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Edited Transcript of BLX.AX earnings conference call or presentation 20-Aug-19 1:00am GMT

Full Year 2019 Beacon Lighting Group Ltd Earnings Call

Mulgrave Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Beacon Lighting Group Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Speirs

Beacon Lighting Group Limited - CFO

* Glen Robinson

Beacon Lighting Group Limited - CEO & Director

* Ian Robinson

Beacon Lighting Group Limited - Executive Chairman

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Conference Call Participants

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* John Hynd

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst

* Josephine Little

Morgans Financial Limited, Research Division - Senior Analyst

* Sam Teeger

Citigroup Inc, Research Division - Analyst

* Sue Mitchell;AFR ;Senior Reporter

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Beacon Lighting Group financial 2019 results presentation for the 53 weeks ended June 2019. (Operator Instructions)

For opening remarks, I would like to turn the conference over to Beacon Lighting Group Chairman, Mr. Ian Robinson. Go ahead please, Ian.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [2]

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Thank you very much, Lisa. Good morning, ladies and gentlemen. As the Chief Executive Chairman of the company, I'd like to welcome you to the Beacon Lighting Group results presentation. With me today on the teleconference is our Chief Executive Officer, Glen Robinson; and our Chief Financial Officer, David Speirs. This morning, we will be discussing our results for the financial year 2019, ending on the 30th of June 2019. We'll be talking to the results presentation that was filed this morning on the ASX and on our corporate website. The presentation will take approximately 30 minutes, followed by time for questions.

In a year that has been the most challenging for the business for some time, our retail sales achieved modest growth, while emerging business continued to exceed expectations. Profit decreases as sales growth in the core business was -- the profit decreased as the sales growth in the core business was insufficient to cover the additional costs. The Australian economy has not assisted the business during the period, and it appears that the housing sector has changed direction and will be supportive this financial year.

If you turn to Page 2 of the presentation, this outlines what we'll be discussing today with Glen, our CEO, taking you through the results overview; followed by David, our CFO, presenting the financial results, cash flow, balance sheet and dividends. Then we will pass back to Glen for the growth strategy and the outlook. After that, I'll direct any questions you might have.

I'll now hand you over to Glen.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [3]

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Yes. Thank you, Ian, and welcome, shareholders, to the Beacon Lighting Group results presentation for the financial year 2019. I'd like to start on Page 4 and review the key highlights for the financial year 2019. I personally cannot remember a year with so many economic distractions that affected the housing market and therefore, the group, whether it be the tightening credit, the banking inquiry, a disruptive election, all of these resulted in lower housing churn, decreased auction clearance rates and reduction in house prices, with trading particularly challenging during the election period. Having gone through those difficult periods, we believe that the sales result was reasonable but not exciting.

The group achieved a record in sales of $241.8 million, up 2.5% on the previous year. The group achieved record sales in Beacon Lighting company stores, online sales channels, Beacon International, Beacon Energy Solutions, Light Source Solutions Roadway and Masson for Light, with good momentum in the emerging businesses [continuing].

Unfortunately, even though the group were able to improve sales, we're not able to do the same with profit. EBITDA profit declined by 10.4% to be in the middle of our guidance at $29.7 million. Group net profit after tax result came in at $16.2 million, which was a 17.2% reduction on the previous year. Throughout the year, the group opened 5 new company stores located in Warrnambool, Mackay, Moore Park, Modbury and Craigieburn and purchased and converted 2 franchise stores to company stores in Underwood and Albury.

The group purchased its first property asset in Parkinson, Queensland, converting an ex-Masters store into our Queensland and New South Wales warehouse distribution center. While the conditions were inconsistent at times, we have had a focus throughout the year on cost control, gross profit margins, optimizing stores for great customer service and increased focus on exceptional lighting design. We continue to strengthen our marketing presence with further investment in advertising and the release of many new and exclusive products. We see that the hard work that we've done throughout this financial year 2019 year will position the business strongly for the years ahead.

Page 5, we'll go through the underlying results for the group for the financial year 2019. Sales for the year increased from $235.9 million to $241.8 million, an increase of $5.8 million or 2.5%. Gross profit dollars were flat with last year coming in at $154.7 million, a decrease of $320,000 or 0.2%. Gross profit margins reduced from the record highs achieved last year at 65.7% to 64%, mostly due to the devaluation of the Australian dollar to the U.S. dollar and improving sales in the emerging businesses, which operated at lower GP margins. Other income decreased as expected from $1.8 million to $1.63 million, reflecting the lower number of franchise stores with 2 acquisitions that were made throughout the year and 1 acquisition in the previous financial year.

Even though we found sales relatively tough, we were able to manage operating expenses reasonably well, coming in line with last year as a percentage of sales at 52.4%. EBITDA decreased from $33.1 million to $29.7 million, a $3.4 million decrease or 10.4%. EBITDA margin decreased from 14.1% to 12.3% of sales. Net profit after tax came in at $16.2 million, a reduction of $3.3 million or 17.2%. Net profit margin decreased from 18.3% to 6.7% -- sorry, 8.3% to 6.7% of sales.

If we now turn to Page 6, we can run through the financial year 2019 profit reconciliation. The statutory result referred to in the annual report is marginally different to these underlying results in this presentation. The reason for the difference is that, in financial year 2019, we had a 53-week retail year versus financial year '18 being a 52-week retail year. We have, therefore, reduced the underlying results here in this presentation by removing a week worth of sales, GP dollars, expenses and profit for this presentation results to get a more accurate comparison to last year. The other adjustment highlighted on Page 6 was for a one-off nonrecurring costs associated in the setup of the new Parkinson DC. The net effect of these 2 adjustments is a positive EBITDA for the underlying result of $136,000.

I'll now hand you over to David Speirs, our CFO, to run through some further details on the financial results.

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David Speirs, Beacon Lighting Group Limited - CFO [4]

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Thank you, Glen. Sales on Page 8. The Beacon Lighting Group reported sales result was $241.8 million, which is an increase of 2.5% compared to 2018. Sales for the core businesses of retail and commercial throughout financial year 2019 was unpredictable with positive sales growth in some months and disappointing sales growth in other months. Company comparative sales declined by 2.3% in 2019. Online sales which support the company comparative stores were a highlight as they increased by 22% in financial year 2019. The sales for the emerging businesses were much more exciting as they increased by 43% in 2019. Record sales results were achieved by Beacon International, Light Source Solutions Roadway, Beacon Energy Solutions and Masson for Light.

Gross profit on Page 9. The Beacon Lighting Group achieved a gross profit margin of 64% of sales and $154.7 million in gross profit dollars. The continued innovation in product development has supported the current gross profit margins and provided some insulation from the downward margin pressure as a result of the need to be continually price competitive in the retail market, along with the increase in cost base as a result of the Australian dollar decline. With the vertical product integration from factory to customer, the Beacon Lighting Group has been able to maintain high gross profit margins for the core business throughout 2019.

It should, however, be noted that the rate of sales growth is much faster in the emerging businesses than in the core business. The gross profit margins for the emerging business are lower, and that the core margins -- they are much lower than the core business, so the margin mix of the Beacon Lighting Group is also changing. With the current sales trend continuing in the future, the gross profit margin can be expected to decline, but it's expected that the emerging businesses will be generating more gross profit dollars for the Beacon Lighting Group.

Operating expenses and other income. The Beacon Lighting Group other income of $1.6 million decreased by 10.4% as a result of franchise stores being purchased and converted into company stores. The Beacon Lighting Group operating expenses were 52.4% of sales in financial year 2019, which was in line with the same percentage of sales in 2018. This was a good result for the group. Controllable expenses, particularly including remuneration expenses, have been carefully managed throughout 2019. Managing store rosters to store traffic remain a priority. In recent years, the Beacon Lighting Group has installed 50 solar systems onto our stores and the Victorian distribution center. Along with the renegotiation of our energy contracts, this has resulted in the group achieving significant energy savings in financial year 2019.

The group has continued to invest in the selling and distribution expenses at a rate of 40.5% of sales. Expense productivity gains have also been realized for the marketing expenses and general and administration expenses.

Cash flow on Page 12. Beacon Lighting Group operating cash flow has declined in line with profits in 2019. Capital expenditure was at record levels from the Beacon Lighting Group in 2019. The group made their first property acquisition with the purchase of the Parkinson distribution center in Queensland. The purchase price of the property, including on costs, was $12.6 million, or another $2.4 million was required to get the facility to be operational from a distribution perspective and the completion of additional building works. The Beacon Lighting Group capital expenditure has been funded by retained earnings and additional borrowings. An additional loan of $12.5 million was provided by the ANZ Bank to support the purchase of the Parkinson distribution center. The total dividends of $11 million was provided for financial year 2019. This involved the payment of $8.5 million and the reinvestment of $2.5 million.

Balance sheet on Page 13. At the end of June 2019, there was an increase in cash, reflecting the timing associated with the payment of creditors and some short-term borrowings. The Beacon Lighting Group has continued to invest in inventory to support new stores, new supply chain and the growth in emerging businesses. The total investment in inventory has increased by $6.3 million.

With the continued growth in the emerging businesses, receivables has also increased by $2 million. The increase in borrowings in 2019 reflected borrowings associated with the Parkinson distribution center and the funding of additional stock.

Dividends on Page 14. The Beacon Lighting Group has paid a fully franked dividend of $0.0255 per share for half 1 2019. The directors for Beacon Lighting Group have declared a fully franked dividend of $0.02 per share for half 2 2019 compared to a fully franked dividend of $0.025 per share for half 2 financial year 2018. The record date for the half 2 dividend will be the 6th of September, and the payment date will be the 26th of September 2019. The annual dividend payout ratio for the Beacon Lighting Group is expected to remain between 50% to 60% of net profit after tax.

Thank you. I will now pass you back to Glen.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [5]

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Yes. Thanks, David. If we move on to Page 16, we can review our core growth strategies that we'll take into the financial year '20 and the years ahead. Starting with brand and customer. The group will continue to have a customer-focused culture. We will offer the largest range of fashionable and technically advanced lighting in same prices to inspire our customers whilst catering to all sections of our market, whether it be renovators, new homeowners, renters or the trade, from the budget conscious to the aspirational designer homeowner. We offer convenience to our customers with 113 stores, 28 design studios and 5 commercial sales offices, plus online shopping. We'll provide our customers with unparalleled service with our team of over 1,000 associates. Within that team, we have 333 accredited lighting design consultants ready to advise our customers about how to light their homes better.

In addition, our Beacon Design Studio is continuing to gather momentum in the premium lighting design offering and have been featured heavily on this season of The Block. The group has also substantially grown our VIP customer base to 433,000 members and 29,000 trade club members. Throughout the year, we have added to our sales offering to include an installation service in selected categories, and this has the potential to be expanded further.

On Page 17, we'll discuss the store optimization strategy. The group has a great network of 113 stores. It is always our goal to make each one of those businesses stronger than the year before. Since financial year 2014, we have added 31 new stores, which, given our maturity profile, would suggest those stores are yet to mature. And we should see greater growth -- credit growth, productivity, expense gains and profit from those stores over the coming years.

The group closed the Subiaco store in Perth in order to improve the sales performance of other Beacon stores in that area. Store rosters have been closely managed throughout the year to ensure the right team coverage at the right times of the day. The group has had a focus on our energy use and carbon footprint over the year by optimizing the use of solar systems on our stores, using energy-efficient lighting within the stores and implementing improvements to the HVAC systems. This has helped us to reduce our energy usage.

The new store rollout strategy. The group, over the years, has had a focus on finding strong sites in new markets to open new stores. Throughout the year, the group was successful in opening 5 new stores at Warrnambool, Mackay, Moore Park, Modbury and Craigieburn. These new stores in all cases have met expectations in their first year and should offer future growth as they mature. Market research shows further growth in new stores, in new markets is still available for the future.

New product ranges on Page 18. Beacon Lighting will continue to inspire our customers within Australia and in new markets internationally with the most progressive range of lighting anywhere in the world. The group designed and developed 600 new and exclusive items throughout the year. The year ahead will see a greater push towards more smart lighting, including voice-controlled lighting within Beacon Lighting stores. There'll also be more development into designer -- designing lights to support the Beacon Design Studio stores with LED strip lighting being a big opportunity. Online and social media continues to be a very important growth opportunity for the group. During the 2019 year, online sales grew by 22% and made up 5.5% of retail sales.

The group also expanded our sales, our product ranges throughout our online platforms in the U.S., Europe and other international markets. The media landscape continues to change, and online marketing continues to grow in importance, particularly with inspiring our customers around new product releases information.

Now on Page 19, we'll discuss our emerging businesses. The group has 5 emerging businesses, which we see as key growth opportunities for the years ahead. They help diversify the group into other sales channels and markets. The emerging businesses had a successful year with a total sales increase of 43% and a profit increase of 59%. Light Source Solutions Roadway and Globes had a very good year with more than a 50% sales improvement. Beacon Energy Solutions also increased sales by more than 50%. Masson for Light increased sales by more than 30%, and Beacon International continues to grow across the U.S., Europe and China, with a strong sales increase of more than 50%. Each of these emerging businesses operate in quite separate products, channels and markets. By growing these businesses organically, they will become more substantial operations in the years ahead and should continue to represent solid growth for the group.

New business opportunities. Throughout the year, financial 2019, the group purchased the ex-Masters site in Parkinson, Queensland, being its first major property acquisition for the group. We then went about converting that site to our distribution facility for Queensland and New South Wales stores, along with the Roadway and Queensland commercial office, shoring up the logistics capabilities for future expansions of the group and also providing cost efficiencies for the years ahead. The group also acquired 2 Beacon Lighting franchise stores in Underwood, Queensland and Albury, New South Wales and converted those stores into company-operated stores.

If we now turn to Page 21, we can review the current outlook for the group. The recent comparative sales trends have continued into the new financial year. However, we do feel, along with others, that housing-related conditions will gradually improve over the first half and into the second half, supported by low interest rates, changes to bank lending requirements, tax rebates and support for new homeowners. This should be positive for the group.

We are in the process of acquiring the franchise store in Myaree in WA and converting that to a company-operated store. This will then mean the group has 3 remaining franchise stores. We have 2 new stores planned for the financial year so far. They will be in Virginia, Queensland and Belmont, WA. We will also close 2 stores at Sunshine in Victoria and Mandurah in WA. As we can see, the surrounding stores can adequately service those markets. We will relocate our Midland store in WA to a new site.

The group is in the process of replatforming our website, and this will be completed throughout the financial year, recognizing the e-commerce channels as a positive growth area for the business. We'll continue to develop exciting new products to support the core businesses and the emerging businesses with a focus on value, innovation, design and smart lighting. We recognize that financial year 2019 was a relatively challenging trading environment for the group. However, we believe conditions should improve into financial year '20, and the business is in a strong market position to make the most of those improving conditions.

Thank you all for your time and interest in Beacon Lighting, and I'll pass you back to Ian Robinson, our Executive Chairman, to direct any questions you have.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [6]

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Thank you, ladies and gentlemen, for your time and listening to our presentation. We invite you to ask some questions. Do we have any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first person with the question is Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [2]

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Just in terms of the first question, just curious if you can maybe define -- how you define a successful year. Is it remaining the category leader, holding profit flat in the submarket, getting growth or something else?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [3]

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I think if you can improve your sales through a relatively difficult or probably the most difficult period we've seen for a very long time, that does sort of suggest that we'd maintained our growth. We've opened up new stores. As I said, we're comfortable with the business. We've continued to invest in advertising. So we're still getting our name and brand out there. And as I said, this was a tough environment, but we've done everything, I think, we can to ensure that we're in a great position to maximize our return once we start to see the conditions start to improve.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [4]

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Yes. I think, Sam, the big thing that was the challenge this year was the churn rate, the number of houses being bought and sold. And when you've got that churn rate dropping by 30%, you're going to find it more difficult. And the expectation is that we'll get back to a normalization of the number of houses being sold, which would be supportive for us.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [5]

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I understand. So just to clarify, successful year equals sales growth.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [6]

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Sales growth and continued investment in the business as well, Sam. We don't look at the business as a 1-year proposition. We've been in the business for a long period, and we want to continue to grow that year-on-year. So yes, sales are important. I mean we really are out there trying to drive profitability for the business. That's the main objective, but we had the opportunity with Masters, the Masters site to improve our logistics operation. And that will see a lot of benefits for us in the years ahead. So yes, there was a lot of good points that I think we completed throughout the year, but it was a pretty difficult environment.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [7]

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Right. Okay. And you've guided to 2 new stores in FY '20, which is a bit below what you've done in previous years. I guess to what extent would there be upside to this? And what months are the Virginia and Belmont stores scheduled to open?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [8]

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Yes. It looks like both of those will be opening in the second half at the moment. And they are fairly rubbery at the moment because you're not guaranteed about how quickly the sites will be available for handover.

Is there upside to that? There is potentially. We -- to maybe reflect back on your question previously, what does success mean, well, we are trying to improve profitability. And by just rolling out new stores, it probably doesn't help profitability dramatically. We've got 2 earmarked. If there was another 2 that we found were really terrific size, then we'll jump on it. But it's about finding those sites and being confident that, one, they're not going to cannibalize any of the other stores, that's, I think, we've got to be careful of in a tighter sort of environment, and also that we can get into profitability pretty quick. So we were really happy with the 5 stores that we opened this year. They all performed, as we mentioned, above our expectations. So if we can find some other stores like that, then yes, we will definitely jump on those.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [9]

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Got it. And in terms of the like-for-like sales trading update. When you say that recent trends have continued, should we take that to mean the second half like-for-like trends which we estimate are running at around about a 4% decline? Or are you referring to a shorter time period?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [10]

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I think we're going to be really careful about how we look at the comps right at the moment. We finished out the financial year this year on the 30th of June. Last year, we finished on the 26th of June. So the end of financial year sales, we had the benefit of that in this financial year 2019. But we didn't get it in July as we did last year. So we're actually cycling basic numbers in July this year. Therefore, the July comp result wasn't great. June comp result was good. And the August comp result looks good, too. So that's why it's a bit hard to read exactly how the comp results are going at the moment just because of the timing of the 30th of June.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [11]

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So we basically missed out on the 30th of June week sale, which is a big week for us. Yes, that fell into the last financial year, and it gave us a slower start to July. So if you take those type of things out of it, we are getting comp increases, but we had a slower start to July.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [12]

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Right. And last question, can you just talk a bit about the gross margin outlook for FY '20? I guess on the one hand, currency is probably becoming an increasing headwind, but at the same time, in FY '19, you might have had some clearance, which may or may not need to be repeated in FY '20. And then just following on from that, maybe one for David, just how the hedge rate in '20 compares to '19 and if he can just please confirm how long it typically hedges for.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [13]

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Yes. I think from a clearance point of view, we had to pull this promotional lever a little bit harder, obviously, throughout the year because it was a relatively tight year obviously. If things were to improve, then we wouldn't be doing that as much. So therefore, you would expect gross profit margins to improve. I think mostly gross profit margins in the core business were relatively stable. They were a little bit under pressure in the second half, and we did some price adjustments throughout the second half to reflect the new position of the AUD to the U.S. dollar. But yes, I mean if we start to see some reasonable comp performance, then we won't be able to -- we won't have to push the discount lever as hard. And also throughout the financial year '19, we did have 10 independent lighting stores closed down, and that does indicate how difficult the trading environment was for independent lighting stores. And they were obviously clearing products throughout that period as well. So as we head into, hopefully, what we believe should be a more positive environment, we won't be discounting as heavily and we should be able to improve our gross profit dollars and margins.

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David Speirs, Beacon Lighting Group Limited - CFO [14]

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In terms of our hedge contracts moving forward, obviously, we have got about a couple of months covered. That's obviously an advantage to the current spot rate at the moment. But obviously, we'll be looking at acquiring some more contracts going forward as the Aussie dollar bounces up. In terms of the underlying rate compared to last year, obviously, we expect it to be a little bit less, obviously, this year in 2020 than we did in '19. But again, we've got a lot of work in managing the retail prices and slowing the cost increases for the supply chain. And we certainly had a better result towards the end of the second half from a margin perspective than we did in the earlier half -- early in the second half.

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Operator [15]

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Our next question is from Jo Little from Morgans.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [16]

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Just firstly, I suppose just going back onto Sam's question around the GM in the second half. So you've clearly said that in the core retail business, I mean, it was down a little bit in the second half but stable overall for the full year. So I'm just trying to understand, obviously, you got a 40% growth in top line in the emerging business. So I guess what you're saying is a vast majority of that second half GM decline came from that.

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David Speirs, Beacon Lighting Group Limited - CFO [17]

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Yes, it did. We had a much better sales growth rate in our emerging businesses than we did in our core business. And obviously, they are much lower margins than the retail businesses.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [18]

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Okay, cool. So in order for us to kind of model it, are you willing -- I suspect you could say no, but maybe just to quantify in the sales, just how much of the emerging business contributes.

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David Speirs, Beacon Lighting Group Limited - CFO [19]

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That's not something we're breaking out. Other than we're trying to give the market a flavor for -- at the margin, we put -- changing it as we move forward. And I think the second half last year, too, that was coming off sort of record-high margins for the group. They were in the 66 range, which was a fantastic effort. A 63 in the second half this year was reasonable, considering the Aussie dollar decline and...

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [20]

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And the growth.

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David Speirs, Beacon Lighting Group Limited - CFO [21]

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And the growth in the emerging businesses.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [22]

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Yes.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [23]

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Okay, cool. So I guess we'll be wrapping up some inventory ahead of this emerging business kind of growth, particularly internationally, et cetera. So do we get another step-up in that this year? And are you flagging that it can continue to grow at that kind of 40% level?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [24]

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I think from the sales point of view, we are seeing great momentum there. We're a small player in a very big market in the international area, and we would expect sales growth to be very substantial like what we've had in the previous year. And that goes with a lot of the emerging businesses, whether it be international or roadway and some of the other ones as well. But we do expect some solid growth out of those. Absolutely.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [25]

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Okay. And just maybe Ian or Glen, just we talked about housing -- new housing churn for being a major drag. Can we talk about renovation activity in the market, which is obviously another key driver for you guys and what you're seeing there?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [26]

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Yes. We haven't really seen much of an uplift in the renovation activity, which is probably not that surprising given all the issues that we saw, particularly in the second half. I mean we know that, and we indicated this at our half year results, that an election result usually does knock the sales quite considerably, just the distractions. And I think this election campaign was particularly disruptive with the proposed tax changes that we thought were actually going to come through. And I think most people in Australia thought that was actually going to happen, which was substantial. Customers weren't spending at that time, and that's unfortunate for us. You had really probably 2 months of disruption there. And when you take 2 months out of 6 months, it's hard to sort of pull yourself back from that. Thankfully, we have seen a bit of a recovery since that -- since the election, and we have seen some more normalized spending.

What we're saying right at the moment, I think in August is that The Block is definitely getting the good news out there about renovation activity, and we're starting to see that particularly in the stores where, as we mentioned, August is looking pretty good from a comparative point of view. So yes, there's some more positive news out there. I think customers are able to now get some financing to be able to put behind renovation, and we should see the benefit of that coming through in this second half.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [27]

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I think the other part which is interesting also, Jo, was that New South Wales, in last financial year, was probably the one that hurt us the most, and that seems to be the one that's turning quicker than the other states. So I think that's where the greatest mortgage stress was, and the relaxation of the interest rates on housing is starting to show some improvement in sales in New South Wales, which is quite encouraging for us.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [28]

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Okay. That's helpful. And I noticed you said that -- you talked about the independents closing down in the second half, which is quite interesting. Just on the competitive landscape, anything more to note on that, maybe from a Bunnings point of view, number of SKUs, their discounting activity? Anything else to call out there?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [29]

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Look, we've got 113 stores that do regular checks on Bunnings. I think there's been a couple of categories that they have had to push a little bit harder. I think that might be because more so of increased inventory from the importers themselves or the wholesalers going into Bunnings, and they've had decrease in product. So the prices have been pushed pretty hard in some categories, and we've had to respond to that a little bit, but the range in itself hasn't changed dramatically. But I just think a lot of those wholesalers were looking for greater sales increases throughout the year. When they didn't come through, they had to clear some of the stock. So we've had to battle a bit with that. But the range in itself hasn't changed substantially. They're a bit pushed into smart lighting as well. But I think it's a confusing category, smart lighting, to be able to sell as a DIY-type product. And I think we're probably in a better position to be able to make the most of smart lighting.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [30]

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And maybe just lastly, sorry for the timing, but just on the international business, perhaps just an update on, I guess, the retail, as you're selling through the U.S. and Europe and you plan to Canada and China. And what gives you the confidence to move over there?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [31]

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Yes. So if we just have a look at America, Wayfair ended up being our largest customer over there. And they've done a terrific job. It's an online platform only. But that's performed exceptionally well for us throughout the year, great growth and a good, real decent sales performance.

And then we had homedepot.com. So they're another very significant customer of the U.S. business. And we're just getting placement into their largest DIY chain, which is Menards in the U.S. So they sit behind Home Depot and Lowe's. So we've done pretty well in the U.S. area. I think in Europe, we've done particularly well on Amazon, that's our main sales platform there, and a couple of key customers who we've been working with for a number of years, and they continue to go along pretty strongly. And we have just started B2C customer sales directly in Europe. So that was interesting as well. Not a significant amount of sales, but it was just interesting that we can get that all set up and operating out of the office that we've got over there. And that has potential for further growth in the year ahead. They also had a very hot summer season, which was terrific for us. The heat came very early in this season. And because we probably sell ceiling fans over there, we did have quite a strong period of sales because of that.

Within China, we've set up the office there now. And really, what we've seen with China is 2 major aspects, is obviously the license of our IP into that market and just maximizing our license revenue through the Hong Kong business and then potentially China sales. And by setting up the China business, we can now sell into China domestically, whereas previously, we would have to sell -- export the product out of China to Hong Kong and then re-import it into China, which didn't make a lot of sense. It was very costly to do that. So now we have the ability to tap into the domestic market in China for some of the unique products that we're selling in other countries. And I think from understanding the China market, they do respond well to international brands. So hopefully, we can get that up and going and be a more significant part of the international sales for financial year '20.

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Operator [32]

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Our next question is from [Hamish Burns].

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Unidentified Analyst, [33]

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I would just like to drill down into your operating costs because the medium-term trend of operating costs within the group appears to be increasing up 150 basis points since FY '16 through to 52.4% in the current result. So I'd just like to know outside of solar and energy savings, which have been well publicized by Beacon, what other efficiency programs are underway.

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David Speirs, Beacon Lighting Group Limited - CFO [34]

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Certainly, we've been focusing very much on store rosters and managing them to support traffic better, which has been successful. You can also see the leverage we'd be getting in the marketing and general administration areas of the business where, in effect, we've been getting productivity gains. And that selling and distribution does reflect the investments we continue to make in the sales-generating businesses.

You talked about the period from '16 to sort of '19 -- or '16 to '18 was a period of a lot of store openings. And what tends to happen is you don't get the most productivity gains of a new store in year 1, year 2 or year 3. You get them as those stores are maturing and generating a much greater sales base. So they were investments that we made in those years and which did impact our percentage of sales.

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Unidentified Analyst, [35]

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Okay. Sure. Understood. I guess what's interesting, is it the longer-term trends? And sorry, it's going right back to the 2012 to 2016 period. There was a fairly continued decline in this period from 56% through to the magic year of 50.9%, which is I believe the optimum year for the group. So from 56% in FY '12 to 50.9%. And I guess to the point of store rollouts, I mean, there was only 96 Beacon stores at the time, so my assumption would be there would be a degree of operating leverage within the business as it's growing since then.

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David Speirs, Beacon Lighting Group Limited - CFO [36]

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Also I think it was a challenging year 2019. Obviously, our comp sales were down 2.3%. So it's hard to get leverage in that sort of environment, especially where we have contractual expense increases in terms of rent and obligations to our associates. So that sort of makes it difficult to start with. But to bring an expense -- operating expense in line with last year was a fair effort, I think, in 2019. That's not to say that it's not something that we think about a lot.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [37]

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But if we get our comp sales up into positive territory for the year, we do have the opportunity of bringing that percentage down.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [38]

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Yes, absolutely. That's the goal, is to try to drive it through the sales.

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David Speirs, Beacon Lighting Group Limited - CFO [39]

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Yes. And we have made a big investment in the DC in Parkinson. We did call out some of the one-off operating expenses, but we would hope, in future years, those operating expenses will improve. And a simple example will be rent -- instead of -- we had to rent that externally. The rents continue to go up. As a property we acquire, the carrying cost of that continues to go down as we go forward and pay off the debt. So they are sort of cost leverage opportunities that we're investing in this year.

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Unidentified Analyst, [40]

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Sure. So while you have a network of leases, you'll forever be at the mercy of sort of CPI, 3% annual reviews. Could -- if I've got time, just to quickly go through the store rollout, which I know you've already commented is tapering off just [planned borrowers] FY '20. But would it be possible just to get a sense of -- if it's possible, the cost of opening in each store, I think, is something around $1 million, $1.2 million. And with the -- I suppose, the increased focus that Beacon is placing on [online,] in your high-growth areas of the business, I mean -- because obviously for an online presence, you don't need too many stores. Do you think that the long-term goal of Beacon might not involve so many new store openings in the future?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [41]

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I think, yes, new stores is an interesting one that we need to consider. You've got online growing at 22%. So you've got to put the money where you're getting the growth. And we're going to -- as mentioned, we're replatforming our website so that there's going to be -- all our websites will be much better performing for the year ahead. So there's some significant investment going into that, recognizing that it's growing at a good rate.

Now new stores, we've made plenty of money and profits, growing the business by rolling out new stores in previous years. But it's harder to justify opening up new stores when you've got a tighter environment like we do at the moment. If we went back to 2015, I think we had double-digit comp gains, and that was supported by strong house price growth, lots of churn, and auction clearance rates, they were very high. If the environment was looking like that, then we probably wouldn't be having this conversation about the new store rollout because everything is ticking along very well. Stores are very profitable and continue to roll them out.

Now right at the moment, we've just gone through really probably 18 months of relatively tough retail environment on the back of some pretty tough housing conditions out there. As that starts to improve, we would expect that comps will start to improve, and our appetite to roll out stores will probably also continue to improve. So yes, right at the moment, we've indicated 2 stores as we've mentioned, but that could be 4 stores within the year. It just really depends on what sites become available and whether we think they're key sites to drive sales and profitability.

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David Speirs, Beacon Lighting Group Limited - CFO [42]

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And [Hamish], just to correct you, the cost to open a new store is normally 500 to 600 in CapEx and maybe 150 to 200 in stock and some preopening costs as well. So it's a little bit less than what you originally thought.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [43]

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So I think that we need to consider what's happening online. We're over 5%, and we're probably going to be advancing substantially on that. That means that over 5% of your business is being delivered via a different way than directly from the sales activity within the stores. And that's likely to be part of the growing future that requires less assets to service the amount of sales.

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Operator [44]

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Our next question is from Sue Mitchell from AFR.

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Sue Mitchell;AFR ;Senior Reporter, [45]

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Glen, I wondered if you have any thoughts on whether the government needs to do more to stimulate the economy and should it be thinking through a surplus hedge.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [46]

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That's not for us to comment on.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [47]

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Yes, exactly, exactly. I mean, look, we were -- there was a lot more stimulus. I think to put it in context, when the GFC was coming through in 2008 and 2009, we were reasonably concerned about what that was going to do to sales. And I think the labor government at the time jumped on the stimulus packages pretty quickly, and our sales responded relatively quickly as well. So we got through that period reasonably well. I think the uncertainty that we've had probably over the last 12 months hasn't helped our sales. So anything they can do to support housing should be positive for retail sales.

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Sue Mitchell;AFR ;Senior Reporter, [48]

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Okay. And in terms of the trade wars, do you have any thoughts? Or are these trade wars causing you more heartache or heartburn I should say in China? Or could they actually be a benefit for you in the longer term if, for example, it frees up some capacity in China or Chinese suppliers start offering better deals to customers outside of the U.S.?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [49]

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I won't try to have an opinion on it. It's so far removed from our business, except I can't say that's good for anyone.

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Operator [50]

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Our last question is Sam Teeger again from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [51]

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Just 2 very quick follow-ups. Just trying to understand the Light Source Solutions business in a bit more detail. At the moment, what percent of the sales comes from the street lighting opportunities you are pursuing? And can you provide an update about them? And then is it fair to say the residual just comes from the GE globe sales?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [52]

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That's right. Yes. Yes. So we won't necessarily break them out, but I'll just have to say that the street lighting business is performing pretty well. We're a relatively small player in that, as we've explained in the past. There's one group there that has quite a high percent of market share, but we are doing pretty well in that market and continue to grow. We've got good products, and we're strengthening our relationships in the big changeover of the street lights that are out there. So I think with -- that business performed better than what we expected it would for the year. And knowing what has to continue to be rolled out, we expect that, that should continue for the next couple of years. We're really only in the process at the moment of changing over what's called the P category lights, the pedestrian category lights, which is the minor roads, not the major roads. Once the P category lights are changed over, we're going to the V cat lights, which are all the main highway lights. And they will also need to be changed over. But we're only in the early phases of the P cat changeover. So we're very happy with it.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [53]

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Right. So is the GE globe sales the majority of sales at the moment in that division?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [54]

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No, it's -- the majority would sit with the roadway business at the moment. It's not like a big majority.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [55]

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Got it. Okay. And then just in terms of the international business, is it correct that the U.S. is the largest market so far?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [56]

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That's correct, yes. Yes.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [57]

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And what...

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [58]

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Well, it depends. If you talk about sales or profitability, I mean, we make a lot of profit -- profitability through our license sales, so that's good from a profitability point of view. From a sales point of view, the U.S. business is doing very well. Yes.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [59]

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Got it. And was U.S. the other half of sales of international?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [60]

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No, no, no.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [61]

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No. They're having a very hot northern summer in -- both in U.S. and in Europe. So it's the same pretty well for next season.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [62]

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In the fan sales?

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [63]

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Yes, in the fan sales. Yes.

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Operator [64]

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We do have one further question here from [Hamish Burns].

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Unidentified Analyst, [65]

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Sorry, just one more follow-up from me. In the context of store closures, there was -- Subiaco, I believe, closed last financial year. Now I think Deer Park is closer to closure. What's the total stores closed in over the last 3 years?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [66]

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So in the last 3 years, including the 2 that we've just done in July, there would be -- is it 4 or 3?

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David Speirs, Beacon Lighting Group Limited - CFO [67]

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Three. One's a relocation. There'll be 3. I mean Beacon Lighting has not closed stores very often at all. There was a lot of reasons for Subiaco to close, not just business performance. There was issues with the building. That closed down as a result. But there was certainly opportunities...

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [68]

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For entry, yes.

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David Speirs, Beacon Lighting Group Limited - CFO [69]

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Yes. And we had 2 stores in the 1 county in Western Australia, in Mandurah, so we closed one of those down. And we've had a bit of opportunity to close down the Sunshine store, so we did.

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Unidentified Analyst, [70]

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No, that's on a -- please don't interpret that as criticism. I'm just trying to, I suppose, get a flavor of the cost of a store closure as well. I mean I know this isn't something that is a BAU proposition for the group. It's only significant events which you've outlined, but there must be, presumably, onerous leases and some other root causes or...

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [71]

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Yes. We didn't -- they were all end-of-lease opportunities basically or close to the end of lease. So there was no exit costs in that regard.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [72]

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Yes. It was just we didn't make good on the building and got out of that.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [73]

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We're still -- yes. We didn't really need 2 stores in Mandurah. And the Subiaco one, the building wasn't suitable for what we're trying to do. So we had to get out of there predominantly for the building works that were required. And we're opening up another one in Perth to replace those in Queensland.

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Unidentified Analyst, [74]

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Does the cannibalization effects, which was alluded to earlier, is that sort of a difficult metric to predict when you're opening in, let's say, a preexisting metro area as opposed to regional where, I mean, there'll be some impact on store [margin, interest income and radius]. Is there -- I mean is that always a bit of a guessing game from your property chain when it comes to sort of...

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David Speirs, Beacon Lighting Group Limited - CFO [75]

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We have had some research done on that. All our sales get the postcode recorded against it, so we know where our existing sale's coming from. And we identify market opportunities and we open a store with an expectation of a reasonable understanding of what the cannibalization will be. And we don't do that without that information.

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Unidentified Analyst, [76]

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Okay. Sure. So if it's within a 10% or similar bandwidth, do you think it's worthwhile because in the long term, there will be growth?

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David Speirs, Beacon Lighting Group Limited - CFO [77]

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It depends on the market size.

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Operator [78]

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Ian, do we have time for one more question or not?

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [79]

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Yes, we're fine.

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Operator [80]

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Next question is from John Hynd from Wilsons.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [81]

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Just trying to understand the outlook commentary in regards to some of the points you've made, please. So -- and balancing, I guess, how the stores work at various points in the cycle. Starting with a franchise store being bought back, what sort of revenue impact would that typically have? And then I think you've mentioned the new stores. And correct me if I'm wrong, the new stores have come -- are expected to come on in the second half this year, and then you're closing 2 stores in Victoria and WA. How should we think about how that works together in regards to your commentary for earning -- or sorry, revenue growth for the period, please?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [82]

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John, I think with the closures, Sunshine and Mandurah, they -- you'd have to assume that they were not great performing stores. They were -- there's a reason why we are closing them. So -- and they are already completed. So you take those out of the sales. But also I think there's an expectation that some of those sales will be retained within the Beacon Lighting Group. Customers have proven they're willing to travel to go to a destination store like Beacon Lighting.

And particularly in Mandurah where the Mandurah market wasn't -- when it was growing strongly, it probably could have justified 2 stores. But it's been pretty hard over in WA for 5 years or so. It can't justify 2 stores in that particular market.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [83]

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Basically, a regional account with 2 fairly substantial big lighting stores is probably too much of an ask. So it was definitely something that we thought was well worth rationalizing. And the number of -- a good percentage of those sales have transferred across to an existing store, the one that's going to continue.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [84]

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So we would expect good sales growth in the existing Mandurah store because it's not having to divide its sales between the old Mandurah store. And same goes with Sunshine. We'd expect a fairly decent portion of those Sunshine sales to transfer across to Melbourne on Hoppers Crossing and Watergardens stores.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [85]

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And we did see the Subiaco closure. We were pleasantly surprised by the amount of sales that we transferred to adjoining stores.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [86]

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Right. So yes. So you've got those that will be [devastatedly] absorbed, which makes sense. And then, I guess, the franchise and new stores, how should we think about those?

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [87]

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Well, the franchise is one of the top-performing stores in the network, so we were delighted to be able to get it. But you've got to understand the franchise sales, they buy all their product office anyway. So half of what their turnover is already in our sales level, as the additional retail sales that is the additional part. So we don't get the full incremental sales of that business because we have to back out the wholesale sales that are already there.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [88]

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Plus the other income, which is the royalties. So...

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [89]

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Plus the royalties.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [90]

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You don't get the full uplift, but as Ian mentioned, it was a good-performing store, and we'll be happy to have it back in the network.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [91]

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Yes. Very, very profitable stores. So we're very happy to have it back in our network.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [92]

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And the new stores, have you made -- are you willing to make any comments about those?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [93]

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The new stores coming or the new stores done?

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [94]

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Sorry, the new stores, Virginia and Belmont.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [95]

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Yes. Look, they're -- as I mentioned earlier, they're still rubbery because we're still waiting for handover of those sites probably in the second half. And first year sales...

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [96]

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We won't be getting much in this financial year, I wouldn't think, from those couple of stores.

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David Speirs, Beacon Lighting Group Limited - CFO [97]

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We think they'll be very good stores for us for a long time.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [98]

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Yes.

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David Speirs, Beacon Lighting Group Limited - CFO [99]

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They're in good locations, in good markets.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [100]

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Great sites, present very well.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [101]

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And the stores we opened last year, some of those have been pretty good performers. So generally, very happy with the stores we opened last financial year.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [102]

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Yes. Okay. Makes sense. And not that you really feel it at all, I imagine. But what is the impact from buying a franchise store and bringing it -- consolidating into the group? On a gross margin level, I guess, academically, how should I think about that?

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [103]

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I think that all of a sudden, we're getting the wholesale and retail sales from that business. We previously were only getting the wholesale sales and the margin. So there is a little bit of gain as a result of that acquisition.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [104]

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You pick up their profitability, and they were very profitable in their own right. So the way we look at it is the additional profit line that they're generating becomes ours. Listen, they've already paid the royalties as well. So their profit line really becomes ours.

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Operator [105]

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Thank you. Ian, we don't have any further questions.

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Ian Robinson, Beacon Lighting Group Limited - Executive Chairman [106]

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Very good. Okay. Thank you, ladies and gentlemen, for your time. And wish you a pleasant day.

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Glen Robinson, Beacon Lighting Group Limited - CEO & Director [107]

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Yes. Thanks, everyone. Bye.