GWA Group Limited (GWA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GWA Group Limited FY '24 Results Presentation. [Operator Instructions] I'd now like to hand the conference over to Mr. Urs Meyerhans, Managing Director and Chief Executive Officer. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us on the webcast or conference call for GWA's results for the financial year '24. My name is Urs Meyerhans. I'm GWA's Managing Director. Joining me today are Calin Scott, our Group CFO; and Craig Norwell, our Group Executive for Sales. We look forward to talking further with many of you over the coming days and weeks. I will start with an overview of our group results and key themes, including an update on our safety performance. Calin will discuss the group financial results for the year, including P&L, cash flow and balance sheet. Craig will then provide an overview of our business performance, including our key Australian merchants and end market revenue results. I will conclude today's presentation with an update on new products, and I will continue to evolve and refresh our strategy and provide a summary and outlook for financial '25. As always, we are happy to answer your questions at the end of the presentation. Moving to Slide 5. Let me first provide you with the highlights of the year. Our disciplined and consistent execution approach in a challenging market delivered a solid result. Very pleasingly, we continue to deliver volume growth with our trading volumes up 3.8% and U.K. up 4.3%. This is a direct reflection of the successful implementation of our customer first and profitable volume growth strategic priorities. Our ongoing operational and cost discipline resulted in increased normalized group EBIT with a corresponding lift in our normalized group EBIT margin. We continue to generate strong cash with cash conversion of 110% for the year. Our balance sheet remains strong with net debt at its lowest level in 5 years. That enables continued growth in dividends with the final dividend up 14% to $0.08 per share and fully franked, and the full year dividend up 15% compared to last year. Our mantra on controlling the controllables delivered excellent progress with our strategic initiatives with solid momentum in key areas of engagement with plumbers to a successful launch of new products and strong improvement in customer service metrics such as DIFOT and NPS. I'm pleased with the progress of the GWA team in financial year '24. In addition to delivering a solid financial results, we continue to create a strong strategic platform for sustainable future growth. Moving to Slide 6. A quick update on safety. We incurred a few minor injuries during the year. Impacted workers returned relatively quickly to full duties. Some of these injuries related to back pain or muscle strains. Unfortunately, that resulted in increase in the total injury frequency rate. This does not represent an increased safety risk profile. Overall, we noticed an improved safety culture throughout our entire business, which celebrates open and transparent reporting. We continue to target lead indicators, which we believe are more relevant in preventing longer-term more serious health outcomes. This has led to improvement in incident reporting with the Worker Insight Frequency Rate improving Ion the prior year. I will now hand over to Calin to go through the group financial results.

Thanks, Urs. Moving on to Slide 8. This slide presents the results first on a normalized basis, which excludes significant items, and then on a reported basis, which includes significant items. Some of you will recall, we issued a trading update on the 26th of June, which foreshadowed significant items for the year, primarily related to restructuring of our New Zealand business. FY '24 significant items are consistent with that update and were $9.7 million pretax. These included $6.2 million cost associated with New Zealand restructuring, $1.3 million related to the implementation of the ERP program in the United Kingdom and $2.2 million related to the enhancement of our digital platforms. Significant items of $1.4 million pretax in FY '23 related to restructuring activities in Australia. Group revenue was up slightly on the prior year. We had good growth in Australia with sales up 1.8% on a dollar basis and volume growth 3.8%. We also had an increase in the U.K. with revenue up 8.6% on a dollar basis and volume up 4.3%. New Zealand remained a very challenging market during the year and declined by 16.5% on the prior year. Craig will detail the key components of revenue in his section. On a normalized basis, EBIT was up 5.4%, a strong result in what remains a challenging market. We continue to be disciplined on costs, and that's resulted in a lift in our normalized EBIT margin to 17.9%. Moving to Slide 9. This slide shows the results on the first second half. While conditions softened during the second half, revenue was largely flat in Australia with an increase in the United Kingdom partially offset by decline in New Zealand. EBIT margin was broadly maintained due to the 4% price increase we implemented in Australia and February, which is primarily to offset FX weakness. Now turning to Slide 10. This slide contains the waterfall chart we typically present to set up the key drivers of earnings over the year. As always, this is presented on a normalized basis. With regards to volume, as Urs mentioned, we delivered volume growth in Australia and United Kingdom and solid traction on our strategic initiatives. This was partially offset by a continued challenging market in New Zealand. With regards to price mix, as I just mentioned, we implemented a price increase of roughly 4% in Australia in February 2024 primarily related to cost increases. This was offset by some unfavorable product mix driven by customers looking for more affordable products and solutions. With regards to foreign exchange, the average Australian dollar-U.S. dollar exchange rate for the year was $0.68 which compares to $0.72 in the prior year. The lower Australian dollar impact the stock purchases and balance sheet revaluations. These are partially by hedging activities. In relation to others, this bar relates to our continued cost discipline, controlling the controllables across the business. Primarily, this includes the cost reduction initiatives we implemented in the second half of FY '23 to adjust our operating [ rates ] model to align to local market conditions and cost savings and continued discipline on costs. Short-term incentives. This refers to accruals of short-term incentives of FY '24 relates to financial performance exceeding targets despite the challenging operating environment. Now turning to Slide 11. GWA continues to generate strong cash, which, in turn, provides enhanced return to shareholders. Operating cash flow was up slightly from the prior year, reflecting our continued disciplined approach to the capital management. This assisted in the continued strong cash flow generation to deliver improved customer service deliveries. Cash conversion remained strong with a cash conversion ratio of 110% for the year. Capital expenditure was $3 million compared to $2.2 million for the prior year. Our capital expenditure program remains focused on growth initiatives to drive revenue growth opportunity and cost efficiencies. Turning to Slide 12. We remain focused on providing strong returns to shareholders. While our dividend policy is to pay 65% to 85% of net profit after tax dividends, due to our strong cash flow over FY '23 and FY '24 resulted in net debt, the Board declared an $0.08 final dividend fully franked, which is up 14% on the interim dividend. This represents an 87% payout ratio on underlying net profit of tax, bringing the full year dividend to $0.15 per share fully franked, up from 13% -- up from $0.13 from the prior year, an increase of 15%. Moving to Slide 13. GWA remains in a strong financial position. Net debt as at the 30th of June was $97 million, 17% lower than 30th of June 2023 and at its lowest level in 5 years. Our credit metrics continued to improve, and it remained at the lower end of our target range. We have total banking facilities of $220 million with significant headroom of $123 million. I will now hand over to Craig to discuss our performance on markets.

Thanks, Calin, and good morning, everyone. In my section today, I'll provide some further context to our revenue by market and for Australia by state as well as some commentary on our key segments. Turning to Slide 15. This is the typical slide we present to show our revenue from our key end markets. I'll start with Australia, our largest market, which represents 83% of group revenue. As Urs and Calin have already mentioned, we generated good volume growth in Australia during the year. We are benefiting from the realignment of our sales team to a state-based structure as opposed to the previous segment structure. That's enabling us to identify and respond more quickly to local sales opportunities with localized solutions. In New Zealand, the market remains challenging, reflecting the significant decline in local business activity. We have proactively responded by simplifying our business, streamlining brands and products and adjusting our organizational model. Despite the challenging conditions in New Zealand, we maintain a solid commercial pipeline and order bank led by the health and Aged Care segments. Sales in the U.K. increased by 9% with overall volume growth despite the contraction in the market. Our local management team in the U.K. continues to execute well and added 3 new merchant partners during the second half, which should assist growth into FY '25. Turning to Slide 16. This slide details Australian states and their sales performance year-on-year. In New South Wales, despite ongoing softness in Renovation and Replacement, we had a stronger second half in the builder and project segments. We're also seeing continued traction with our plumber bundle offering to targeted maintenance plumbers. In Victoria, we had good growth in commercial with several key project wins in the health care segment, offset by a decline in the merchant segment. Queensland sales were below the prior year as the market remains soft, but we mitigate this somewhat with some targeted wins primarily in commercial. Over in the west, we had strong growth from increased completions in the residential builder market and from our strategic investments into entry-level products. In addition, we also had good plumber bundle sales, which augments our residential business. South Australia was our highest growth state with all segments up on the prior year and volume growth across all product categories. Turning to Slide 17. While the last slide demonstrated sales by market, this slide illustrates sales through our main customers in Australia. We continue to gain traction with our Win the Plumber strategy, including plumber bundle sales, and that's reflected in 2 merchants growing by just under 5% for the full year. We remain absolutely committed to our Customer First and Profitable Volume Growth strategies and the transition to a state-based organization is assisting in improved customer relationships and customer metrics. I will now hand back to Urs, who will discuss this further.

Thanks, Craig. Moving to Slide 19. We continue to launch new products during the year to build our presence in core segments. We launched Contura II Hero collection during the year, which has resonated strongly in the market and is the best performing new product launch in GWA's history in terms of initial sales. Other products we launched through the included modular prefabricated frame collection as part of our scalable bathroom offer. This is an increasing trend we're experiencing to a streamlined installation at building sites. We introduced stylish entry sanitaryware and baths and affordable commercial tapware to grow the share in builders and affordable housing segment. In the current market environment, customers are looking for lower-priced products. And we continued with the introduction of Lead free tapware ranges ahead of the new mandatory code, which will come into effect from May '26. And looking forward, we are planning to launch our new CleanFlush Urinal technology and smart-connected tapware in the beginning of the financial year to future proof our commercial product offerings. I will make a few comments about our strategic progress and how we continue to evolve our strategy, targeting key growth segments. Moving to Slide 21. During the year, we made further excellent progress in core areas of strategy, which already summarized on this slide. Firstly Win the Plumber. As we said consistently, plumbers represent the single biggest opportunity for GWA to grow volume and share in Australia and New Zealand. Extending our reach and engagement with plumbers continues to underpin our strategy. We achieved substantial progress here across both commercial new build and maintenance plumbers. As Craig mentioned earlier, our specialized plumber bundle also targeting maintenance plumbers continue to gain traction with sales up 8% on the prior year. In the year, we extended our reach with Australia and New Zealand plumbers. We have 25,000 plumbers now signed up and categorized between new builds and maintenance. We have also engaged with 18,000 plumbers in providing technical services. We are assisting plumbers with technical training and to help them meet the CPD in hours. During the year, we conducted training for over 2,500 plumbers. This includes the inaugural GWA Plumber Roadshow across all 6 capital cities in Australia and New Zealand with over 800 attendees learning about the latest trends in our innovative plumbing solutions. For innovation through design and partnership, a key priority for our growth strategy remains on product innovation. As I mentioned earlier, we continue to launch of new products during the year. [ That is also piloted ] in our vitality index being new product, number of sales as a percentage of total sales continue to track ahead of our 10% target. We are also ramping up our speed to market with these launches. For customer service, our service will continue to improve with DIFOT in Australia and New Zealand consistently delivering over 90%. It was 78% last year. Meanwhile, we continue to experience a steady improvement in our Net Promoter Score and continue to improve and strengthen our relationship with our key trading partners. Moving to Slide 22. Some of you will have attended our Strategy Update at our innovation and design center in Prestons in March this year, where we provided an update on our strategic priorities. While our strategy remains clear and consistent, we continue to evolve our priorities, and this slide represents a refreshed strategy on the page to 2027. The fundamentals have not changed. We continue to maintain an absolute focus and commitment to Win the Plumber and Customer First and Profitable Volume Growth. Our goal is clear, we are driving towards the position of trusted technical partner. Our strategic tenet summarizes the key growth pillars by segment. And on the next slide, I will summarize our key initiatives to support this. Moving to Slide 23. This slide brings down into more detail of the key initiatives by each growth pillar. Our growth pillars target areas where we see the biggest opportunities over the next few years for GWA. Firstly, Win the Plumber. As we mentioned earlier, our priority remains on being the trusted technical partner for plumbers. We will achieve this by continuing to provide leading technical services and solutions to plumbers, leveraging our unrivaled expertise in this market. We will build on initial success we have had with plumber bundle sales and build a comprehensive aftermarket capability to grow spare part sales. This will provide a growing presence in a more stable maintenance and repair segment of the ANZ markets. For care, we have prioritize health and aged care within our commercial new build and renovation offerings as key growth segments. This will continue. We are developing unique solutions in this segment such as hospital smart ecosystem, which is [indiscernible] Our residential with the ongoing shortage in housing, we continue to monitor market plans and lifestyle changes in residential building, and we are enhancing our product offering accordingly. It includes providing a complete powerful offering, not just sanitary or taps but a more complete sales solution for builders. It also includes building capabilities in multi-residential solutions. Lastly, commercial. We will leverage our already strong presence in the commercial segment by ensuring we are well positioned across all categories. While new build in the office space is slow in the short term, commercial renovation remains a core target area, and we remain very pleased to grow in this category as commercial premises are refurbished, particularly in relation to water-saving technology and being more competitive in the market. Of course, underpinning these initiatives is our attention on our merger partners and ensure that we continue our service offering in key areas such as DIFOT, product availability and service. Let me move to Slide 25. Let me summarize the key points from today's presentation before concluding with the outlook for financial year '25. In a challenging market and our [indiscernible] GWA team delivered a solid result, we continue to deliver volume growth with increased normalized group EBIT and margin. While the New Zealand market remains challenged, we have responded proactively and directly with a reset and simplification of our operations. Our balance sheet remains solid, and our prioritization on Customer First and Positive Volume Growth initiatives have resulted in excellent progress on our strategy. Meanwhile, our continued attention on Win the Plumber underpins our refreshed and evolving strategy. Moving to Slide 26. I will conclude with an outlook for financial year '25. First, a roundup of our key geographic markets. In Australia, the outlook for most segments is mixed. However, we expect solid demand in health and aged care projects and strong demand in the residential section in the medium term. We expect the New Zealand economy to remain challenging, and we have realigned our business in response. In the U.K., we expect a modest recovery in financial '25 across both new build and repair and renovation, and we also expect to benefit from new customer wins late in financial year '24. Moving to Slide 27. Moving more specifically to Australia, our largest market accounted for 83% of group revenue. In commercial, new office builds are expected to decline, offset by office refurbishment and the positive outlook in health care. In response, we continue to prioritize health care and aged care projects and increase product specification with existing builders, property owners and developers. In residential detached, we expect a contraction following a decline in approvals to the 10-year low. In that context, we are targeting an increased market penetration and product specification with volume home builders across our markets. Activity in multi-residential-is expected to increase, driven by an acute housing shortage. I know the timing of this recovery remains uncertain. And finally, in residential repair and renovation, we expect residential activity to remain subdued. We will continue to [ accommodate ] our maintenance plumbers and increase our shareholder in this more stable market segment. Regardless of the economic conditions across our markets, our strategy centers on controlling the controllable and building around technical strengths. Ladies and gentlemen, that concludes the presentation. Calin, Craig and I are happy to take your questions.

[Operator Instructions] Your first question comes from Ben Kairaitis from MST Marquee.

My first question was just on Australia volumes. So clearly, great results for the year with volumes up 4%. I just wanted to see how this compares to where you see market volumes in the period and how much you believe that was a function of share gains. So I know back in February, you indicated that this forecast for the year was for markets to be down 11%. So clearly, a significant delta to where volumes ended up. So just hoping you could square that up for me, please?

Yes. Look, we clearly have seen in the second half the market slowing a bit. So with our -- as continue to achieve volume growth we relate it to market share gains across our key categories.

Okay. Great. So when you look at the results and forecast down 11% last year, is that where your internal views of where the market declined? And then I just wanted to square that up for FY '25 of that market being down 2% or the external forecast being down 2%. So how does that compare to your internal expectations for this next year?

Thanks, Ben. So I think we did mention at the half year when we published these numbers that we always publish in unadjusted. We thought 11% was probably a bit aggressive in terms of the decline. We don't necessarily think we've seen such a strong decline. If I think about '25 and look at their projection of about 2%, that to me feels a bit more realistic and a bit more on the money. But that 11% we mentioned at the half year, we thought it was a bit aggressive.

Okay. Great. And then just on cash conversion. So another really strong result again above 100%. So if I look at the components of working capital, you've got receivables down and payables up. Just wondering if this is sustainable going forward? Or should we expect some reversion there?

But not necessarily any reversion, Ben. I think your observation right on the bat, payables being up, but you'll also notice that stock was up. So this a correlation there in terms of what we bought and we just [ hadn't ] pay for the stock coming through. I would expect our cash flow moving forward probably be more in line with that target of 90% to 100%.

[Operator Instructions] Your next question comes from Guus Vreeburg from Macquarie.

Just touching on Australia. You noted some mixed headwinds there. Could we delve a little bit deeper into that? Maybe touch on what end markets you see the most trading down and those end markets, what are you seeing volume growth in those that trading down is happening.

Yes. So look, if I go through our 4 sort of segments, we usually talk about first our commercial, particularly commercial office buildings. We would expect a decline into '25 because there's not a lot of new office being built. Offsetting that, we see good pickup in regard to office renovations and a strong demand in the health and aged care sector. If you look at residential, clearly, as I mentioned in the presentation, we are at a 10-year low in regard to approval so that will have, obviously, an impact on sales for new buildings. If I look at repair and renovations, we continue to believe that will be subdued, but again, I would say it is clearly focusing on the maintenance plumbers and get a bigger share of the more stable high market environment.

And maybe just touching on your strategy. So you've hit your 25,000 target for plumbers sign on -- sign-ups, could you maybe step on -- or step through what you're doing to drive engagement? What are the next steps here? And what do you expect that plumber bundle sales performance to continue outperforming your number for Australia?

Yes. Look, first of all, we're not giving you a forecast in regard to expected outlook for specific product segments. But if I look at the plumber engagement, there's probably a few things we continue. Clearly, we are very much focused on providing training opportunities across all the plumbers, across all our states and our markets. We continue to provide technical interactions with plumbers. And we also continue to work with the plumbing industry to develop new solutions. We often said when you look at the plumber, their most valuable asset is time. So if we can provide a big product and solution where they will save time on the job, it becomes more valuable to them.

Perfect. And just a last quick question on freight. We've seen spot rates increase, had a bit of tailwinds in the current year. You noted a $2 million to $4 million headwind to next year. Do you -- what's your level of freight ocean freight contract coverage? Just a very rough estimate there in terms of your requirements.

Yes. Thanks, Guus. So we particularly enter into contracts 12 months in advance, and we usually cover around 50% of our forward expectations. This year, we noticed an increase in volatility in the ocean freight rate direction, increase that coverage to around 70% to 80%. So we're sort of well covered into FY '25.

Your next question comes from Shaurya Visen at Bank of America.

Just some quick one on Australia. Just following on some of the comments you've made. Look, Australia demand has been quite soft [indiscernible] and you sort of flagged that for the last couple of halves. I'm just trying to think as you see and you speak with your customers, do you think that demand has sort of bottomed or you think it sort of worsened before it gets better? I know it's not an easy question to answer.

Well, look, it depends what time of the day or week you pick up the newspaper. Sometimes as you said, it hit the bottom, sometimes [indiscernible] softer. What really focusing is coming back to our strategy. We're very clear where we're focusing on. We identify growth opportunities. And regardless of the market, we will absolutely focus on those areas going forward.

And just looking at your slide where you've sort of got your targets and how you're tracking versus them. I just noticed on you've got an orange start on the EPS CAGR. Just wondering what that means is like tracking in line or lower? Or what does it mean, sorry?

Right. Sure. So if you look at our FY '24 results, [ normalized ] net profit after tax was 3.4%. Our target for the LTI for executives, [ that's stops to ] 10%, so that orange is just sort of tracking probably just a bit below the 5% to 10% target.

[Operator Instructions] We are showing no further questions at this time. So that concludes the conference for today. Thank you all for participating. You may now disconnect your lines.