FY23 Half Year Results - Chair and CEO Commentary
Thank you for your ongoing support of the Bremworth brand as we hit the midpoint of our five-year transformation plan and work to deal with the adverse weather event from Cyclone Gabrielle that impacted the woollen carpet business on 14 February 2023.
The first six months of FY23 has seen us continue to invest for the future in:
- Brand awareness
- Product and design
We continued to run campaigns to support our mid to long term brand position as the market leader in New Zealand made, New Zealand wool carpet and rugs.
We designed new products and introduced new colours to refresh our ranges.
Importantly, we embarked on a bold distribution expansion strategy in Australia to enhance our brand presence and scale our revenue opportunities in this large market. Australia represents around half of our total sales presently and we were forecasting this to grow significantly over the coming years.
We also moved to future proof the business by upgrading our technology platforms to improve plant efficiency and have designed and launched a new direct-to-consumer (DTC) website to enable our rug business to grow faster.
We continued to stay true to our purpose of finding a more sustainable way through investments in reducing carbon and waste.
Our move to all-wool has seen other brands in New Zealand and Australia launch new wool products.
This is not unexpected and indeed validates our move and the progress we have made, while also sharpening the focus on natural carpets as an alternative to plastic-based carpet.
It also further demonstrates consumers raised awareness to the natural benefits of wool.
Pleasingly, the carpet and rug business is still growing year-on-year.
Australian carpet and rug revenue is up 8% on the previous year despite the deliberate move away from low-margin high-volume commercial business in FY22 to focus on premium residential consumers in that market and the well-publicised macroeconomic headwinds faced in both New Zealand and Australia.
This provides support to our decision to embark on the distribution expansion strategy to enhance our brand presence and scale our revenue opportunities in the large Australian market.
Just as important, margins have continued to improve as brand investments start to bear fruit.
Our DTC rug business is achieving double digit growth, with the DTC model providing a lower cost to serve with impressive margins and unparalleled consumer insights which help improve our service and product development pipeline.
The six-month result also reflects prudent investment in, and management of, our inventory - with the lowest level of aged inventory in 10 years and improved profile of our core ranges as we positioned ourselves for growth in the key Australian market.
Our wool buying division, Elco Direct, has seen a slowdown versus last year.
The results have been impacted by geo-political issues - specifically, the war in Ukraine and the zero-COVID-19 policy that was being observed by China up until December.
The Elco Direct business is run efficiently and continues to grow share of the direct wool buying sector. This provides the Bremworth carpet business with a significant competitive advantage in our core raw material inputs.
Bremworth is planning to introduce direct long-term contracts through Elco Direct to support strong wool farmers, ensure continuity of supply of good quality wool and smooth margins, with these plans scheduled for Q4.
DTC DIGITAL BUSINESS
We currently operate a DTC rug business that has shown encouraging growth and will become a material revenue and profit contributor to Bremworth in the years ahead.
To complement this digital business, we are planning to open brand experience stores, giving consumers the opportunity to learn more about wool, design, trends, Bremworth and ultimately the chance to design and purchase their own rug instore.
This platform will further enhance the consumer experience of Bremworth and raise awareness to the benefits of Bremworth carpet and rugs. Brands that are omni-channel have proven to increase loyalty to the brand, average spend across all channels and lifetime value.
Profits have been impacted by litigation, including the ongoing defence required to fight American-owned Godfrey Hirst which continues to be a drag on resources and costs.
Godfrey Hirst dropped their damages claim last year but have sought court orders in the form of corrective statements and an injunction over alleged misleading statements in Bremworth’s Going Good marketing campaign. Godfrey Hirst allege that Bremworth has been misleading the public by representing that synthetic carpet has a materially worse environmental impact than wool carpet. In essence, Godfrey Hirst do not want us to say that synthetic carpet has a worse environmental impact than wool carpet across the life cycle of the products.
More recently, Godfrey Hirst amended their claim in an attempt to capture the whole of Bremworth's marketing campaign and require Bremworth to either publish corrective statements or stop its marketing campaign.
Bremworth considers that the new orders Godfrey Hirst seek are inequitable, anti-competitive and unconscionable, especially in light of Godfrey Hirst's own advertising and conduct and has raised these arguments in its defence to Godfrey Hirst's amended claim.
The Board will keep shareholders apprised of developments, with the court hearing set down for later in the year.
Macro-economic conditions in both markets remain a consideration in our outlook, with inflation in both our key markets expected to put a drag on growth. However, the recent significant weather events in New Zealand may cushion some of those headwinds over the next four to 12 months.
The Board and management remain committed to the ongoing investment in Bremworth to build a high performing, sustainable business for the long term.
Operating conditions for the Elco Direct wool acquisition business are expected to improve with the removal of COVID-19 related restrictions in China meaning a rise in demand and prices is expected in the second half of the year.
Carpet business and event subsequent to balance date
On 14 February 2023, the Napier yarn spinning plant suffered widespread flooding as Cyclone Gabrielle struck the Hawke’s Bay region.
The Napier yarn spinning plant is a key plant within the Group’s woollen carpet operation, supplying woollen spun yarn to the Auckland carpet plant for conversion into carpet and dyed fibre to the Whanganui yarn spinning plant for processing into felted yarns for carpet manufacturing.
The Napier yarn spinning plant has not been operating since that adverse weather event, with preliminary assessments confirming:
- widespread flooding throughout the plant;
- significant damage to services within the building and to plant and equipment; and
- loss of inventory.
The initial stages of the clean-up have just got underway – with access to the plant only just becoming possible for that to occur.
It is expected that the plant will likely be offline for a yet to be determined, but significant, amount of time – given the extent of the damage and the work required to reinstate buildings, plant and equipment.
A full discussion of the impact of Cyclone Gabrielle on the woollen carpet business can be found in Note 1 (Going concern) to the 1H23 financial statements, while the risks posed by these weather events are considered in Note 12 (Climate-related disclosures) to the 1H23 financial statements.
As a consequence of the assessments that have been undertaken and after having considered the uncertainties relating to some of the assumptions underlying these assessments – more particularly, the time it could take for the clean-up and reinstatement of buildings, plant and equipment and to switch to alternative sources of yarn and dyed fibre - the Board has concluded that these uncertainties are not significant and able to be managed.
In forming these views, the Board has taken into account the following:
- the cash surplus of $10.4 million as at balance date along with positive equity and positive working capital, with the negative cash flows from operations the result of the Group’s ongoing investment to support sales growth and service levels – particularly in the large Australian market - and to build a high-performing, sustainable business for the long term;
- the strong inventory position and the quality and profile of that inventory, with 94% of uncommitted inventory as at balance date made up of current stock-keeping units (SKUs);
- the scope and extent of the Group’s insurance programme and the comprehensive policies in place to protect itself against losses from such events, the discussions the Company has had with representatives of the insurers and our own claims advisors and the expected timing of insurance payments;
- the steps that have been taken to reduce discretionary spending and to protect its cash resources during the period of interruption to the business; and
- the Group's ongoing ability to resort to other sources of funding.
The Board is also reassessing whether original expectations around realising the full benefits of the transformation from FY25 onwards is still possible and will provide an update to shareholders once it is able to complete a detailed assessment.
For and on behalf of the Board of Directors:
George Adams - Chairman
Greg Smith - Chief Executive Officer