GWA Group Limited (GWA) Earnings Call Transcript & Summary

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

Thank you very much, and good morning, everyone. Thank you for joining us on today's call for GWA's results for the year ended 30 of June 2022. My name is Urs Meyerhans, GWA's Managing Director, and I'm joined today by Calin Scott, our Group CFO; and Craig Norwell, Group Executive for Sales. We're pleased to present the results to you today and look forward to talking to many of you over the coming days and weeks. If we move to Slide 3. For today's presentation, I will first provide an overview of our group results and key themes. Calin will discuss the group financial results for the year, including P&L, balance sheet and cash flow. Craig will then provide an overview of our business performance, including our key end market performance. Following Craig, I will discuss how our strategy is evolving and provide a summary and outlook for financial year '23. We'll be happy to answer your questions at the conclusion of the presentation. And moving to Slide 5. Before I comment on the specifics, I would like to reflect on the last 12 months, where we have seen ongoing COVID disruptions and restrictions and the challenging economic environment impacting supply chain and costs. I'm proud of the achievement of the GWA team as we have improved our safety performance, delivered an improved EBIT performance from first half to second half. We build our management team, exited our loss-making China sales function and achieved considerable progress with several strategic initiatives. Let me now focus on the particulars. We're pleased to deliver an improved financial performance on last year with revenue up 3.2%, normalized EBIT up 9.3% and EBIT margins up by 100 basis points. The balance sheet remains solid and that has enabled the Board to declare a AUD 0.8 fully franked final dividend with the full year dividend of AUD 0.15 per share, up 20% on last year. Given the ongoing supply chain disruption, we increased inventory of core products, ensure ongoing product availability for our customers. This has resulted in a planned increase in working capital, particularly in the second half, which impacted the operating cash flow for the year. Following the strategic review of our business, we decided to close the China sales function. The costs associated with this exit and investing in the new ERP system also impacted cash flow for the year. These are one-offs. We continue to make good progress on our strategy implementation, which I will talk about later in the presentation. Our improved financial performance provides good momentum into financial year '23 with the outlook for our key segments remaining positive. In summary, I'm very pleased with our performance in financial year '22, which continues to position GWA very well for the future. And now moving to Slide 6. Safety remains our #1 focus I'm pleased to report that we have recorded an improvement in the Total Injury Frequency Rate during the year. We experienced an increase in this late last year that was mainly due to metal handling injuries. We implemented customized training strategies to address the root cause of the injury, and that has resulted in a decline in the rate to 1.9 for the year compared to 4.3 last year. We continue to enact our COVID management plans across the business, including the introduction of mental health and well-being programs. I will now hand over to Calin to go through the group financial results.

Thanks, Urs. So if we turn to Slide 8. This slide presents the results first on a normalized basis before significant items and then on a reported basis, which includes significant items. As mentioned earlier, we experienced several headwinds in FY'22. And despite these challenges, we've delivered an increase in both revenue and underlying EBIT for the year. Group revenue increased by 3% to AUD 419 million, primarily reflecting improved activity on Australia, which had revenue growth of 7% and an uplift in our U.K. business. This was, of course, partially offset by disappointed performance in our New Zealand business due to shutdowns in the first half and COVID continuing to impact our operations in the second half of staff shortages. Normalized group EBIT was up 9% to $75 million. That improvement in earnings came despite the significant increase in freight costs compared to the prior year. This demonstrates our ongoing operational discipline. Normalized EBIT margin was up 100 basis points to 17.9%, reflecting ongoing cost control and operating leverage that we have in the business. Normalized NPAT increased by 12% to AUD 47 million, including an effective tax rate of 30%. On a reported basis, including significant items of AUD 12.1 million after tax, NPAT for the year was AUD 35 million, which was consistent with the prior year. For FY '22, significant items were AUD 15.2 million pretax and include costs associated with the implementation of the ERP/CRM system and the closure of the China sales function. Turning to Slide 9. This slide contains the waterfall chart we typically present to set out the key drivers of earnings over the year. A reminder, this is presented on a normalized basis. That excludes the significant items I detailed earlier. The volume mix, pleasingly in Australia, we had positive sales mix for the year. However, that was offset by the performance in New Zealand and China, with the U.K. largely consistent with the prior year. In relation to price, you will report that we implemented a price increase of approximately 3% on the 1 of July, and that was followed by an additional price increase in Australia of around 4% from the 1 of December. These increases were primarily to offset increased costs. With regard to price, you can see here the significant impact of additional freight costs compared on the business during the year. We have largely successfully mitigated these costs through price increases and operational efficiency. In relation to foreign exchange, our average hedged AUD to USD exchange rate for FY'22 was AUD 0.72, which compares to AUD 0.69 for FY'21. We're currently hedged 54% at USD 0.73 for FY'23. Moving to China sales function. Following a detailed strategic review, we closed the sales function in China in June. China sales function was acquired by GWA as part of the Methven acquisition in 2019. Notwithstanding the challenges of COVID-19 in China, the sales function lacked sufficient scale to be profitable and as a result, we made a decision to close this function. This does not impact our China sourcing and supply operations. For net cost changes, we continue to manage our cost base diligence having generated a further supply chain savings in FY'22. And given our brand portfolio review work being undertaken, we delayed some advertising and promotional spend. The net effect of these moving parts was a 9% increase for normalized group EBIT for the year, solid results. Moving on to Slide 10. This slide shows the half-on-half improvement for FY '22 and demonstrates that we have positive momentum going into FY '23. We indicated that the interim results in February that we expected an improved performance in the second half, and our results are consistent with that guidance. The half-on-half improvement in revenue and EBIT has primarily been driven by strong performance in Australia. Moving on to Slide 11. GWA remains focused on providing strong returns to shareholders, and as you can see here, this third year in a row of increased full year dividend to shareholders, which, of course, remain fully franked. Looking at the FY '19 dividend, you may recall our reports results for that year included profit from the sale of the Door & Access Systems business, which contributed to the higher dividend payer for that period. Moving on to Slide 12. Turning now to cash flow from operations, given the ongoing supply chain disruption in global markets, we increased inventory of our core SKUs to ensure we continue to supply our customers. Together with the short-term ERP impact on trade receivables, this has resulted in an increase in working capital, particularly in the second half, which negatively impacted operating cash flow for the year. Capital expenditure and other investment activities is quite a bit lower than the prior year, as our main focus during the year was the implementation of the ERP system. Our capital expenditure program remains focused on growth initiatives to drive revenue-enhancing opportunities, and for FY '23, we expect CapEx spend of between AUD 9 million and AUD 11 million. Cash restructuring and other costs relate primarily to the ERP/CRM system and the closure of our China sales function. As we have mentioned earlier, our continued robust balance sheet has enabled 20% increase in the full year dividend to AUD 0.15 per share fully franked. Moving on to Slide 13. On this slide, we take a closer look at the key outcomes impacting cash flow for the year. As I just mentioned, we deliberately increased inventory in response to supply chain challenges to ensure we continue to [ split our corporate earnings ]. We also noting that inventory at the end of financial year '21 was lower than normal due to shipping delays in that year. We implemented the new ERP system in April '22 and notwithstanding the extensive pre-live system, we did, which also include, a delay of the launch from January to April, we experienced some short-term issues on implementation. These issues have now largely been resolved, however, the [indiscernible] some sales to be pushed back from April to May and June, resulting in a higher debtors balance at the end of the year. We expect to see significant improvement in cash flow from operations in FY'23. Moving on to Slide 14. GWA remains in a strong financial position. Net debt as of the end of 30 of June 2022 was AUD 138.2 million, which was up on the 30 of June 2021, reflecting the planned increase in inventory outlined in the cash flow analysis. Our credit metrics remain within target levels, and we have total facilities of AUD 220 million, including a multi-currency 3-year revolving facility of AUD 180 million, which matures in 2024 and a separate AUD 40 million 1-year multicurrency revolving bilateral facility, which matures in October 2022. In relation to rising interest rates, we have a number of interest rate swap transactions to manage our exposure to this risk. I will now hand over to Craig Norwell to discuss our performance by markets.

Thanks, Calin. Good morning. My name is Craig Norwell, Group Executive for Sales here at GWA. Today, I'll provide some further context on our revenue performance by market, by state and some commentary on our key segments. Turning to Slide 16. This slide documents our revenue by our key end markets. Overall, revenue improved by 3% on the prior year. Australia is our largest market, representing around 80% of our group revenue. And here, we continue to generate good sales growth, building on the momentum from the first half. Revenue was up 7% for the year. Commercial sales strengthened, primarily in renovation and replacement projects within the Care and [indiscernible] segment. We also had good traction with key developers on smart water solution and that created a number of wins in the new build office projects against the overall market trend. Our commercial forward order bank remained strong and increased 16% in value on the start of the year, which creates a strong platform for future growth, especially the sustained growth in the health and aged care, office and medium-density [indiscernible] segment. In New Zealand, we called out at the interim results that the COVID shutdowns in the first half effectively closed our operations for 5 weeks with negligible sales where we were only committed to [indiscernible] for emergencies. While we are trying to make that up in the second half, the ongoing impact of COVID with staff shortages impacted our ability to get products out of the warehouse and hence the delay in sales. Sales in international markets increased by 3.7%. That reflects good growth in our U.K. business, offset by a decline in China sales, which was impacted heavily by the dynamic [indiscernible] policy approach to COVID. As both Urs and Calin have mentioned, following a detailed strategic review, we closed the sales function in China in June. Of course, this does not impact our China sourcing operations. Turning to Slide 17. This slide gives you the picture of our Australian sales for the year by state, remembering that Australia accounted for 81% of group sales in FY '22. We had double-digit growth in New South Wales driven by very strong commercial growth and consistent growth across all segments and the majority of our customers throughout the year. In Victoria, we had a much stronger second half performance following the lockdowns we experienced in the first half. We shut quite a few stores and a number of sites. The lead indicators in our largest 2 states of New South Wales and VIC remain positive. Queensland is disappointing with sales only marginally ahead of the prior year. Renovation and replacement sales growth was solid. However, delays in commercial and residential detached construction created delays in sales for both. Western Australia remains consistent and continues to be a strong detached residential market with improved commercial growth despite border closures, while South Australia growth was strong throughout the year, although a small market. Turning to Slide 18. While freight issues continue to cause disruption, we've been proactively managing our response to these issues. We have long-term shipping contracts. And during the year, we supplemented this in the first half by chartering 2 vessels in conjunction with other importers to maintain our product availability. Our supplier base is regionally diversified, and we maintain exclusive long-term agreements with our supplier partners, which include commodity hedging. Domestically, we have introduced measures to address pallet shortages that includes alternative pallet and domestic freight providers to minimize supply disruption. We continue to work with both our customers and supplier partners on demand planning to ensure minimum disruption. As Calin mentioned, we proactively increased inventory of core SKUs to ensure ongoing product availability for our merchant partners. Our national distribution footprint enables us to continue to support our customers, and we continue to work closely with them to minimize disruption and out of stocks. I'll now hand back to Urs.

Thanks, Craig. If you move to Slide 20, let me provide you with a progress update of our growth strategy. Some of you will recognize our strategy on the page, which I first presented in August last year and then beginning of February this year. We are focused on core priority areas, particularly in how we can meet the plumbers, continue our strong NPD and the innovation pipeline and deliver great customer experiences. I'm pleased to report good progress in these areas. Plumbers are the single biggest opportunity for GWA to grow volume and share in Australia/New Zealand. In our markets, any of our bathroom products have to be installed by a licensed plumber. We are implementing measures to connect, deepen and leverage our plumbing industry relationship, with focus on delivering trusted and valued, services and solutions to plumbers. During the financial year '22, we extended our reach with plumbers across Australia, New Zealand from 4,500 to 10,000. The key focus of our growth strategy remains on product innovation. We have completed our 5-year NPD roadmap to support our go-to-market product strategy. We have also completed a product category review and as a result, we have identified a range of SKUs, which will be deleted over the next 1 to 2 years. Our focus is to deliver an integrated customer experience with structured brand and category portfolios. To support this objective, we redefined our brand strategy with a clear brand and customer value proposition, which I will discuss shortly. And finally, we continued our investment in digital opportunities to deliver superior customer experience, which I will also address shortly. Moving to Slide 21. We have a good plan of new talent and company experience in the management team, which is responsible for delivering the strategy. Each strategic pillar is owned by an executive, which drives greater accountability and progress. We'll have the opportunity to meet with the leadership team over the coming months, including at an Investor Day, which we are planning the whole year in September, October, obviously covers everything. If you move to Slide 22, as I just mentioned, we redefined our brand strategy with a clear brand and customer value proposition. For the last 12 months, we completed 3 distinct phases of research, to ensure we will play the future fit in competitively compelling brand and customer value proposition. Phase 1 covered initial interest customers across ANZ. In Phase 2, we collected 1,800 qualified responses to validate our funding across ANZ. And in Phase 3, our team has new a number of value workshops and numerous in-depth integrity professionals. These activities confirmed our brand portfolio focus on Caroma, which is the market most well-known brand in the ANZ market. And Methven, which is renowned for its innovation and expertise in showering technology, these are supported by other brands in key customer and product categories. If you move to Slide 23. We continue our investment in digital opportunities to deliver superior customer experience. 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 the visualizer, the user specifies their bathroom dimensions, adds floor and wall tiles and can then customize the new bathroom with products, including basins, taps, showers, toilet suites. In May 2022, we launched the virtual tour of our flagship store in Alexandria, New South Wales, this will enable customers anywhere to experience our product offerings from the comfort of their own home, with consistent with our strategy to improve the customer experience with our brands to build engagement with customers on their renovation and purchase journey. If you have not done so yet, we encourage you to experience it for yourself at caroma.com.au. Moving to Slide 24. As we mentioned earlier, one of the key initiatives we completed during the year is the implementation of the new ERP/CRM across Australia and New Zealand. This will place a number of outdated legacy systems across the 2 countries with single integrated system. The main benefit of the new platform include the moving complexity from the business to import a design and enhanced user start for greater insight across customer experience and productivity gains. As Calin mentioned, we had some short-term disruption on implementation, which caused some [ oscillatory ] not unexpected with an implementation of this scale. They are now being largely rectified, and we expect to be fully resolved in first half. Moving on to Slide 26. Let me summarize the key points from today's presentation before concluding this outlook. While we still had some market challenges in financial year '22, we proactively address this issue to deliver an improved financial performance, consistent with our guidance. Our balance sheet remains strong, leading to an increased dividend for shareholders and capacity for growth investments. We deliberately built inventory to ensure product supply amid significant supply chain and freight challenges. While that impacted cash flow for '22, we expect to see a significant increase in cash flow from operations in financial year '23. We are generating good momentum into financial year '23 and our key markets remain positive. Finally, we made good progress with several of our strategic initiatives as part of our strategy to generate sustainable shareholder value creation. Moving to Slide 27. Turning to the outlook for financial year '23. We remain well positioned to capitalize on positive sentiment across key construction segments. In the Commercial segment, there's ongoing demand for care products and signs of recovery in the new build category, while there is continued momentum in the residential detached category. Approaching the residential and commercial renovation and replacement segments remain at historically elevated levels. We maintained strong operational leverage to the market, underpinned by ongoing operational discipline, including and managing higher input costs through proactive pricing and managing inventory levels to meet customer demand. And we expect cash flow to return to normalized levels in financial year '23. Our strategy is clear and competent. Our management team is committed and focused on our core biology to win that number and leverage our brand proposition in digital tools to successfully execute our full year strategy. Ladies and gentlemen, that concludes the presentation. Calin, Craig and I are happy to take your questions.

[Operator Instructions] Your first question comes from [indiscernible] from Macquarie Corp.

Just a quick question on the 20% reduction in SKUs that you listed, if you could just give a little bit more color on that and just how that fits into your strategies?

Yes. Thank you. Well, first of all, I think we mentioned about 6 months ago that we want to simplify our business. We have a lot of skills we have thought to make that 6,500 SKUs with most [indiscernible] you see interesting sales, 20% of the SKUs developed the highest value in sales. And then you have a long tail. And when we did an order value, we saw that we had a lot of older SKUs, which we have replaced with new product, we see a logistics to new products and therefore, are able to simplify our distribution.

And just quickly on CapEx as well. You listed AUD 9 million to AUD 11 million for financial year '23, quite a bit of a step-up there historically. So if you could maybe give a bit more color on that as well, please?

Yes. Probably, there is 2 points. First of all, as we mentioned this financial year, we're really focused on the implementation of ERP. So this sort of kept the other inspection aside from the business. What we have done in regards to the strategy, what we identified, particularly in the wins of plumber and customer experience, we believe it is essential that we will have flagship stores in each of our states. We have a flagship for the New South Wales, we have smaller store in South Australia. What we like is able to have our own showroom in each of the states, which will help us win the customer experience side, but we'll also have a trained plumbers into our own [Technical Difficulty].

Your next question comes from Matt Abraham from Credit Suisse.

And I have just a query on the strategic review. I think, we have a follow-up to that last question. So you did mention the closure of the China sales facility. I was just wondering if we can expect any other major wholesale strategic announcements following this review and how you anticipate that to impact growth going forward?

Thanks, Matt. So first of all, the question we have, as we mentioned in the presentation, we have completed our strategic review. We don't expect any changes to the footprint of the business as it is today. In regards to the initiatives, as I mentioned in the presentation, our single biggest opportunity for us is to get closer to the plumber. The plumber industry in Australia, New Zealand are key to our product, because as I said, you need a licensed plumbers for bathrooms products. And we have a unique position to really become the technical partner of the plumber industry in across Australia and New Zealand that ultimately will drive volume growth in our key markets.

Okay. So really, U.K. announcements and takeaways have been announced and you have reached like a sufficient point in that process to draw the key conclusions from the strategic review itself. Is that a fair summary?

Yes, it is fair summary.

Okay, great. And then, again, I might just sort of follow-up on that CapEx query. So just going back to that sort of the step-up in FY'23 in CapEx, and you also have that A&P component of your guidance that sort of interest as well, I guess if you just take a step back and just understand what you anticipate those 2 components of the outlook to remain for FY '23 growth at a revenue level potentially? Is it possible to put some color behind what you expect that step-up to name for revenue growth?

Look, we're not in the core strategic percentage. If you look at the growth opportunities, twofolds, one on the plumbers that we moved from 4,500 to 10,000 plumbers, as we mentioned when we presented the February that the total of about 26,000 plumbers in Australia and New Zealand, our target is to get to 25,000 plus. That doesn't always directly translate into revenue because there is a delay, as you start working with the plumbers as they change and understand some of the value proposition. So we don't see an immediate -- but you will see it in the medium term. In regard to A&P, again, A&P is investing linked to our overall brands going forward. I think historically the value be confused with our brand. But with the brand work we have done is, our focus will be very much on Caroma investments that will be more targeted to enhance our pull strategy.

Okay. So maybe another way of putting it is, do you anticipate this to deliver accelerated growth from the rate of growth being observed now? Or would it be consistent?

No, we do expect that we will see volume growth going forward.

Accelerated growth. Okay.

[Operator Instructions] Your next question comes from Keith Chau from MST Marquee.

A few questions from me. Just the first one around the building of inventory, so I understand it's related to ensuring the supply chains is just fine. But can you give us a sense of whether part of the inventory build speaks to the confidence on your outlook for volumes? Or is it simply a risk mitigation exercise?

Thanks, Keith. Probably 2, absolutely, we expect a goal. So therefore, we have adjusted some of the inventory, but it's probably good for me to hand over to Calin, just to provide a little bit insight into the inventory build, because I think they show me lot of the slides, the AUD 45 million -- billion. So it's [Technical Difficulty]

So just to give you a bit of a flavor on that AUD 45 million, probably first thing to note is inventory at the end of FY '21 was probably undercooked a bit, because of supply chain challenges. So that AUD 7 million of inventory that we probably ended short in FY '21. That leaves us about AUD 38.5 million. And if I look at that, I can break it up into 2 buckets. One relates to things that probably sits a little bit outside of our control, you would have heard, obviously, freight has increased. And great performance part of our inventory costs. So there was -- at the end of FY'22, about AUD 7 million extra freight sitting in the inventory value, there's also goods and transits due to increased lease times. We've had to increase our goods and transits. That was about AUD 10 million and ended about AUD 2.5 million relating to product cost inflation. So that bucket is really things that sit out sort of our control. And then if we look at the balance, that's an increase in SKUs, which is, to your point, both a safety mechanism as well as positioning us for future growth.

That's very helpful. So I guess one of the things that's kind of nagging me a little bit is a couple of years ago, when demand rolled off gives massive destocking of the channel. Can you give us a sense of how you're managing that risk this time around? I don't know if the new CRM system actually helps you understand is it helpful or otherwise the channel is. And yes, just trying to understand how you're going to manage that risk going forward if demand were to drop off, not to say that it was given your outlook comments, but just trying to understand the risk around that.

Yes. Thanks, Keith. Let me take that one. So look, once the ERP is fully functioned we will get initial insight. There's probably still a little bit way to go. But in regards to the inventories, we spent a lot of time over the last probably [indiscernible] demands to really understand the inventory, put it into different categories like what we call category A, B and C. This category A are products, which we see a fast turnarounds and strong demands, and our inventory build was really focusing on the category A rather than just a blended increase across the inventories.

Okay. I understand. And then maybe just an extension of that question. Can you give us a sense of where you think channel inventory is sitting across all of the key geographies you operate on?