I would now like to hand the conference over to Mr. Martin Nicholas, Group CFO. Please go ahead.
Thank you. Good morning to everybody joining today's call. It's my pleasure to welcome you to our First Half 2023 Results Call. I'll walk you through the group's trading performance. Then Jim Clayton, our CEO, will provide an operational and strategic update. I would like to start our presentation today by acknowledging and paying our respects to the traditional custodian on whose land we meet today. I would like to pay respect to their elders, past and present. Further to extend that respect to all Aboriginal and Torres Strait Islanders present today. We celebrate the continuing contribution of their food culture and their connection to, and custodianship of this country. Turning to slide four, we start with an overview of our results. In the first half 2023, we again reliably delivered steady EBIT growth. A well-controlled result against a particularly dynamic backdrop.
Sales hit another record high for the first half, with relative sales performances panning out broadly as we expected. America's solid growth, APAC steady, and EMEA volatile. Sales growth was more modest than in recent periods at 1%. As a group, we consolidated the exceptionally strong sales growth seen in the last two years. Moreover, we saw the foundations of continued growth with successful innovative new products, NPD, a growing Direct-to-Consumer channel, DTC, and robust results from our new geographies. Gross margins were well managed and strengthened nicely in the face of significant inflationary pressures and exchange rate volatility. Operating expenses were well controlled and aligned with sales to deliver sustained EBIT sale growth of 13.1% and EBIT growth of 7.6%.
NPAT and EPS were steady versus the prior year after absorbing the impact of increased finance costs from seasonally elevated borrowing and increased interest rates. Cash flow and net debt were in line with our expectations, reflecting the normal seasonal receivables increase, tactical inventory build, and the LELIT purchase in early July. We expect to see a healthy cash inflow in the second half 2023 as these peak receivables are collected and a more predictable supply chain allows a return to a more normal inventory flow model. Turning to slide five, we see our key segment performances. As expected, our performance diverged between the two business segments. Our strategically important global product segment grew revenue by 5% and gross profit by nearly 7%.
In constant currency terms, we successfully consolidated the exceptional revenue gains of 39% in the first half 2021 and 24% in the first half 2022. Getting ovens back into supply allowed us to enjoy the air fryer tailwind, making cooking the fastest-growing product category in the half. Coffee also grew with the tailwind of at-home quality coffee still driving sales. As expected, food preparation category is rebasing post-COVID. Group-wide new product development launches landed well, with strong sales from both the Barista Express Impress and the Smart Oven Air Fryer Pro. While our investment in the group's digital platform paid dividends with our direct-to-consumer sales growing 66% to become our fifth largest customer globally. Price rises in this premium segment and a normal level of promotional activity improved our gross margin % in the face of widespread inflationary pressures.
In contrast to the global segment, our smaller mass market distribution segment declined in both revenue and in gross margin, where recovering cost increases proved more challenging. The primary driver of this reduction was the Nespresso product line, which faced a major supply disruption during a product changeover involving sourcing from the Ukraine. The distribution segment still delivered over AUD 26 million of gross profit to cover its direct expenses and to reinvest in the global product segment. Turning to slide six, here we see the relative theater sell-in performances in the global product segment. The Americas, our largest region, grew 22% or 12% in constant currency, with U.S. consumers proving resilience at the premium end of the market. Ovens led the charge, coffee delivered solid growth, and our NPD landed very well. Mexico also accelerated in its second year.
Sell-in and sell-out were broadly aligned in the Americas. We were pleased with APAC's performance, consolidating the exceptional growth of the first half 2021 at 49% and the first half 2022 at 22%. Our NPD again performed well, and our first direct entry into Asia, South Korea, is performing above our expectations. In ANZ, sell-out moderately exceeded sell-in, and we held our market share position. EMEA's consumer purchases actually grew in the first half 2023, in contrast to the reported 22% sell-in decline, which largely reflects retailer destocking. We didn't participate in discounting to artificially drive retailer buyer, and we will look to consumer offtakes to pull through stronger retailer orders in future periods. For EMEA, the first half 2023 is a reflection of retailer behavior quite disconnected from end consumer behavior. To slide seven.
Although today we naturally focus on first half 2023 performance, given the turbulence over the last seven years, we thought it would be useful to place this performance in a longer-term context. Here you see first half global segment sales at constant exchange rates over the last seven years. In the pre-COVID period, 2017 to 2020, the global segment grew at a CAGR, constant average growth rate, of 16%. During COVID, this accelerated to a 31% CAGR in the first half 2020 to the first half 2022. In the later half, even after accounting for retail destocking, the global segment still grew by 1%.
This means, at least through the first half 2023, we've been able to consolidate the step change in growth we experienced in 2020 to 2022, landing us well ahead of the 2017 to 2020 growth trajectory. At the same time, despite tariffs, inflationary pressures, increases in FOB, freight rates, and currency swings, we've taken our growth margin back to 37%. Each theater has its own story, but over this same period of first half 2017 through first half 2023, all three regions have delivered solid growth. APAC at a 15% CAGR, Americas at a 16% CAGR, and EMEA at a 27% CAGR.
The COVID period certainly has brought some noise into our growth trends, but throughout these seven years, our acceleration program, increased investment in MPD and marketing, geographic expansion, and a single global platform or digital ecosystem, has continued to deliver and lay the foundations for continued growth. To slide eight. This slide shows how gross margin strengthened over the last 12 months. Focusing on the red bars, you can see that the magnitude of the gross margin headwinds caused by our manufacturing partners increasing FOBs, the punitive ocean and domestic freight rates, and the strength of the US dollar. Collectively, they reduced gross margin by approximately 3%. This was more than offset by price rises we took in the premium global segment to approximately 4% and a slight benefit in mix netted against the more normal promotional cadence.
Looking forward, we appear to be entering a more benign inflationary environment for our products with recent substantial decreases in freight rates and FOB reductions coming through and a moderating US dollar, all of which should support ongoing healthy gross margins. To slide nine. This EBIT bridge exhibits the flexibility of our business model, or put another way, the control we have over our expense designs. With top-line revenue growing at approximately 1%, EBITDA grew at 13.1%, and EBIT at 7.6%. The incremental benefit we captured in sales growth and gross margin improvement covered a small increase in overheads, with the rest dropping straight to EBIT. Total marketing, R&D, and technology services spend was held broadly flat for the half after a number of periods of rapid acceleration.
The completion of major digital platform projects and accelerated content creation in FY 2022 gave us the headroom to do this without materially impacting consumer-facing spend. Investment levels in R&D and innovation were strategically maintained. As with every year before this one, in the second half 2023, we will work to align our expenses with our gross profit trajectory to deliver sustained EBIT growth. Slide 10. Turning to the balance sheet. When comparing December 2022 against December 2021, you can see the impact of our purchase of the lease, as well as our approach to inventory planning, flowing through this balance sheet. Inventory and net debt levels are both within our planning parameters and expectations. The negligible obsolescence risk of our products enables us to tactically build and release inventory as a hedge against supply chain uncertainties.
With growing supply chain stability, the scale of that hedge will begin to reduce and inventory levels will naturally decline. Our December 2022 inventory balance was AUD 172 million higher than in the prior period and broadly steady on June 2022. Breaking this into its component pieces, our core inventory increased approximately AUD 66 million as a natural outcome of our inventory planning process, whereby we land the maximum level we're willing to hold and then sell for the first half. As with prior years, we adjust our purchase pattern in the second half to glide each product back towards its equilibrium point.
We'll work through this exact process in the second half of FY 2023. Of the remaining AUD 106 million increase, AUD 73 million relates to the addition of LELIT inventory and new inventory pools for Mexico and South Korea, and AUD 33 million relates to inventory held for NPD launches. In more discuss the Launch 2.0 process and our increasing upfront investment in inventory to maximize the ROI of our new product launches later in this presentation. December receivables were in line with the prior period and AUD 195 million above June 2022. We collect this seasonal build in January and February. Pleasingly, days outstanding are well controlled and in line with the prior year. Our PP&E increase is driven by both production tooling investments and manufacturing assets acquired with LELIT. Other intangibles reflect our ongoing investment in R&D projects.
The increase in goodwill and brands is also the result of the LELIT acquisition and some exchange rate fluctuations. Overall, our overall 12-month swing in net debt is driven by our inventory planning process over the second half of 2022 and the first half of 2023, coupled with our purchase of LELIT. As we now collect peak season receivables and as a more predictable supply chain reemerges, allowing a transition back to our normal inventory flow model, we expect to see a healthy cash inflow and reduced net debt in the second half of 2023. Lastly, our ROE period-on-period change is a result of the shares issued also as part of the LELIT acquisition, which is pleasingly performing to plan. Turning to slide 11. Before I turn over to Jim, a few key points I'd like to reiterate about our first half 2023 performance.
Firstly, despite the volatility in our markets, including the retailer behavior in those markets, we delivered another record sales number and sustained our track record of delivering solid EBIT growth. We saw encouraging growth from new product development, direct-to-consumer channel, and new countries. Our product portfolio benefited from both the quality coffee and air fryer tailwinds, all supporting our medium-term growth trajectory. Gross margins were well managed with a healthy 100 basis point increase. Price and controlled promotional spend outweighed cost increases, a reflection of the value our premium products deliver to our customers. We demonstrated the ability to control expenses to deliver sustained EBIT growth, even in a moderated sales growth environment. Lastly, our December 2022 net debt position is a result of the purchase of LELIT, coupled with our approach to inventory planning when supply chain is unpredictable.
With the supply chain now behaving more reliably, we will transition back towards a more normal working capital model. We expect this to drive a cash inflow in the second half of 2023. On that note, I'll now pass to Jim Clayton, our CEO, to provide an operational and strategic update.
Thank you, Martin, and good morning to everyone. Slide 12. Today, I'm gonna take you through two topics: our Launch 2.0 process, an abstracted view of Breville. Conclude with some thoughts on FY 2023 and our outlook for the year. Turning to slide 13. When we launched the Barista Express Impress this year, we used a new launch process, what we call Launch 2.0. To help you understand the step change improvement this new process has delivered, I've set up an analytic drag race between the Barista Pro, which was launched under the old process, and the Barista Impress. As luck would have it, they have very similar price points, neutralizing the elasticity variable. Turning to slide 14. At the highest level, there are two main differences between the launch processes.
One, the elapsed time from the first country launch to the last, and two, the go-to-market approach within a country. In this example, Launch 2.0 cut three months off the total launch time, which is a revenue accelerator. The major driver for shortening the total launch time is inventory positioning. In Launch 1.0, we launch in the first country then begin to ramp production to support the existing country and the next. With 2.0, we built material inventory ahead of time to support a big bang launch in each country. This played a role in our FY 2022 inventory number and is embedded in our first half 2023 inventory number for a SKU launching in the second half of 2023. Looking at the country level on this chart, you can see a difference in the width of the launch bar.
Picking Australia as an example, the Barista Pro went into the first retailer in November 2018. The last retailer in Australia, however, did not receive the new product until April 2019. The production ramp approach drives this incremental step-by-step rollout. With Launch 2.0, we preloaded all launch inventory so that all retailers went live with the new product on the same day. There was an actual launch day. Why does this matter? In Launch 1.0, the burden of marketing the new product falls on Breville alone, supporting the product throughout the retailer rollout. With version Launch 2.0, Breville and all our retail partners were marketing the new product on the same day, giving a leverage effect on our marketing spend. In theory, this should accelerate the numbers of consumers evaluating the new product versus the Launch 1.0 approach.
Let's see if that happens. Turning to slide 15. Let me help you understand what you're looking at here. This is a four week trailing average of the weekly sell out data of the Barista Pro and the Barista Impress in a single country. Both curves are anchored on each product's first week of launch. This means we are apples to apples on time in market, but we are not aligned against seasonal patterns because they launched in different months. I've highlighted the core Christmas window in purple for each. With the Barista Pro, it launched in its first retailer, then steadily climbed for two years. At the end of the second year, it hit its run rate for future years. A proxy for the revenue we reported for the Barista Pro from this country is the area under the gray line.
I say proxy because this is sell out data, not sell in. With the Launch 2.0 process, the Barista Impress came online quickly and may have reached its long-term run rate seven weeks after launch. Two quick footnotes. The flat dip on the left side of the curve is a function of using a four-week trailing average. The spike is driven by the holiday season. The net out of this analysis is our Launch 2.0 process is driving material revenue acceleration within a country. Turning to slide 16. Looking at the aggregate sellout data across all markets, you can see the combined impact of countries launching more quickly, coupled with the accelerated path to run rate for the product. This chart shows you the four-week trailing average of the aggregate weekly sellout data for each product, with both products anchored on their first week of launch.
I've also included an indication of when each country came online. By the 40th week after launch, the Barista Impress had a weekly unit sellout that was 8.5 times larger than the Barista Pro. Slide 17. In the last two slides, I ran the analytic drag race based on each product having an equal time in market. If instead I cut the data based on the calendar year, we can normalize out seasonality. The Barista Pro will have an advantage because it has more time in market. In this race, the Barista Pro has a five month head start. Focusing in on Barista Pro's 35th week from launch, you can see that by this time, Barista Pro had launched in at least one retailer in all countries.
With Launch 2.0, the Barista Impress had a higher weekly unit sellout having only launched in Australia and New Zealand. We saw a 4.5x sell out delta at the peak and a 2.5x delta exiting behind. No matter how I cut the data, I'm seeing the new Launch 2.0 process is a material improvement in our acceleration program. If NPD is a core strength, Launch 2.0 process is throwing fuel on the fire. Slide 18. To look at Breville through a lens you may not have considered. Slide 19. Breville is, and for quite some time has been a global small domestic appliance company. Looking through a different lens, it is also a virtual intellectual property and information management company. Slide 20.
With limited exceptions, which I footnoted at the bottom of the chart, the following statement is true: Breville doesn't make anything, move anything, store anything, sell anything or service anything. You may have to sit with this statement for a bit to see the Breville I'm talking about. If we don't do any of that, what do we do? We generate and protect intellectual property, support its go-to-market and aftermarket support through the management of roughly 2,500 third parties in multiple languages and time zones to deliver the numbers Martin reports to you each year. Through a market analyst view, you can see the virtualization in our numbers. Our property, plant, and equipment is approximately 3% of total assets, and our EBIT dollars per employee is AUD 160,000. Both metrics are quite unique when compared to other companies in this vertical.
This is because we don't really use PP&E, and we don't have many employees on a relative basis. We are a virtual company. I appreciate that each time we have these discussions, I drone on about the corporate platform. I do this because it is the corporate platform that makes this virtualization possible. It's what we use to coordinate and align 2,500 third parties every day. To stretch an analogy, it's a bit like comparing the total employees at the Sydney Airport to the number of employees in the control tower. The control tower can run with just a few employees because of three things. One, the skill and capabilities of those employees. Two, the standardization and predictability of processes. Three, the underlying sense and respond technology platform. Slide 21. What are the advantages of virtualization? Speed, agility, and business model flexibility.
We can go into new countries quickly and integrate acquisitions fairly easily because we don't have physical assets in play. It's a framework and data game. For the new countries, it's contracting with the right third parties and connecting them to our corporate platform. For acquisition integration, it's cleansing and loading data. The core global processes of the platform are already in place. The advantage of agility cannot be overstated in the current environment. How did we manage our way through the shocks of COVID? By quickly seeing the alignment problems and directing and project managing third parties to fix them. If we relied on physical assets, our flexibility and adaptability would collapse. Lastly, the business model. As I watch the reported numbers of other companies navigating their way through this macro environment, negative operating leverage is more the rule than the exception.
Small reductions in gross profit are equating to material reductions in EBIT. Negative operating leverage at work. In a virtual company posture, a lack of fixed assets and their associated operating costs makes the business model more malleable, much like a software company. It certainly doesn't mean you are immune to the challenges of falling gross profit, but it does mean you have more degrees of freedom to adapt and respond. Slide 22. Lastly, a bit about FY 2023 and our outlook. Slide 23. When COVID first hit, I held a town hall with all employees and told the team we were at the beginning of a marathon, and we needed to pace ourselves accordingly.
During this current leg of the race, where central banks are using their tools to beat back inflation, thus driving the economic cycle, I told the team that we would be running in the rain, emphasis on running. Looking at the first half of 2023, I reflected a bit on the acceleration program progression despite the backdrop. I landed on the following. As we went through COVID, I told many of you that I did not trust the data. I am analytic by nature, so this was a frustrating period. As I look at the first half of 2023, I'm seeing indications that we are back on model. The three theaters behaved as predicted on a relative basis. The consumer sellout pattern or shape was normal. The supply chain on the whole behaved predictably, enabling us to begin transitioning back to our inventory flow model.
The primary driver of noise in the first half came from retailers, specifically the spread between sellout growth in the NDA versus the selling decline. This should naturally right itself as retailers get their footing. Second, the acceleration levers of NPD, geographic expansion, and acquisition are performing well. The NPD pipeline looks solid on a forward basis. The Launch 2.0 process is magnifying the financial impact of new products. The new geographies are firing, and the LELIT integration and plan are on track. Third, our innovation-driven product focus, theater diversification, and business model virtualization has so far given us the flexibility to ride the undulating economic waves washing through various countries, as well as adapt to the behavior of retailers in the value chain, all while holding our gross margins.
Finally, after a couple of years of effort, we've removed the supply constraint we were experiencing in ovens, enabling cooking to be the fastest-growing product category globally. Our multi-year effort and investment into our digital offense is paying dividends, with DTC ascending to our fifth largest customer globally. This is not to say that we are not in a very challenging and dynamic environment. As I look to the next five years, I see that the team is continuing to lay the foundation to support continued acceleration. We are running in the rain. Slide 24. Focusing specifically on the second half, some of our manufacturers are running at reduced capacity as COVID rolls through China. From all that we see today, we believe the inventory insurance policy we took out last year will prevent this hiccup from materially impacting our second half numbers.
Because I believe we are now on model, we will begin the transition back to an inventory flow model. This will be a measured cadence with a touch of just in case, but we expect working capital to begin to release. Along with everyone else in the market, we're seeing reduced input and logistics costs. This tailwind benefit will begin to flow through our numbers as we turn our inventory. We expect to launch three new products in the second half, two of which will be going through the Launch 2.0 process. While this will execute in the second half, it's more of a tailwind setup for the first half of 2024 because all three should be fully distributed for holiday 2024. Lastly, as always, we'll continue to invest in marketing R&D and technology consistent with our gross profit trajectory. Slide 25.
Our outlook guidance for FY 2023 is we expect EBIT to land between AUD 165 million and AUD 172 million, which is 5%-10% growth on FY 2022. In prior periods, I've seen a bit of excitement kicked off by the caveat bullets below our outlook. In an effort to dampen some of this excitement, you'll see these are the same bullets we use every time I provide our outlook statement. Nothing new this year. With that, I will now hand it to the operator, who will open the call up for any questions you might have about our first half 2023 results.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. We ask that all participants limit their questions to one per turn, and if you have any further questions, you will need to rejoin the queue. Your first question comes from Tom Kierath from Barrenjoey. Please go ahead.
morning, guys. Just a question on inventory and just where you see retailer inventory. I guess, like, following on from that, just how you see sell out tracking around the different regions. Is it improving, decelerating, et cetera? Thanks.
From a Breville perspective, retailer inventory is in a good position, meaning coming out of the half. I say good position, it's in the position that they put it in. Meaning, to my knowledge, no big retailer has too much Breville inventory.
Mm-hmm. Okay.
I think that's right. I mean, from a sellout.
Mm-hmm.
Perspective, we, I think we put this in the deck, which is in America, sell in and sell out were pretty close to one another. In Asia- Pac, sell out was running faster than sell in, call it marginally.
Yeah.
In EMEA, that's where we saw the biggest spread, where sellout was positive, single digit positive. Sell in, I think whatever we reported, -22% on the sell in.
Yeah. Is it getting better or worse, I guess is the question. There's obviously a six-month period, there's a fair bit of time for what can happen. Just trying to get a sense of whether things have bottomed and they're improving or potentially still getting a little softer.
Yeah, it doesn't quite work that... Sorry, I'm just trying to internalize the question. It doesn't quite work that way because you've got holiday, right? I'll have a decent read on the second half probably, I don't know, March-ish.
Mm-hmm.
Sometimes when you, when you look at January, February, March together, they can give you a pretty good run rate for the second half. In general, in this business, the second half is pretty stable, predictable. I don't know how to describe it. I've disclosed in lots of presentations, sell out curves for lots of SKUs, and you can look at the second half. It tends to be relatively boring.
Okay. Got it. Thanks, Jim.
Your next question comes from Lisa Deng from Goldman Sachs. Pardon. Please go ahead.
Hi. Just one question on gross profit margin outlook. As we are moving into lower cost environment, as you had pointed out, and we've taken up the, you know, prices to the effect of four percentage point improvement on the first half, is that price going to be sticky, you know, even though the cost is going to be increasingly favorable? How do we think about the GP trend or margin trend into the second half? Thanks.
Okay. Thanks, Lisa. Look, I'd rather have those cost decreases coming through than not having them coming through because it puts something in our pocket. So far, you haven't seen us need to lean into any abnormal discounting or promotion, and that's how we landed the 1% gross profit increase in the first half, and now we've got declining input costs. I think I put the statement in the presentation that we see a quite benign, if not positive position for gross margin moving into the second half. No, we don't see it coming under threat from pricing or discounting.
The potential is actually an even more positive, you know, expansion than what we've got in the first half, right?
I think what I was trying to say is you've got headwinds and you've got tailwinds. They're at least balanced and maybe the tailwinds are slightly outweighing the headwinds. Yeah. There could be some gross margin progression.
Got it. Thank you.
Your next question comes from Alexander Mees from Morgans. Please go ahead.
Good morning, gentlemen. Just a question about your comment around Europe, where you said that declining sell-in reflects retailers destocking across Europe and not consumers buying patterns. I'm just wondering why you think there's been that disconnect, and is there a reasonably heavy implication that retailers are gonna start restocking soon?
I think the driver of the disconnect is pretty simple, which is a war in the Ukraine, you know, coupled with inflation and central banks doing everything they can to beat it back. I think that's what put all retailers in Europe on the back foot, and caused them to not believe, you know, kind of forward data. They were tempted to plan for the worst. I think. Look, what happens when retailers run. A retailer on a normal week, let's say, you know, nine-to-five kind of week, needs a certain amount of inventory in their warehouse to keep their stores filled and so forth.
If the tradie is gonna, you know, get the forklift and this and that and so forth, there's a certain amount of inventory that needs to exist in that warehouse for that to happen. Same with Breville. When you run it really tight, which we've all gone through at Breville, as we went through COVID, you end up having to work that warehouse a whole lot harder because trucks are unloading in the morning, and then you've got to get them out the next day, and you start cross docking and all kinds of things to meet that timeline. What you see is there is some for every single retailer, there is some minimum level that they need to hold to get into a more kind of steady, normal operating environment.
My hypothesis in Europe specifically is that some of the retailers are below that waterline. You can do it for a while, but eventually, you'll start to wanna balance that back out. When that happens, I don't know. For a kid, you know, 90 years of Breville, and to date, all of those retailers ran on X amount of weeks of cover, let's say, or days of cover in their warehouse, I don't think they've all suddenly said, "Gosh, you know, we could run the whole thing just the same, with a whole lot less." Eventually they'll heal up, but I think that'll happen when they start trusting their data, right?
When they believe they can start to predict their future, and then they'll start to steady and stabilize against that with some sense of confidence.
Thanks, Jim.
Your next question comes from John Sanford-Hind from Wilsons. Please go ahead.
Good morning, Jim and Martin. Thanks for taking my question. Just touching on, APAC perhaps, the A great result, given the strength over the last couple of years. I guess despite the difficult conditions, we had expected a little bit more growth. You know, cyber periods were pretty favorable, by all reports. You've also added in South Korea, which, to your account, is performing ahead of expectations. How should we unpack the result at the constant currency line, for APAC, please?
Yeah. One, be careful with South Korea because it's the law of small numbers, right? Which this is their first year.
Yeah. Yeah.
They have come out of the gate, a lot faster than we thought they would. Against the weight of the entire rest of the theater, they're not there to move the number, so to speak. I think the bit that when you look at an Asia-Pac, I mean, if I just pick on ANZ, you know, when I started, every analyst called ANZ a 2%-3% grower. You know, it already reached terminal. That region has grown between 8% and 12%, let's call it. I guess the CAGR from 17 to 20 was 16%.
Yeah.
15, whatever it was. Which was a, I think, a little bit surprising, relative to original expectations. A region that was clocking at, you know, a 15 all of a sudden dropped to 49. Was it 49?
49 and then 22.
A 49 and then stuck a 22 on top of that. That's a, that's a lot to hold on to. As I said, when we were going through that and I was trying to get my head around it, I thought some of that was driven by competitors putting ANZ at the bottom of their supply chain to-do list, that I thought we were probably picking something up just because they weren't there. The counterargument to that one is our market share held. I expected.
Mm-hmm
T o go backwards if that hypothesis were there. Within that model, I think you've got to look at Asia- Pac over a three year period and kind of start to forecast what do we think the run rate's gonna be. And to what extent are we going to be able to take you know, a plus whatever it was, 60%, 70% increase and then push that through. The main driver for the ANZ portion of Asia- Pac has always NPD. That +49% and +22% came without NPD, you know, in COVID.
Now what we're gonna be watching over the next little period is this intersection of where does that thing stabilize, you know, kind of on its own, let's call it the core, and then where does NPD come in to drive a shot in the arm.
Yeah. That's very helpful. It was a great result. Thanks, guys.
Your next question comes from Keegan Booysen from Jarden. Please go ahead.
Good morning, team. Just one from me. Just regarding the LELIT acquisition, I was hoping you could talk a bit more, give some color just around the benefits of the P&L, both from a sales line, as well as a margin standpoint as well. You know, particularly given, you know, the stock term and what it would be versus the core Breville products might be a bit different. If you could just expand on that a bit. Then also which regions, I think it's mainly in EMEA, that it would benefit, please.
We're pleased with how LELIT has started. Clearly it's early days. It's been in our hands for six months. You know, we haven't yet really taken the brand with any anger into the Americas or into the APAC regions. That would be opportunity. Integration's gone well. The business has been recapitalized. We thought about putting sales numbers or profit numbers in the announcement. We didn't really because it wasn't the story of the half. You know, in the half we had to absorb Nespresso declines we spoke about. We had to absorb Euro retailer decline, food prep reset.
We didn't really talk about Bed Bath & Beyond as well. That we had offsetting tailwinds of new product development that's really firing DTC, firing ovens, firing in the Americas. Each of those within a 1% sales growth in the end, each of those were more important than the sales and the profit that LELIT brought to the party. I look forward to talking about the LELIT acquisition with Peter. They're probably more the full year, Jim, than at the half.
A little bit. I think the other bit in the year-over-year net out is it's pretty close to the back out from Russia.
Correct.
Those two, you know, kind of wash themselves a little bit at the EBIT line, which gives you a pretty clean year-over-year view.
If I was doing a waterfall chart, yeah, LELIT would be a positive blip on the waterfall, but I've got eight others positive and eight others negative surrounding it.
Yep.
It's not the feature of the first half.
I mean, to be fair, it's a small company.
Yes.
I tend to talk about acquisitions about two or three quarters after we do them, about why we did it and so forth. By itself, it can't make a difference. By definition, it's too small.
Okay. Thank you.
Your next question comes from Grant Saligari from Credit Suisse. Please go ahead.
Thanks and good morning. Just wondering whether you could comment, please, on the outlook for a couple of the cost lines or expense lines. Specifically, your promo and markdown expense you commented on the first half had a, you know, relatively benign sort of outcome, but you're now, as you said, got relatively higher cost inventory relative to the cost of goods that's coming through the market now. Sort of interested directionally in how you think that promo line might move in the second half. The second expense line is just around the employee expenses, which stepped up to about AUD 100 million in the first half. Just wondering whether that's a reasonable sort of peg in the fang for the second half.
Just the third is the other expenses line, which has been quite volatile half to half, but fairly consistent on a full year basis. Again, just wondering whether you could comment on the movement in the half and other expenses and whether the full year historical is a reasonable guide to where that might land for the FY 2023, please.
Maybe I'll take the first one and let you take the second two.
Okay.
The promotional cadence that we ran in the first half was what I would describe as the normal promotional cadence for a first half. We will also have a normal promotional cadence for the second half. I don't expect any change one way or the other. When I say we're back on model, it's kind of we're back in our half-on-half flow as well.
I think the first part of the question is half a good guide for the second half? Yes, because we're not in an employee expansion game at the moment, apart from a few heads added from LELIT. The increase you saw in employment benefits was largely around retaining the current team and motivating the current team. There was about a 4.5% pay rise in there. There was an increase in the STI and the LTI incentive opportunity. Obviously, whether they pay out or don't pay out will depend on the performance of the group and a very limited amount of travel going back into our world as well.
I'd expect the second half employee benefits are pretty line ball lined up with the first half. In terms of other expenses, I spoke about that a little bit in the commentary, but maybe not enough. There you're seeing a pullback on third-party expenses. We've got a number of large technology projects that were largely completed in FY 2022, so it allowed us to pull back on some of those. A small element of insourcing where we've moved some of those activities and headcount into the business rather than third party. We saw a distinct reduction in legal expenses and some one-offs, such as the costs of entering South Korea, and a number of other one-offs not repeating. Yeah, I'm pretty confident that the second half on other expenses also mirrors the first half.
That's kind of a normalized run rate.
Okay. Thank you.
Your next question comes from Russell Gill from J.P. Morgan. Please go ahead.
Hi, guys. I guess more of a question about the next couple of years. You basically said you're back on model, I guess, after COVID-19, and you highlighted during COVID-19, you accelerated investment, you know, reinvested the uplift in gross profit, and highlighted the flexibility in your cost base. Given, I guess, the environment now where potentially you're moving into more of an uncertain consumer, and you noted the discounting that you could have done in Europe to drive sell-in, just how you think you're gonna manage the top line versus, I guess, the EBIT line over the next couple of years in that sort of environment, when you're saying you're going back to on model?
I would say we manage it the same way we managed it in probably 16, 17, 18, 19 and 20. Which is the hiccup that needs to flow through is the retailers need to find their footing. Once retailers find their footing, sell out is flowing to sell in, which is flowing to us, right? In that construct, if you're on model, you run your normal offense that you ran in the pre-COVID period.
When you look.
Oriented-
Yeah.
You know, more geographic expansion and acquisition, you know, da, da, da, right? It's just now it starts to become more predictive within the construct of when we do our annual planning, "Hey, we think this is gonna be plus or minus this or that." You start to have some confidence in that variance, which is what we lost through kind of the COVID period.
Okay. Okay. I guess the question is, we look at that 15-19 period where the top line grew sort of mid to high single-digit and the EBIT line something similar. From today's base, where you see things and the outlook you own, you're still confident that's the direction of where the business will be going, both on the top line and the EBIT line?
I don't think we grew single digit. I think the CAGR was. I don't know what the CAGR was. It was 16 or something like that during that period.
Eighteen.
It was whatever. It was double digits. It's a bullet that that's playing through within a construct. You got the COVID period, then you'll have this settling out on the other side of that. Once that's all done, the dust has settled. You know, why wouldn't company, just generically, if everything's back to, quote, "normal," so to speak, then it's gonna be back to the strength of our offense, you know, relative to everyone else in the market, you know, within a construct. The system has to settle down. Like, that part hasn't completed yet, like the settling in, right? Central banks are still raising. Like, we're still in the economic cycle that they're kicking off.
You're gonna have to ride that wave. When I say on model, what I mean is that I could have a. Let's say I've got a sellout curve that's down 80%. Just making this up. It's the shape of the curve that I care about, right? It's like, yeah, you'd rather that be plus instead of minus, but it's the shape. Which is did July, August, September, October, November, December, does the curve have the right shape? 'Cause if the curve has the right shape and you're running at minus 80, then by God, you're running at minus 50, right? You can start to get a feel for where each SKU, you know, is playing its game. That's what I mean by on model.
Within that construct, if consumers are buying at the same time, so to speak, and in the same magnitude of delta, let's call it the delta from October to July or something like that, you're starting to see these same patterns, then you're starting to look at something that is much more predictive. Whether pointed up or down, it is more predictive than in a world where you got the thing looks like an EKG and you have no idea what's in front of you. That's, to me, what, you know, kind of the last three years felt like, which is I did not trust forward data because I didn't trust the shape of the curve. It was bouncing all over the place. Once that curve starts to stabilize, then you can start to align your offense behind that curve.
Great. Thanks, Jim.
Your next question comes from Tim Lawson from Macquarie. Please go ahead.
Hi, gentlemen. Thanks for taking my question. Just in regards to provision movement, sometimes we can't see all detail at the half. Could, Martin, maybe comment on sort of movement in provisions as capitalization and warranty expense and any other sort of, you know, line items that we don't necessarily get to see with the half year?
Yeah, sure. Not much to say on provision movement. They're pretty much where they were the half year, so not really any movement at all. Warranty expenses and provision as a percentage of turnover is holding about the same. Provision for doubtful debt holding about the same. Yeah, no real noise there, Tim. As you, as you rightly say, you see more disclosure in the full year, but there's not a lot to see there.
Okay. Thank you.
Your next question comes from Apoorv Sehgal from UBS. Please go ahead.
Morning, Jim. Morning, Martin. One question from me. Just wanted to clarify some comments on the EMEA business. Into January, February, have retailers started restocking? Is retail behavior becoming more rational? Is that translating into improved sell-in outcomes in EMEA?
Like I said before, I'm gonna have to get into March or April. The reason I say that is that my experience over the last eight years is that January is a very random month because so many retailers close their year-end in January, so they all play games one side, you know, one way or another. I have to ignore January, well, however it goes. It's not relevant in a sense 'cause they're trying to get the inventory where they want it for you guys.
Then in February, March, they snap, and then you have to put all three of them together. Once you put all those three months together, then you can get a sense of where they're lining up from a run rate basis. We're in a hurry up and wait pattern.
All right. Okay, thank you.
Your next question comes from Sam Haddad from Petra Capital. Please go ahead.
Hi, Jim and Martin. Just on EMEA again, on the competitive backdrop there, you mentioned that you're not participating in discounting to drive artificial selling, but are you seeing other competitors do that? What does that mean in terms of stock position currently held with retails in Europe? Are you seeing, retails holding more stock with competitive brands at the moment? How does that translate to the outlook for you in terms of demand for your, for your brand?
Sam, I was really having trouble hearing your question, but I think I got it, which is I have no visibility to retailer inventory holdings of third parties. I can only see mine. The question I run around the table when half closed is, are we in a good position going into the second half? The answer I got back across all three theaters is yes.
If, if past behavior is a good indicator of future behavior, you've seen us not discounting for many periods now. Why would we clip in, especially when nature of our inventory is that it's has negligible obsolescence, Sam. So it's not. It's a pressure that I think we hear talked about in the market a bit about, is inventory putting pressure on people to clear it and to discount. Not happening to any degree with Breville.
I mean, a couple, maybe a couple things. First, I've been there for whatever, eight years and some change. I have never seen a spread like this between sell-in and sell-out. From my perspective, it would be something close to crazy to run some discount. You're not trying to discount to drive consumer demand, you're trying to discount to drive retailers to hold the inventory they should hold. That to me just seems like a crazy idea. It's like, I'll wait. Thank you. And we'll let the consumer offtake, which is the true mean reversion line, stabilize the system and once they get more confident.
I think the other comment that I'd make on inventory, because no matter how many, how much I try to beat it back, it keeps coming up, which is when we all met in August, everybody was running around with their hair on fire because we had too much inventory, which was gonna cause all kinds of promotion and all this you know, parade of horrible, which sounded like I was a retailer. We had that inventory and our gross margins expanded 100 basis points. The takeaway that I'd like for everybody to walk away with now that the numbers are on the board, is there is zero R-squared between our inventory position and our gross margin, which is those two are not connected. And it's just because I can sell the same product for 10 years.
It doesn't make any sense to do it any other way. Doesn't make sense to discount into a retailer when the sellout offtake is where you want it. You just sit tight and play each half, and everything will eventually get back to the mean reversion line. For me, it's really about managing the portfolio, which is when the retailers behave the way they did in EMEA, obviously my theater head in EMEA is like, "Oh my goodness." I got on the mic and I was like, "We have a problem." At the BRG level, we don't. Fine. There's no problem to fix. This is where theater diversification comes into play, which is we're between the goalposts, nothing to fix, nothing's broken, play through. That's how we do this every time.
When we come out and talk to you guys, you wanna, like, pick at each piece of what about this or what about that one? It's actually a portfolio play. Americas was firing, Americas covered the behavior of Europe. Nothing to see, nothing to fix, play through. This is basically the half that we reported. Said another way, I'm not trying to optimize the behavior of any single country. Trying to optimize the output of BRG. I have all kinds of levers and tools and dials underneath BRG, which lets a lot of the noise cancel itself out before it ever gets to my desk, as something to be done. In this instance, in the first half, it all canceled out.