METHVEN LIMITED - 2017 ANNUAL SHAREHOLDERS MEETING
Wednesday 1 November 2017
Opening Speech – David Banfield
SLIDE 14 - Introduction
Good afternoon ladies and gentlemen, fellow shareholders and members of the
Methven team.
I am delighted to be here with you again this year and in particular, here at ‘The
Source’ in our Methven Experience Centre.
After the presentations and formalities today, you will be able to take a tour of
our home here in Avondale and be able to see first-hand some of the state-of-
the-art manufacturing equipment on site, including our investment in new digital
machining equipment (CNC). This is designed to enhance our long-term
competitiveness and manufacturing flexibility.
You will be able to meet some of our Legends of Methven (team members who
have been with us for at least 25 years) and as importantly, our apprentices –
being trained to ensure we have skills in Methven to ensure our long term ability
to manufacture in New Zealand. Finally, I hope that you gain a sense of the
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benefits we get from having everything from ideation to engineering, tool-making
to manufacturing, and assembly to despatch, all under one roof.
SLIDE 15 - FY17 performance
We were hugely disappointed by last year’s results, especially off the back of a
good FY16 performance. Despite there being a number of one-off impacts in
the year, we recognise that tapware performance across Australia and New
Zealand was poor, and that our focus on showering has left room for private
label and smaller brands to win some share from us in the tapware market. We
know that many competitors source standard products from low cost country
suppliers and as such, it highlights that in the absence of exacting market
standards in New Zealand, we have to raise our game further in order to
maintain our market leadership. This market share loss, along with the fact that
we manufacture our own tapware, meant factory margins were further impacted.
Finally, investment in fixed cost in the New Zealand market that was designed
to drive top line revenue failed to deliver the expected growth. Instead, we
experienced a double whammy of lower sales and increased cost. These
investments have already been unwound in FY17 as part of our simplification.
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Ultimately, we failed to deliver the results we expected, and are very clear on
actions that will deliver a sustainable platform for long term profitable growth.
I now move on to the results
Today, for the purpose of comparability, I will mainly focus on the constant
currency results that take local results and translate them at a consistent rate
across both years. This removes distortions caused, for example, by the
weakening of GBP post Brexit.
Sales for the year ending 30 June 2017 finished at $100 million dollars - flat on
the previous year, while EBIT (Earnings before Interest and tax) finished down by
7.8% in constant currency, and NPAT (Net profit after tax) down 15.1% or $1
million dollars in constant currency. Net Debt increased by $5 million dollars,
primarily as a result of increased inventory for sales that did not materialise in
the period. Capital expenditure was $2.627 million dollars, down 50% on the
previous year.
Our final dividend was 3 cents per share, bringing the total to 7 cents for the
whole year. The dividend was partially imputed as a result of lower tax being
paid in New Zealand.
SLIDE 16 - Business Review
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We endeavour to give you transparency about our goals and also performance
against those goals using a simple slider mechanism colour coded green, amber,
red. As you can see from the chart on the screen, we achieved three of our goals,
partially achieved one, and failed to achieve three - which is not good enough,
and not in line with our capability or expectation.
We targeted sales growth in New Zealand, but ultimately saw our revenue
decline by 2.5% year-on-year. The decline was all due to our second half
performance, with South Island demand returning to pre-quake levels and
general tapware sales the other cause of the decline. Better second half gross
margins offset increases in fixed costs that were put in place (but ultimately
failed) to deliver growth.
In Australia, we targeted both sales and profit growth. Despite margins being up
by 25% in the second half, we were unable to recover the impact of the first
quarter one-offs, where the closure of Masters affected rest of market demand
and AU/US$ depreciation caused margin weakness. On a product basis, our
underperformance was again due to tapware - this will be addressed in 2018.
The UK was our major success for FY17, with sales growth of 8.8% achieved over
the year and profit growth of 32%. New distribution started with Bunnings, giving
us a national distribution footprint, and we also agreed a second new national
distribution contract that will commence in February 2018. The primary driver
of the growth was our shower technology.
Our Satinjet and Aurajet technology remains a significant differentiator to our
global competitors, and helped us to be recognised as UK Best Shower Brand of
the Year, with UK Aurajet sales up by 123%.
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The decline in tapware sales in Australia and New Zealand also affected factory
performance and along with the supply chain disruption in Q1, ultimately meant
that we were unable to improve our profit.
SLIDE 17 - Impacts in FY17
As previously highlighted, a number of one-off impacts in FY17 ultimately meant
that we did not achieve our goals for the year. The slide shows that all of these
have now been fixed or will have no further impact, except the
underperformance of tapware in Australia and New Zealand which I will now
focus on.
Over the last three years, considerable effort has been placed on innovation in
showering, including the Aio hand shower, the Aio shower system, the Rua hand
shower that is about to launch in all markets, and a new shower technology that
we intend to launch in the second half of FY18. We strategically focused on
showerware, as we felt (and still feel) that this truly differentiates us verses our
global competition. However in order to maintain our market leadership in the
NZ market and also grow market share in Australia, it is vitally important that we
expand our tapware offering, bring new business models, adding technology that
improves performance, and ultimately gives our key customers (plumbers and
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consumers) more reasons to buy Methven. With the absence of tough market
regulatory standards in New Zealand, competitors or traders can source lower
quality products that on the surface look the same, but in reality, are very
different. As market leader, it’s incumbent on us that we set new standards in
terms of product design, business model and total long term peace of mind for
end users – something we believe people only get from Methven. We have been
testing activity in the first months of the new financial year, with some
encouraging results so far and will roll this out in the second half. In addition,
we will be launching a matching tapware range with our new shower technology
in Q4 FY18, and also be preparing for a significant relaunch of our trade tapware
range through Q4 FY18 and Q1 FY19.
SLIDE 18 – 2017 Successes
During 2017, we had a number of successes, some of which I would like to share
with you now.
In Product and Technology innovation, we launched our Safeflow shower
technology, a single lever thermostatic shower mixer designed to ensure a
perfect temperature and therefore perfect experience with every shower, even
when there is a change in water pressure, for instance when someone flushes
the toilet.
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We also launched Black Aio and Waipori shower collections, which you can see
in our Experience Rooms here at The Source, with very positive consumer
feedback. Please have a look while you’re here – we’d love to know what you
think.
In Digital innovation, we launched our Plumber App, our online $1 handset trial,
and developed our Specification Portal, all designed to make it easier and more
convenient for our customers to experience Methven.
SLIDE 19 – 2017 Successes
We added New distribution in the UK, with both Bunnings and City Plumbing
Supplies, which will increase our national distribution by over 600 distribution
points. We have also announced new international distribution that I will come
back to later on.
In the UK, we were recognised as a Cool Brand and also Best Shower Brand,
beating many of our major international competitors. And finally, we were
awarded Best of the Best at the world-famous Red Dot Awards in Germany, one
of the most prestigious global awards in our category.
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SLIDE 20 - Long term stable but positive trend in sales and earnings
While FY17 was hugely disappointing, it is important to keep the performance in
context over a longer period.
The chart shows sales and earnings from FY13 to FY17 in constant currency and
as can be seen, the long term trend is stable. We have achieved a compound
annual Revenue growth rate of 2.8% and a Compound Annual earnings Growth
Rate (CAGR) growth of 5.9%. We know we can, and should be, achieving better
than this, but felt it important to put our disappointing year in context.
SLIDE 21 – FY17 impacts highlighted need for increased agility
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The unforeseen events of FY17 highlighted the lack of flexibility in our existing
business model. We have therefore launched our business transformation plan
Fit 4 the Future, to transform our business and put us in a position to weather
unexpected events. This plan is designed to simplify, better integrate teams,
automate key processes around the business, and create a strong core platform
for future growth.
SLIDE 22 - Fit 4 The Future
The goals of the Fit 4 the Future transformation plan are to achieve a 300 basis
point (3% percentage points) improvement in gross margin, a 10% reduction in
fixed cost for reinvestment in our brand, and decrease the sales required to
break-even each month by $1 million dollars.
A major programme of work has been identified, ranked, and validated, and is
currently underway.
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SLIDE 23 and 24 - Fit for the future program progress
The Fit 4 the Future plan is due to last for a period of two years. At the end of
the first quarter of Year 1, with 13% time gone, 33% of efficiency projects and
46% of our profitability projects are in execution stage, and as you can see
from the slider at the bottom of the page, we are confident that we can achieve
the stated goals.
One example of simplification that is underway is our SKU reduction
programme. A SKU is a stock unit. We have a goal to reduce the total product
count by 33-50% in this financial year without impacting long term sales, profit
or customer satisfaction. I am delighted to tell you that at the end of Q1, we
have achieved 31% of our full year target. This means less products to hold in
stock, less working capital, less data to maintain, and a simpler proposition for
our customers.
SLIDE 25 - Strategy on a page
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The Fit 4 the Future programme (FFF) has now been added to our M130
strategy, and therefore extended our strategic plan to June 2020, with the
strategic focus remaining on strengthening core markets, delivering
international growth with our proprietary technology, and having a future-proof
and ethical business model.
I now take each of these in turn.
SLIDE 26 - Immediate priority is delivering Core market growth
Consumer led innovation in showers, taps and valves is critical for us to deliver
growth from our core markets who generate the majority of our earnings. We
are focused on not just delivering innovation, but also on being able to quickly
and cost effectively proliferate SKUs in order to maximise results and better
leverage our existing distribution and manufacturing facilities.
Improving digital capability and customer interaction through digital channels
is both cost effective and scalable. We have now launched our $1 handset
trial online in NZ and UK (Australia to follow shortly). The platform has been
created so that it’s easy to add additional products and services in the future
and to make digital interaction with Methven seamless. Should you want to
sign up, please see Johnny today, who will set you up for the trial.
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In addition, we aim to launch new business models that shorten the long
purchase cycle in our industry, giving consumers the opportunity to upgrade
their experience easily, recycle end-of-life product, and choose different
payment solutions.
SLIDE 27 – Aurajet – one of the most awarded shower technologies in the world
Aurajet is one of the most awarded shower technologies in the world, with
recognition in the US, Europe, Asia, Australia and New Zealand. It is crucial that
we now deliver increased international sales from this world-leading technology.
SLIDE 28 – International markets and digital sales model key to future revenue
aspiration
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We have two distinct models to deliver international growth - a more traditional
business model via retailers and established distributors in new markets, and a
digital and disruptive model that we are testing in North America. Let me give
you examples of both models in action.
SLIDE 29 – Growing our commercial footprint to leverage IP
In South East Asia, we worked very closely with NZTE looking at potential
partners and were delighted to sign a contract with a new distribution partner
Ipmuda in Malaysia in July. Ipmuda have set their annual sales target at $1.25
million. I am also really pleased to confirm that I will be signing a new contract
in Singapore this week. We are also looking to add other markets in the future
as a part of the same process with NZTE.
SLIDE 30 – Growing our commercial footprint to leverage IP
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In the USA, we have taken a different approach and are very excited about the
opportunity that this presents. We have decided to test a digital direct-to-
consumer model in the first stage. We launched via Kickstarter with our new
shower Rua, that utilises Aurajet technology to deliver a great shower
experience but only uses 6.8 litres of water per minute (in line with soon-to-be
introduced new Californian standards). In the first 10 days, we have over 200
backers and have generated sales of over USD$70 thousand dollars, and have
generated much discussion about Methven. In addition, we have launched
online with Home Depot and Amazon and Walmart, and expect 5 additional
online retailers to follow in the next few weeks. This is a data driven and
interactive environment that lets us test, learn and interact with new
consumers with little cost, risk or complexity as product is directly supplied to
our new partners in California direct from Auckland.
SLIDE 31 – Strong purpose and talent base from which to grow
We have a clear and aligned cause at the heart of the business, and are
delighted to have retained existing talent and attracted new talent that is
determined to make a difference at Methven and in doing so, also make a
difference to our planet and our communities. We partner with over 75 local
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businesses supporting the local community, and also support the restoration of
the Whau River (the river around Avondale) by planting, clearing and mulching
the local waterways.
SLIDE 32 – Market and product mix to drive margin expansion
By 2020, we aim to generate over 70% of our sales outside New Zealand and
almost 60% of our sales from showering. This, along with Fit 4 the Future, will
deliver margin expansion and give us a broad foundation for longer term
growth.
SLIDE 33 – FY18 Guidance and Trading Update Q1
Profit for the quarter ending 30th September finished up by 32% ($300k) in
constant currency, however tapware in New Zealand has continued to
underperform over the quarter and is forecast to continue at current levels
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until the new activity rolls out in Q3 FY18 and new products in Q4 FY18/Q1
FY19.
We expect half year profits to be up by 10 % before one off Fit 4 the Future FFF
investments which will mean our reported figures will be flat or slightly down on
a constant currency basis.
Our guidance for this year is to increase our Net profit in constant currency by
at least 10% and this guidance is maintained.
SLIDE 34 – Fix, transform and grow
So in summary:
The issues that impacted the business in FY17 are FIXED or are in the process
of being fixed.
Our Fit 4 the Future programme will help us transform the business and make
our results more predictable.
New international markets and strong core markets will be the catalyst for our
long term profitable growth.
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We are proud to be a New Zealand manufacturer creating the best showers in
the world from New Zealand.
I finish with a video of our story…..
SLIDE 35 – Video
I will now hand back to Alison, but would like to thank her and the Board for their
support for the significant changes we are making to the business, in order to
make us Fit 4 the Future.