Put simply, this was another impeccable result from BRG, and...

Put simply, this was another impeccable result from BRG, and I’ll wager it will go down as the best result of this reporting season, not only in terms of its prima facie performance, but especially in terms of its quality and the conservativeness with which it has been stated. .

Even though the headline result beat consensus forecasts at both the EBITDA and NPAT lines by 2% or 3%, when the financial result is adjusted for some conservatively accounted items taken above the line, the “beat” is more like 7% to 8%.

Specifically, the following items held back the FY13 result compared to FY12:

Reported Pre Tax Profit = 71.3m

Adding back:
- Restructuring cost in relation to termination of Keurig distribution agreement = $0.80m
- Higher share based payments (FY13: $1.33m, FY12: $0.82m )= $0.51m
- Non-recurrence of Profit on Asset Sale (FY13: nil, FY12 = 0.49m) = $0.49m
- R&D Costs Expensed (FY13:$7.55m FY12:$6.61m) = $0.94m
- Amortisation of previously capitalised R&D (FY13:$4.89m FY12:$4.48m) = $0.41m
- Start-up costs associated with UK launch and branding campaign = ~$2m (this figure isn’t explicitly stated, I have estimated it from the delta in the “Other” item in the Operating Segment section of the Annual Report, it having gone to $3.60m in FY13 from $0.88m in FY, so I think $2m looks like a reasonably conservative estimate)

So if you add all these up, you get in excess of $5m of items taken above the line, equivalent to 7% to 8% of Reported Pre-Tax Profit.

The other feature of this result is the fact that advertising expenses were $23m in FY13, up a whopping 33% on FY12’s $16.8m spend.

Now, admittedly, some of this $6.2m increase would have been incurred as part of the $2m start-up costs in the launch in the UK, but it is still clear that far the bulk of it represents a significant investment in raising awareness of the various Breville brands. With advertising and marketing being 4.7% of Revenue in FY13 (up from 3.9% in FY12), this marks the highest level in the company’s history and is to me a clear leading indicator of strong organic growth to come in subsequent years.

Put another way, if Market and Advertising as a percentage of Revenue was held at the 4% level, this would have boosted Pre-Tax Profit by an extra $4m-odd (and extra 5% to 6%)

And another thing: Commissions from Keurig fell to $17.1m in FY13, from $19.5m in FY12, a fall of $2.5m. I’ll suspect most analysts will have taken their cue from the March 2013 announcement relating to the loss of the Keurig distribution rights.

That announcement referred to the agreements ceasing from 1 July 2013. So it is possible that analysts might still have modelled flat Keurig commissions in FY13 vs FY12, implying that the result beat analyst forecasts by an additional amount equivalent to the extent that the actual reduction in Keurig commissions fell faster than they had expected.
(But I concede that I am merely guessing a bit here).

Nevertheless, even if I ignore this last point, it still looks to me like the company’s management could easily have – if it was so inclined – reported a profit result some 12% to 14% higher, based on my assessment.

This is clearly a very conservatively-stated and padded result, and it contains a whole raft of prudential buffering, in my view.

It is exactly what I look for in a set of financial statements.

The investment profession calls this “hollow-logging”, and it bodes well for the scope and/or prospect for future results to again beat expectations.

It is simply best practice and speaks volumes for the quality of the company’s board and its financial managers.

I can sleep easy in the knowledge that management and the company’s auditors aren’t conducting accounting alchemy which will come back and bite unsuspecting shareholders one day when they least expect it.