GWA Group Limited (GWA) Earnings Call Transcript & Summary

Thank you. Good morning, everyone. Thank you for joining us on the webcast or conference call for GWA's results for the half year ended 31st of December '22. My name is Urs Meyerhans, GWA's Managing Director, and I'm pleased to present the results today. Joining me on the call this morning are Calin Scott, our Group CFO; and Craig Norwell, our Group Executive for Sales. We look forward to talk further with many of you over the coming days and weeks. Let me go through the agenda. For today's presentation, I will first provide an overview of our group results and key themes. That will include a summary of our continued focus on safety. 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 markets. I will conclude today's presentation with a discussion on how our safety is evolving and provide a summary and outlook for the remainder of financial year '23. We will be happy to answer your questions at the conclusion of the presentation. Let me move to Slide #5. Group revenue was up 3% despite the mixed performance from our end markets, particularly at the end of Q2. On a reported basis, EBIT was up 13% and net profit was up 15%. That includes significant items in the prior corresponding period, which we did not incur for the first half of year '23. Therefore, on a normalized basis, EBIT was down 4% year-on-year. You will recall our comments at AGM where group revenue had increased by 8% for the first quarter of financial year '23 compared to the prior corresponding quarter. From October to December, we saw a shift in market sentiment, and this was most pronounced in the residential renovation and replacement segment, where we saw a decline in sales activity through our merchant partners. This was magnified by destocking by 1 specific merchant. Sales to this customer were down 21% for the second quarter and down 12% for the half. While our other markets held up reasonably well, this had a negative impact on Q2 overall. Regarding costs, in addition to the anticipated increase in ocean freight, we incurred higher customer freight costs. This was due to a few levy surcharges and warehouse costs in the half, which we are addressing with announced price increases and through our continued disciplined cost control. Despite the contraction in the market, the balance sheet remains solid and that enabled the Board to declare a $0.06 fully franked interim dividend. Cash flow has improved and cash generation remained strong at over 100% for the half. For the second half, we expect that detached housing completions and commercial new build and renovation activity will remain solid. Our commercial forward order book remains strong and is up 6.5% since June '22. However, given the rising interest rates and potential impact on consumer sentiment, we expect residential innovation activity to remain subdued. In the meantime, our disciplined approach in executing our strategy has strengthened our business fundamentals, and we will provide more details later in the presentation. Slide 6. Safety remains our #1 focus. We incurred 2 minor injuries in our New Zealand business, which were not reported by employees on a timely basis. These events have presented an opportunity to improve our injury management practices and employee reporting obligations. As a result, we had an increase in the total injury frequency rate. We are continuing to enhance our safety performance measurement with a shift in emphasis in addition to TRIFR towards measuring leading indicators of safety risk, such as workers' insights. We have seen a measurable improvement in this area. During the period, we updated our risk profile assessment to include psychosocial risk. We are also evolving our safety approach to respond to changing ways of working, including hybrid work arrangements. I will now hand over to Calin to go through the group financial results in more details.

Moving on to Slide 8. Thanks, Urs. This slide presents the results presented on a reported basis, including significant items, and then on a normalized basis, which excludes significant items. As Urs just mentioned, we did not have any significant items in the first half of financial year '23. Significant items in the first half of financial year '22 with $3.8 million of tax related to costs associated with the implementation of our ERP and CRM projects. On a reported basis, EBIT for the first half was up 13% to $34.1 million and NPAT was up 15% to $21.3 million. Group revenue increased by 3% to $207.1 million. This was due to increased sales in Australia, while sales in New Zealand increased 5% on a constant currency basis. However, on translation, sales in New Zealand were lower than the prior corresponding half. Normalized group EBIT declined by 4% to $34.1 million, and I will walk through the key movements in group EBIT on the next slide. Normalized EBIT margin was down 120 basis points to 16.5%. Turning on to Slide 9. This slide contains the water fall chart we typically present to set out the key drivers of earnings over the period. This is presented on a normalized basis. In relation to volume and mix, the decline now reflects the net sales contraction experienced in the late part of the second quarter, partially offset by mix improvement in the Australian business. It also reflects the impact of destocking from 1 merchant during the half and an overall shift from our merchant network and higher inventory cash flow. With regards to price, you will recall that in Australia and New Zealand, we implemented a price increase of 5% in July and 5% in the U.K. from November 2022. These primarily related to cost increases. Turning on to freight. You can see here the significant impact of additional freight and warehouse cost hedge during the period. There are 2 components to freight. Inbound freight, where we have seen a recent decline in sea freight charges and improvement in container availability, that takes time to flow through to the income statement, but inbound freight charges are capitalized as part of inventory. We expect to see the benefit of lower inbound freight charges in H2. With regards to outbound freight, we also incurred freight charges primarily related to higher diesel costs, which impacted our outbound freight costs and deliveries to customers. On warehouse costs, the preparation of an extended production delay due to Chinese New Year this year, and many of our suppliers introduced any longer lead, we continue to hold higher levels of inventory and had to hold stock upside. We use an external provider as a temporary solution. For foreign exchange, our average hedge Australian dollar-U.S. dollar exchange rate for the half was USD 0.72 compared to USD 0.70 for the prior half. We are currently hedged 80% at USD 0.70 for the remainder of FY '23. With respect to China operations, this represents savings on the closure of our China sales function at the end of last year. Finally, net cost changes. Given the current environment, we continue to manage our cost base diligently. We generate some SG&A savings, which were partially offset by higher advertising and commercial spend. Turning to Slide 10. Operating cash flow was $44.6 million compared to $43.6 million for the prior half. The increase in cash flow was primarily due to the favorable impact of the movement in debtors, partially offset by a small increase in inventory. Cash restructuring, other costs of $2.3 million relate primarily to the ERP/CRM system and costs related to the closure of our China sales operations. Capital expenditure for the half was $1.4 million compared to $1.6 million in the prior period. Total capital expenditure for FY '23 is expected to be between 3 and $3.5 million. As Urs mentioned earlier, a continued robust balance sheet enabled $0.06 interim dividend, fully franked. Moving on to Slide 11. Just wanted to make a further comment on inventory levels. We adopted a proactive inventory management plan in response to ongoing COVID challenges in our supply chain network and, as was mentioned, the preparation of longer than usual Chinese New Year shutdown babies across agent. The increase in inventory value reflects rising freight product costs as well as a shift in inventory composition from taps and showers into sanitary in response to market demand. We have also been actively reducing stock levels of category B and C stock while increasing stock on hand of A Class SKUs, which are higher demand and faster moving products. We are substantially improving the quality of stock in hand. We expect to see stock on hand levels reduced in H2. Moving now to Slide 12. GWA remains focused on providing strong returns to shareholders and the dividend policy is to pay out 65% to 85% of NPAT of dividends. As you can see here, the interim dividend is similar to the prior period. The interim dividend of $0.06 remain fully franked. Turning to Slide 13. GWA continues in a strong financial position. Net debt as of 31st of December was $136.6 million, which was down 1% from 30th of June 2022. Gearing ratio of 26.1% compared to 26.2% at the 30th of June, and leverage remains consistent at 1.7x. We have total facilities of $220 million, including a multicurrency revolver facility of $180 million and a separate $40 million 1-year multicurrency revolving bilateral facility. This facility expires in October, and we expect to extend this prior to the same. I will now hand to Craig Norwell to discuss our performance by markets.

Thanks, Calin, and good morning, everyone. Today, we'll provide some further context to our revenue performance by market, by state and some commentary on our key segments. We turn to Slide 15. This slide documents our revenue from our key end markets. Overall, revenue improved by 3% on the prior corresponding half. In Australia, our largest market, representing 81% of group revenue, we had strong sales growth in the first quarter with sales up 7% on the same quarter last year. As Urs said, we saw a decline in residential renovation volumes over the second quarter, particularly in December with sales declining 3.9% in Q2 when compared to Q1, and this resulted in H1 sales being up 3% on H1 last year. Q2 sales were also exacerbated by destocking from one of our major customers, which I'll talk about more shortly. In New Zealand, sales increased by 4.8% on a constant currency basis for the first half. And like Australia, we saw a decline in demand over the second quarter. On translation to Australian dollars, sales declined 0.4% on a reported basis. U.K. sales have consistently improved over the course of the first half, increasing by 5% on a constant currency basis and up 2.5% on a reported basis in Australian dollars. Turning to Slide 16. This slide gives you the picture of our Australian sales for the first half by state, remembering that Australia accounted for 81% of group sales in H1. In New South Wales, we had strong double-digit growth in the first quarter from strong commercial and residential renovation demand. However, in line with Urs' comments, we saw demand moderating in the second quarter for residential renovation and delays for key commercial projects into Q3. In Victoria, we had a stronger period with constant growth throughout the period, lapping the COVID lockdowns experienced in the first half last year where a number of merchant stores and construction sites were shut. Queensland also delivered better results over this period following disappointing sales last year, in particular, strong sales in the residential detached newbuild and commercial segments. Sales in both South Australia and Western Australia improved throughout H1 in South Australia sales finishing the first half steady and Western Australia in solid growth because of commercial and residential renovation with some softness in residential detached new build. We turn to Slide 17. While the last slide demonstrated sales by market, this slide illustrates sales to our main customers in Australia. We had good sales momentum with 3 of our top 4 customers during the half. That reflects our joint business planning initiatives and some early wins as part of our 'Win the Plumber' initiatives. Despite the reduced volumes experienced, we continue to grow revenue in 3 of our largest 4 customers in the second quarter. Unfortunately, you can see the impact of 1 customer significantly destocking in the second quarter, where our sales were down 21%. Turning to Slide 18. We continue to productively manage our supply chain to address disruption and ensure supply to customers. Our supplier base is reasonably diversified, and we maintain exclusive long-term agreements with our supplier partners, which includes commodity hedging. As Calin mentioned, we're seeing international sea freight costs reduced with container availability improving, and we're addressing domestic freight cost issues and increases with pricing and looking at more efficient alternative domestic freight arrangements. In New Zealand, we increased inventory levels to minimize impact at the peak of the freight seasonal period. I'll now hand you back to Urs.

Thanks, Craig. Moving to Slide 20. We launched new products during the period, including new consumer smart bathrooms and kitchen collections such as smart toilets, sensor sink and bathroom mixers and soap dispensers to capitalize on the growing demand for touchless products. Aged Care remains a core growth area for us, and we continue to evolve our popular independent living range, Livewell. This included the launch of grab-rail showers, support accessories, smart retrofit bidet as well as additional colors. During the period, we had a soft launch of our new Youth Care collection to cater for the education sector, an important step for early life brand recognition. Moving to Slide 21. Let me make a few comments about the progress of our strategy. This is our strategy on a page. Some of you will recall the investor briefing we held last September, where we repeated our strategy for growth. At that event, we outlined our core priority areas, particularly in how we can win with the plumbers, continue our strong NPD and innovation pipeline and deliver great customer experience. We continue to make solid progress in these areas, which will be summarized on the next slide. So on Slide 23, let me run through some strategic highlights, win the plumber. As you will recall, summers are the single biggest opportunity for GWA to grow volume and share in Australia and New Zealand. During the half, we extended our sale in New Zealand plumbers to 11,000. We also launched a successful trial of a new tactical phone support line, which received a 90% of overall rating for plumbers, and we will roll out this new service across Australia in the second half of financial '23. Craig reported in his section that we see early signs of momentum for this growth pillar. Our innovation through design and partnership, a key focus of our growth strategy remains on new product innovation. We have an established 5-year NPD roadmap to support our go-to-market product strategy. As I just mentioned on the previous slide, we continued the roll out of new products in the half, including new customer smart bathroom and kitchen collection and our Livewell range. We are providing workshops for our key clients, architects specified and occupational therapists in which we use [ age suite ]. This enables participants to witness and experience firsthand the aging process and how our products can be used. In terms of our supporting functions, we continue to make good progress. As part of our product category review, we have deleted 20% of our SKUs with a continued focus on core products. The phasing out of these SKUs will be managed over a period of time. We continue our investment in digital opportunities to deliver a superior customer experience, which includes the refresh of the Caroma website to support our digital innovations such as augmented reality, the Caroma visualizer tools. We implemented the new ERP/CRM system in April last year. It has now been embedded with a focus on extracting efficiencies using a single indicated system and supporting improved customer service. On Slide 25, let me summarize the key points from today's presentation before concluding with the outlook. Group revenue up 3% for the half despite the mixed performance from our end markets. On a reported basis, EBIT was up 13%. However, on a normalized basis, EBIT was down 4%. Despite the contraction in the market, the balance sheet remains solid, and that enables the Board to pay $0.06 fully franked interim dividend. Cash flow has improved and cash generation remained strong at over 100% for the half. While market conditions are expected to be mixed and uncertain for the rest of the year, we have a committed management team, a clear strategy and continue to improve the fundamentals of the business. We are well positioned to proactively respond to the changing market conditions. And finally, on Slide 26, outlook. We expect continued demand in the commercial newbuild and renovation segment, and our commercial forward order book remains strong and is up 6.5% since June '22. We also expect continued momentum in residential detached building to continue in the second half. Conversely, the residential renovation and replacement segment is expected to remain subdued due to the inflationary pressure impacting consumer sentiment and behavior. In response, we continue to closely monitor and adjust our business operations as required to respond to these market conditions. We will manage input cost inflation for proactive pricing cases when required and that includes pricing cases in Australia from 1st of April and New Zealand from 1st of March. We will continue to manage inventory to meet demand and stocks on hand are predominantly A Class stocks, which are higher demand and faster-moving products. Our strategy remains clear and consistent. We will prioritize our actions to focus on profitable volume growth. accelerate initiatives under customer experience for ease of doing business with any end, have a clear and proactive approach to cost management. Ladies and gentlemen, that concludes the presentation. Calin, Craig and I are happy to take your questions.

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

Thanks for your time and taking my questions today. First, queries, just in reference to the 2Q trend which you called out hopefully. I'm just wondering how we should think about the second half relative to that second quarter on a revenue against the PcP basis? You've called out expectations for R&R to be subdued. Should we think of that second half trend as a continuation of the second quarter? Or will that be a worse first PcP revenue outcome in that second half relative to the second quarter?

Thanks, Matthew. It's probably half question to answer. So probably 2 things. As Craig mentioned, the second quarter was clearly impacted by destocking by one of our major merchants. As you see here mid of February, we haven't heard of any other major destocking. So we don't expect such drop. But having said that, especially in the residential renovation market, the outlook is very uncertain because it really depends what the reserve trends are doing with interest rates.

So I might ask one on some of your strategic initiatives that were discussed at the September Investor Day. So you had 10,000 plumbers that you engaged at June 2022. That's been increased by 1,000 plumbers. I know that there is that target to engage 25,000 plumbers by the end of this financial year. That implies quite a significant step up in the next 6 months in the number of plumbers you will need to engage to reach that target. So are you sticking by that 25,000 target for the number of plumbers engaged?

There's probably a couple of things, good questions. So thank you. One is 25,000 not by the end of this fiscal year. So that was part of our 2025 strategy that we spoke to you about back in September. At the end of this year, we -- our goal is to be connecting to 20,000. However, to your point, the focus has been the quality of engagement. So maybe the best comparison is to this time last year, where we were connecting with 5,000 largely our traditional strength in commercial and residential new build. So that was about 175 businesses then. We've now successfully expanded that to 11,000, which is taking us into a new plumber customer base in maintenance. And now that's made up of 8x as many plumbing businesses up 1,500.

Okay. That's helpful. And then just on the vitality metrics, the impact of the new products that you have introduced into the SKU range. Could you potentially just give a bit of a guide as to what contribution of those new products that you've outlined in this presentation have made to revenue, please?

Yes. So if I look at the revenue impact for this first half, it's all been patched up in under $40 million. If you look at the Vitality Index for the first half, it was about sitting at 17.5% compared to 14% a year ago.

Okay. And just one last one, if I may. The spare part servicing business that was discussed at the Investor Day, if you're able to just provide an update on the progress of the launch and rollout of that business and how that's progressing?

Yes. So really, if you remember, there were 3 strategic pillars that we sort of bought to life across plumber, partnering through design and innovation and then thirdly, through aftermarket offers. Aftermarket offers, the focus has been on assessing the range price point and the route to market for plumbers. So we've come a long way in that. And by the end of this fiscal year, we will have actually implemented that into our targeted plumber customer base. So it's on track.

Your next question comes from [ Gus Weinberg ] from Macquarie.

So you just mentioned during the presentation, your forward order book is quite strong. I was just wondering what the length of this visibility is maybe in terms of weeks or months and how this differs towards your different end markets?

Good question. I can probably take that. So fair to say there's 2 things going on our order book at the moment. One is typically, we have been talking a couple of years ago, most of those projects would have been in the 9 to 12 months out from now to when they would have been completely drawn down. Some of those projects now will be in that order book for longer given there's some delays that we've probably talked about in the last 2 to 3 of these updates. However, a lot of what's driving the resurgence of commercial and our confidence in commercial is refurbishment, so smaller jobs, in particular, when you look at things like health care, age, care and education. And we're starting to see, I suppose, a very clear sign of growth through retail as well. So in one way, some of those projects will spend a little bit longer. But in a lot of other ways, they're coming in and out of their order bank with far more velocity than they would have traditionally.

Okay. So that's sort of still at that 9- to 12-month market in terms of order visibility, if I get that right?

Hard to predict that we've got more there that will spend 3 to 6 months in the now because they're more smaller refurbishments. And we got some major new build that may have been typically 9 to 12 and probably 12 to 18 months now. But certainly, refurbishment far outweighs newbuilding in where our growth is coming from in that order book.

Okay. Perfect. And maybe just a second one, just on price. You mentioned an increase in Australia as of the 1st of April. How high was that increase maybe also for New Zealand if you've got that?

Yes. So I mentioned the price increase in Australia 1st of April, that's 4% and in New Yearend from 1st of March at 5%. And I probably should say this is not a blanket price increase across all our products. Clearly, when we look at our product pricing and external pricing, we take the account into the competitive landscape. So some of the products probably would have come down some states and some have gone up a bit more than the both, sorry, the percentage I quoted. So overall, 4% and 5%, we should realize.

Okay. And maybe just a last one on recovery of cost. How do you -- do you expect those price increases to recover costs into the second half? Just noting that margins came down versus PcP this half?

Yes. So we hold the pricing cases, we are required to give 3 months' notice. So these price increases have been in the market now for some time. Overall, they have been accepted, there's been a little bit push back, but we are quite confident to get that. And then in regards to obviously, costs, as was mentioned in the presentation, we do see very pleasing that ocean freight and container availability, they are improving. And we see lower ocean freights, but as Calin mentioned, it will take a while for this to come through inventory. So we will see -- we see some of the benefits will flow through into the P&L probably begin in the Q4.

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

A few questions from my end. First one, just around the state of the channel or I think earlier you mentioned that you weren't expecting any destocking, but quite clearly, there's a risk of that going forward. For the rest of your top 4 customers outside of the one that destocked, can you give us a sense of whether their revenue expense was similar to customer B over the last couple of years? And maybe as a follow-on, what gives you confidence outside of revenue growth comparisons that there won't be destocking for the other 3 customers.

And I can probably take that, Keith, I think. So we monitor stock on hand across the majority of those top customers on a monthly basis as part of our performance with them and in a lot of cases, we get sufficient sales information to be able to look at the cover of that stock. To your point, over the last couple of years, I mean, as you probably recall, the shape of the growth across the top merchants varies quite markedly over time depending on their state and segment mix. I don't think there's anything in the last couple of years' performance for all of those key merchants that would indicate that there's a risk on excess stock or a risk on, I suppose, some correction through the quarter of 2023. But obviously, we're living in uncertain times. So how true that is over the course of this year, I don't know. But we've got real confidence in commercial. I mentioned on the order bank question about the sheer breadth of that coming across multiple segments and refurbishment based. We're confident we'll be winning share in those broader commercial segments. So there's good sales out success there. We see ongoing -- while growth like as, I suppose, easy to get in residential new build. The absolute sort of sales of that backlog with labor shortages remains high in terms of confidence. It's really that renovation space, which is unclear what it does until interest rates are seen as being firm for the medium term. So -- but from what I see today, I don't see any obvious risk for other merchants outside the one we've referenced today.

And Craig, maybe I'll just follow up on that quickly. I mean in prior results briefing, it was talked about destocking being less of a risk going forward. So -- just to be explicit, that customer B, when you look at their sales profiles and product in versus product out based on their monthly progression, was it a clear standout from your reconciliations that their inventory levels were significantly higher or were above normal compared to the other 3 customers? I just want to be explicit on that one.

Yes, they've traditionally carried a higher stock level with a slower stock turn than other customers in our key merchants.

Okay. That's great. And then the second question just relates to that 5% to 10% EPS growth target for FY '23 to '25. That was notably answered in today's release, but maybe it stands to reason. Urs, can you give us a comment on the, I guess, the -- not reiterating that in today's results?

Well, first of all, we obviously talked about that in September. If you read the annual report, the 5% to 10% EPS growth is direct link to executive incentives. And I would say this is a long-term 3-year measure. And clearly, the executives are very much incentivized to get that pay.

So maybe putting it another way, you feel like FY '23 is an okay base to set those metrics on?

Sorry, say again.

So I think that target was a FY '23 to FY '25 EPS growth target of 5% to 10%. That was a metric that was disclosed at the investor briefing last year. So is FY '23 to '25 the right to frame? Or do you think that's pushed out?

No, no. Well, as I said, one, the long-term incentives are issued to the executives, they're not going to be pushed out by the Board. So we do whatever is in our power to achieve that.

Thank you. 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 for your attendance and your interest. In some ways you said, while the margins remain somewhat uncertain, we do feel we have the fundamentals in place. You will see some benefits in regard to costs. We're managing our inventories well. And we're looking forward to talk to you individually over the next days and weeks. Have a good day. Thank you.