Breville Group (ASX:BRG)

Jim Clayton
CEO
Market Cap (AUD): 2.33B
Sector: Consumer Discretionary
Last Trade (AUD): 17.93 +0 (+0%)
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1. About

Breville Group Limited is a Public Company that is ranked number 637 out of the top 2000 companies in Australia. The Company generates the majority of its income from the Household Appliance Wholesaling in Australia industry. Breville Group Limited is engaged in the innovation, development, marketing, and distribution of small electrical appliances. The Company's segments include North America, Australia, and New Zealand, Rest of World and Other. In North America, the Company distributes Breville branded products through various channels. In Australia and New Zealand, the Company principally trades through its own brands Breville and Kambrook and also distributes a range of Philips products in the personal care and garment care categories. In the United Kingdom, the marketing and distribution of Breville designed products to retailers is through the Company's own brand, Sage. The Company's Other segment includes the shared service facility, design and development, and global marketing functions, as well as the depreciation/amortization charge on Company's assets, including capitalized product development projects. The Company's products include espresso machines, mini ovens, toasters, and kettles.

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue ($’M)

% of Revenue

% of Profit (before Tax, Depn & Amort)

Profit drivers[2]

Global Product

$526.9

80.8%

84.3%

  • The Global Product segment revenue for the year increased by 12.2% to $526.9m (FY17: $469.6m) and 13.4% in constant currency.
  • All geographic regions contributed to this result, with North America growing by 9.8%, ANZ by 9.1%, and ROW by 9.9%.
  • Global Product segment EBIT for the year was $73.3m (FY17: $72.4m), representing a 1.2% increase. The segment EBIT margin of 13.9% compares to 15.4% in FY17. The reduction in EBIT margin is reflective of the Group’s ongoing strategic acceleration program. The increased investment in marketing and R&D along with the European expansion has been expensed within the Global Product segment.

Distribution

$125.5

19.2%

15.7%

  • Revenue for the year of $125.5m was $10.7m or 7.8% lower than prior year (FY17: $136.2m)
  • The Distribution segment included revenues from the North American Nespresso® machine partnership for the entire FY18, compared to the prior year where revenues commenced in the second half. FY18 also included new revenues in ANZ from the Aquaport acquisition and the Nestlé® Dolce Gusto® distribution relationship.
  • The segment’s EBIT margin increased to 10.8% from 4.9% in the prior year. The improved segment EBIT margin was driven by improved brand and product revenue margin mix.

3. Strategy

 

The Group is focusing on the following key strategic pillars:[3]

 

  • Breville Group’s primary strategy is the design and development of the world’s best kitchen appliances together with expanding distribution and dynamic marketing on a global scale
  • Focus on driving consumer understanding of, and engagement with, the Group’s product and proposition
  • The Group continues to invest in engaging marketing activity for the Sage® brand to drive targeted expansion and accelerate the brand’s presence in the premium channel in the United Kingdom.
  • The core driving the Group’s growth continues to be investment in product development and a focus on design and innovation
  • Breville actively protects their customer value through increased investment in intellectual property protection and via the development of a portfolio of patented innovative products for future sustainable growth
  • Breville Group invests in the training and education of its team; building strong, collaborative links with world experts in food thinking and technology. The Group is also involved in several consumer facing and chef liaison activities
  • Strongly committed to its core values of creativity, simplicity, insight and excellence in all departments, Breville recruits, trains, assesses and rewards employees on this basis
  • The Group continued to grow its highly talented and experienced team, bringing on board additional experience and expertise, particularly in the areas of marketing, product design and development, IT and logistics
  • The Group has continued to transform its go-to-market process. With the objective of an aligned calendar setting, both within Breville itself and its external manufacturing and retail channel partners, the Group seeks to fully leverage an increasing number of new product introductions to continue to drive its business and iconic brands forward

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

Growth Rate

Household Appliance Wholesaling

$8 billion (2017)

(2.8%) (annual 13-18)

Kitchen and Diningware Wholesaling

$2 billion (2018)

1.0%  (annual 14-19)

Domestic Appliance Retailing

$15 billion (2018)

2.1% (annual 14-19)

5. Competition

 

Major competitors include:[5]

 

  • Samsung Electronics Australia
  • Electrolux Home Products
  • Panasonic Corporation(TYO:6752)

6. History

 

1957[6]   

The Company was established

 

1960   

Research and development center was established by John O’Brien

 

1997   

Acquired the US based Metro Marketing

 

1999   

Listed on the Australian stock exchange

 

2001   

Housewares International Limited acquired the ‘Breville’ companies in Australia, New Zealand and Hong Kong, as well as a 50% interest in Anglo-Canadian Housewares

 

2003   

SABCO was acquired to further strengthen the position as a leading supplier of goods for the home

 

2007   

Housewares International Limited acquired the remaining 50% interest in Anglo-Canadian Housewares from its joint venture partner

 

2008   

Housewares International changed its name to Breville Group Limited

 

2009   

Breville Group commenced a further rationalisation of the non-electrical housewares product range in North America

 

2010   

Breville Constitution Amended

 

2013   

Breville launched compostable juicer bag for its products

 

2016   

Breville Group Limited announced that its distribution agreement with Philips for Australia and New Zealand expired on 31 May 2017

7. Team

 

Board of Directors[7]

 

Steven Fisher – Non-Executive Chairman

Tim Antonie – Non-Executive Director

Peter Cowan – Independent Non – Executive Director

Sally Herman – Non-Executive Director

Dean Howell – Non-Executive Director

Lawrence Myers – Non-Executive Director

Kate Wright – Non-Executive Director

 

Management Team

 

J. Clayton – Group Chief Executive Officer

S. Brady – General Manager, Product

Martin Nicholas – Group Chief Financial Officer[8]

M. Payne – Chief Operating Officer

C. Torng – Global Go-to-Market Officer

Sasha Kitto – Company Secretary


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8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/2018 (ended 30 June):[9]

 

Division

Revenue ($’M)

% Change

Profit (before Tax, Depn & Amort) ($’M)

% Change

Global Product

$526.9

12.2%

$73.3

1.2%

Distribution

$125.5

(7.9%)

$13.6

106.1%

Total

$652.4

7.7%

$86.9

10.0%

9. Risk

 

Major risks include:[10]

 

Material business risks

Foreign exchange exposures

Transactional exposure as its product purchases is primarily paid for in US dollars.

Translational exposure as its international earnings, a large portion of which are denominated in US dollars, are translated into Australian dollars for reporting purposes.

 

Adverse global economic and geopolitical conditions and consumer demand

Adverse changes to the general global economic and geopolitical conditions and the retail landscape and consumer sentiment in the principal markets in which the Group operates will impact its financial results.

 

Margin risk

The highly competitive nature of the small domestic appliance market together with changes in manufacturing costs, including commodity prices, will have an impact on the Group’s financial results.

 

Product development and innovation

Insufficient investment in product development and innovation may result in loss of competitive advantage.

 

Interest rate risk

The group is exposed to interest rate risk on its borrowings, cash balances and derivative financial instruments. The group’s policy is to manage its interest rate risk using a mix of fixed and variable rate debt where appropriate. Cash advance facilities have short term fixed interest rates with maturities ranging between 1 and 3 months, therefore within the financial year they are exposed to interest rate risk.

At 30 June 2018, 100% of the Groups borrowings (2017: 100%) are exposed to floating rates. On a principal net receivable of $57,992,000 (2017: $41,283,000), at an average payable rate including line fee and margin of 2.5% (2017: 2.2%) and average receivable rate of 1.1% (2017: 0.8%), an increment of 0.5% in the market rates would result in a decrease in finance costs of $310,000 (2017: $206,000), conversely a decrement of 0.5% in the market rates would result in an increase in finance costs of $227,000 (2017: $170,000).

The group’s net exposure to interest rate risk calculated as at 30 June 2018 is not representative of its exposure during the financial year due to seasonality in the volume of sales such that financial performance is historically weighted in favour of the half to 31 December. This seasonality results in a higher level of receivable and inventory balances and a consequent increase in working capital requirements. All of the group’s borrowings during the year (2017 average borrowings: 100%) are at a floating rate of interest. On an average principal net receivable during the year of $23,699,000 (2017: $49,031,000), at an average payable rate including margin of 2.5% (2017: 2.2%) and average receivable rate of 1.1% (2017: 0.8%), an increment of 0.5% in the market rates would result in a decrease in finance costs of $85,000 (2017: $245,000), conversely a decrement of 0.5% in the market rates would result in an increase in finance costs of $41,000 (2017: $192,000).

 

Foreign currency risk

The group undertakes certain transactions denominated in foreign currency and is exposed to foreign exchange rate fluctuations.  Such exposure arises primarily from purchases of inventory by a business unit in currencies other than the unit’s functional currency (purchases are predominately US dollar denominated). Other foreign exchange risk only arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency.To hedge exposure arising from the purchase of inventories or payments in currencies other than the business unit’s functional currency, forward exchange contracts may be utilised. At inception these hedge contracts are designated as cash flow hedges to hedge the exposure to the variability in cash flows arising as a result of movements in exchange rates below contracted exchange rates for options and for movements above or below a contracted exchange rate for forward exchange contracts.Also, as a result of the group’s investment in its overseas operations, the group’s balance sheet can be affected significantly by movements in the exchange rates of the jurisdictions it operates within.

 

Capital management

The board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.The board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. The board monitors the group’s gearing ratio and compliance with debt covenants on a regular basis. The group’s gearing ratio at 30 June 2018 and 30 June 2017 is nil due to the group being in a net cash position. The gearing ratio is defined as group net borrowings divided by capital employed (net borrowings plus shareholders’ equity).

 

Credit risk

Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The credit risk on financial assets, excluding investments, of the group that has been recognised on the balance sheet is the carrying value amount, net of any uncollectible receivables.The group trades only with recognised, creditworthy third parties. It is the group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In certain instances, where deemed appropriate, receivable insurance is acquired to offset the group’s exposure to credit risk. In addition, receivable balances are monitored on an ongoing basis with the result that the group’s exposure to bad debts is not significant. There are no significant concentrations of credit risk across the group. With respect to credit risk arising from the other financial assets of the group, which comprise cash and cash equivalents and certain derivative instruments, the group’s exposure to credit risk arises from default of the counter party with a maximum exposure equal to the carrying amount of these instruments. These counter parties are large multi-national banks.Since the group trades only with recognised third parties, there is no requirement for collateral.

 

Liquidity risk

The group’s objective is to maintain a balance between continuity of funding and flexibility through the use of cash advances and bank overdrafts. The group’s bank facilities carry a thirteen-month term in Australia, New Zealand, USA, Canada, UK and Germany. As at 30 June 2018, 100% of the group’s borrowings will mature in greater than one year (2017: 100%) and nil (2017: nil) in less than one year.