JB Hi-Fi Limited (JBH) Earnings Call Transcript & Summary

[Audio Gap] 2020 Annual General Meeting. My name is Stephen Goddard. I'm the Chairman of the JB Hi-Fi Group, and I'm your Chair for today's meeting. We have a quorum, and I am pleased to declare the meeting open. I'm delighted to be able to extend a warm welcome to our shareholders, proxies and guests who are participating through our online meeting platform for our first virtual AGM. I would like to start by introducing my fellow directors: Beth Laughton; Mark Powell; Melanie Wilson; Richard Uechtritz; and our Executive Director, Richard Murray. Our group CFO, Nick Wells; and Company Secretary, Doug Smith, are also in attendance, as is Travis Simkin of our auditors, Deloitte Touche Tohmatsu. Obviously, as this is a virtual AGM, there is a risk of technical difficulties. If this happens, it will be at my discretion whether we continue the meeting or postpone or adjourn the meeting. In the unlikely event that I drop [indiscernible] meeting, the Chair of the company's Audit and Risk Management Committee, Beth Laughton, will assume the Chair. The agenda for today's meeting is as follows: procedural issues, items of business, voting opens, Chairman's address, Group CEO's address, directors standing for election and reelection, proxy votes received, questions on all items of business, voting closes, final votes and the close of meeting. I'll start by briefly setting out how the virtual meeting will work. Today's meeting is being held online by the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. Attendees can listen to the proceedings and view the slides. In addition, shareholders and proxies have the ability to ask questions and submit votes. Questions can be submitted at any time. [Operator Instructions] While we can submit questions from now on, I will not address them until the relevant time in the meeting. Questions may be moderated or, if we receive multiple questions on 1 topic, amalgamated together. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. When I do this, if you are eligible to vote at the meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. Results of voting will be shown at the end of the meeting and released to the ASX after the meeting. If you have any difficulties voting or submitting questions, please consult the online meeting guide, which can be accessed within the platform or on the JB Hi-Fi Investors website. The items of business for the meeting is set out in the Notice of Meeting and are as follows: number one, to receive and consider the financial and other reports for the financial year ended 30 June 2020; number two, to vote on the election and reelection of directors; number three, to adopt the remuneration report; and four, to approve the grant of restricted shares to the Executive Director. I now declare voting open on all items of business. The polling icon will soon appear. Please submit your votes at any time, and I will give you a warning before I close voting. [Voting]

We now move to my Chairman's address. The financial year ended 30 June 2020 was a strong year for JB Hi-Fi Limited and its subsidiaries in the most challenging of times. We were pleased to report strong sales and earnings for the year, as we provided our customers with the products they required as they spent time working and learning at home as well as upgrading their home appliances and entertainment products. Importantly, we also kept our team members in jobs with an absolute focus on health and safety. The group's operations continue to be affected significantly by the COVID-19 pandemic and related government actions. We remain committed to supporting government and community efforts to limit the spread of the virus. The health, safety and well-being of our team members, customers, business partners and the wider community is our highest priority. We would like to, again, take our almost 13,000 team members across Australia and New Zealand who are doing an incredible job in meeting the extraordinary challenges faced during COVID-19. In recognition of their incredible contribution, in June, the group paid a cash bonus of $1,000 to each of its full-time customer-facing team members, prorated for part-timers and casuals, in JB Hi-Fi Australia, The Good Guys and JB Hi-Fi New Zealand. Our motivated, passionate, knowledgeable and highly trained staff continue to be our most important asset. We believe the group is an employer of choice with an inclusive, busy, enjoyable and, most importantly, safe working environment that helps us to continue to attract and retain high-caliber staff. We would also like to recognize Greg Richards, who retired as Chairman of the Board and as a Nonexecutive Director on 30 June 2020, after 12 years of service. Greg made a significant contribution to the growth and performance of the group during his tenure. And on behalf of the group, I would like to thank Greg for the role he has played as both a director and Chairman. We wish him all the best for the future. It is an honor to succeed Greg as Chairman, and I'm looking forward to continuing the focus on delivering sustainable long-term growth for shareholders. It is with deep sadness and sincere condolences that we acknowledge the passing of Wai Tang. Wai was appointed to the Board in September 2015 and retired in February 2020 shortly before passing away. Wai's passion for retail was evident through her time on the Board, particularly her ongoing focus on the group's digital channels, customer experience and supply channel. She made a significant contribution to the group and is greatly missed. Turning to the group's operating model. The group comprises 2 leading retail brands: JB Hi-Fi, with a focus on technology and consumer electronics; and The Good Guys, with a focus on home appliances and consumer electronics. The value proposition for each brand centers around ranging the best brands at low prices, supported by exceptional customer service across our store network in Australia and New Zealand, our online offering and through our commercial channels, JB Hi-Fi Solutions and The Good Guys Commercial. The dual-branded retail approach is underpinned by 5 key enablers that provide the group with a unique competitive advantage: being scaled, a low-cost operating model, quality store locations, strong supplier partnerships and our multichannel capabilities. An integral part of the Board's ongoing strategy is to encourage innovation and diversification through new products, technology, merchandising formats, advertising and property locations in a controlled and responsible manner to ensure that we remain current and relevant to our customers. We have a culture of embracing change, which is seen as a natural part of the business. And this approach provides opportunities to increase revenue, margin and productivity. In FY '20, the group adopted a sustainability plan, outlining our commitment to having a positive impact on our people, our community and our environment. We are committed to developing our people and providing them with a safe and respectful workplace whilst looking for ways to improve work flexibility, diversity and inclusion; giving back to our communities within which we live and work; and minimizing the impact of waste and greenhouse gases generated by our operations on the natural environment. In FY '20, over $4 million was raised as part of our workplace giving programs in bushfire support, and we launched reusable and user-pays plastic bag options at JB Hi-Fi stores, resulting in a 72.5% reduction in plastic bag usage and in the elimination of 59 tonnes of plastic waste. In August, we released our first sustainability report, which can be found on the group's investor website. We are pleased with the progress we've made to date and the overwhelmingly positive response from our team members. The group regularly reviews all aspects of its capital structure with a focus on maximizing returns to shareholders. Continued solid earnings growth and prudent management of our balance sheet, including relatively low gearing, provides the ability for us to maintain and optimize our capital structure. The Board believes that the current dividend payout ratio of 65% appropriately balances the distribution of profit to shareholders, the repayment of debt and the reinvestment of earnings for future growth. In closing, the Board remains focused on building long-term shareholder value. For the record, since JB Hi-Fi listed in October 2003, the JB Hi-Fi share price compound annual growth rate is 21.9% to 26 October 2020 compared to 3.7% on the ASX 200 Accumulation Index over the same period. The earnings per share compound annual growth rate is 21.2%, and the dividend per share fully franked compound annual growth rate is 22.7%. More recently, over the past 3 years, the JB Hi-Fi share price compound annual growth rate is 28.1% to 26 October 2020 compared to 1.3% on the ASX 200 Accumulation Index over the same period. The earnings per share compound annual growth is 15.9%, and the dividend per share fully franked compound annual growth rate of 17%. I would like to take this opportunity to thank my fellow directors, the executive and particularly our store and support teams for their unwavering commitment to the ongoing prosperity of your company and its shareholders. I now invite Richard to address the meeting on the operational results.

Thank you, Stephen, and good morning, ladies and gentlemen. As we have said before, retailing is a dynamic and exciting industry, and JB Hi-Fi and The Good Guys are market leaders in their respective sectors. The core of our proposition has always been and will always remain our unwavering focus on our customers. Our customers have continued to turn to us for their technology and home appliance needs, and our almost 13,000 dedicated and knowledgeable team members across Australia and New Zealand have responded and adapted in an amazing manner to make sure we meet these needs safely and effectively. As Stephen mentioned, we continue our absolute commitment to health, safety and well-being of team members throughout COVID-19, and we are pleased to have kept all our team members in jobs without any Australian government COVID-19 subsidies. We are pleased with how our businesses continue to adapt to the challenges presented by the virus and related restrictions, including how our online and supply chain operations have scaled and maintained high levels of customer service and on-time delivery during a period of significantly increased volume. We continue to invest in our online capacity and capability and in our supply chain, which in FY '20 included the launch of a new online platform for JB Hi-Fi in Australia and 3 new home delivery centers. In FY '20, online sales were up circa 50% on the prior year to nearly $600 million across the group, with quarter 4 sales up 134%. Turning to our last financial year's results. FY '20 was a strong year for the group with sales of $7.9 billion, up 11.6% on the prior year. Underlying EBIT was up 30.5% to $486.5 million. And underlying NPAT was up 33.2% to $332.7 million, with statutory NPAT up 21% to $302.3 million. Underlying earnings per share was up 33.2% to $2.896 per share, and total dividends for FY '20 were up 33.1% or $0.47 per share to $1.89 per share. The group had 314 stores across Australia and New Zealand as at 30 June. JB Hi-Fi Australia's total sales grew 12.5% to $5.32 billion, with comparable sales up 12.2%. Sales momentum was strong through the year and accelerated in quarter 4 as customers spent more time working, learning and seeking entertainment at home. Online sales grew 56.6% to $404 million or 7.6% of total sales, with quarter 4 sales up 155.2%. JB Hi-Fi Australia's gross profit increased by 11.7% to $1.17 billion, resulting in a gross margin of 22%. Cost of doing business was 14.1%, down 80 basis points on the prior year. The business' low cost of doing business remains a competitive advantage and is maintained through a continued focus on productivity, minimizing unnecessary expenditure and leveraging scale. Elevated sales growth and cost control more than offset the additional operating costs associated with ensuring that team members and customers remain safe during COVID-19 and resulted in strong earnings growth. EBIT was up 26.2% on the prior year to $380.8 million, with EBIT margin up 78 basis points to 7.2%. JB Hi-Fi New Zealand's total sales were down 5.7% to NZD 222.8 million, with comparable sales down 5.7%. Quarter 4 sales were materially impacted by the temporary closure of stores as a result of the New Zealand government restrictions. Online sales in New Zealand grew 53.3% to NZD 20.4 million or 9.1% of total sales, with quarter 4 sales up 145%. Gross margin declined 75 basis points to 16.5%. And cost of doing business was 16.6%, down 14 basis points on the prior period. EBIT was negative NZD 1.9 million, in line with last year, as the impact of the temporary store closures was offset by the wage subsidy received from the New Zealand government, which is passed through directly to team members, and reductions in depreciation. The group is focused on continuing to improve its performance in New Zealand. However, as a result of past performance and the ongoing uncertainty arising from the current environment, in FY '20, the group reviewed the carrying value of certain JB Hi-Fi New Zealand assets. This review resulted in a one-off NZD 25.6 million or AUD 24 million noncash post-tax impairment charge. The Good Guys total sales grew 11.7% -- sorry, 11.2% to $2.39 billion, with comparable sales up 10.8%. Sales momentum improved through the year and accelerated in quarter 4, as customers spent more time working and learning at home as well as upgrading their home appliances and entertainment products. Online sales were up 33% to $174.2 million or 7.3% of total sales, with quarter 4 sales up 91.3%, as strong sales on The Good Guys website was partially offset by a decline in third-party marketplace sales. Gross profit was $490.2 million, whilst gross margin was down 9 basis points to 20.5%, with sales mix offsetting gross margin improvements. Cost of doing business was 15.4%, down 121 basis points, as store wages remained well controlled throughout the year. Strong operating leverage from the elevated sales growth and cost control drove strong EBIT growth. EBIT was up 47.8% on the prior year to $107.8 million, with EBIT margin up 112 basis points to 4.5%. The group balance sheet continued to grow in strength with relatively low financial and operating leverage, evidenced by a solid fixed charges cover of 3.4x, 0 net debt and interest cover of 40.4x. In regard to FY '21 trading, we have today provided a sales update for quarter 1. For the period 1st of July 2020 to 30 September 2020, JB Hi-Fi Australia's total sales growth was 27.3%, in the prior period, it was 4.7%, with comparable sales growth of 27.6% versus the prior comparable period of 3.7%. JB Hi-Fi New Zealand's total sales growth was negative 2.5%, in the prior period, it's 3.8%, with comparable sales growth of negative 2.5% versus the prior period of 3.8%. The Good Guys total sales was 30.9% versus pcp of negative 0.5%, with comparable sales growth of 30.9% versus pcp of negative 1.8%. We are pleased to report very strong comparable sales growth in Australia, even with our metropolitan Melbourne stores temporarily closed to customers during this period. Our online businesses have continued to scale and meet the needs of our customers in a period where restrictions have impacted their ability to visit our stores. This online growth, combined with continued sales momentum in stores across the rest of Australia, has resulted in a strong start to FY '21 and positions us well as we enter the key Christmas trading period. Following the Victorian government's announcement of move to Stage 3 restrictions, all stores located in metropolitan Melbourne reopened to customers yesterday. We are pleased to welcome back metropolitan Melbourne customers into our stores in a safe manner as well as continuing to meet the needs of our customers online with fulfillment by home delivery and contactless click and collect. Whilst the group is pleased with the start to FY '21, in view of the uncertainty arising from COVID-19, the group does not consider it appropriate to provide FY '21 sales guidance. In closing, I would again like to recognize and thank our almost 13,000 team members across Australia and New Zealand who have delivered another record result in FY '20 in a challenging environment. Our team members are our #1 asset and our most important competitive advantage. Their dedication and deep product knowledge continues to delight our customers every day. In JB Hi-Fi and The Good Guys, we believe we have 2 unique and relevant brands, particularly in the eyes of our customers. With a customer-focused business model built on our diverse product offering, deep relationships with our suppliers, a high-quality multi-channel offer and exceptional customer service, we are confident we will maintain our market-leading competitive position. I look forward to another exciting and successful year in FY '20. Thank you, and back to you, Stephen.

Thank you, Richard. Item 2 on the agenda relates to the election of Melanie Wilson and the reelection of Beth Laughton as directors. Melanie was appointed to the Board on the 3rd of June 2020 and is a member of the Audit and Risk Management Committee. Melanie gained extensive experience in senior management roles across global retail brands, including Woolworths as Head of Online for Big W and as manager of the strategy group and Limited Brands. Her retail experience includes online e-commerce, store operations, merchandise systems, marketing, brand development and logistics fulfillment. Melanie is currently a nonexecutive director of Baby Bunting Group Limited, iSelect Limited, EML Payments Ltd and Property Guru Group. I will now hand over to Melanie to say a few words.

Thank you, Stephen. As a retailer myself, I was attracted to the Board of JB Hi-Fi as it's one of the world's leading retailers. The group has continued to innovate and shift its product offering to meet the needs and demands of customers and to stay ahead of the trends in consumer electronics, home entertainment and home appliance space. A summary of my experience is listed in the annual report. But specifically, I hope to contribute to the Board and serve shareholders by bringing experience and insights from my background in retail, having held executive roles in large specialty retailers in Australia and the U.S. over the past 15 years. I have a strong focus and passion in e-commerce and digital, having experienced running an e-commerce business at Big W with a focus around customer experience and touch points in their digital journey, including web, CX, payments, click and collect and last-mile delivery. I'm also a digital customer. And while I still enjoy walking into stores, I do a large proportion of my own shopping online. I spend a lot of time researching online retailers both in Australia and overseas to understand the best practices and trends in the online and multichannel retailing. I also have a background in strategy, specifically growth strategy and corporate finance. In terms of my commitment to the Board, I consider myself to be a full-time director and have the capacity to meet all of my commitments and duties that are required in that role. I also plan to buy shares in the company during this financial year. I will now hand back to you, Stephen. Thank you.

Thanks, Melanie. Beth Laughton was appointed to the JB Hi-Fi Board in May 2011, became Chairman of the Audit and Risk Management Committee in June 2012 and is also a member of the company's Remuneration and Nominations Committee. After qualifying as a chartered accountant, Beth spent over 25 years in corporate finance, providing mergers and acquisition advice and arranging equity funding for companies in a range of industries, including specialty retail. She is also a member of the Boards of GPT Funds Management Limited and Shopping Centres Australasia Property Group and Chair of both of their Audit, Risk Management and Compliance committees. I'll now hand over to Beth to say a few words.

Thank you, Stephen, and good morning, everyone. It is a privilege to be a member of the JB Hi-Fi Limited Board, where I believe I apply skill and diligence in undertaking my responsibilities. So Stephen has outlined my executive background. But I also believe that in addition to the fundamental audit accounting and corporate finance experience, I also bring extensive experience as a nonexecutive director, particularly in the areas of strategy, governance, audit and risk management and remuneration committees. I'm a keen observer of various retail models, from both a retail and landlord's perspective, and I a.m. also a very strong believer in the longevity of the JB Hi-Fi Group approach, which continues to evolve to meet customers' needs. The JB Hi-Fi and The Good Guys teams have demonstrated amazing capability during very difficult times to deliver exceptional returns. As Chair of the ARMC, I've been particularly pleased to see the considered and well-executed actions undertaken under the group's risk management framework with a particular focus on the health and safety of our -- all our team members and our customers and suppliers. As Stephen explained, this year, we released the group's first sustainability report, and I look forward to the evolution of reporting against sustainability targets into the future. Also, next year, we will release our first modern slavery report. In FY '20, the group adopted the complex accounting standard on leases, AASB 16, and you will have seen the impact of this in our financial report and in our ASX announcements. I look forward to continuing -- contributing to the important work of the Board and working with the JB Hi-Fi Group leadership team in continuing to deliver sustainable long-term value for shareholders. Thank you for supporting my reelection. Back to you, Stephen.

Thanks, Beth. We will shortly answer any questions submitted by shareholders or proxies. But before we do this, we will disclose the proxy votes [indiscernible] under each item of business. Firstly, the proxy votes for item 2A, the election of Melanie Wilson; the proxy votes for item 2B, the election of Beth Lawton; the proxy votes for item 3, the remuneration report; and finally, the proxy votes for item 4, approval of the grant of restricted shares to the Executive Director. We will now take questions from shareholders. Questions will be read out by our Company Secretary. And the relevant director, executive or Travis Simkin from our auditors will answer them. After the questions, I will close voting.

Thanks, Stephen. The first question is from [ Mike Moby ] of the Australian Shareholders' Association. With respect to item 4, the issue of restricted shares to the CEO, can you please provide some background to the highlight against this resolution?

Thanks for the question, [ Mike ]. And look, also, thanks for spending some time with me a couple of weeks ago. It's always good to talk to you and hear the views of the Australian Shareholders' Association. Look, one of the proxy advisers put a recommendation to vote against this item. I'm not sure of the particular reasons. It could relate to last year's remuneration report. I think the important thing to say is there was approximately 80% in favor of the resolution. And secondly, that proxy adviser did recommend that people vote in favor of the remuneration report this year. Thanks, Doug.

Thanks, Stephen. Next question is for Richard from Mr. Stephen Mayne. How did CEO, Richard Murray, come to recently sell his Toorak house for almost $14 million to a 4% shareholder, Dion Hershan, from Yarra Capital Management. Were there any direct negotiations between Richard and Dion? And has Dion voted in favor of the various pay resolutions at today's AGM?

I'm not aware of how Dion has voted today, to be honest.

Thanks, Richard. Another question from Stephen Mayne for Stephen Goddard, our Chairman. Our CEO, Richard Murray, has done such a great job for shareholders over many years that now he is on the Mayne Report Rich List and no longer needs to work. Can Richard comment on his likely retirement scenario and also whether he believes the next JB Hi-Fi CEO is currently working for the business?

Thanks for the question, Stephen. Look, Richard's been the CEO since the middle of 2014, and he's done a wonderful job over that period. I think he's got plenty of runway, and the company certainly would hope that, that's the case. Look, all I'd say in terms of any succession, which is sometime in the future, is that JB Hi-Fi focuses on building a very strong management team. I think you can see by the performance within each of the divisions that we have very good leadership across our business. So we're very confident that at some point in the future, if -- when Richard decides to move on and we would assume that to be some time in the -- certainly, the medium to longer term, that we'll be able to manage that from within the business. But I think that's some time ahead of us.

Thanks, Stephen. Another question from Stephen Mayne. Gerry Harvey has cranked up Harvey Norman's newspaper advertising this year to extraordinary levels we've never seen before. Is Gerry wasting tens of millions on vanity advertising with News Corp? Or is there merit in this strategy that JB should be emulating?

Richard?

Sorry, apologies. We're on mute. Sorry, just to -- thanks, Stephen, for your question on Harvey Norman's advertising strategy. Look, one, I respect to all our competitors. Of course, taking a look at what all our competitors are doing because they look at what we're doing. That said, we do like to run our own race. I'd hazard a guess, Harvey's are a very big advertiser in the Australian market, and they would get pretty competitive rates. That said, we're very comfortable with the strategy we employ. Obviously, the JB Hi-Fi stores, we have half of them in shopping centers, which does mean that we have a certain amount of passing traffic, whereas we do tend to spend more for The Good Guys as they are stand-alone destinations. And so we need to encourage people to go to those stand-alone destinations. But very comfortable with how we're executing the market, both across our physical media and digital media.

Thanks, Richard. Another question from Stephen Mayne. Proxy adviser, Ownership Matters, released a report this week which suggested ASX 300 companies fish from quite a shallow pond when sourcing new directors, and this is more pronounced with female directors. Could our newest director, Melanie Wilson, who is up for election today, please outline the JB Hi-Fi recruitment process from her perspective? And could the Chair give his perspective if we consider finding a new female director with deep retail expertise who is not the current member of the directors' club? One for you there, Stephen, please.

Thanks, Stephen. Look, the process was quite extensive and thorough. I'm not going to go into the details of that. But look, I think you saw from the experience that Melanie has in vast retail areas over a long period of time and also with her experience in online, she knows the international markets. She talked a little bit about the strategy experience that she's had. We think Melanie was an excellent choice for JB Hi-Fi. And in the few months that she's been on board, that has been demonstrated to be the case. So we're very pleased with the appointment of Melanie. That's a good thing, I think, for JB Hi-Fi. So I think that's the best response to that, Stephen. Thank you.

And that's all the questions we have. Thank you, Stephen.

Thanks, ladies and gentlemen. That concludes the questions. We will now take a few moments to allow you to finish voting. Please complete your voting now. [Voting]

Thank you. Voting has now closed. Please bear with us for a few minutes while we finalize the votes so we can display them to the meeting. Ladies and gentlemen, we now have the results of voting as shown on your screens. You will note that all items have been passed with more than 50% of votes cast in favor. On behalf of the Board, I would like to thank you for participating in today's AGM. I hope you have enjoyed the virtual format. I also hope that you and your family stay safe and well in the weeks and months ahead. I now declare the meeting closed.