includes significant items. For the first half, significant items are related to the implementation of the ERP CRM systems, which is consistent with what was outlined at the full year results presentation last August. For this half, group revenue increased by 2% to $201.3 million, primarily reflecting improved activity in Australia, which had revenue growth of 6%. This was partially offset by the shutdowns in New Zealand and COVID impacting sales in our international businesses. Normalized group EBIT was up 11% to $35.6 million. That improvement in earnings came despite the significant increase in freight costs compared to the prior corresponding period. Normalized EBIT margin was up 140 basis points to 17.7%, reflecting the operating leverage that we have in the business. With normalized NPAT increasing by 12% to $22.4 million, and on a reported basis, NPAT for the period was $18.6 million, which includes significant items of $3.8 million after tax. Moving on to Slide 9. This slide contains the waterfall chart GWA typically presents to set out the key drivers of earnings over the period. A reminder, this presents on a normalized basis. They exclude the significant items I detailed earlier. In relation to volume and mix, we had positive sales mix in Australia, driven primarily by the rollout of new products. However, that was offset by the impact of COVID on both international markets and New Zealand. With regards to price, you will recall that we implemented a price increase of approximately 3% on the 1st of July across Australia and New Zealand, and that was followed by an additional price increase of around 4% in Australia from 1 December. These increases were primarily related to freight cost increases. With regards to foreign exchange, we saw unfavorable balance sheet revaluations being partially offset by gains on product purchases. Our average hedge Australian dollar to U.S. dollar exchange rate for the first half was $0.70, which compares to $0.69 for the prior corresponding half. We are currently 73% hedged at USD 0.75 for the remainder of FY '22. In relation to net cost changes, we continue to manage our cost base diligently. We delayed some marketing spend in the first half, which we expect to spend in the second half as we continue to invest in our key brands and as part of our strategy to engage with end users. The net effect of all these moving parts was an 11% increase in normalized group EBIT for the period. Moving on to Slide 10. Cash flow from operations continues to be a solid result. Operating cash flow was $43.6 million, which compares to $49.7 million for the prior period. We did call out at the full year results in August that given the current freight situation, we would build inventory stock somewhat in the first half to ensure stock availability so we can service our customers. This has impacted working capital for the half. Given the continued uncertainty around supply chain, we expect stock levels will need to remain somewhat elevated until these constraints ease. Cash conversion remains excellent with a cash conversion ratio of 96% despite some of the COVID and freight challenges during the first half. Capital expenditure and other investing was $1.6 million for the half, which is lower than our initial expectations and reflects our current focus on the implementation of the ERP CRM project. Our capital expenditure program remains focused on growth initiatives to drive revenue-enhancing opportunities and cost efficiency. Cash restructuring and other costs relate primarily to the ERP CRM project. The amount is lower than the reported expense and this is due to timing of payments. As Urs mentioned earlier, our continued strong cash generation and robust balance sheet enabled a 17% increase in the interim dividend to $0.07 per share fully franked. The record date is 21st of February, with dividend being paid 4th of March. Moving on to Slide 11. GWA remains in a strong financial position. Net debt as at 31st of December was $104 million, which is in line with the levels at 30th of June 2021. Our credit metrics remained solid with a gearing ratio of 21.2% and leverage of 1.3x, down 1.4x from 30th of June 2021. We have total facilities of $220 million, including multicurrency revolving facility of $180 million and a separate $40 million 1-year multicurrency revolving bilateral facility, which matures in October 2022. We will look to renegotiate this facility as part of our normal treasury management practices. I will now hand back to Urs.

Thanks, Calin. Slide #13 documents our revenue by our key end markets. Overall, revenue improved by 2% compared to the first half of last year. In Australia, our largest market, representing around 80% of our group revenue, the business generated good sales growth, up 6%. We have positive momentum in the commercial sector and renovation in the replacement segment, in both residential and commercial, and we continue to target key areas, including education and aged care. Commercial sales strengthened this first half [ as forward projects ] have drawn down from our order bank. Nevertheless, our commercial forward order bank remains strong and is up 11% compared to June of this year. At this time, I would like to address the topic of market share. Historically, the market share percentage was calculated by reference to external market data, adjust for internally developed assumptions. I'm sure you will agree that over the last 2 to 3 months, there has been significant volatilities as a result of the global business climate. This, in turn, led to substantial volatility in the market size estimates. While market share data or percentages are interesting, it is not the primary measure of success. And from my perspective, the real focus needs to be on growing our top line profitably in a manner that maximizes the return to our shareholders and investors. Accordingly, that will be our focus of the information provided to the market going forward. In New Zealand, we called out that HA in October '21, that due to government restrictions, our operations were effectively shut down for 5 weeks with basically no sales. That impacted revenue, which was down 15% for the half. We experienced a partial recovery in sales as some restrictions are lifted from late September '21. And pleasingly, the second quarter sales increased by 38% on the first quarter of financial year '22. In our International business, sales declined by 5%. That reflects the continued impact of COVID in this market and has a strong prior comparative period in the United Kingdom, which include the pre-Brexit purchases by some of our clients. Moving on to Slide 14. As all of you will have seen, freight issues continue to cause disruption for many companies and GWA is not immune from these challenges. However, we have been proactively managing our response to these issues, and that will continue for the second half. We have long-term shipping contracts in place. And during the year, we supplemented this by hiring 2 vessels in conjunction with all of importers to maintain our product availability. Our supplier base is rich and diversified, and we maintain exclusive long-term agreements with our supply partners, which includes commodity hedging. Domestically, we have introduced measures to address pallet shortages. And as Calin mentioned previously, we increased our level of safety stocks to ensure ongoing product availability of key SKUs for our customers. Moving to Slide 15. A key focus of our growth strategy remains product innovation. We launched new products and range extensions during the period in key areas. Our focus on hygiene and bathroom solutions continues to be important, especially in the current environment. We extended our GermGard antibacterial glazing to all new Toilet Seats and Toilet Suites. We launched new products, including taps, showers, accessories and sanitaryware to complement our offering. These include Caroma sink mixers and Live Well OPAL colors. The launch of sink mixers expand on the success of the URBANE II and the LIANO II bathroom launches from the prior year. Moving to Slide 16. We continue to leverage our centers of excellence to create water solutions for the business environment. This is a key differentiator for GWA and our brands. We have 2 centers located in Auckland and Sydney to leverage our local technical design and sourcing capability in taps, showers and sanitaryware. These centers are focused on designs of world's first flushing systems, has set the shower experiences and water-saving solutions. Our in-house testing laboratory is NATA-accredited and enables full product lifestyle -- life cycle testing, allowing us to support region-specific and customer collaboration product development. Moving to Slide 18 in regard to strategy. I would like now to make a few comments about the continued evolution of our growth strategy. Some of you will be familiar with our strategy on the page, which I first presented in August last year. I don't propose to go through the strategy in detail today. We are planning on hosting an investor market briefing in the later part of this year. Clearly, this would be dependent on any COVID-related restrictions at the time where we will detail our strategy and physically demonstrate our product design capability at our Preston Innovation Center. Today, let me provide you with a brief update on how we are settling the groundwork of our strategic development. We are focusing our core priority areas, particularly in how we can deliver great customer experiences. I'm pleased to report some good progress has been made in this area. We have undertaken extensive work to review customer journey analysis to identify different customer purchasing journeys and their pain points. This is an important building block of our market category, product and branding strategies. We have commenced a brand portfolio review to implement a clear brand value proposition to our customers, while undertaking category reviews to support our brands. We are also implementing digital tools to improve our customer experience, which I will provide an example of on the next slide. Last but not least, one of the key building blocks for us is the implementation of the new ERP CRM system, which is planned to go live in the second half. If you turn to Slide 19, one of our key products over the past few months has been enhancing our online platforms to offer virtual and augmented reality experiences. This will allow purchasers to visualize their new bathroom, kitchen or laundry. In December, we launched a Caroma visualizer, which enables a user to build and visualize their bathroom with a virtual walk-through experience using augmented reality. Using this tool, the users specified the bathroom dimensions, add floor and wall tiles and can then customize the new bathroom products, including basins, test showers and toiletries. Through this technology, we can help customers on their renovation journey in the comfort of their own home. This is consistent with our strategy to improve the customer experience with our brands. I encourage you to have a look at this new tool, which is on the Caroma website, when you have time. We will also be able to showcase this tool and other digital capabilities we are working on at the strategy briefing later in the year. Moving to Slide 20. There has been some change to the management team over the past few months. Therefore, I thought it would be useful to summarize the leadership team of GWA. While there have been some new appointments, our team has included executives who have been with the business for some time. That means we have a good balance of new talent and company experience. Our leadership team is charged with implementing the strategy, each focusing on specific strategic areas that I presented earlier on the strategy on the page. You will have an opportunity to meet with the leadership team over the coming months. Let me move to Slide 22. It summarizes the key point from today's presentation before concluding with the outlook. While the last 6 months are challenging, we proactively addressed this to deliver an improved financial performance. Our cash flow and balance sheet remains strong, leading to increased dividends and capacities for growth investments. We are generating good momentum into the second half and our key markets remain positive. Finally, we have made good progress in establishing the groundwork on the core priority areas as part of our ongoing strategy development to generate sustainable shareholder value creation going forward. Last, but not least, turning to Slide 23 and focus on an outlook for the remaining of financial year '22. We remain well positioned to capitalize on current market conditions. We expect continued momentum in our key markets, particularly in the renovation and replacement segment, both for residential and commercial. Commercial new business completions are expected to remain subdued. However, as confidence and activity increase in the commercial segment, we remain well placed to capitalize on this expected improvement. The multi-residential segment, whilst only representing 5% of Australian revenue, is expected to be flat in financial year '22 due to lower net migration resulting from international border closures and travel restrictions. We continue to closely monitor and adjust our business operations as required to respond to the market uncertainty and this disruption being experienced here and abroad. Price increases implemented during the year are expected to largely mitigate the impact of high cost increases. Our supply chain remains robust, and despite some intermittent supply delays, we are very pleased to continue to service our customers into financial year '22. For financial year '22, we currently expect group normalized EBIT in the second half will be higher than the first half, clearly subject to any potential further impact of the general economic environment. Our strategy is clear and consistent. We are focused on building a solid foundation, which includes our new ERP CRM system and our core priority areas to build customer engagement, finalize our brand value proposition and expand our digital footprint. Ladies and gentlemen, that concludes the presentation. Calin, Craig and I are happy to take any of your questions.

[Operator Instructions] Your first question comes from Keith Chau from MST Macquarie -- or Marquee, I'm sorry.

I just want to go back to your point around looking at market share. And I take your point around the end markets being volatile and it's hard to make an estimation, but internally, do you still track your market share performance? And are you happy at this stage that you're not ceding market share to your competitors? I know we've had this discussion in the past and market share has been maintained, but do you still take that view? That remains the case?

Look, first of all, taken market share, we clearly -- we have quite an extensive sales force out in the field. And clearly, we get quite a lot of [ intelligence ] setback to head office. And our assessment is while we've seen some challenges in the first half, they were mainly driven by external challenges, not where we have lost product sales to our competitors. So I would say all our market presence is the same it was 6 months ago.

Okay. So I guess you're happy with your customer relationships. They're still long term and ongoing, and you'll ride with them as the cycle continues to improve?

Yes, absolutely. And if you look at customer [ point 2 for 1 ], and I think I mentioned in August, we obviously have a strong relationship with some of the key merchants. We have joint business plans and we actively, on a monthly or quarterly basis, work together. And then we have a very, very strong relationship with the key commercial sector.

Okay, okay. And given the strengthening demand backdrop and supply shortages, was there any channel fill in the period in 1H '22? Or could you talk to the state of the channel more broadly and whether you expect there could be some potential for a channel fill going forward?

Look, I think it's not just us, but I think in general, our industry, we probably would have seen some of what we call back orders increasing in the first half. We saw disruptions we have -- sort of last year back on top of that. We haven't seen any fundamental changes or behavior [indiscernible] of our channel destocking or any other actions in that regard.

Okay. So I'll take away from that comment that the channel is reasonably healthy at the moment and levels are at reasonably normal levels.

Yes.

Okay. And then the backlog visibility that you have, given the demand strengthening, how far out is your backlog that you can see across your portfolio of customers? Are you able to give us a sense of whether you've got orders locked in for 3 months, 4 months, 5 months? Or is it much shorter than that?

I think that's the perfect question. So Craig Norwell, our corporate executive for sales, Craig, have a go.

Thanks, Urs. It's a good question. So I think similar to Urs' point on half our sales team are focused on merchant or our primary customer and the other half focused on plumbers and builders, it's probably similar in terms of the outlook. So we have -- with all of our merchants, we work on an annual sort of joint business planning process, which are built on initiatives, including a collaborative forecast. In terms of the certain volume and the outlook, both our commercial business and our residential builder business, our order bank, it's often referred to as our commercial business, really looks at committed orders that are at least out sort of the next 12 months, maybe a little bit later in that extended lead time. And then with our residential builders, we typically work on a 2-year contract basis. So for 40% of our business, we have an outlook that goes at least for the next 12 months in advance at any point in time.

And Calin, would you -- is that time frame longer than usual? Or is that the norm for the business?

So look, it's typically been sort of 9 to 12 months. Some of the delays in the construction, the fact that we're seeing a push out to sort of further than 12 months is not inconsistent with what's happening in the market.

Yes. One of the things you should clearly notice if you look at the detached housing, historically, we would have reported that houses being built somewhere between the time frame of 9 to 12 months. We consistently see that sort of blow out to about 12 to 15 months and it's just an issue of overall shortage of building materials.

Okay. And I'll just ask a quick final one, and it might sound a bit odd given where approvals data is going, but how early in the growth leg of the demand cycle do you think we are? Is this the start of a prolonged period of improvement for demand growth? Or do you expect the outlook to be more of a strong for longer, but maybe more moderate growth going forward?

It's a good question. And you probably mentioned 2 words there that we use, stronger for longer. So certainly, I don't think we're at the start and the numbers that underpin what Calin and Urs talked about is our commercial growth in the first half has been strong. Our commercial and residential R&R growth has been in line with our growth. And then residential largely, because of multi-res, is just behind. We expect residential to get slightly sort of better through the course of 2022, but until immigration changes, no dramatic change. We think residential and commercial renovation and replacement will continue to strengthen, but always be stronger for longer because of labor shortages, especially in our categories where everything is required to be installed by a plumber. Commercial certainly will continue to strengthen because so far growth has been through refurbishments. At the moment, we're not seeing a great shift in new build. So I'd say we're not at the start, but we expect stronger for longer through the course of 2022 and F '23.

Your next question comes from Peter Wilson from Credit Suisse.

Ask on operating cost, specifically the marketing spend, which you said has been delayed for the second half. Just interested in why it was delayed given you got NPD to advertise behind? And what's the quantum of the amount that you've deferred? So why was A&P delayed and what was the quantum, I think is the question.

So A&P, why it's delayed, first, [ in the plan is ], as we outlined in the strategic update is we really, at the moment, have a look at our brands, how well we position our brands going forward. And this work has sort of started in the beginning of this financial year. And we said before we do any major investments, we need to finish this piece of work, which will sort of be completed in the next month or so. If you look at the magnitude, you'd probably talk about $1 million to $2 million.

Okay. And [indiscernible] including next 1 or 2 months, any learnings you can share so far? For example, do you anticipate any kind of brand rationalization and what effect that might have on revenues and margins going forward?

Look, we've -- no, I don't want to make a comment in regard to brand rationalization. The other piece of work we are clearly doing is we are doing a complete category review where we're looking at our high sellers and the low sellers, and that's quite an active -- going on the cost, supply chain, marketing and sales where we look at some of the SKUs we're carrying, but they are very low volume, how can we substitute them so we can minimize the impact on any top in sales.

Okay. And then in terms of the market, if you think about that, the residential renovation market, is it the case of just continuing at a high level? Or do you actually expect somehow for the B2B growth in that market in the next 12 months?

Yes. So I think probably similar to the stronger for longer comment, we would -- and probably similar to Urs' point on half 2 being stronger than half 1, we would expect to see some improvement but not dramatic improvement. I think while labor shortages and the importance of trade in renovation and replacement and also supply shortage is not expected to change anytime soon, but it will be a better outlook, but not a dramatically different outlook.

Okay. And one more actually, if I can. Just on new products, is there anything you can share in terms of the contribution to sales of these new products launched recently? And also, I guess it's not a new product, but Smart Command has taken a lot of comments in past material. Any update on how that is progressing?

So I suppose on both fronts, so our momentum on NPD so far this year has been driven by 2 things. One, Urs commented on color, tapware and share ranges through Caroma. They performed particularly well and certainly complement Caroma's bathroom collection. So that continues to be a key priority for us through 2022 across all segments. On Caroma Smart Command , we've been very targeted on the right offer for the right customers. So we've learned that it's not a holistic solution that works forever. It's obviously a premium price solution. We've matched that to where the customer need is. It certainly has performed well through the first half of the year, and we're certainly confident on its ability to continue on that growth trajectory aligns to where it best suites customer need, which is far more focused now.

Your next question comes from Peter Steyn from Macquarie.

I just want to very quickly, perhaps an elongation of visibility and outlook commentary, but specifically, just look at that commercial new activity and what your expectation is beyond the second half. Do you have any sense of when you could realistically expect a recovery in that market from a demand perspective?

That's a tough one. If I look at -- there's probably a few points. One, if you look at our order book, it's growing, so that's a good sign. But I think as we discussed before, while overall, it gives us some visibility over the next 12 months, there's always a risk that some of the projects, while they're on the order book, may be delayed. And we're really sort of raising some of the positive economic trends to see that we see an upswing in commercial. So we do expect, probably sort of in '23, this to improve. But in regard within the timing, it's quite difficult at the moment.

Yes, no problem. I wasn't trying to pin you down too much on this one. I just wanted to get a bit of a perspective of what you thought FY '23 could look like in that space. And then just on the Europeans you're in, you expensed $5.4 million below the line this period, what would that look like in the second half? And would that be the completion of it as you go into rollout? And then a follow-up question to that is just could you give us a bit of a sense of how you think the ERP and CRM combination is going to make a meaningful difference in the business in '23 and beyond?

Okay. Let me answer your second part of the question, and then I hand over to Calin in regard to the financial side. So look, what we see in regard to the ERP and CRM is at the moment, we have a number of archaic systems. We have a number of systems that are not connected with each other. So the system will be short out of support. So one of the main benefits we will get out of this is we have integrated systems and we have one version of the tool. So in regard to just managing inventory level, dealing with customer inquiries, customer planning, it will be an integrated solution for us and I would expect just some intangible benefits to get out of that. It's always -- an implementation of ERP, especially we have to replace an old one, which is not serviced anymore, it's always somewhat difficult to establish a strong payback. In regard to the costs, Calin?

Yes. So look, in regards to the costs in the presentation on Slide 27, we set out key assumptions for FY '22. At this stage, we're still tracking $11 million for the full year given we did $5.4 million in the first half. It's roughly about the same in the second half, so another $5.5 million in the second half.

Perfect. And would that basically be the bottom line? Or how much would you expect implementation beyond that into '23 could be?

At this stage, we don't anticipate any additional costs flowing into '23 from that implementation.

Okay. Perfect. And last, just a very quick question, more around the competitive environment in relation to the price increases you've put through is, any sense of how competitors have responded or moved their own prices? Do you think that you're still very much as competitive as you were before? Or do you think you're getting more competitive by virtue of some of the supply chain work you're doing?

Look, I'll make some channel comments, and then I'll hand over to Craig just to talk to you about the competitive landscape. So one of the things we have introduced this year with the price increases, we haven't adopted sort of a blanket price increase. So we've done more a specific price increase where we looked at our products, how they compare to the market. Some products up substantially, some products we held. So it's a more sort of a scientific approach. In regards to the market and competitive landscape, Craig?

Yes. So I think Urs mentioned the supply challenges in terms of cost and availability. So everyone is plagued by those, and we've certainly seen a number of players in the early part of this fiscal year and even now through the first part of the calendar year take place. So I think it's quite consistently being applied. From a performance point of view, [ point on ] hasn't changed our competitiveness. We review our business performance in sort of quite distinct price corridors. And the first 6 weeks of this year, in terms of 2022, are in line with that stronger half 2 than half 1. So certainly, the way we're reviewing performance and momentum would indicate that hasn't in any way detracted from our competitiveness in the marketplace.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Meyerhans for closing remarks.

All right. Thank you very much. Once again, thank you for joining us for the update. I know that we will talk to many of you over the coming days, and we're looking forward to that. Stay safe and enjoy the reporting season.

That does conclude our conference for today. Thank you for participating. You may now disconnect.