U.S. Markets closed

Edited Transcript of DLX.AX earnings conference call or presentation 15-May-19 12:30am GMT

Half Year 2019 DuluxGroup Ltd Earnings Call

Victoria Jan 15, 2020 (Thomson StreetEvents) -- Edited Transcript of DuluxGroup Ltd earnings conference call or presentation Wednesday, May 15, 2019 at 12:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Patrick William Houlihan

DuluxGroup Limited - CEO & Chairman

* Stuart Ronald Boxer

DuluxGroup Limited - Former CFO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Daniel Kang

Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Peter Steyn

Macquarie Research - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by and welcome to the half year results analyst briefing. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 15th of May 2019. And now I'd like to hand the conference over to your first speaker today, to Mr. Patrick Houlihan. Thank you, please go ahead.

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [2]

--------------------------------------------------------------------------------

Thank you, and good morning, everyone. My name is Patrick Houlihan and I am the Managing Director and CEO of DuluxGroup. Welcome to DuluxGroup's webcast for the financial results for the half year ended 31 March 2019. I am joined by DuluxGroup Chief Financial Officer, Stuart Boxer.

In terms of today's agenda, we'll follow our usual format. I'll provide an overview of the group and segment performance following which, Stuart will take you through some of the other numbers including cash flow and balance sheet items in greater detail. I will then conclude with comments on the Nippon Paint proposal and outlook. Following the presentation, we will allow ample time for questions.

So starting with the results. DuluxGroup's first half result was in line with the guidance that we provided at our 2018 year-end result and at our AGM. In particular, the revenue and EBIT growth for the Dulux ANZ business and, therefore, DuluxGroup overall, would be biased to the second half. Group revenue for the half was flat on a like-for-like basis and group EBIT was also flat, excluding favorable one-offs in the prior period. A key driver of the result was the decorative paint market, which declined 4% in volume terms relative to an unusually strong prior period. The result was a tale of 2 quarters. The first quarter was challenging, with revenue down 4%. This was offset by a stronger second quarter in which revenue growth returned to a more normal plus 4% level. Costs and margins were generally well managed despite raw material cost pressures.

Given the stronger second quarter which continued into April, we have maintained our full year guidance. The Board has declared an interim dividend of $0.15 per share, an increase of 7.1%. The Board has also declared a special dividend of $0.28 per share. Both dividends, which are fully franked, will be paid in late June.

And finally, we announced on April 17 the Nippon Paint proposal to acquire DuluxGroup for a consideration of $9.80 less the $0.43 for the 2 dividends. We will discuss this later in the presentation.

In terms of the specifics of the result, whilst headline sales declined slightly, this was due to the sale of the coatings business in China. Excluding these divestments, sales were flat.

As we pointed out at the full year result last year, the 2018 result was impacted by a number of favorable one-off items, including the sale of Glen Waverley. Stuart will take you through these again later. Excluding these prior year favorable one-offs, group EBIT was slightly ahead and NPAT was 4% below last year due to higher interest now that the Merrifield factory is complete and a higher tax rate. Cash flow was impacted by the weaker Q1 sales which impacted both inventory and creditors.

Our safety and sustainability performance was generally positive, with our near miss reporting, resource consumption and waste generation tracking in the right direction. We've unfortunately seen our level of injuries increase largely driven by manual handling. Whilst our performance still compares very favorably with our peers on this measure, we have renewed our focus on this important area whilst continuing our broader focus on disaster prevention and fatality prevention.

I will now go through the performance of the operating segments. I won't dwell on this slide as we will step through each of the segments in turn. I will, however, point out that we are showing both the headline figures and, where relevant, the figures compared to the prior year, excluding the favorable one-offs.

For Dulux ANZ, the result was consistent with the guidance that we provided at the full year and AGM last year, that is that revenue and EBIT growth will be biased to the second half. The key driver of the result was the market. Market volume growth in the prior corresponding period was unusually strong at 5%. So we see the decline of 4% during this half as more of a normalization than a structural reduction.

The 1% net market volume growth over the 2 years is more in line with the longer-term average of 1% to 1.5% per annum.

As we indicated earlier, the result for Dulux was a tale of 2 quarters. The first quarter was particularly challenging, driven by the market with revenue declining around 5% on the very strong prior year. However, we were pleased to see a strong recovery during the second quarter, with revenue growing approximately 6%. We were also pleased that the business held EBITDA margin for the half despite the flat revenue outcome and raw material pressures, which are now moderating as we head into the second half.

And finally, I'll remind you that despite the slight reduction in EBIT versus the prior year, the business still delivered a very strong EBIT margin of 18.5% for the half.

The Selleys & Parchem segment produced strong EBIT growth despite also having a challenging first quarter. Selleys' EBIT growth reflected positive mix outcomes and good cost control. Like Dulux, its second quarter was strong. Parchem's EBIT growth reflected a good revenue outcome in flat markets and profitability improvement resulting from refinements to its distribution model, which have resulted in broader distribution and lower fixed costs.

Whilst B&D delivered slightly lower EBIT for the half, this was largely due to investment of just over $1 million in the B&D to You mobile showroom strategy. We were pleased with the revenue growth outcome for the business despite challenging markets. The business generally managed its costs and margins well. Lincoln Sentry had a challenging half impacted by weaker markets. The business managed its cost well to minimize the impact on EBIT and continues to deliver a return on net assets in excess of 25%.

The headline result for the Other businesses segment was impacted by the sale and exit of the China Coatings business last year, which impacted the revenue and profit comparatives. Excluding these impacts, the result for the segment reflected weaker result for Yates and Papua New Guinea in challenging markets. The remaining businesses in this segment were broadly in line with prior year, with continued investment in the U.K. and in the Indonesian JV, which commenced trading at the end of the half.

I will now invite Stuart to take you through some additional financial details.

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Pat, and good morning, everybody. Below business EBIT, the results were generally in line with our guidance. Corporate was slightly favorable to our expectations and guidance with savings achieved relative to the prior year excluding the one-offs. We have reduced our full year guidance from $31 million to $28 million, excluding any costs associated with the Nippon scheme of arrangement. Net finance costs were in line with our guidance. The increase over prior year is largely due to the capitalization of interest associated with the Merrifield project in the prior year. Due to cash flow timing, we have slightly increased our full year net finance cost guidance from $18.5 million to $19 million, again excluding the interest impact of the special dividend and any other scheme-related impacts.

Tax is marginally higher than our guidance, but we have -- second half effective tax rate of 30.5% is our expectation. Whilst our balance sheet remains very comfortable, we were disappointed with the cash flow outcomes for the half. Working capital was impacted by the weak first quarter. Whilst we foreshadowed first quarter market and revenue challenges, we did not react quickly enough to reduce our inventory levels. Our second quarter performance was better on inventory but the results and adjustment to our raw material and finished goods purchases resulted in lower creditors at March. Restructuring-related cash outflows in China, as we exit the remaining Coatings businesses, also impacted the cash result for the half.

We are very focused on delivering an improved second half cash flow performance. Notwithstanding the weak first half, we are targeting cash conversion of around 80% for the full year. We expect this to be largely driven by the improved working capital focus plus our typical cash flow profile, which has a very strong second half bias.

I've included here the schedule showing the one-off items that had a favorable impact on last year's results. I'm not going to go through these but as you finalize your full year numbers relative to last year, I remind you to take accounts of these items.

I'll now hand back to Pat to go through the Nippon Paint proposal and the outlook.

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [4]

--------------------------------------------------------------------------------

You are all aware that on 17 April, we announced a proposal for Nippon Paint to acquire 100% of DuluxGroup in a 100% cash deal. The proposed price represents a very strong 16.1x historic EBITDA multiple, which we believe is the highest multiple paid in a global paint and coating sector. DuluxGroup Directors are recommending the offer to shareholders in the absence of a superior proposal and subject to the independent expert concluding that the scheme is in the best interest of shareholders. The $0.15 per share interim dividend and the $0.28 per share special dividend, both of which are fully franked, will be deducted from the $9.80 headline price. The current scheme time table is shown on the slide. We expect the scheme booklet to be sent to shareholders in mid-to-late June with a shareholder vote to occur in late July or early August.

I will now like to conclude with some comments on outlook. Whilst our first half was impacted by a market decline in the core decorative paint market, which particularly impacted our first quarter, we believe that one of the main reasons for this was the unusually strong market growth in the prior period. Our strong second quarter, which continued into April, gives us confidence about our second half. Looking forward, we expect to see continued solid demand from our core existing higher market segment.

In conclusion, subject to economic conditions and excluding nonrecurring items and impacts associated with the Nippon Paint scheme of arrangement, we expect 2019 full year NPAT to be higher than the 2018 NPAT of $150.7 million. That now ends the formal part of the presentation, I will now open the call up to questions. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question in queue is from Daniel Kang from Citigroup.

--------------------------------------------------------------------------------

Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [2]

--------------------------------------------------------------------------------

Just a quick couple of questions, if I may. Firstly, it was pleasing to see the rebound in the March quarter, 6% revenue, increase continued in April. Just interested in the -- what's driving that 6% improvement? Was it volume, mix or pricing or a combination of each? And then from a broader perspective, are you seeing a bottoming in the market? That's my first question.

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [3]

--------------------------------------------------------------------------------

In terms of that March quarter, thanks for your question, Daniel -- in terms of that March quarter, we really felt it was more business as usual. Obviously, that December quarter, we had that very high comp I mentioned in the discussion just then

prior year grew 5%. This half we were going through was down 4%, so that net-net effect. But if I look across the half and I take paint as an example, market volume was down 4%, share was flat and price was up 4%. So that will be the characteristics of the drivers.

Obviously, we've shared before that in 2018, raw material prices were mitigated to a level of about 6%. They continued to grow in this half at a rate of mid-single digits. So we were able to use price to largely recover that, but also good cost control led to those flat EBITDA margins, but essentially, I think that gives you the shape. But in terms of sort of consumption fundamentals, we're feeling like we're now entering a more normal period because in half 2 last year, the decorative paint market grew 1.5%. So we're now not comparing to that abnormally high prior period.

--------------------------------------------------------------------------------

Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [4]

--------------------------------------------------------------------------------

So you're expecting 1% to 1.5% normalized growth going forward?

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [5]

--------------------------------------------------------------------------------

Well, history says that the decorative paint market grows 1% to 1.5%. So what I'm saying is we're now comparing to that historically. So time will tell what actually happens but we've at least got a more normal comparative.

--------------------------------------------------------------------------------

Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [6]

--------------------------------------------------------------------------------

Got it. And just elaborating on your raw material costs, is it -- has it -- you've indicated that moderated. Are you expecting a tailwind in the second half?

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [7]

--------------------------------------------------------------------------------

So hi, Daniel, Stuart here. What we've sort of talked about is that we had raw material increases in the mid-single digits for the Dulux Paint business during that half, and we've guided to those raw material cost increases being low single-digits in the second half. So that's sort of what we're expecting.

--------------------------------------------------------------------------------

Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [8]

--------------------------------------------------------------------------------

Okay, got it, got it. And just finally, in terms of regulatory approvals, I'm assuming that's progressing quite well. What is the timing that you would expect these to come through? Any issues that you'd expect?

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [9]

--------------------------------------------------------------------------------

Look, it's still relatively early in that process. It's all sort of going along as expected at the moment, Daniel. So nothing really to report. And the time table that we put in the slide is sort of reflective of what we expect and how we expect those sort of approvals to flow to enable us to keep to that time table.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And our next question is from Peter Wilson from Credit Suisse.

--------------------------------------------------------------------------------

Peter Wilson, Crédit Suisse AG, Research Division - Associate [11]

--------------------------------------------------------------------------------

First, for the B&D Group and Lincoln Sentry, you speak to weaker markets. I mean, I assume you're speaking about new housing here. Can you just give a bit of color there and a bit of color on how it has progressed throughout the year and the expectations in the second half?

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [12]

--------------------------------------------------------------------------------

In terms of -- I'll comment on B&D and Stuart can comment on Lincoln Sentry. But with B&D, we made the comment it grew revenue about 6% for the half, so we really actually were pleased with that. And if anything, that revenue growth, I should point out, was biased even more strongly in quarter 2. The B&D business has a greater exposure to new housing than, say, for example, the Dulux Paints business. But again, it's bias is heavily to detached. And so on one hand, whilst we say lead indicators like housing approvals having come off, we're still seeing a pipeline of activity.

But when you dig into that data, the detached housing statistics are actually, in the scheme of things, pretty consistent. So we feel we haven't sort of had any sort of adverse exposure in that regard. So pretty consistent performance from B&D. And as I mentioned, if it wasn't for the one-off type investments we're making in what we think is a very innovative and transformative consumer experience with the B&D to You vans, where we invested in the order of $1 million, the underlying nature of that business did very well. So we're focused on continuing to take that forward in the way we have, particularly, over the last couple of years.

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [13]

--------------------------------------------------------------------------------

Yes. And I think, for Lincoln Sentry, the market exposure is not dissimilar to B&D. It's sort of in the slides in terms of its exposure in new housing. It's probably a little bit more exposed to multi-risk. B&D, of course, is much more exposed to detached housing, to Pat's point. And Lincoln's a bit more exposed at multi-res market and a little bit of commercial. So I think that's where that business started to see a little bit of weakness.

I think the other thing is that unlike most of other businesses where the size of the project, if you like, is relatively small, and we talk about that as being one of the drivers of the resilient aspects of the market, for Lincoln Sentry on the cabinet hardware side, in particular, whilst the products themselves are relatively inexpensive, they're attached to a larger project, being a renovation of a kitchen or a bathroom. So perhaps you saw a little bit of that coming off as well in terms of the overall market.

--------------------------------------------------------------------------------

Peter Wilson, Crédit Suisse AG, Research Division - Associate [14]

--------------------------------------------------------------------------------

Okay. The bias to Q2 for Lincoln Sentry revenue growth is -- what's the story there?

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [15]

--------------------------------------------------------------------------------

The bias to Q2?

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [16]

--------------------------------------------------------------------------------

I mentioned that with B&D, I think you may be referring to, Peter, all I was saying there was we had good solid revenue growth across the half of 6%, but in just making reference. And if anything, it was even sort of more quite stronger, I should say, in the second half. I was just making a point it's interesting that Dulux and Selleys and others also saw that sort of relativity but...

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [17]

--------------------------------------------------------------------------------

Yes. The Lincoln Sentry was more consistent across the half. It didn't show that Q1-Q2 differential.

--------------------------------------------------------------------------------

Peter Wilson, Crédit Suisse AG, Research Division - Associate [18]

--------------------------------------------------------------------------------

Okay, apologies, B&D. Your comments around cash conversion being a little bit weak because you built up a bit of working capital because you didn't properly anticipate lower volumes. Which business segment were you referring to there and, I mean, where do you think the weakness came from?

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [19]

--------------------------------------------------------------------------------

Yes. So look it was -- there's sort of different performances in different businesses but it was generally sort of across the board. As I sort of said when I was going through the slides, whilst we were anticipating a weaker revenue performance than normal in that first half and particularly the first quarter, I think we just underestimated that, to some extent, in terms of there reaction on inventory. So we did see that better growth in the industry more or less across the company.

And as I said to you, we're starting to see that improvement in the second quarter coming through. But we've got that sort of credit to catch up to come, which we expect to occur now in the second half as we're getting inventory under control. So it was generally across the board, and you can sort of -- there's no specific hotspot.

--------------------------------------------------------------------------------

Peter Wilson, Crédit Suisse AG, Research Division - Associate [20]

--------------------------------------------------------------------------------

Okay. So just generally across all 3 business units, volume was slightly weaker than you'd expected?

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [21]

--------------------------------------------------------------------------------

Yes, I think -- I mean as I said, we foreshadowed it so we did expect, particularly in the Dulux business, that weaker market because of the comparative. But I think we just didn't react well enough in the way that we were managing our inventory through that period. So that's pretty much what the driver was. But I think one of the things that I'll remind you is that we've got it back to that 80% cash conversion for the year because as we see the inventory coming down and we also expect those creditors to start to build up again, given sort of getting into a more normal cycle in the second half, plus the fact that we typically have a stronger second half of cash flow, we still sort of remain confident that we'll be able to get to that 80% level for the full year.

--------------------------------------------------------------------------------

Peter Wilson, Crédit Suisse AG, Research Division - Associate [22]

--------------------------------------------------------------------------------

And just one more, if I can. The outlook for flat completions is probably a little bit more optimistic than many of the outlook segments that we're seeing. Can you maybe explain your view there and what visibility you have over that pipeline?

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [23]

--------------------------------------------------------------------------------

I think if anything, it's sort of representative of our bias to detached housing more than anything. Obviously, over the long run, Australia is tended to build about 150,000 new homes a year, 100 detached, 50 multi-res. Obviously, that spiked in recent years as we're now into the 200,000.

If you look at the net movement in Australia's -- if you look at the movement in our net population growth, which is being driven actually to a reasonable extent by immigration effects, the underlying demand for housing is about 180,000. So within all of that, we're seeing detached being pretty consistent, at least, the bits we play in. And we are more biased to the premium end of the market, we should point out. And we've only got a 25% market share of new housing for that very reason. So it really is representative of the areas of the market we're primarily exposed to and maybe that accounts for some of the differences you're commenting on.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question is from Peter Steyn from Macquarie.

--------------------------------------------------------------------------------

Peter Steyn, Macquarie Research - Analyst [25]

--------------------------------------------------------------------------------

Apologies, I thought I had canceled my question because I thought it had been asked. But perhaps just curious around market trends and, particularly, your comments around April, given that we had a fairly substantive disruption to trading patterns in the latter part of the year, months with holidays. How is that sort of going to come through in the base for you, and what's your experience in terms of demand levels notwithstanding that, Pat?

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [26]

--------------------------------------------------------------------------------

Look, in terms of April, we're really saying that, that March quarter we saw which was getting back to normal, so to speak, April was just a continuation of that. To your point around holiday periods and so on, that's something that more impacts say, trade-biased businesses. They obviously go -- hard pre-shutdown periods like that Easter, ANZAC Day week. Whereas, retail actually uses that holiday time to actually get those do-it-yourself jobs done around the home, given the nature of our product.

So we didn't see anything untoward in that mix. And remember last year, April and ANZAC Day, I mean, they were all ultimately in there, last year, April was earlier. So the timing in the weeks of when those things happen obviously move slightly. But we're really saying that period from January onwards got back to more normality and April was a continuation of that.

--------------------------------------------------------------------------------

Peter Steyn, Macquarie Research - Analyst [27]

--------------------------------------------------------------------------------

Yes. And then perhaps just a quick follow on -- I'm not too sure how much visibility you'd have on this, but is there anything discernible around ticket sizes of purchases at a retail level that is worth calling out? Is that reasonably consistent? Or are you seeing anything changing in terms of the types of projects the end customer maybe taking on?

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [28]

--------------------------------------------------------------------------------

No, nothing specifically. I mean the nature of our product tends to be sort of those low value -- relatively low-value repair renovation jobs around the home. So I think the consistency Dulux as sort of the proxy for the ANZ here is displayed over 20-odd years through economic and other cycles, continues to carry on. If I look at the mix of our products in terms of sort of premium through to mid and entry price points, we saw no change in the mix. And I think, again, that's a long sort of proven dimension of our business, where people are doing things like painting relatively infrequently and so the propensity to do it once and do it right. So nothing I can call out that's different than the sort of things we've seen over the long term.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

There's no more further questions at this time. I'd like to hand the call back to the speakers for any closing remarks.

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [30]

--------------------------------------------------------------------------------

We might do one final check for questions and if there are none, we will conclude the call.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

(Operator Instructions) There's no further questions at this time.

--------------------------------------------------------------------------------

Patrick William Houlihan, DuluxGroup Limited - CEO & Chairman [32]

--------------------------------------------------------------------------------

All right. Well, thank you, everyone, for joining the call today. We appreciate your time.

--------------------------------------------------------------------------------

Stuart Ronald Boxer, DuluxGroup Limited - Former CFO & Executive Director [33]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Ladies and gentlemen, that does conclude the call for today. Thank you all for participating. You may all disconnect. Goodbye.