Thank you for standing by, and welcome to the GWA Group Limited FY2022 Full Year Results Presentation. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask the question, you will need to press the star followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Urs Meyerhans, Chief Executive Officer. Please go ahead.
Thank you very much. Good morning, everyone. Thank you for joining us on today's call for GWA's results for the year ended 30 June 2022. My name is Urs Meyerhans, GWA's Managing Director, and I'm joined today by Calin Scott, our Group CFO, and Craig Norwell, Group Executive for Sales. I'm pleased to present the results to you today and look forward to talk further with many of you over the coming days and weeks. We move to slide three. For today's presentation, I will first provide an overview of our group results and key themes. Calin will discuss the group financial results for the year, including P&L, balance sheet, and cash flow. Craig will then provide an overview of our business performance, including our key end market performance.
Following Craig, I will discuss how our strategy is evolving and provide a summary and outlook for FY2023. We will be happy to answer your questions at the conclusion of the presentation. Moving to slide four, five. Before I comment on the specifics, I would like to reflect on the last 12 months where we have seen ongoing COVID disruptions and restrictions and a challenging economic environment impacting supply chain and costs. I'm proud of the achievement of the GWA team as we have improved our safety performance, delivered an improved EBIT performance from first half to second half, rebuilt our management team, exited our loss-making China sales function, and achieved considerable progress with several strategic initiatives. Let me now focus on the particulars.
We are pleased to deliver an improved financial performance on last year with revenue up 3.2%, normalized EBIT up 9.3%, and EBIT margins up by 100 basis points. The balance sheet remains solid, and that has enabled the board to declare an AUD 0.08 fully franked final dividend with the full year dividend of AUD 0.15 per share, up 20% on last year. Given the ongoing supply chain disruption, we increased inventory of core products to ensure ongoing product availability for our customers. That resulted in a planned increase in working capital, particularly in the second half, which impacted operating cash flow for the year. Following the strategic review of our business, we decided to close the China sales function. The cost associated with this exit and investing in the new ERP system also impacted cash flow for the year with a loss.
We continue to make good progress on our strategy implementation, which I will talk about later in the presentation. Our improved financial performance provides good momentum into financial year 23, with the outlook for our key segments remaining positive. In summary, I'm very pleased with our performance in financial year 22, which continues to position GWA very well for the future. Moving to slide six. Safety remains our number one focus. I'm pleased to report that we have recorded an improvement in the total injury frequency rate during the year. We experienced an increase in this rate last year. That was mainly due to manual handling injuries. We've implemented cost-saving strategies to address the root cause of the injuries, and that has resulted in a decline in rate to 1.9 for the year compared to 4.3 last year.
We continue to enact our COVID safe management plans across the business, including the introduction of mental health and wellbeing programs. I will now hand over to Calin to go through the group financial results.
Thanks, Urs. If we turn to slide eight. This slide presents the results first on a normalized basis before significant items, and then on a reported basis, which includes significant items. As mentioned earlier, we experienced several headwinds in FY2022, and despite these challenges, we've delivered an increase in both revenue and underlying EBIT for the year. Group revenue increased by 3% to AUD 419 million, primarily reflecting improved activity in Australia, which had revenue growth of 7% and an uplift in our U.K. business. This was, of course, partially offset by disappointing performance in our New Zealand business due to shutdowns in the first half and COVID continuing to impact our operation in the second half with staff shortages. Normalized group EBIT was up 9% to AUD 75 million.
That improvement in earnings came despite the significant increase in freight costs compared to the prior year. This demonstrates our ongoing operational discipline. Normalized EBIT margin was up 100 basis points to 17.9%, reflecting ongoing cost control and operating leverage that we have in the business. Normalized NPAT increased by 12% to AUD 47 million, including an effective tax rate of 30%. On a reported basis, including significant items of AUD 12.1 million after tax, NPAT for the year was AUD 35 million, which was consistent with the prior year. For FY2022, significant items were AUD 15.2 million pre-tax and included costs associated with the implementation of the ERP CRM system and the closure of the China sales function. Moving on to slide nine.
This slide contains the waterfall chart we typically present to set out the key driver of earnings over the year. A reminder, this is presented on a normalized basis that excludes the significant items I detailed earlier. The volume mix. Pleasingly, in Australia, we had positive sales mix for the year. However, that was offset by the performance in New Zealand and China, with the U.K. largely consistent with the prior year. In relation to price, you will recall that we implemented a price increase of approximately 3% on the first of July, and that was followed by an additional price increase in Australia of around 4% from the first of December. These increases were primarily to offset increased costs. With regards to freight, you can see here the significant impact additional freight costs have had on the business during the year.
We have largely successfully mitigated these costs through price increases and operational efficiency. In relation to foreign exchange, our average hedge AUD to USD exchange rate for FY2022 was $0.72, which compares to $0.69 for FY2021. We are currently hedged 54% at $0.73 for FY2023. Moving to China sales function. Following a detailed strategic review, we closed the sales function in China in June. China sales function was acquired by GWA as part of the Methven acquisition in 2019. Notwithstanding the challenges of COVID-19 in China, the sales function lacked sufficient scale to be profitable, and as a result, we made a decision to close this function. This does not impact our China sourcing and supply operations.
For net cost changes, we continue to manage our cost-based due diligence, having generated further supply chain savings in FY2022, and given our brand portfolio review work being undertaken, we delayed some advertising and promotional spends. The net effect of these moving parts is a 9% increase in normalized group EBIT for the year. A solid result. Moving on to slide 10. This slide shows the half-on-half improvement for FY2022 and demonstrates that we have positive momentum going into FY2023. We indicated at the interim result in February that we expected an improved performance in the second half, and our results are consistent with that guidance. The half-on-half improvement in revenue and EBIT has primarily been driven by strong performance in Australia. Moving on to slide 11.
GWA remains focused on providing strong returns to shareholders, and as you can see here, this is the third year in a row of increased full-year dividend to shareholders, which of course remains fully franked. Looking at the FY2019 dividend, you may recall the reported result for that year included profit from the sale of the Door and Access Systems business, which contributed to the high dividend payout for that period. Moving on to slide 12. Turning now to cash flow from operations. Given the ongoing supply chain disruption in global markets, we increased inventory of our core SKUs to ensure we continue to supply our customers. Together with the short-term ERP impact on trade receivables, this has resulted in an increase in working capital, particularly in the second half, which negatively impacted operating cash flow for the year.
Capital expenditure and other investing activities is quite a bit lower than the prior year, as our main focus during the year was the implementation of the ERP system. Our capital expenditure program remains focused on growth initiatives to drive revenue-enhancing opportunities, and for FY2023, we expect CapEx spend of between AUD 9 million and AUD 11 million. Cash restructuring and other costs relate primarily to the ERP CRM system and the closure of our China sales function. As I had mentioned earlier, our continued robust balance sheet has enabled 20% increase in the full year dividend to AUD 0.15 per share fully franked. Moving on to slide 13. On this slide, we take a closer look at the key items impacting cash flow for the year. As I've just mentioned, we deliberately increased inventory in response to supply chain challenges to ensure we continue to supply to our customers.
Also noting that inventory at the end of FY2021 was lower than normal due to shipping delays in that year. We implemented the new ERP system in April 2022, and notwithstanding the extensive pre-live testing we did, which also include a delay of the launch from January to April, we experienced some short-term issues on implementation. These issues have now largely been resolved. However, this did cause some sales to be pushed back from April to May and June, resulting in a higher debtor balance at the end of the year. We expect to see significant improvement in cash flow from operations in FY2023. Moving on to slide 14. GWA remains in a strong financial position.
Net debt as at the end of 30 June 2022 was AUD 138.2 million, which was up on the 30 June 2021, reflecting the planned increase in inventory outlined in the cash flow analysis. Our credit metrics remain within target levels, and we have total facilities of AUD 220 million, including a multi-currency three-year revolving facility of AUD 180 million, which matures in 2024, and a separate AUD 40 million one-year multicurrency revolving bilateral facility, which matures in October 2022. In relation to rising interest rates, we have a number of interest rate swaps in place to manage our exposure to this risk. I will now hand over to Craig Norwell to discuss our performance by markets.
Thanks, Calin. Good morning. My name is Craig Norwell, Group Executive for Sales here at GWA. Today, I'll provide some further context of our revenue performance by market, by state, and some commentary on our key segments. Turning to slide 16. This slide documents our revenue by our key end markets. Overall, revenue improved by 3% on the prior year. Australia is our largest market, representing around 80% of our group revenue. Here we continue to generate good sales growth, building on the momentum from the first half. Revenue was up 7% for the year. Commercial sales strengthened primarily in renovation and replacement projects within the care and medium density segments. We also had good traction with key developers on smart water solutions, and that created a number of wins in the new build office projects against the overall market trend.
Our commercial forward order bank remains strong and increased 16% in value on the start of the year, which creates a strong platform for future growth, especially with sustained growth in the health and aged care, office and medium density residential segments. In New Zealand, we called out at the interim result that the COVID shutdowns in the first half effectively closed our operations for five weeks, with negligible sales, where we were only permitted to sell the essentials for emergencies. While we were trying to make that up in the second half, the ongoing impact of COVID with staff shortages impacted our ability to get products out of the warehouse and hence a delay in sales. Sales in international markets increased by 3.7%.
That reflects good growth in our U.K. business, offset by a decline in China sales, which was impacted heavily by the dynamic zero policy approach to COVID-19. As both Urs and Calin have mentioned, following a detailed strategic review, we closed the sales function in China in June. Of course, this does not impact our China sourcing operations. Turning to slide 17. This slide gives you the picture of our Australian sales for the year by state. Remembering that Australia accounted for 81% of group sales in FY2022. We had double-digit growth in New South Wales, driven by very strong commercial growth and consistent growth across all segments and the majority of our customers throughout the year.
In Victoria, we had a much stronger second half performance following the lockdowns experienced in the first half, which shut quite a few stores and a number of sites. The lead indicators in our largest two states of New South Wales and Vic remain positive. Queensland was disappointing, with sales only marginally ahead of the prior year. Renovation and replacement sales growth was solid, however, delays in commercial and residential detached construction created delays in sales for both. Western Australia remains consistent and continues to be a strong detached residential market, with improved commercial growth despite border closures. While South Australia growth was strong throughout the year, although a small market. Turning to slide 18. While freight issues continue to cause disruption, we've been proactively managing our response to these issues.
We have long-term shipping contracts, and during the year, we supplemented this in the first half by chartering two vessels in conjunction with other importers to maintain our product availability. Our supplier base is regionally diversified, and we maintain exclusive long-term agreements with our supplier partners, which include commodity hedging. Domestically, we have introduced measures to address pallet shortages that includes alternative pallet and domestic freight providers to minimize supply disruption. We continue to work with both our customers and supplier partners on demand planning to ensure minimal disruption. As Calin mentioned, we proactively increased inventory of core SKUs to ensure ongoing product availability for our merchant partners. Our national distribution footprint enables us to continue to support our customers, and we continue to work closely with them to minimize disruption and out of stocks. I'll now hand back to Urs.
Thanks, Craig. If you move to slide 20, let me provide you with a progress update of our growth strategy. Some of you will recognize our strategy on the page, which I first presented in August last year and then again in February this year. We are focused on core priority areas, particularly in how we can win the plumbers, continue our strong NPD and innovation pipeline, and deliver great customer experiences. I'm pleased to report good progress in these areas. Plumbers are the single biggest opportunity for GWA to grow volume and share in Australia and New Zealand. In our markets, any of our bathroom products have to be installed by a licensed plumber. We are implementing measures to connect, deepen, and leverage our plumbing industry relationship. We are focused on delivering trusted and valued services and solutions to plumbers.
During the financial year 2022, we extended our reach with plumbers across Australia and New Zealand from 4,500 to 10,000. The key focus of our growth strategy remains on product innovation. We have completed our five year NPD roadmap to support our go-to-market product strategy. We have also completed a product category review, and as a result, we have identified a range of SKUs which will be deleted over the next one to two years. Our focus is to deliver an integrated customer experience with structured brand and category portfolios. To support this objective, we redefined our brand strategy with a clear brand and customer value proposition, which I will discuss shortly. Finally, we continue our investment in digital opportunities to deliver superior customer experience, which I will also address shortly. Moving to slide 21.
We have a good blend of new talent and company experience in the management team, which is responsible for delivering the strategy. Each strategic pillar is owned by an executive, which drives great accountability and focus. We will have the opportunity to meet with the leadership team over the coming months, including at an investor day, which we are planning to hold either in September or October, obviously COVID permitting. If you move to slide 22. As I just mentioned, we redefined our brand strategy with clear brand and customer value proposition. Over the last 12 months, we completed three distinct phases of research to ensure we will create a future fit and competitively compelling brand and customer value proposition. Phase I covered initial interviews with customers across ANZ. In phase II, we collected 1,800 qualified responses to validate our findings across ANZ.
In phase three, our team had a number of value workshops and numerous in-depth interviews with professionals. These activities confirmed our brand portfolio focus on Caroma, which is the market's most trusted and well-known brand in the ANZ market, and Methven, which is renowned for its innovation and expertise in shower technology. These are supported by other brands in key customer product categories. If you move to slide 23. We continue our investment in digital opportunities to deliver a superior customer experience. In December, we launched the Caroma Visualiser, which enabled a user to build and visualize their bathroom with a virtual walkthrough experience using augmented reality. Using the Visualizer, the user specifies the bathroom dimensions, adds floor and wall tiles, and then can customize the new bathroom with our products, including basins, baths, showers, and toilets.
In May 2022, we launched a virtual tour of our flagship store in Alexandria, New South Wales, which enables customers anywhere to experience our product offering from the comfort of their own home. It's consistent with our strategy to improve the customer experience with our brand to build engagement with customers on their renovation and purchase journey. If you have not done so yet, we encourage you to experience it for yourself at caroma.com.au. Moving to slide 24. As we mentioned earlier, one of the key initiatives we completed through the year was the implementation of the new ERP CRM system across Australia and New Zealand. This replaces a number of outdated legacy systems across the two countries with a single integrated system.
The main benefit of the new platform includes removing complexity from the business through process redesign and enhanced use of data for greater insight across customer experience and productivity gains. As Calin mentioned, we had some short-term disruption on implementation, which caused some poor accuracy, not unexpected with an implementation of this scale. They are now being largely rectified, and we expect to be fully resolved this half. Moving on to slide 26. Let me summarize the key points from today's presentation before concluding with the outlook. While we still had some market challenges in financial year 2022, we proactively addressed these issues to deliver an improved financial performance consistent with our guidance. Our balance sheet remains strong, leading to an increased dividend for shareholders and capacity for growth investments. We deliberately built inventory to ensure product supply amidst the significant supply chain and freight challenges.
While that impacted cash flow for 2022, we expect to see a significant increase in cash flow from operations in FY 2023. We are generating good momentum into FY 2023. Our key markets remain positive. We made good progress with several of our strategic initiatives as part of our strategy to generate sustainable shareholder value creation. Moving to slide 27. Turning to the outlook for FY 2023. We remain well positioned to capitalize on positive sentiment across key construction segments. In the commercial segment, there's ongoing demand for core products and signs of recovery in the new build category, while there is continued momentum in the residential detached category. Volumes in the residential and commercial renovation and replacement segments remain at historically elevated levels.
We maintain strong operational leverage to the market, underpinned by ongoing operational discipline, including managing higher input costs through proactive pricing and managing inventory levels to meet customer demand. We expect cash flow to return to normalized levels in FY 2023. Our strategy is clear and consistent. Our management team is committed and focused on our core priority to win the plumber and leverage our brand proposition and digital tools to successfully execute our growth strategy. Ladies and gentlemen, that concludes the presentation. Calin, 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 are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Bruce Greenberg from Macquarie Group. Please go ahead.
Urs, Calin and Craig. Just a quick question on the 20% reduction SKUs that you've listed. If you could just give a little bit more color on that and just how that fits into your strategy.
Yeah, thank you. Well, first of all, I think we mentioned about six months ago that we want to simplify our business. We have a lot of SKUs. We have just in excess of 6,500 SKUs. With most distributors, you see an interesting curve. 20% of the SKUs be one of the highest value in sales, and then you have a long tail. When we did a detailed review, we saw that we had a lot of older SKUs which we have replaced with new product. We see a larger succession to new product, and therefore are able to simplify our distribution.
Thanks for that. Just quickly on CapEx as well, you listed AUD 9 to AUD 11 million for FY 2023. Quite a bit of a step up there, historically. If you could maybe give a bit more color on that as well, please.
Yeah. Probably two points. First of all, as we mentioned, this financial year, we really focused on the implementation of ERP. We sort of kept any other distraction aside from the business. What we have done in regard to the strategy, what we identified, particularly, with the plumber and customer experience, we believe it is essential that we will have flagship stores in each of our states. We currently have a flagship store in New South Wales. We have smaller store in South Australia. What we would like is be able to have our own showroom in each of the states, which will help us on the customer experience side, but will also help us bring plumbers into our own venues for training.
Perfect. Thank you. I'll leave it there.
Yeah .
Your next question comes from Matt Abraham from Credit Suisse. Please go ahead.
Morning. Thank you very much for taking my question. I might just start with a query on the strategic review, as a bit of a follow-up to that last question. You did mention the closure of the China sales facility. I was just wondering if we can expect any other major wholesale strategic announcements following this review and you know, how you anticipate that to impact growth going forward?
Thanks, Matt. First of all, the question. We have, as we mentioned in the presentation, completed our strategic review. We don't expect any changes to the footprint of the business, as it is today. In regard to the strategic initiatives, as I mentioned in the presentation, our single biggest opportunity for us is to get closer to the plumber. The plumbing industry in Australia and New Zealand are key to our product because as I said, you need a licensed plumber to install any bathroom product. We have unique position to really become the technical partner of the plumbing industry across Australia and New Zealand. That ultimately will drive volume growth in our two markets.
Okay. Really the key announcements and takeaways have been announced, and you have reached a like a sufficient point in that process to draw the key conclusions from the strategic review itself. Is that a fair summary?
Yes, it's a fair summary.
Yeah. Okay. Okay, great. Thank you. Again, I might just sort of follow up on that CapEx query. Just going back to that sort of step up in FY2023 in CapEx, and you also have that A&P component of your guidance that's of interest as well. I guess if we just take a step back and just understand what you anticipate those two components of your outlook to mean for FY2023 growth, you know, at a revenue level, potentially. Is it possible to, you know, put some color behind what you expect that step up to mean for revenue growth?
Look, we're not gonna quote a specific percentage. If you look at the growth opportunities twofold. One on the plumbers, that we moved from 4,500 to 10,000 plumbers. I think we mentioned when we presented in February that there's a total of about 36,000 plumbers in Australia and New Zealand. Our target is to get to 25,000+. That doesn't always directly translate into revenue because there is a delay. As you start working with the plumbers, as they change and understand some of their value proposition. You don't see an immediate change, but you will see that in the medium term. In regard to A&P, again, A&P is an investment into our overall brands going forward.
I think historically, value has been used with our brands, but with the brand work we have done, our focus will be very much on Caroma and Methven, and we will be more targeted to enhance our pull strategy.
Okay. Maybe another way of putting it is, do you anticipate this to deliver accelerated growth from the rate of growth being observed now or would it be consistent?
No, we do expect that we will see volume growth going forward. Absolutely.
To accelerated growth. Okay. Okay, great. I'll leave it there. Thank you very much. Cheers.
Thanks, Matt.
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, gentlemen. A few questions from my end. Just the first one around the building of inventory. Understand it's related to ensuring the supply chains is fine. Can you give us a sense of whether part of the inventory build speaks to the confidence on your outlook for volumes, or is it simply a risk mitigation exercise?
Thanks, Keith. Probably two. Absolutely. We expect a growth, so therefore we have adjusted some of the inventory. But it's probably good for me to hand over to Calin just to provide a bit of insight into the inventory build, because I think he's showing one of the slides, the AUD 45 million build. Calin, can you provide some additional insight?
Sure. Look, Keith, just to give you a bit of flavor on that AUD 45.5 million. Probably first thing to note is inventory at the end of FY2021 was probably undercooked a bit, because of supply chain challenges. There was about AUD 7 million of inventory that we probably ended short in FY2021. That leaves us with about AUD 38.5 million. If I look at that, I can break it up into two buckets. One relates to things that probably sit a little bit outside of our control. You would have heard, obviously, freight has increased and freight forms part of our inventory costs. There was, at the end of FY2022, about AUD 7 million extra freight sitting in the inventory value.
There's also goods in transit due to increased lead times. We've had to increase our goods in transit. That was about AUD 10 million. There's about AUD 2.5 million relating to product cost inflation. That bucket is really things that sit outside of our control. If we look at the balance, that's an increase in SKUs, which is to your point, both a safety mechanism as well as positioning us for future growth.
That's very helpful. Thank you, Calin. I guess one of the things that's kind of nagging me a little bit is a couple of years ago when, you know, demand rolled off, there was, you know, massive destocking of the channel. Can you give us a sense of, you know, how you're managing that risk this time round? I don't know if the new CRM system actually helps you understand how full or otherwise the channel is. Yeah, just trying to understand how you're going to manage that risk, going forward if demand were to drop off. Not to say that it would, given your outlook comments, but just trying to understand the risk around that.
Yeah. Thanks, Keith. Let me take that one. Look, once the ERP is fully functional, we will get additional insights. There probably still will be way to go. In regard to the inventories, we spend a lot of time over the last probably, six to nine months to really understand the inventory, put it into different categories like what we call, category A, B and C. Obviously category A are products which we see a fast turnaround and strong demand. Our inventory build was really focusing on the category A rather than just a blanket increase across the inventories.
Okay, I understand. Maybe just an extension of that question, can you give us a sense of where you think channel inventory is sitting across all of the key geographies, you operate on?
Maybe I can take that, Keith. I think if you think about more with the customers, I mean, you raised a question about optimism, I suppose, in growth. You know, this is the third year now we've had a formal joint business planning process in place with our top five merchants. That's supported by monthly reviews, but also quarterly sort of top to top rhythm. Part of that is monitoring sales out against our growth initiatives and stock on hand. Over the course of FY2022, there hasn't been any material change to stock cover in any of those merchants, and there's no obvious change in growth outlook across those five merchants either. At the moment, there's nothing that we'd be aware of that would say there's anything that would cause a change to that anytime soon.
Probably just adding to that very quickly, our backlogs or books that have increased substantially. We do see some positives moving into commercial, particularly as a new build. You also see more activities on the retail sector because after COVID, we have seen activities into the retail sector settle. We will expect an improvement there. The one market we probably watch very closely is high-rise multi-res. If you look at that's only about 4% of our revenue. We're not that dependent on it.
Yeah. Okay, understood. I might just ask one last one and then jump back in the queue. Just on price. You know, you talked about a 5% price increase for the first of July. Can I just understand whether you think you'll be able to offset all cost pressures, including advertising and promotion spend, including freight costs? Do you think your price increases will be able to offset all of your costs and inputs? If you think about the average realized price increase for FY2023, so not your announced but your average realized price increase, what do you think that number to be for FY2023, given you've got the roll forward of last year's price increases as well?
The 5% which we quote in the presentation is actually the realized price increase. We've gone to market with about 8%. I think as we said before, we are far more, if you wish, scientific in regard to pricing. Some of the products we've increased, some of the products remain, some of the products we even decreased just to make sure we are market competitive. We focus on the 5% increase when we build our budget, and we believe that with all the things we know today, the pricing increase will cover that. Having said that, if we see changes in our supply base or cost base, we're quite willing to go again at the first of January.
Okay, that's great. Thanks very much.
Your next question comes from Matt Abraham from Credit Suisse. Please go ahead.
Thank you. Sorry, just one more, if I may. This query just relates to marketing and advertising spend. You called out that in the second half there was a delay in some of that spend. I recall in the first half that you stated that there was a delay in first half advertising and promotion spend and anticipated a bit of a catch up effect in second half. Given that there has been another delay, is it fair to conclude that total marketing spend for the financial year is, you know, lower than what it would be otherwise, in the absence of those delays?
Absolutely. You know, we've done it for the purpose. Because I think I mentioned in February, going through the brand review, we decided, well, let's be clear first what our key brands are before we just spend A&P. Now that we have a clear, brand value proposition, our advertising money will be spent on those brands.
Okay. Would it be possible to put a quantum to, you know, the delta between like a normal year and this year gone by, given the delays?
I think the key assumptions we said we would expect in 2023, the A&P spend to be up somewhere between AUD 5 million-AUD 6 million higher than what was 2022.
Okay. That is the delta itself then. I'll leave it there. Thank you. Cheers.
Your next question comes from Keith Chau from MST Marquee. Please go ahead.
Hi, guys. Just a couple of follow-ups. The closure of the China sales office, what was the loss coming out of that sales office? Are you able to just quantify what the negative contribution was in FY2022 and what the expected outcome is for FY2023?
First, if I was to hear full.
Thanks. Sorry, Keith. We actually called it out on slide nine. It's AUD 2.1 million EBIT impact.
Okay, thank you. Just with respect to the review, I mean, it sounds like you've got everything lined up. You know, SKU rationalization is in place, and there's a good path forward there. Can you help me understand your brand portfolio? I didn't notice any change there. Is there any expectation to change any of the brands within the portfolio now, or do we take it as the strategic review is done and you're kinda good to go from here and it's just SKU rationalization?
Yeah. Look, in regards to brands, our work has sort of identified clearly that we're gonna invest on Caroma and Methven, but we will continue with some of our smaller brands, and they will really serve us either to have to serve specific sales channels or specific categories. No, I don't expect a fundamental change after this.
Great. Thank you. There's obviously an increased focus on serving the customer, or the end consumer and also serving the plumber. I think part of that was given some ceding of share to the consumer in recent years. Are you confident that the business is now in a state where it can compete effectively to at least retain share before winning share back?
Yes, I am. I think the strategy has the right pillars in it. We still need to execute them. You know, in our industry, I often say to people, our industry is probably the second slowest in the world after agriculture. We don't see an immediate pickup in a few months. Being consistent, and focusing on a few things but do them very well, we absolutely believe, and we've already seen it, we will increase what we call a pull strategy. When people go into different stores, they will ask for Caroma rather than just be guided by the store.
Okay. Understood. Thanks very much.
Thank you.
Thank you. Your next question comes from Lisa Huynh from J.P. Morgan. Please go ahead.
Hi. Morning, team. I just wanted to follow up on the destocking point. I understand you're not seeing any obvious change yet, but can you just talk about the forward order visibility of your book and how far out, you know, some of your buyers are now committing to ordering now that you're talking to them more frequently?
Yeah, sure. I can take that. As I said in the presentation, our commercial order bank grew by 16% from the start of the year. Secondly, we've seen that quite consistent in terms of the growth trajectory through care, which is obviously largely for our aged care and health care. We're certainly seeing that start to come through in things like education, but also medium density within multi-res. We don't think high density will probably come back at scale till there's some immigration sort of shift. The other point of your question, I think, is how far out. We've certainly seen that slowly sort of, I suppose expand from say, you know, typical sort of nine month window to nine to 12 months. Not a major shift in the last 12 months.
That's probably been happening right throughout the COVID period in the last two to three years.
Okay, sure. I guess, you know, we understand that around the commercial channel, but how does that differ in the retail channel, just given the supply chain challenges? You know, if we look over to the U.S., we've seen some material destocking take place over the last, few weeks as, you know, they anticipate a slowdown over there.
Yeah. As Urs mentioned, I think what we've seen throughout COVID has been Australia's been traditionally at 80% of our sales. It's been off the pace probably on internet sort of D2C type sales. We've seen that shift in a lot of the, I suppose, purchase decisions being made more that way, but still valuing sort of touch and feel in store. We've seen that growth be sustained no matter what the restrictions have been. It's a bigger and bigger part of our merchant businesses, and there's no sign to say that's gonna come off or reduce any time soon. Matter of fact, our key partners in that space see sustained growth. There would be no indication here in this part of the world that stock levels would be reduced as a result of a shift in that purchase channel.
Okay, sure. That's good color. Thanks. Just one final one, just on the freight cost increase. You've noticed a AUD 6-AUD 8 million EBIT headwind. I guess, can you just give us a little bit more color on what's driving that? Does that just reflect the year-to-date changes in the freight costs? You know, how are you looking into that into the next year? Thanks.
Yeah. The freight costs is driven probably by two things. First of all, overall container availability. There's less container available, more demand, prices go up. Clearly just with some of the disruptions we've seen, especially out of the Asian countries, we have seen an increase in freight costs per container. We usually lock in about 50% of our freight in long-term contracts. Our supply chain then takes the balance between what do they source on the spot market versus what they source against the contracted rates.
Okay, sure. Thanks. I'll leave it there. Thanks, guys.
There are no further questions at this time. I would like to hand back the conference to Mr. Meyerhans for closing remarks.
All right. Once again, thank you very much for joining us this morning. As I said, we are pleased with our results, and we are looking forward to catching up with many of you over the next few days or weeks. Have a good day. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.