Thank you. Good morning, everyone. Thank you for joining us on the webcast or conference call for GWA's results for the half year ended 31st of December, 2022. My name is Urs Meyerhans, GWA's Managing Director. I'm pleased to present the results today. Joining me on the call this morning are Cailin Scott, our Group CFO, and Craig Norwell, our Group Executive for Sales. We look forward to talking further with many of you over the coming days and weeks. Let me go to the agenda. For today's presentation, I will first provide an overview of our group results and key themes. That will include a summary of our continued focus on safety. Cailin will discuss the group financial results for the year, including P&L, balance sheet, and cash flow. Craig will provide an overview of our business performance, including our key end markets.
I will conclude today's presentation with a discussion on how our strategy is evolving and provide a summary and outlook for the remainder of financial year 2023. We will be happy to answer your questions at the conclusion of the presentation. Let me move to slide number 5. Group revenue was up 3% despite the mixed performance from our end markets, particularly at the end of Q2 . On a reported basis, EBIT was up 13% and net profit was up 15%. That includes significant items in the prior corresponding period, which we did not incur for the first half of financial year 2023. Therefore, on a normalized basis, EBIT was down 4% year-on-year. You will recall our comments at AGM, where group revenue had increased by 8% for the first quarter of financial year 2023 compared to the prior corresponding quarter.
From October to December, we saw a shift in market sentiment, and this was most pronounced in the residential renovation and replacement segment, where we saw a decline in sales activity through our merchant partners. This was magnified by destocking by one specific merchant. Sales to this customer were down 21% for the second quarter and down 12% for the half. While our other markets held up reasonably well, this had a negative impact on quarter two overall. Regarding costs, in addition to the anticipated increase in ocean freight, we incurred higher customer freight costs. These were due to fuel levy surcharges and warehouse costs in the half, which we are addressing with announced price increases and through our continued discipline cost control.
Despite the contraction in the market, the balance sheet remains solid, and that enabled the board to declare an AUD 0.06 fully franked interim dividend. Cash flow has improved and cash generation remains strong at over 100% for the half. For the second half, we expect that detached housing completions and commercial new build and renovation activity will remain solid. Our commercial forward order book remains strong and is up 6.5% since June 2022. Given the rising interest rates and potential impact on consumer sentiment, we expect residential renovation activity to remain subdued. In the meantime, our disciplined approach in executing our strategy has strengthened our business fundamentals, and we will provide more details later in the presentation. Slide 6. Safety remains our number 1 focus.
We incurred two minor injuries in our New Zealand business, which were not reported by employees on a timely basis. These events have presented an opportunity to improve our injury management practices and employee reporting obligations. As a result, we had an increase in the total injury frequency rate. We are continuing to enhance our safety performance measurement with a shift in emphasis in addition to TIFR towards measuring leading indicators of safety risk, such as workers' insights. We have seen a measurable improvement in this area. During the period, we updated our risk profile assessment to include psychosocial risks. We are also evolving our safety approach to respond to changing ways of working, including hybrid work arrangements. I will now hand over to Calin to go through the group financial results in more detail.
Moving on to slide 8. Thanks, Urs. This slide presents the results first on a reported basis, including significant items, and then on a normalized basis, which excludes significant items. As Urs just mentioned, we did not have any significant items in the first half of financial year 2023. Significant items in the first half of financial year 2022 were AUD 3.8 million off tax related to costs associated with the implementation of our ERP and CRM projects. On a reported basis, EBIT for the first half was up 13% to AUD 34.1 million, and NPAT was up 15% to AUD 21.3 million. Group revenue increased by 3% to AUD 207.1 million. This was due to increased sales in Australia, while sales in New Zealand increased 5% on a constant currency basis.
However, on translation, sales in New Zealand were lower than the prior corresponding half. Normalized group EBIT declined by 4% to AUD 34.1 million. I will walk through the key movements in group EBIT on the next slide. Normalized EBIT margin was down 120 basis points to 16.5%. Moving on to slide 9. This slide contains the waterfall chart we typically present to set out the key drivers of earnings over the period. This is presented on a normalized basis. In relation to volume and mix, the decline here reflects the net sales contraction experienced in the late part of the second quarter, partially offset by mix improvement in the Australian business. It also reflects the impact of destocking from 1 merchant during the half and an overall shift from our merchant network from high inventory to cash flow.
With regards to price, you will recall that in Australia and New Zealand, we implemented a price increase of 5% in July and 5% in the U.K. From November 2022. These primarily related to cost increases. Moving on to freight. You can see here the significant impact additional freight and warehouse costs had during the period. There are two components to freight. Inbound freight. We have seen a recent decline in sea freight charges and improvement in container availability, that takes time to flow through to the income statement, as inbound freight charges are capitalized as part of inventory. We expect to see the benefit of lower inbound freight charges in H2. With regards to outbound freight, we also incurred freight charges primarily related to higher diesel costs, which impacted our outbound freight costs in deliveries to customers.
On warehouse costs, in preparation of an extended production delay due to Chinese New Year this year and many of our suppliers introducing longer lead, we continue to hold higher levels of inventory and had to hold stock off-site. We used an external provider as a temporary solution. For foreign exchange, our average hedged Australian dollar, US dollar exchange rate for the half was $0.72 compared to $0.70 for the prior half. We are currently hedged 80% at $0.70 for the remainder of FY2023. With respect to China operations, this represents savings from the closure of our China sales function at the end of last year. Net cost changes. Given the current environment, we continue to manage our costs there diligently. We generated some SG&A savings, which were partially offset by higher advertising and promotion spend. Turning to slide 10.
Operating cash flow was AUD 44.6 million compared to AUD 43.6 million for the prior half. The increase in cash flow was primarily due to the variable impact of a move of debtors, partially offset by a small increase in inventory. Cash restructuring other costs of AUD 2.3 million relate primarily to the ERP CRM system and costs relating to the closure of our China sales operation. Capital expenditure for the half was AUD 1.4 million compared to AUD 1.6 million in the prior period. Total capital expenditure for FY2023 is expected to be between AUD 3 million and AUD 3.5 million. As Urs mentioned earlier, a continued robust balance sheet enabled an AUD 6 cent interim dividend fully franked. Moving on to slide 11. Just wanted to make a further comment on inventory levels.
We adopted a proactive inventory management plan in response to ongoing COVID challenges in our supply chain network, and as Urs mentioned, in preparation of longer than usual Chinese New Year shutdown by our suppliers across Asia. The increase in inventory value reflects rising freight product costs, as well as a shift in inventory composition from taps and showers into sanitary in response to market demand. We have also been actively reducing stock levels of category B and C stock while increasing stock on hand of A class SKUs, which are higher demand and fast-moving products, thereby substantially improving the quality of stock on hand. We expect to see stock on hand levels reduce in H2. Moving on to slide 12. GWA remains focused on providing strong returns to shareholders, and the dividend policy is to pay out 65%-85% of NPAT as dividends.
As you can see here, the interim dividend is similar to that of prior periods. The interim dividend of AUD 0.06 remains fully franked. Turning to slide 13. GWA continues in a strong financial position. Net debt as of 31st of December was AUD 136.6 million, which was down 1% from 30th of June 2022. Gearing ratio of 26.1% compared to 26.2% at the 30th of June. Leverage remains consistent at 1.7 times. We have total facilities of AUD 220 million, including a multicurrency revolving facility of AUD 180 million and a separate AUD 40 million one-year multicurrency revolving bilateral facility. This facility expires in October, and we expect to extend it prior to this date. I will now hand to Craig Norwell to discuss our performance by markets.
Thanks, Calin. Good morning, everyone. Today, we'll provide some further context to our revenue performance by market, by state, and some commentary on our key segments. We turn to slide 15. This slide documents our revenue from our key end markets. Overall, revenue improved by 3% on the prior corresponding half. In Australia, our largest market representing 81% of Group revenue, we had strong sales growth in the first quarter, with sales up 7% on the same quarter last year. As Urs said, we saw a decline in residential renovation volumes over the second quarter, particularly in December, with sales declining 3.9% in 2Q compared to 1Q. This resulted in half one sales being up 3% on half one last year.
Quarter 2 sales were also exacerbated by destocking from one of our major customers, which I'll talk about more shortly. Like Australia, we saw a decline in demand over the second quarter. On translation to Australian dollars, sales declined 0.4% on a reported basis. U.K. sales have consistently improved over the course of the first half, increasing by 5% on a constant currency basis and up 2.5% on a reported basis in Australian dollars. Turning to slide 16. This slide gives you the picture of our Australian sales for the first half by state, remembering that Australia accounted for 81% of group sales in half 1.
In New South Wales, we had strong double-digit growth in the first quarter from strong commercial and residential renovation demand. In line with Urs's comments, we saw demand moderating in the second quarter for residential renovation and delays for key commercial projects into quarter three. In Victoria, we had a stronger period with constant growth throughout the period, lapping the COVID lockdowns experienced in the first half last year, where a number of merchant stores and construction sites were shut. Queensland also delivered better results over this period, following disappointing sales last year, in particular, strong sales in the residential detached new build and commercial segments. Sales in both South Australia and Western Australia improved throughout half one, with South Australia sales finishing the first half steady and Western Australia in solid growth because of commercial and residential renovation with some softness in residential detached new build.
We turn to slide 17. While the last slide demonstrated sales by market, this slide illustrates sales through our main customers in Australia. We had good sales momentum with three of our top four customers during the half. That reflects our joint business planning initiatives and some early wins as part of our Win the Plumber initiatives. Despite the reduced volumes experienced, we continue to grow revenue in three of our largest four customers in the second quarter. Unfortunately, you can see the impact of 1 customer significantly destocking in the second quarter, where our sales were down 21%. Turning to slide 18. We continue to proactively manage our supply chain to address disruption and ensure supply to customers. Our supplier base is reasonably diversified and we maintain exclusive long-term agreements with our supply partners, which includes commodity hedging.
As Calin mentioned, we're seeing international sea freight costs reduce with container availability improving, and we're addressing domestic freight cost issues and increases with pricing and looking at more efficient alternative domestic freight arrangements. In New Zealand, we increased inventory levels to minimize impact at the peak of the freight seasonal period. I'll now hand you back to Urs.
Thanks, Craig. Moving to slide 20. We launched new products during the period, including new consumer smart bathroom and kitchen collections, such as smart toilets, sensor sink, and bathroom mixers, and soap dispensers to capitalize on the growing demand for touchless products. Aged care remains a core growth area for us, and we continue to evolve our popular independent living range, Livewell. This included the launch of grab rail showers, support accessories, smart retrofit bidet, as well as additional colors. During the period, we had a soft launch of our new youth care collection to cater for the education sector, an important step for early life brand recognition. Moving to slide 21. Let me make a few comments about the progress of our strategy. This is our strategy on a page.
Some of you will recall the investor briefing we held last September, where we detailed our strategy for growth. At that event, we outlined our core priority areas, particularly in how we can win with the Plumber, continue our strong NPD and innovation pipeline, and deliver great customer experience. We continue to make solid progress in these areas, which will be summarized on the next slide. On slide 23. Let me run through some strategic highlights. Win the Plumber. As you will recall, plumbers are the single biggest opportunity for GWA to grow volume and share in Australia and New Zealand. During the half, we extended our reach with Australian and New Zealand plumbers to 11,000.
We also launched a successful trial of a new technical phone support line, which received a 90% approval rating from plumbers. We will roll out this new service across Australia in the second half of financial 23. Craig reported in his section that we see early signs of momentum for this growth pillar. For innovations through design and partnership, a key focus of our growth strategy remains on new product innovation. We have an established 5-year NPD roadmap to support our go-to-market product strategy. As I just mentioned on the previous slide, we continued the rollout of new products in the half, including new customer smart bathroom and kitchen collections and our Livewell range. We are providing workshops for our key clients, architects, specifiers, and occupational therapists, in which we use an AgeSuit.
This enables participants to witness and experience firsthand the aging process and how our products can be used. In terms of our supporting functions, we continue to make good progress. As part of our product category review, we have deleted 20% of our SKUs. We will continue to focus on core products. The phasing out of these SKUs will be managed over a period of time. We continue our investment in digital opportunities to deliver a superior customer experience, which includes the refresh of the Caroma website to support our digital innovations such as augmented reality, the Caroma Visualiser tool. We implemented the new ERP CRM system in April last year. It has now been embedded with a focus on e-extracting efficiencies using a single integrated system and supporting improved customer service. On slide 25, let me summarize the key point from today's presentation before concluding with the outlook.
Group revenue up 3% for the half, despite the mixed performance from our end markets. On a reported basis, EBIT was up 13%. On a normalized basis, EBIT was down 4%. Despite the contraction in the market, the balance sheet remains solid, and that enables the board to declare AUD 0.06 fully frank interim dividend. Cash flow has improved, and cash generation remains strong at over 100% for the half. While market conditions are expected to be mixed and uncertain for the rest of the year, we have a committed management team, a clear strategy, and continue to improve the fundamentals of the business. We are well positioned to proactively respond to the changing market conditions. Finally, on slide 26, outlook.
We expect continued demand in the commercial new build and renovation segment. Our commercial forward order book remains strong and is up 6.5% since June 2022. We also expect continued momentum in residential detached building to continue in the second half. Conversely, the residential renovation and replacement segment is expected to remain subdued due to the inflationary pressure impacting consumer sentiment and behavior. In response, we continue to closely monitor and adjust our business operations as required to respond to these market conditions. We will manage input cost inflation through proactive pricing cases when required, and that includes pricing cases in Australia from 1st of April and New Zealand from 1st of March. We will continue to manage inventory to meet demand, and stocks on hand are predominantly A class stocks, which are higher demand and faster moving products.
Our strategy remains clear and consistent. We will prioritize our actions to focus on profitable volume growth, accelerate initiatives on the customer experience for ease of doing business with us, and have a clear and proactive approach to cost management. Ladies and gentlemen, that concludes the presentation. Cait, Craig, and I are happy to take your questions.
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. Your first question comes from Matthew Abraham from Credit Suisse. Please go ahead.
Hi there. Thank you for your time and taking my question today. First query is just in reference to the two key trend which you called out helpfully, just wondering how we should think about the second half relative to that second quarter on a revenue against the PCP basis. You've called out expectations for R&R to be subdued. Should we think of that second half trend as a continuation of the second quarter, or will there be a worse first PCP revenue outcome in that second half relative to the second quarter?
Thanks, Matthew. It's probably a hard question to answer, so probably two things. As Craig mentioned, the second quarter was clearly impacted by destocking by one of our major merchants. As you see here, middle of February, we haven't heard of any other major destocking, so we don't expect such a drop. Having said that, especially in the residential renovation market, the outlook is very uncertain because it really depends what the Reserve Bank are doing with interest rates.
Okay. Thank you. I might ask one on some of your strategic initiatives that were discussed at the September Investor Day. You had 10,000 plumbers that you engaged at June 2022. That's been increased by 1,000 plumbers. I know that there is that target to engage 25,000 plumbers by the end of this financial year. You know, that implies quite a significant step up in the next 6 months in the number of plumbers that you will need to engage to reach that target. Are you sticking by that 25,000 target for the number of plumbers engaged?
There's probably a couple of things. Good question. Thank you. One is 25,000, not by the end of this fiscal year. That was part of our 2025 strategy that we spoke to you about back in September. The end of this year, we, our goal is to be connecting to 20. However, to your point, the focus has been the quality of engagement. Maybe the best comparison is to this time last year, where we were connecting with 5,000, largely our traditional strengths in commercial and residential new build. That was about 175 businesses then. We've now successfully expanded that to 11,000, which is taking us into a new plumber customer base in maintenance. Now that's made up of eight times as many plumbing businesses at 1,500.
Okay, that's helpful. Just on the vitality metric, the impact of the new products that you have introduced into the SKU range, could you potentially just give a bit of a guide as to what contribution those new products that you've outlined in this presentation have made to revenue, please?
Yeah. If I look at the revenue impact for this first half, it probably would have just been under AUD 40 million. If you look at the Vitality Index for the first half, it was about sitting at 17.5 compared to 14 a year ago.
Okay, that's helpful. Thanks. Just one last one, if I may. The spare part, servicing business that was discussed at the investor day. Were you able to just provide an update on, the progress of the launch and rollout of that business and how that's progressing?
Yes. Really, if you remember, there were 3 strategic pillars that we sort of brought to life across Plumber, partnering through design and innovation, thirdly through aftermarket offers. Aftermarket offers, the focus has been on assessing the range, price point and the route to market for plumbers. We've come a long way in that. By the end of this fiscal year, we will have actually implemented that into our targeted plumber customer base. It's on track.
Okay, great. Thank you. I'll pass it on.
Thank you. Your next question comes from Peter Wilson from Macquarie. Please go ahead.
Hi, Urs, Calin and Craig. You just mentioned during the presentation your forward order book is quite strong. I was just wondering what the length of this visibility is, maybe in terms of weeks or months and how this differs towards your different end markets.
Good question. I can probably take that. Fair to say there's two things going on in our order book at the moment. One is typically, you know, we had been talking a couple of years ago, most of those projects would have been in the nine to 12 months out from now to when they would have been completely drawn down. Some of those projects now will be in that order book for longer, given there's some delays that we've probably talked about the last two to three of these updates. A lot of what's driving the resurgence of commercial and our confidence in commercial is refurbishments, so smaller jobs. In particular, when you look at things like healthcare, aged care and education, and we're starting to see a very clear sign of growth through retail as well.
In one way, some of those projects will spend a little bit longer, but in a lot of other ways they're coming in and out of our order bank, with far more velocity than they would have traditionally.
Okay. That's sort of still at that nine to 12 month mark in terms of order visibility, if I get that right.
Hard to predict, but we've got more in, more there that will spend three to six months in there now because they're more.
Yeah
... refurbishments. We've got some major new build that may have been typically nine-12, and they'll probably be 12-18 months now. Certainly refurbishment far outweighs new build in where our growth's coming from in that order book.
Okay. Perfect. Maybe just a second one. Just on price. You mentioned an increase in Australia as at the first of April. How high was that increase? Maybe also for New Zealand, if you've got that.
Yes. I mentioned the price increase in Australia 1st of April, that's 4%. In New Zealand from 1st of March, at 5%. I probably should say this is not a blanket price increase across all our products. We clearly, when we look at our product pricing and external pricing, we take the account into the competitive landscape. Some of the product probably would have come down, some stayed, and some have gone up maybe more than the quotes I just, sorry, the percentage I quote. Overall, 4% and 5% we should realize.
Okay. Thanks for that. Maybe just a last one, you know, on recovery of cost. You know, how do you expect those price increases to recover costs into the second half? To just noting that margins came down first PCP this half.
Yeah. With all the pricing cases we are required to give three months notice. These price increases have been in the market now for some time. Overall, they have been accepted. There's been a little bit pushback there, we're quite confident to get that. In regards to obviously costs, it was mentioned in the presentation, we do see very pleasing that ocean freight and container availability, they are improving. We see lower ocean freight. As Calin mentioned, it will take a while for that to come through inventory. We see some of the benefits will flow through into the P&L probably particularly in the quarter four.
All right. Perfect. Thanks. I'll leave it there.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Keith Chau from MST Marquee. Please go ahead.
Good morning, gents. A few questions from my end. The first one, just around the state of the channel. Urs, I think earlier you mentioned that, you know, you weren't expecting any destocking, but clearly there's a risk of that going forward. For the rest of your top four customers outside of the one that destocked, can you give us a sense of whether their revenue trends were similar to customer B over the last couple of years? You know, maybe as a follow on, what gives you confidence outside of revenue growth comparisons that there won't be destocking for the other three customers?
I can probably take that, Keith, I think. We monitor stock on hand across the majority of those top customers on a monthly basis as part of our performance rhythm. And in a lot of cases, we get sufficient sales out information to be able to look at the cover of that stock. To your point over the last couple of years, I mean, as you probably recall, the shape of the growth across the top merchants varies, quite markedly over time, depending on their state and segment mix. I don't think there's anything in the last couple of years' performance for all of those key merchants that would indicate that there's a risk on excess stock or a risk on, I suppose some correction through the course of 2023.
Obviously, we're living in uncertain times, so how true that is over the course of this year, I don't know. We've got real confidence in commercial. I mentioned on the order bank question about the breadth of that coming across multiple segments and refurbishment-based. We're confident we'd be winning share in those hotter commercial segments, so there's good sales out success there. While growth won't be as, I suppose, easier to get in residential new build, the absolute sort of sales of that backlog with labor shortages remains, you know, high in terms of confidence. It's really that renovation space which is unclear what it does until interest rates are seen as being firm for the medium term.
But from what I see today, I don't see any obvious risk for other merchants outside the one we've referenced today.
Craig, maybe I'll just follow up on that quickly. I mean, in prior results briefings, it was talked about this topic being less of a risk going forward. Just to be explicit, that customer B, when you look at, you know, their sales profiles and, you know, product in versus product out, based on their monthly progression, was it a clear standout from your reconciliations that, you know, their inventory levels were significantly higher or were above normal compared to the other three customers? I just wanna be explicit on that one.
Yeah. They've traditionally carried a higher stock level with a slower stock turn than other customers in our key merchants.
Okay. That's great. Thank you. The second question just relates to that 5%-10% EPS growth target for FY2023-2025. That was notably absent in today's release, you know, maybe it stands to reason. Urs, can you give us a comment on the I guess the not reiterating that in today's results?
Well, no. Yes. First of all, we obviously talked about that in September. If you read the annual report, the 5%-10% EPS growth is directly linked to executive incentives. I would say this is a long-term, three year measure. Clearly, the executives are very much incentivized to get that there.
maybe putting it another way, you feel like FY2023 is an okay base to set those metrics on?
Sorry, say again?
I think that target was a FY2023 to FY2025 EPS growth target of 5%-10%. That was the metric that was disclosed at the investor briefing last year. Is FY2023 to FY2025 the right time frame, or do you think that that's pushed out?
No, no. Well, as I said, once the long-term incentives are issued to the executives, they're not gonna be pushed out by the board. We do whatever is in our power to achieve that.
Okay, that's great. Thanks very much. Again. I'll give someone else a turn.
Thanks, Keith.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Meyerhaens for closing remarks.
All right. Thank you very much for your attendance and your interest. In summary, as we said, while the markets remain somewhat uncertain, we do feel we have the fundamentals in place. We will see some benefits in regards to costs. We're managing our inventory well, and we're looking forward to talk to you individually over the next days and weeks. Have a good day. Thank you.