Address by Derek O'Neill Billabong s Chief Executive Officer The 2004-05 financial year was another record period for Billabong International Limited. Net profit after tax lifted 44.1% to $125.4 million, up from $87.0 million in 2003-04 (the prior year). Earnings per share (EPS) was 41.9% higher at 61.0 cents, up from 43.0 cents in the prior year. Both measures exceeded the Company s market guidance. When compared with the prior year, group sales revenue, as reported in Australian dollars, lifted 25.0% to $843.6 million (up from $674.7 million). EBITDA rose 38.8% to $200.1 million (up from $144.1 million) and global EBITDA margins increased to 23.7% (up from 21.4%). Cashflow from operations increased 74.7% to $116.4 million. Directors declared a second-half franked dividend of 20.5 cents a share, taking the yearly payout to 38.0 cents fully franked. This represents an increase of 43.4% over the previous year and maintains a 62% payout ratio. The result was achieved on strong performances in Australia and the United States and continued improvements in Europe. It includes the first full-year contribution from the Honolua Surf Company and a nine-month contribution from Kustom shoes and the associated Palmers Surf accessories business. On a regional level, sales revenue in the Americas lifted 28.7% in US dollars, or 21.9% in Australian dollars, with a significant margin improvement. Australasian sales lifted 43.1%, with the result buoyed by the exceptionally strong retail environment that characterised the first half in Australia. European revenue lifted 8.0% in Euro terms, or 9.4% in Australian dollars, with sales passing 100 million for the first time. All brands within the Group recorded strong performances, with the core Billabong brand remaining the mainstay of the business. Element continued to build its market share and further cemented its place as one of the world s best-performing boardsports brands. The Von Zipper brand had good growth, particularly in the US and Australia. Kustom, which was acquired through the year, continued to build on its solid foundations and the Honolua Surf Company wholesale apparel range showed early promise following its launch in the US. As forecast at the half year, the Australian market retreated from its first-half exceptional highs and returned to more normal levels in the second half. With this in mind, it is worthwhile noting that the Company s global reach and multi-brand strategy allows it to absorb region-specific economic fluctuations and retail cycles and still deliver solid growth. Therefore, the Company, in the absence of any unforeseen exceptional circumstances, remains comfortable with its medium-term goal of the consistent delivery of 15% annual EPS growth. I ll now hand over to the Company s chief financial officer, Craig White, for a more detailed review of the business performance.
AMERICAS Compared with the prior year, sales revenue increased 28.7% to US$293.9 million (up from US$228.5 million), EBITDA rose 46.9% to US$63.3 million (up from US$43.1 million) and EBITDA margins on sales lifted to a new high of 21.5% (up from 18.8%). In AUD terms, sales revenue in the Americas increased 21.9% to $394.0 million and EBITDA of $84.8 million was 39.2% higher than the prior year. Strong conditions in the boardsports segment, cutting edge product, supply chain refinement and continued innovative marketing and promotional campaigns have underpinned the strong result. Both men s and girl s categories showed good growth in the US, with key products including t- shirts, fleece, track jackets and denim jeans. Men s boardshorts and girl s swimwear were also popular among youth boardsport-inspired consumers. While the result includes the first full-year contribution from the acquisition of both Honolua Surf Company and nine months of the Beachworks retail chain, organic growth was also achieved among specialist independent and chain retailers. Element apparel and hardgoods continued to build on solid foundations and the brand was firmly entrenched as the leader in the skateboard category. Von Zipper continued to capture growing awareness in the US, while Honolua Surf Company achieved its first-year objectives. Canada performed well with sales increasing more than 30% in local currency, while in Brazil sales were up more than 85% in local currency with further margin improvement.
EUROPE Compared with the prior year, European sales revenue increased 8.0% to 101.0 million and EBITDA rose 12.8% to 19.1 million. In AUD terms, sales revenue from Europe was $173.9 million, a 9.4% increase, EBITDA showed signs of improvement to increase 14.3% to $32.9 million and EBITDA margins increased to 18.9% from 18.1% in 2003-04. The Billabong brand performed well, Element achieved excellent growth and Von Zipper maintained steady momentum. Kustom was launched in June and is already receiving good repeat orders, while Honolua has met with a positive response after its recent introduction into the Company s own retail stores. The Company s best growth markets were Italy and Germany, while Spain remained the largest territory in the region and the UK showed improvement. Key product categories in Europe included girl s knits and swimwear and men s boardshorts, t-shirts and accessories. The expansion of sub-season ranges for pre-christmas and mid-summer has been well received and is enabling the Company to provide a consistent flow of new product into the retail account network. While retail trends did not show any significant improvement, Billabong was pleased with its own growth and the confidence that retailers showed in the Company s products. A continued focus on working with the Company s other international design teams has helped lift brand appeal in Europe and the Company goes into the -06 financial year with a good level of confidence. European general manager Peter Casey will be returning to Australia in January to take up the new position of global operations manager. The new role will see Peter take responsibility for ensuring supply chain efficiency and effectiveness and operational consistency across all regions. Franco Fogliato will be promoted from the position of deputy general manager to European general manager, effective from October 1. Franco joined Billabong in January 2004 as European sales manager. He has more than a decade of experience in the European sportswear sector and, prior to joining Billabong, he was general manager (western Europe) of apparel company The North Face. Joining Franco in Europe will be Francois Carrete, who has more than 15 years experience in the boardsports industry and has been with Billabong USA since its inception as a wholly-owned operation. Prior to joining the US business, where he oversaw Canadian and Central American sales, he spent two years in sales and operations at Billabong Europe.
AUSTRALASIA Billabong and the Group s other brands maintained their exceptional performance in Australasia, with sales revenue growing 43.1% to $275.7 million from $192.7 million previously. EBITDA of $78.1 million was 51.0% higher than the prior year. Margins also lifted to 28.3%, from 26.9% in the previous year. The strong Australian dollar helped in purchasing and contributed to margin improvement. The Australasian region, coming off the back of a record first half, continued to perform well in the second half. Retail conditions softened through the year, as expected, and the Company has managed its inventory levels well in the face of an exceptionally mild winter. The Company increased its marketing contributions throughout the second half, in particular with the global expansion of the Kustom brand and the growth of the in-house audiovisual department. Investment in the audio visual area is in response to recently-signed new media partnerships with Vodafone live! and Nickelodeon in Australia and MTV on a global level. In Australia, three flagship Billabong stores were opened in the first half and one in the second half in partnership with key retailers. The stores, at Torquay, Melbourne, the Gold Coast and Cairns, are performing at budgeted levels. For Billabong, the leading category in Australasia during the year was girls accessories, while men s and girls garments both grew strongly. Element continued to demonstrate its strong consumer appeal, design innovations helped boost Von Zipper s growth, while operational synergies were achieved following the acquisition of the Kustom and Palmers Surf brands. Revenue from the Company s New Zealand operation grew in excess of 20%, while revenue in Japan was up more than 30%.
OTHER REGIONS Royalty returns from third-party licensees in smaller regions lifted 60.6%. The Company maintains strong relationships with licensees such as South Africa, Bali, Argentina and others and they have each achieved excellent growth. The Company achieved good growth in the Middle East and is seeking to establish a licensed operation in the region in the next 12 months.
BRANDS Billabong The surf-inspired core brand of Billabong maintained its position as one of the world s leading youth lifestyle brands. Billabong showed solid growth in all regions, particularly Australia, and remained the Company s biggest contributor to revenue. A number of flagship Billabong retail outlets were opened through the year, with the highest profile being in New York s premium retail, tourism and entertainment destination of Times Square. Such stores allow the Company to partner with key retailers to better communicate the brand s core values. Element The skateboard-driven Element brand continues to achieve outstanding growth in key international markets, particularly the US. Global sales grew 46% as measured in Australian dollars. Element hardgoods sales are continuing to grow, as is apparel which remains the strongest performing category. During the period the first Element-branded retail store was opened in New York s Times Square. It opened in May alongside a Billabong-branded retail store and immediately below the high profile MTV Studios. The profile of Element-sponsored athletes remained high, particularly Bam Margera with whom a new long-term partnership was struck. Planning was also advanced for the launch of Element Shoes, which will be unveiled at the Action Sports Retail trade show in California in September. The footwear line will complement Element s existing hardware, apparel and accessories range. The range will initially be launched in the US market and is expected to be rolled out to select international markets throughout the -06 financial year. Von Zipper The Von Zipper eyewear and apparel brand delivered global revenue growth of approximately 30%. The greatest contributions came from the US, where the brand enjoyed a record spring/summer season, and Australia.
Honolua Surf Company The first shipments of the Honolua Surf Company wholesale range were made in the US prior to the close of the first half of the 2004-05 financial year. The range has met with a positive response and sales are continuing to build. The brand is competing well in coastal US surf shops and will be progressively introduced to other territories in the near future. The first shipments to select Australian retailers are planned for November. Honolua Surf Company has its own retail network in the US and made its first full-year contribution to the Group. There are currently 32 stores operated by Honolua management. These include both Honolua-branded stores and a chain of stores operated under the Beachworks name. Through the period the number of Beachworks stores grew from six to ten. Kustom and Palmers Surf The Kustom and Palmers Surf brands were acquired by Billabong during the 2004-05 financial year. Following the acquisition, a number of new styles of Kustom shoes were developed and a wider range of price-points was established. The brand is progressing well, with both men s and girl s shoes continuing to sell well in Australia and New Zealand. Kustom is now being rolled out into key international territories. The first deliveries into Europe occurred just prior to the close of the financial year, while the US launch will take place at the Action Sports Retail show in California in September. Kustom shoes were also introduced to the Japanese market in June and are planned to be launched in Brazil during the year. The Palmers Surf brand remained the strongest player in the surf wax business and in Australia the brand is controlled by a new sales division called Network Surf. This division is designed to create a total hardware package for retailers and handles Palmers products and Billabong wetsuits and surfboards.
MARKETING Billabong negotiated a number of strategic marketing partnerships through the 2004-05 financial year. These include a multi-year partnership with MTV Networks that will see unique content from Billabong-aligned surf, skate and snow initiatives broadcast on the network. A partnership was also struck with Vodafone live! that gives users of the mobile telephone network instant access to Billabong-related news and information. The new initiatives complement Billabong s existing support of the Association of Surfing Professionals men s and women s World Championship Tours (WCT) and the international junior surfing circuit, as well as individual support for the sport s leading athletes. Billabong s Andy Irons won his third consecutive world title during the period, with Joel Parkinson 2 nd, Luke Egan 5 th, Taj Burrow 6 th and Mark Occhilupo 12 th. Keala Kennelly was 7 th in the women s world title, while Billabong surfer Pablo Paulino won the ASP world junior championship and Billabong snowboarder Antti Autti won the world half-pipe title. Billabong was involved in a number of DVD-related product releases through the year and continues to support the Jack McCoy Surf Film Festival that is touring internationally. The Billabong Pro WCT surfing event at Teahupoo in Tahiti proved very successful and the Solid DVD featuring a huge swell during this period was subsequently distributed on the cover of almost 500,000 youth publications worldwide. The Company continues to concentrate on innovative and exciting in-store marketing concepts to portray core brand messages.
RETAIL The importance of retail to the Group is continuing to increase and at June 30 the Company had 64 company-owned and operated stores and 22 licensed stores. The stores operate under four branded concepts Billabong, Honolua Surf Company, Beachworks and now Element. The Company is building its retail presence and is creating new space for its brands. It is expected this trend, which saw the addition of 15 company-owned stores through the year, will continue as new opportunities arise. The greatest concentration of company-owned stores was in the US, where 22 retail stores were operated under the Honolua Surf Company name and seven under the Billabong name. Management of Honolua also oversees the operation of 10 company-owned multi-brand stores under the renamed Beachworks banner. The Company also experienced increased global demand for partner stores on the back of awareness created by the opening of Billabong and Elementbranded licensed stores in Times Square, New York.
SUMMARY and OUTLOOK Billabong International Limited enjoyed a strong growth year and the Company is rapidly approaching the $1 billion sales revenue level. Since the Company publicly listed on the Australian Stock Exchange in August 2000, Billabong International Limited has delivered total shareholder returns of 47.7% per annum. Over the same period, EPS has grown at a compound annual rate of 30.2%. Overall, the 2004-05 financial year was one in which the Company s established brands maintained strong growth and its emerging brands achieved further market penetration. The Company enjoyed good momentum through to the end of the year and healthy margins, strong sourcing capabilities and an ongoing focus on core brand values will continue to drive performance. The Company s brands are some of the largest and bestpositioned in the global boardsports arena and our staff remain proud, passionate and dedicated to the industry. On behalf of the Directors I congratulate the staff worldwide for their contribution to the sustained growth of the Company and to this year s exceptionally strong result. In looking forward, it needs to be appreciated that Billabong International Limited has enjoyed a year of exceptional growth, thus creating a significantly higher profit base for the current year. Hence, in the absence of any unforeseen exceptional circumstances, the Company is returning to its target of 15% EPS growth for the -06 financial year. The Company also remains opportunistic in relation to future acquisitions and partnerships in both brands and retail. Billabong International Limited continues its objective to deliver shareholders with consistent and long-term growth in shareholder value.
Address by Craig White Billabong s Chief Financial Officer Thank you Derek and good morning everyone. Table 1: Consolidated Results The reported NPAT of $125.4m represented an increase of 44.1% over the prior year, which was a strong result. The components of this result include: Sales revenue of $843.6m, excluding third party royalties, represented a 25.0% increase over the prior year ($674.7m). On a constant currency basis revenue growth was 27.8%. Consolidated gross margins at 51.8% improved again on the prior year (49.0%). The gross margin improvement was attributable to three areas: - Increased purchasing power due to the higher AUD and Euro against the USD, which contributed over 50% of the total margin improvement. - Stronger sales on higher margin product, including accessories. - Continued improvements in the supply chain (including lower pricing and logistics costs). Group EBITDA of $200.1m represented a 38.8% increase over the prior year ($144.1m). When viewed in constant currencies the consolidated EBITDA growth improved further to 41.6%. Group EBITDA margins of 23.7% improved from the prior year s 21.4%. 2 nd half EBITDA growth of 15.7% was subdued when compared to 1 st half (66.8%), particularly in the Australasian region, due principally to: - Investment in the global launch of the Kustom brand; and - Additional global advertising and promotion spend that more appropriately rests with the Australian legal entity trademark owners (re-charged back to the Australian brand owners benefiting the European and Americas regions).
Return on average equity increased to 20.5% representing a 31.4% increase over the prior year. Earnings per share was 61.0 cents, a strong increase of 41.9% on the prior year, consistent with NPAT growth. Table 2: Depreciation, Amortisation, Interest Expense and Taxation Depreciation and amortisation increased by 10.8% to $12.3m, and was in line with capital expenditure for the period (excluding the acquisitions of the Kustom / Palmers, and Beach Access businesses). Net interest expense decreased 17.3% to $4.3m. Income tax expense of $58.0m represents an effective rate of 31.6% which is slightly lower than the prior year s effective rate of 31.9%. Table 3: Statement of Financial Position Working capital (including factored receivables) at $183.5m increased 8.6%, which was well below the sales revenue growth rate (25.0%) achieved for the period. The doubtful debts provision at $9.8m remains conservative in accordance with the company s general reserve requirements. Net debt levels ($64.8m) have reduced 31.9% from prior year. Consequently the net debt/equity ratio of 10.1% is also lower than June 04 (16.4%). Interest cover has increased to a strong 43.8 times. Table 4: Cashflow Statement Cashflow from operations of $116.4m represents a 74.7% increase on the twelve months to June 04 driven by revenue growth. I ll now hand back over to Derek for some further comments.
The following tables should be read in conjunction with the Address by Billabong s Chief Executive Officer and Address by Billabong s Chief Financial Officer as set out in the Full Year Results Summary. CONSOLIDATED RESULTS Table: 1 Consolidated Results Results in Constant Currency 2004 Change % Sales Revenue* 1 843.6 659.9 27.8 EBITDA* 2 200.1 141.3 41.6 * 2004 results have been adjusted assuming local currencies were translated at the same rates as for 1 Excluding third party royalties. 2 Segment EBITDA excludes inter-company royalties and sourcing fees. Results as Reported Sales Revenue 843.6 674.7 25.0 EBITDA 200.1 144.1 38.8 EBITDA Margin 23.7% 21.4% NPAT 125.4 87.0 44.1 Return on Equity 20.5% 15.6% 31.4 Earnings per Share 61.0 43.0 41.9 1
Table 2: Depreciation, Amortisation, Interest Expense and Taxation 2004 Change % Depreciation 9.0 8.2 9.8 Amortisation 3.3 2.9 13.8 Net Interest Expense 4.3 5.2 (17.3) Tax Expense 58.0 40.8 42.2 ** 2
Table 3: Statement of Financial Position Working Capital 2004 Change % Trade Debtors (inc factored receivables) 174.9 169.3 Inventory 111.8 103.5 Creditors (103.2) (103.9) 183.5 168.9 8.6 Gearing Levels Borrowings (net) 64.8 95.1 Net Debt/Equity Ratio 10.1% 16.4% Interest Cover 43.8 times 25.5 times 3
Table 4: Cashflow Statement 2004 Change % Reported Cashflow from Operating Activities 116.4 66.6 74.7 Proceeds and Payments for Plant and (15.4) (13.6) Equipment Payments for Intangibles (incl. Kustom / (21.9) (10.7) Palmers and Beach Access acquisitions) Reported Cashflow from Investing Activities (37.3) (24.3) Proceeds from Issues of Shares and other 11.4 8.0 Equity Securities Proceeds and Repayment of Borrowings (27.6) 24.4 Dividends Paid (64.9) (50.6) Reported Cashflow from Financing Activities (81.1) (18.2) Net Movement in Cash Held (2.0) 24.1 4
SEGMENT & BRAND RESULTS American Segment 2004 Change % Results in USD Sales Revenue 293.9 228.5 28.7 EBITDA 63.3 43.1 46.9 Results as Reported (in AUD) Sales Revenue 394.0 323.1 21.9 EBITDA 84.8 60.9 39.2 EBITDA Margin 21.5% 18.8% 5 European Segment Results in Euro 2004 Change % Sales Revenue 101.0 93.5 8.0 EBITDA 19.1 17.0 12.8 Results as Reported (in AUD) Sales Revenue 173.9 158.9 9.4 EBITDA 32.9 28.8 14.3 EBITDA Margin 18.9% 18.1% 6
Australasian Segment 2004 Change % Results as Reported Sales Revenue 275.7 192.7 43.1 EBITDA 78.1 51.8 51.0 EBITDA Margin 28.3% 26.9% 7
EMERGING BRANDS Element Brand Strong revenue growth in excess of 45% for the period in reported currencies. EBITDA margins remain comparable to the Billabong brand. 8 Von Zipper Brand Revenue growth of approx 30% in reported currencies continues the brand momentum. EBITDA margin in the high-teens continues to grow. 9 Kustom / Palmers Brand Acquisition successfully completed during year. Nine months contribution to revenues. Kustom being rolled out into key international territories. 10
FX Impacts The current policy of hedging purchases, but not profit translation, remains unchanged. The short term impact of currency movements on the full year result (profit translation) is as follows: 1 cent increase in the average full year rate for the AUD against the USD = decrease NPAT by 0.6% EURO = decrease NPAT by 0.3% 11 --000--