Earnings Call: H1 2019

Aug 15, 2019

Good morning, ladies and gentlemen. I would like to thank all of you to attend our first half TTI's group announcement. I'm really very happy and delighted to see all of you, and it's always easier to invite people if the results are good. The group had another strong first half, delivering record revenue, profit, and gross margin. Actually, our gross margin has increased for the 11th consecutive first half period. Our new product development machine is as strong as ever. Joe will go in in a little while to present to you our short-term and long-term strategy, how we further can surprise you with good news in future. Can I pass, Joe? I would like to pass the floor over now to our Group CEO, Mr. Joe Perla, and our Group Financial Officer, CFO, Mr. Frank Chan, who will share with you the results and give you some more details a little bit later. Joe? Thank you, Mr. Chairman. Let's start with Frank, who will cover our outstanding financial highlights, okay? Yep. Thanks, Joe, and thanks, Mr. Chairman. As Chairman said, another set of results for the first half of 2019. Our sales delivered an organic growth of 8.7% to over $3.7 billion, a 10th consecutive period increase. Now, excluding the currency impact during the period, like euro and Aussie dollars, our revenue actually increased by 10.7% in local currencies. This stellar performance mainly driven by our very focused and dedicated commitments to the development of innovative cordless technology, delivering strong categories and geographic expansion and market share gains. Milwaukee continued to drive the sales growth momentum, delivering another over 22.2% increase globally, and by Ryobi ONE+ cordless systems and the revolutionary range of cordless outdoor products. Home Care and Appliances revenue was slower as projected, as we continue to transition out of legacy corded products and markets. Our carpet cleaning products and solutions and the newly launched ONEPWR cordless systems has been very well received by the market. Gross margin increased for the 11th consecutive year to 37.6%. Another 50 basis point margin expansion as compared to previous period. The increase was mainly driven by our new high margin products, mix improvements, productivity gains, and very effective supply chain management. During the period, we have also implemented and executed very swift and effective actions and tackled challenging headwinds, including tariffs. EBIT increases by 11.9% to $314 million with a 20 basis points margin improvement. We will continue with this proven strategy to further invest in strategic SG&A to maintain sales growth momentum and further margin improvement while leveraging non-strategic SG&A spend. Net profit increased by also 11.9% to $285 million, with margin also improved by 20 basis points as compared to the same period last year. Earnings per share increased by 12.4% to $0.1561 per share. The board declared an interim dividend of HKD 0.45 per share, representing an increase of 18.4% over last period, and a payout ratio of 37.2% as compared to 35.2% same period last year. Oh, we like this chart. It has always been our target that EBIT and net profit improvements must outperform sales growth. Over the 10 periods under review, we've managed to deliver this target with sales CAGR of over 10%, while our EBIT delivered a CAGR of over 16% and net profits of 22%. Power equipment division now account for close to 90%, 89.1% of the group's total revenue, delivered a 12.1% sales growth or a strong 14.3% in local currency. The increase mainly by the outstanding performance of Milwaukee globally, together with Ryobi ONE+ systems and outdoors, incredible success in cordless lawnmowers, and the exciting new brushless 40V platforms. Our strategy has always been not only to capture additional market share, but also to expand into new categories, creating new markets, leveraging on our innovations and technology. This strategy been very successful, executed over the past years, and we will continue to invest to fuel the growth momentum. Excluding the translation effect, our power division delivered a 20.2% growth in Europe and 15.3% growth in Australia, respectively. EBIT margin of this division remain comparable to that of last year, as we continue to invest in strategic initiatives to capture future revenue growth and margin expansion opportunities. Home Care and Appliances division accounts for now only 10% or 11% of the group's revenue, down 12% in local currency to HKD 406 million. The revenue decline mainly due to, explained before, the transition out of legacy core products and markets. This enabled the division to stay focused in the new cordless ONEPWR system together with carpet washing products and solutions, both with high growth opportunities and also margin accretive. EBIT for this division slightly lower than that of last year. However, with the new portfolio being launched in the second half of the year and the margin-accretive carpet washing products, we expect revenue and margin will improve going forward. From a geographic perspective, all regions delivered satisfactory revenue growth to reflect challenging translation impact. North America remains to be our major market, accounting for 76.3% of the group's revenue, followed by Europe, 16%, and rest of the world, mainly Australia, New Zealand, and South Korea, 7.7%. In local currency terms, Europe grew 14.2%, while rest of the world grew 12.8%, respectively. Consistent with our strategy, we've continued to invest in strategic SG&A for growth and margin improvements. SG&A as a percentage to sales in first half 2019 was at 29.3% as compared to 20% in 2018. We increased strategic SG&A spend by 40 basis points, while we've been able to lever down our non-strategic SG&A by 10 basis points. Joe will give you more details later. R&D spend remained the same as that of last year at 2.9%. Net finance costs increased by only $2 million on a sales increase of close to $300 million, and at a higher interest rate environment during the period under review. With our very diligent financial management, we will continue to deliver very efficient and effective finance costs. Effective tax rate was at 7.1% as compared to 7.4% last period. We remain confident that the current high single-digit effective tax rate is very sustainable through our very effective and yet prudent tax plans leveraging on our global operations. Our balance sheet remained very strong and healthy. We've showed its equity now at $3.18 billion as compared to $2.9 billion in first half 2018. As of June 30th, 2019, our gearing was at 13.1% as compared to 1.8% last year. The increase mainly due to the additional infrastructure CapEx spend during the period, together with the strategic inventory build to maintain our strong sales growth momentum and to mitigate any tariff impact. We consider the CapEx investments essential for the long-term growth of our company and business. There will still be infrastructure spend in the next 12 to 18 months' time. We are confident that the gearing will further improve going forward. Excluding the additional inventory build and infrastructure CapEx spend, gearing actually was at around 5.3%. The inventory build was a one-time thing, and infrastructure spend after 12 to 18 months' time may come down. Working capital as a percentage to sales was at 18.3% as compared to 17% same period last year. The increase was mainly due to the additional inventory build, which is strategic for our growth and to mitigate our tariff impact, as explained. There's no significant changes in both accounts receivables and payable days. We will for sure leverage our financial strength, volume, and visibility to get the best terms from our suppliers while maintaining a very prudent and tight credit control of our receivables. Working capital as a percentage of sales will continue to be below our target level of 20% going forward. CapEx for the period was at HKD 211 million, of which about 50% of it was in the infrastructure CapEx spend. We continue to execute our prudent risk-free financial plans and structure to maximize our finance cost efficiencies, resulting in both a higher level of cash and debt. The increase in net debt of HKD 417 million mainly due to the financing of the infrastructure CapEx and the high level of inventory as previously explained. Currently, 61% of our debt are long-term, a 20% increase to match our long-term CapEx investments. 80% in floating rate, capitalizing the current low interest rate environment. Debt portfolio and structure will constantly be reviewed to maximize our operation and balance sheet efficiencies to support our long-term continuous growth ahead of us. With that said, I'll pass it over to Joe. Thank you, Frank. We're thrilled with our first half performance. Our sales actually in local currency were up over 10% in the first half in the face of significant headwinds in an environment where competitors are making one excuse after another about poor sales performance, our team delivered up 10%. Our profit, as Frank said, was up 12% in the first half. Our financial performance is consistent with our guidance. We intend to grow sales high, strong, single digit. We intend to grow our level of gross margin improvement and EBIT at a faster rate than sales. You can clearly see leverage. We continue to invest aggressively in the right kind of SG&A. Frank, the ticker is stuck. I can't advance it from this slide. This gross margin performance is extraordinary. You will not see a company in our space that can consistently grind out and deliver 50 basis point improvement to gross margin, half after half, year after year. Frank, this one also is stuck. Can you imagine 11 years of gross margin improvement with that kind of trend? This is historically considered to be an impossibility. This does not happen. Once again, we've delivered a 50 bip gross margin improvement, and we are confident over the next 5 years, we will continue to drive gross margin at a rate of about 50 basis points a year. 50 is an easy number to remember, I think investors should recognize that this is not a episodic development, this is a permanent trend. As Frank said, our volume growth drives productivity. Our gross margin improvement is driven by accretive new products with accretive gross margins. We have a very disciplined management of our mix in the company, and you can clearly see that in gross margin. As Frank said, our SG&A investment continues to be highly focused and highly disciplined. We are actually very rigorous about reducing non-strategic SG&A administrative overhead. At the same time, we continue to invest aggressively in areas that we deem strategic. Research and development to drive new products is an investment area. Product management and product development is an investment area. User conversion globally in our Milwaukee business is a major area of investment. Our sales coverage program continues to expand. We continue to expand geographically in a very targeted way. You can see that in our sales growth. LDP means Leadership Development Program. That's our campus recruiting effort. This year we will hire globally about 1,000 graduates from college campuses around the world. Can you imagine we're adding 1,000 high-potential individuals that join our company. That infusion of talent is a very powerful force in driving our results this year and on into the future. As Frank said, our working capital management is very disciplined at TTI. We continue to stay under 20%, which is world-class. We had an inventory in the first half to help us mitigate the effect of the tariffs. The tariffs, by the way, were most painful in the floor care area, where we had the 25% tariff environment. We did a good job of building inventory up in advance of tariffs and mitigating, and you can see that in our gross margin and our EBIT. At the same time, our receivables management is a function of being very disciplined about not selling high-risk customers and not selling in markets that have high risk. One of the things that we are not getting credit for is what we don't do. For example, we didn't rush into Turkey like our competitors. We didn't overinvest in Russia. We didn't overinvest in Brazil and Argentina and Venezuela. Our competitors have all been in these markets, and their receivables performance will show that. I'm really proud of our team for having the kind of discipline and not chase short-term sales when there's risk of collection. Frank, we don't have bad debt risk because we don't sign up customers or countries in the first place that reflect that kind of risk. You can see that in our working capital. Of course, the flagship business at TTI is Milwaukee. As you can see on this wall, we have amazing range of Milwaukee products and so many new products that I won't be able to cover. I will just touch on some of the new products today, we were up 22% in Milwaukee in an environment, again, with significant headwinds, 22%. What I was most excited about is Europe. Europe was up actually 25% in the first half. We actually had our largest competitor actually announce recently that they were incredibly pleased with their European business growing 5%. They were pleased with 5%. We are up 25%. I think that would tell you that we are in a position of leadership. We are capturing market share. We are developing new markets, and I can assure you that these kind of numbers are what we expect over the next five years here at TTI with Milwaukee. Our Fuel business. Fuel is our highest priced, high-end, most sophisticated range of cordless brushless motor products in Milwaukee. While Milwaukee was up 22 overall, I think it's particularly encouraging to see that the highest gross margin, high-end range of Milwaukee actually outgrew the average and was up 24%. That's going to continue, David, as well. One of the things that is unique about TTI is we focus on very specific end user groups we call verticals. I'm going to touch on six verticals today just to give you a sense of how we attack the market. We don't look at the market in a broad brush. We look very specifically at groups of end users that have specific requirements that are different than other groups of end users. For example, Carpentry remodeling. This is commercial residential construction activity. We have an incredibly broad line and a growing line of products to serve this market. We're adding, here in the second half, a series of really cool innovative products. For example, this is a rear handle cordless circ saw. This is a ubiquitous product on job sites in the West Coast of the U.S., and for the first time ever, there's an 18-volt cordless product that replaces corded. We have a 12-inch miter saw. This is a beast, and is a required product on residential and commercial job sites. For the first time ever, we have a single 18-volt battery that drives this high performance, very precise miter saw. This is the world's most accurate, most precise cordless, compact router. This product is perhaps the most important product we're launching in the second half. This is finally a framing nailer, we call them a framer, that will replace the traditional pneumatic or the gas-powered units on the market today. This is incredibly fast and accurate. It doesn't jam. This will literally revolutionize the way people put together houses, in markets like Australia, U.S., Canada, Scandinavia. This is a game-changing product in the framing arena. We also have our first-ever cordless concrete cutoff saw. This is a 9-inch cordless concrete cutter, replacing hydraulic or gasoline on these job sites. This is a really cool, super quiet impact driver that makes half the noise of a typical impact driver. Half the noise. It's got terrific torque. It changes the game for somebody who uses these products all day. You don't now have to have the earmuffs because the product is very quiet. Here is a brand-new installation tool with replaceable heads that changes the way that the end user will install various materials on the job site. We can go on and on on carpentry and remodeling. The next area is what we call MEP, mechanical, electrical, and plumbing. This is the core of Milwaukee. This is an area that we continue to dominate globally, and we will amplify that domination here with the products we're launching here in the second half. For example, this is an incredible cordless sewer. It's not a pleasant thought, but if you have an issue in a commercial building, a hotel, et cetera, like this hotel. If you have an issue with the plumbing, this will clear up to 200 feet. It will clear the pipes and get you back to normal in the bathrooms. This is the first-ever cordless fish tape. We call it the Angler. What this device does is you pull the trigger, and it will literally pull the wire through conduits. If you're an electrician, you can now install the wiring in a commercial setting without the tedious and carpal tunnel-oriented process that people used in the past. Here is a first-ever cordless cable stripper. Here is a crimper for crimping aluminum or copper wires in a commercial electrician environment. This product is really exciting. This is the first-ever cordless torque wrench. You can set the torque with this device on your iPhone or onboard, and you very precisely, even if you're not a skilled end user, you now can appear to be skilled because you can't make a mistake. Once you set the torque, you pull the trigger, and you will screw the threaded mechanical fastener at exactly the right torque. Not too much where you strip it, and not too little where it doesn't have a good attachment. It's another breakthrough product in our cordless family. Another vertical is, I'm really excited about this space. This is power utility. Around the world today, people worry about the macroeconomic environment. Let me assure you, whatever the macroeconomic environment does over the next 5 years, the world's power utility arena will get massive investment. You name the country, and I can tell you that this is an area where there's significant infrastructure investment required, and we're seeing that spending happen like crazy. We have a unique series of products for the power utility repairman. For example, this is the first ever, this is a 10,000 PSI hydraulic pump powered by a lithium battery. It's an incredible breakthrough for an application that's very common with the power utility user. This is one of our favorites. This is a utility light. If you're a power utility repairman, if you look up here to your right, you'll see the light just fires up, and then you can see that this light, which can be oriented remotely 200 feet away. You install this light, and you can figure out which power line is down, where the damage is, et cetera. This is fired by a lithium battery. It's cordless. You can control it with your iPhone, or the remote control device. This really changes the way a power utility. If you think if you're a utility repairman, and it's nighttime, and it's raining, you just put the light in, and you can figure out where you have to go do your work. Here we have, this is called a hot stick light. This device is called a hot stick light because, of course, power utility people deal with a lot of electricity. You hang this up, it's cordless, you turn this light on, and you can see exactly what repairs are needed in the area where there's a lot of juice flowing through these lines. Okay. Next vertical is what we call transportation. Whether you are a repairman for cars, trucks, bulldozers, boats, planes, trains, David, any device that moves, we call transportation. We have an onslaught of new product to serve this marketplace, and this is new for us. For example, we have a long anvil impact wrench, which is for installing wheels on these various transportation vehicles. This is a real breakthrough. These are extended reach ratchets. If you're a mechanic and you're trying to remove or install bolts of any kind, the extended nose on this thing allows you to get to places where historically you'd have to use a manual ratchet. This is a game changer for the automotive mechanic. Here is another breakthrough product. This is a cordless die grinder. It's super powerful. It's 12 volt. It's very compact. Any mechanic working around engines of any kind will find this product a must-have as they do their jobs. One of the areas that is brand new for TTI is mechanics hand tools. We are attacking the $6 billion global market for wrenches and sockets and ratchets, et cetera, torque wrenches, with our line of mechanics hand tools. We have designed a unique range here. These are high gross margin, super high performing mechanics hand tools. It takes us into a space we've never been in before. This is all brand new market for us. The reaction so far has been incredible. We are racing one of these mechanics hand tool products after another to market to meet the demand that we've seen so far. Okay, shifting gears. People ask us all the time, "Where are we going to see the growth in the future?" I just want to emphasize that we have a number of startup businesses that we've created from scratch inside the company that have vast potential. For example, lighting. If you look at this collectively, we think this could be a billion-dollar business for TTI as time goes on. The traction we see in our lighting program is extremely encouraging and only getting better. Another example is something we call PACKOUT. One of the things that's happened in the power tool market over the last decade, because of cordless, is the end user is buying more and more different tools. If you look at the typical fleet of tools that an end user has, it used to be an end user would have six, seven, eight tools, and today people have 25, 30, 35 tools. That's very common. The question is, where do you put all those tools? The answer is PACKOUT. People store their tools in their workshop, but more importantly, they need a mobile way of storing tools. If you think of PACKOUT, this is a system, just like for your luggage in the airport, this is a system where the user can wheel their tools, their fleet of tools to the job site where they work, and they can organize it in all these different containers in this interlocking system called PACKOUT. This program is selling five times the forecast. We think this will be a billion-dollar business for the company. The easier we make it for people to store their tools, the more tools they'll end up buying afterwards. This sort of is a catalyst for what we call the tool accumulator. We want people to accumulate as many tools as possible. This encourages them to do that. In hand tools, 10 years ago, we weren't in the hand tool business. Now we're a major factor. We've become a global leader in tape measures, and I'm very excited that we have now reached a point where we have a key determinant of tape measure effectiveness is something called stand out. You basically pull the tape out, and the longer it stands out without bending, the user views it as the more effective the tape is. The market leader today has a 12-foot stand out, and we just came up with a 14-foot stand out on a tape. Can you imagine 14 feet. We will have the best performing line of tape measures in the world. We're rolling this out in the second half, and this is a major hand tool category that we're focused on. Okay, let's shift gears to talk about the DIY market for a moment. If you look in the back, you see that the Ryobi DIY range of cordless power tools and other labor-saving devices, this is the broadest line in the world. Ryobi is the number one brand in the world for DIY tools, and Ryobi is the number one brand in the world for cordless DIY tools. We continue to expand what we call the ONE+ platform with one innovative new product after another. For example, we're launching a whole line of hobby tools that are all powered by the same battery. We have a line of plumbing tools. This is an example of taking technology that we create in Milwaukee, then we let it cascade down into our DIY line. The products aren't as robust as Milwaukee, but perfect for the DIYer. We are doing a lot of this cascading of technology so that we can build the Ryobi ONE+ system into a broader and broader platform. Something that sold extremely well this summer because of the heat was our new air cannon. We have a fan. Actually, we call these things air movement products. This air cannon is powered by a battery, so you don't plug it in, and it's an incredibly effective way of staying cool or drying. If there's a flood or if there's any water damage, this is a terrific way to help expedite the process of drying up the issue. Okay. Outdoor is one of the company's highlights. We've mentioned in the past, and if you look at our Outdoor program here on your left, we were up over 15% in the first half in Outdoor. This is an environment where there were droughts, there was a cold spell in the U.S., yet we still were able to deal with these headwinds and grow over 15%. Why? Because we are the global leader in transforming outdoor power equipment from petrol-based products and AC-based products to lithium battery-powered products. Our lawnmower line of battery-powered mowers is the broadest in the world. It's selling like crazy. We think that our mower business long term is a billion-dollar opportunity for the company. It was nothing three years ago. The sales in the first half are very encouraging. Broadly, this is now our family of lithium-powered, battery-powered outdoor equipment. Historically, all these devices, all these things were powered by petrol or, in some cases, AC. Now it's all battery-powered. There's no fumes. There's no spark plugs to tune. There's no trips to the petrol station. There's no heat. There's no cord to pull. People are adopting this lithium cordless technology at an incredible rate. In fact, the adoption rate here is growing faster than what we planned, and that's great news for our future because we are the clear global leader here in this space. We're launching one new cordless outdoor product after another. For example, a snowblower. Instead of a petrol snowblower, we have a lithium battery-powered. Believe me, if you live in Canada or Norway, this is a product that you're going to want to buy to clear the driveway. One of the things that has been amazing to us is the success of our battery-powered riding lawnmowers. The petrol mower companies are not so happy about this, but we are selling a lot of battery-powered riding mowers. This is actually a zero-turn model. It's a very sophisticated, advanced riding mower, and the sales success of these has given us even more confidence about the future of battery-powered versus petrol outdoor equipment. It's interesting. We have a large competitor that actually just invested in a petrol mower company. Can you imagine? They are now invested in a petrol mower company. That would be like Apple buying a payphone company while they're launching iPhone. We just look at this, and we love it because we're focused on the iPhone and not the payphone like our competitor set. Right, David? floor care actually had a very good first half. Yes, the revenue was down. You have to remember that floor care got hit the hardest, Stephan, with the tariff environment in the U.S. If you just separate the noise of tariff in the short term, discontinuance that we're going through of low-margin floor care, the fact is our carpet washing range, which is a critical part of floor care, has been completely re-engineered, and we are seeing fabulous success on our compact carpet washer and our full-size unit, plus the detergent. We also are now rolling out, finally, our ONEPWR system of cordless floor care and cleaning products. We shipped just a little bit in the first half, so in the second half, we'll end up setting major retailers with this program, and it'll have a nice impact on our growth in 2020. The reaction from the end user on our ONEPWR cordless floor care products has been outstanding. One of the highlights is a product we call Jet. This is a hard surface cleaner that cleans, it vacuums, and it works on all sorts of different floor surfaces, and people love the fact that there's no cord. Cordless matters a lot here. Another successful launch has been our spot cleaner. Again, cordless spot cleaner for quick cleanups, and there's a lot of things that need to be cleaned up on carpet, as you know. This is a great way to do it without a cord. In summary, we launch more new products every quarter than all of our competitors combined will launch for the whole year. Our products are not warmed-over package changes or brand changes. Our new products are designed from scratch, innovative breakthrough products, mostly cordless, along with some hand tools and storage products, as we mentioned. I think that flow of new products should give our investment community confidence that our ability to grow the top line at an improving gross margin is looking pretty good. Anyhow. Why don't we, Mr. Chairman, open up for questions at this point? Frank? Yes, please. Okay, thank you. Okay. Mr. Chairman, can I turn it over to you to wrap it up? Joe, you have done a fantastic job. Even answering your question with the CapEx on the 40%. We invested in a new warehouse on a piece of land we negotiated with the South Carolina government, about 400 acres, and a warehouse innovation center in Milwaukee and improving our manufacturing facilities in the U.S. That will not happen every year, I know, but it was a good question. Thank you. Thank you very much. As we continue investing in our core business, I feel strongly that the exceptional group performance that was the first half will continue. Our global worldwide manufacturing footprint and supply chain, along with the highly effective management team, has helped us to offset the headwind. What are the headwinds? As Joe says, tariffs, which are presently in place. We don't worry too much. Is that right? We manage it. We manage it. We are extremely well-positioned to continue our momentum into the second half and beyond. We will remain passionately committed to executing our goals. I would like to thank our team and you, Joe. Thank you, Horst and everybody for our passionate effort we're putting in. In the end, we all will benefit, you and me and all of us. Thank you very much for attending, and hope to see you with even better news. Exactly. In six months. Six months from now. That's right. Yes, exactly. Thank you very much for attending.