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Edited Transcript of NCK.AX earnings conference call or presentation 8-Aug-19 12:30am GMT

Full Year 2019 Nick Scali Ltd Earnings Call

Sep 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Nick Scali Ltd earnings conference call or presentation Thursday, August 8, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony J. Scali

Nick Scali Limited - MD & Executive Director

* Christopher Malley

Nick Scali Limited - CFO & Company Secretary

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Conference Call Participants

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* John Hynd

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst

* Rodney Forrest;W.H. Soul Pattinson;Analyst

* Sam Teeger

Citigroup Inc, Research Division - Analyst

* Shaun Weick

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Nick Scali Full Year '19 Results Teleconference. Presenting on the call today, we have CEO, Anthony Scali; and CFO, Chris Malley. (Operator Instructions)

I’d now like to hand the conference over to your first speaker today, Chief Executive Officer, Anthony Scali. Thank you. Please go ahead.

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [2]

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Hello. Good morning. Just run and talk through our results presentation, key highlights, sales increased 7% to $268 million. The increase was assisted by full year of sales from 6 stores opened in financial year '18 and part contribution of a further 6 stores opened in financial year '19.

Gross margin increased by 20 basis points to 62.9%. NPAT, up 3% to $42.1 million. Operating cash flow increased 5% to $45.4 million. Final dividend of $0.20. Total dividend for the year, $0.45, up 12.5% on last year. Payout ratio of 86.5%. Six new stores were opened during the year, 5 in Australia and our second store in New Zealand.

Looking at sales growth. So sales growth is driven, as mentioned, by the full year contribution of the 6 stores opened in FY '18 and part year contribution of the -- of 4 of the 6 stores that opened in FY '19. Like-for-like sales were down 1.1%. This is due to a softer second half. Orders up similar to revenue with network growth outstripping slightly negative like-for-like performance.

Looking at our profit and loss, gross profit was up 7%. This is due to sales growth and the 20 basis points improvement in gross margin. Our gross margin improved due to product initiatives, in particular our bedroom category and bringing in our accidental damage warranty. They're brought in from third parties. These are for lounges. We brought those in-house.

Operating expenses increased due to new store openings, including the full year impact of the FY '18 new stores, an increase in marketing spend and investment in our distribution center and head office capabilities and one-offs. OpEx percentage increased 80 basis points in part also due to the decline in same-store sales in addition to the increase in operating expenses.

Second half NPAT was flat. This was due to softer sales performance with the profit growth heavily driven by the first half performance. Net PAT growth was up 3% to $42.1 million. This is our 7th consecutive year of profit growth.

I'll hand over the balance sheet and cash flow to Chris.

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Christopher Malley, Nick Scali Limited - CFO & Company Secretary [3]

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So thank you, Anthony. Turning to the balance sheet. There's been very little change in the balance sheet when compared to the same time last year, which is really reflective of the fact there have been no significant changes to the underlying business structure. We added 6 new stores and relocated our distribution center in Victoria without any significant investment or change to the working capital position.

Looking at sort of the balances in more detail, particularly inventory and deferred revenue, I think those are sort of 2 key balances that sort of give an indication of the strength of the business. The inventory increased by $1 million. So fairly stable compared to last year. There's been an underlying change in the mix of inventory with less now being held in the DCs relative to last year. And that's a reflection of operating efficiencies within the DCs and the success of our clearance stores in helping us clear excess inventory. We also got more inventory coming in, in transit, which is a reflection of the increase in the order bank at the end of the year.

The deferred revenue line is essentially related to customer deposits. But it's flat despite growth in the order bank and that's essentially due to mix issues between mix of sales between case goods and lounges.

Moving on to the cash flow. Given the stability in the balance sheet and the working capital, there's a clear strong correlation between profitability and cash flow, and it's no surprise to see the solid cash flow delivery of 45 -- over $45 million.

With relatively moderate CapEx of around $5 million, we were able to return almost $40 million to shareholders during the year. And this will be maintained in the first half of FY '20 with the payment of the final dividend of $0.20 per share, which will lift our FY '19 payout ratio to 8 -- almost 87% of NPAT.

So that's the balance sheet and cash flow. So I'll hand back to Anthony to take us through the outlook.

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [4]

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Thanks, Chris. New stores, the company will open 4 new stores in the current financial year, 2 of which will be in Auckland, New Zealand. It's important we continue to capitalize on the successful launch of the brand in New Zealand. Our long-term store network target is 80 to 85 stores throughout Australia and New Zealand.

Turning to trading conditions, same-store sales were flat for most of the year with some decline in the fourth quarter. The trend has continued in FY '20, and July same-store sales growth remains negative.

The performance of our New Zealand stores has been very encouraging with strong same-store sales growth reflecting the high level of product and brand acceptance. With the New Zealand store network increasing to 4 this year, this market should make a significant contribution to profit growth in the medium term.

Whilst there is a favorable economic environment of very low interest rates and low unemployment combined with recent tax cuts, there is uncertainty as whether this will translate to an improvement in consumer confidence. As a furniture retailer, Nick Scali Limited is very dependent on housing sales and renovations, which have been in decline, and trading conditions will likely only materially improve when there is an uplift in housing sales and renovations.

With the store network continuing to grow, the company has demonstrated it can deliver a solid profit performance in an environment of flat to negative same-store sales growth. Despite the current difficult trading conditions, the company is well positioned with a strong balance sheet and solid cash flow. This will facilitate the continued growth of its store network and allow the company to explore other growth opportunities as they arise.

Thank you. And we're open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [2]

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In terms of your outlook where you say you can deliver a solid profit performance and flat to negative same-store sales growth, can you elaborate in terms of what you mean by solid profit performance? Is this profit growth, flat profit or is it something else?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [3]

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I think -- we're referring to profit growth.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [4]

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All right. And second question, the full year dividend is a bit below our expectations than last year. Can you talk us through that a bit? And to what extent do you need the money for any acquisitions in the next 12 months?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [5]

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Well, I mean the -- well, the final dividend was actually up on the previous year and the payout ratio has increased. And yes, the interim dividend was almost a little bit abnormally high. And that was -- part of that reason was there was at that time an issue on Franking credits, that we wanted to diminish some of the excess Franking credits we have and with possibility of tax change that would be detrimental to the shareholders.

So -- but overall, where the payout ratio sits now, I think, going forward is about right. And acquisitions, we haven't considered acquisitions in determining the dividend, the final dividend.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [6]

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Got it. All right. And in terms of gross margins, they are already the best in the industry and they continue to get better moving into FY '20. Where do you see them ending up given -- and the pressure from the currency given how weak the dollar is at the moment?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [7]

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Yes. No. It's certainly -- I mean the pressure for us will probably come in the second half because we've got a reasonable hedge cover. So we'll be looking -- we'll be working hard on trying to keep the margin to the 62%, might be as high as it is now. That will depend on how successful we are in coming up with initiatives to offset a lot of margin.

And I think we’ll be looking at our suppliers for reductions given the Asian currencies are -- have devalued as well and we're buying in U.S. dollars. So there could be an offset there as well. So yes, look, it’s certainly going to be challenging with currency at this level.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [8]

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Right. And last question. Just keen to understand the decision to slowly roll out in '20, the 4 stores. I think you've be doing 6 on an annual basis prior to that. And then of the 4, you said 2 in Auckland. I thought there's one also about to open in Christchurch. What's happened to that one?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [9]

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Christchurch is down the track. That’s 2 years away that's going to be built yet. So we haven't -- we're negotiating that. We haven't signed terms on that one so we're not committing to that. But the 4 stores are definitive and they're definitely opening. There could be a few more. So it could be 6 stores this year. But we're just being fairly explicit, there are 4 definitely opening this year.

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Operator [10]

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Our next question comes from Shaun Weick from Macquarie.

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Shaun Weick, Macquarie Research - Analyst [11]

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So first one, I just wanted to, I suppose, step through some of the trading trends you saw out there through the third and the fourth quarter. In particular, it sounds as though, I guess, beyond -- the much talked about post-election bump didn't materialize. And maybe you could just talk a bit about what you saw at a state level as well?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [12]

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Yes. Yes, we didn't see really much improvement after the election at all not -- to be frank. What we have seen in the stores is while the traffic is down a little bit, conversions are much more difficult. And the feedback from our people is that -- is just the customers are a lot more cautious at the moment before buying.

And in terms of the state basis, we've had actually good results in Victoria and South Australia. West Australia is pretty stable. We’re really suffering in the western part of Sydney is really -- and in certain pockets of Queensland.

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Shaun Weick, Macquarie Research - Analyst [13]

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Okay. And maybe just leading on from that slightly. I mean you lifted the marketing spend fairly materially in the second half. And given that, I guess, apprehensiveness of the consumer and uncertainty, would you consider, I guess, discounting to generate incremental sales and conversion? Kind of how are you thinking about that into the next 6 months?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [14]

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Yes. Look, we always discount in some selected product lines. There are some initiatives we're coming up with where -- hopefully will help our sales store close sales. We've continued to be a bit more incented to buy without affecting margin is where -- what we have to do. Because it's a dangerous game to try to chase volume with lower margins.

If we've got to be competitive, I think the first thing we look is how competitive are we compared to our competitors. We have seen -- there have been some furniture retailers that have -- went into administration. There was one with 38 stores that closed in New South Wales and Queensland. They were a competitor of ours, and they were selling product pretty cheap to clear their stock. We could’ve lost a bit through those -- that peer, which is now over.

So it's -- I'm pinning one to try and hold margin and with that might -- still being competitive and trying to get it back from our suppliers and other initiatives, more efficiency in the business in general.

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Shaun Weick, Macquarie Research - Analyst [15]

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Yes. Okay, no, that's helpful. And maybe just on the employee cost side of things, I noticed there that things are pretty much flat there in the second half, kind of half-over-half and year-over-year. I mean what's driving that specifically? And are there any kind of ABIs or -- and I suppose what's your expectations for underlying wage growth into '20?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [16]

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Yes. Look, partly while the employment line looks like -- as a percentage of -- or as a ratio it increases because we did -- we had made constant sales in the second half, which contributed to that percentage getting higher as a percentage of sales, I guess in the ratio. But I don't know. I don't see any particular -- we don't -- we won't have an issue with wage growth. And there's no wardening that's effect going to be -- have any effect on us.

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Shaun Weick, Macquarie Research - Analyst [17]

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Okay. Great. And maybe just one final one. You've obviously talked about same-store sales trends through the current trading period. But you've obviously got visibility through forward orders. Are forward orders are positive at the moment? And kind of what -- what kind of lead indicators do they give you there?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [18]

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Leads like, you saw the July -- really the fourth quarter in July has been in negative comp store -- we've got new comp stores sales. But yes, but the order bank, look, it's not as high as we'd like it to be, that's for sure.

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Shaun Weick, Macquarie Research - Analyst [19]

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But it’s still in positive territory?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [20]

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Yes. Yes.

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Christopher Malley, Nick Scali Limited - CFO & Company Secretary [21]

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Yes.

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Operator [22]

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Our next question comes from John Hynd from Wilsons.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [23]

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I just wanted to touch on the customer deposits line, if possible. It looks like it's pretty much flat year-on-year. But I'm wondering if you can maybe talk us through some of the mechanic sort of change since then, I guess, referring to the fact that you've added the bedding range. And I guess, is non-lounge sales contributing more as well at the moment?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [24]

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No. I think probably -- yes, you've actually answered the question. But look, while we've added the bedroom category, which on take scores, because we carry stock, the deposit is only 10%. If they order a lounge, it’s 30% deposit. So by adding the bedroom category, there is -- the deposit ratios start to drop because obviously we're selling bedrooms. And the percentage of lounge as compared to the total sales has dropped -- is marginally through that. And I guess that's our -- the answer to that.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [25]

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Yes. So can we talk about how -- I guess how it's changed, '19 versus '17? I mean what's the split you're seeing with sales now? Is it -- I think you've normally talked to a 70-30 in favor of lounge sales. Has that held consistent or has that changed? I'm talking in terms of deposits. Because obviously, non-lounge category changed in December when you added bedding. Has that deposit side of things changed recently?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [26]

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Yes. Well, if we compare now to 2 years ago, one thing that has changed is our lead time from our suppliers on lounges has been reduced, so we're delivering quicker through our suppliers. So we’re holding on to the deposit for not as long a time as we were.

So that -- and we've had that one-off benefit probably 18 months ago in terms of sales, the only thing able to do that. So the order bank in terms of the period it represents is a small period that would've been. That’s part of it and the other part of it has been, as you say, case goods as a category, is a larger percentage of our business than it used to be. So those 2 factors has the line of deposits, 10%. And the 2 things combined have brought the deposits down.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [27]

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Okay. So I mean, really it's still -- the split is probably still closer to 70-30 for lounge, non-lounge.

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [28]

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Like our lounge is down to like 70 now. Down to 68.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [29]

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Okay. And of the -- I guess, of the 32 now for non-lounge, what's -- can you maybe talk us through what bedding is contributing now in terms of deposits? And I mean how are you going with pricing for that range? Have you -- has price settled? And can you talk to us maybe how you -- how are you positioned just versus competitors in the space too, please?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [30]

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Sure. So in bedroom furniture, we're increasing our range now. We started with 8 bedrooms, now increasing that to 12 bedrooms and reducing our mattress range. We're going through -- we feel -- our focus really wants to be more in the bedroom furniture, and mattresses will be there to sell. And they're really more for us as a service not as a business.

That will also make reasonable margin on the mattresses. The bedroom furniture has a better margin. And then -- and also by focusing a bit more on bedroom furniture rather than mattresses, we are able to create a point of difference with our competitors just on the design and the materials used in bedrooms that we don't see in the market.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [31]

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Okay. And can you talk to us -- you've always talked to us about an average price of sort of $2,400 to $2,600 for a couch, I think. How are we looking with the bedding range?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [32]

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Yes. The bed range is somewhere in the vicinity $1,700 to $1,800.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [33]

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And that is bed, bedside tables and a tallboy or...

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [34]

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Yes. Because tables aren't necessarily by all the patrons. Some just buy beds and some buy bedsides and dressers and tallboys. There's a mix in that. And we're also selling bedroom storage, ottomans, that sort of bedside. And it's -- the average unit sale is larger than on lounge.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [35]

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Okay. And can we -- just before I get back in the queue, in terms of, I guess, how stores trade normally, I think you brought 2 stores on very close to the end of this year or FY '19. How have they been trading through what they saw of June? And would you still expect them to trade sort of above the 100% capacity level initially and then settle down? Or I guess how are they performing to date?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [36]

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Yes, they're performing reasonable. And obviously, they're a drag in June and now full year results, they're gotten around generating orders. And so they will -- we'll incur losses from those stores for the first few months of this financial year, then we get the benefit of the sales orders coming through to sales when we deliver the furniture.

Yes. Look, for those stores, I’m -- there’s one store that’s doing very well and one store that’s probably a little bit below average. So a mixed result I suppose in the end, and they’re trading about the same as they do June and July.

On [general], they're trending to be better -- June's a bigger month for us. But in terms of proportion of the business, it's pretty steady though. I expect -- I think these stores will improve as people become aware of their location, that we’re there.

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John Hynd, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Equities Analyst [37]

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Okay. And so just one more from me. June, can you just remind me, December and January are your biggest months. Where does June fit in? And I guess how should we be thinking about -- how that's working in regards to that first half result, please?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [38]

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Well, Jan is big in orders, which really you can see the benefit of that in our next financial year, which is this year. And if Jan is the biggest month, then June is the second biggest month.

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Operator [39]

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Our next question comes from Sam Teeger from Citi.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [40]

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Yes. Just 2 quick follow-ups. Firstly, what are you thinking of the CapEx in FY '20? Anything there besides new stores that you're likely to buy back or buy any stores or property? Or are there any capital projects?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [41]

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At this point, the CapEx will probably be less than last year unless we do make a property purchase. There are possibly some opportunities coming up for a few of our existing stores that we might be able to purchase the property.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [42]

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Right. Sounds good. And in terms of just new stores, is it still around about, what, $400,000 in CapEx for a new store?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [43]

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Yes. It's about -- yes, it's a bit more. Well, CapEx $250,000 to fit out and stop at about $300,000, around $500,000 level.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [44]

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And last question. Are the 5 clearance stores in the long-term target of 80 to 85?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [45]

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No. They're not in there. They are not in the store network. We're not counting them as stores.

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Operator [46]

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Our next question comes from private investor, [Peter Stora].

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Unidentified Participant, [47]

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I had a long list of questions here, but all but one of them have been answered for me. Mine is a follow-up on the marketing spend. It seems to me that in the second half, the number of sales advertised on TV just seem more frequent, they just seem to keep coming. And firstly, is that a perception or a reality?

And secondly, if that is the case, if -- at what point is there any risk to the brand you could see as referring to a discounter rather than a quality retailer, please?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [48]

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No. Well, the sales -- we actually ran the same identical sale period we did last -- the year before. And just mainly we've been buying or marketing -- you're seeing more ads, I think. And in answer to that question, no, we don't think it's damaging the brand.

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Unidentified Participant, [49]

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Okay. Well, that's good. But just to say it just -- there just seemed to be -- if you’re getting more ads for your spend, that's good. Because they do seem to be coming through an awful lot of -- in that period -- in that second half.

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Christopher Malley, Nick Scali Limited - CFO & Company Secretary [50]

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Yes. Yes.

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [51]

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Well, January is a very -- as you saw, it would have been a lot around January because that's our biggest month of the year, and the marketing spend on that month is like double. So you did see more ads in the second half than you might in the first half.

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Operator [52]

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Our next question comes from Rodney Forrest from W.H. Soul Pattinson.

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Rodney Forrest;W.H. Soul Pattinson;Analyst, [53]

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Firstly, congratulations on the results. Just have 3 questions, guys. The first one, just on space growth to 85 stores, obviously the 50% increase? Is there sort of a year you're sort of looking for that? And is that sort of net of cannibalization as well, please?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [54]

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Sorry, the first question was...

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Rodney Forrest;W.H. Soul Pattinson;Analyst, [55]

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On space growth, do you have a sort of aspirational target for that 85 stores? By what year? Obviously return rates and growth in space which is phenomenal. And then is that net of cannibalization, please?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [56]

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Yes. So probably -- with that, we've been averaging around 6 stores a year and I think that probably will continue. Because, obviously, if you added 20 stores in 1 year, you'd suffer a lot of pressure on your DCs and systems. So we just prefer to do it steadily with 6 stores, maybe 8, different years we could probably handle.

And probably in the 85 stores, there might be -- there would be some cannibalization. And that's why we’ve been very careful with -- particularly in the short term with a tougher market, being careful that the stores we open aren’t at risk of cannibalizing other stores.

But they’ve been good markets. They kind of -- in good times, rather, the cannibalization seems to be less an impact. In more difficult times, it seems to be more. Yes. So we’re seeing stores that we've opened that did cannibalize a store for a period and then it seemed to come back. And I guess that's just natural market growth, speaks to the moment in time.

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Rodney Forrest;W.H. Soul Pattinson;Analyst, [57]

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Okay. And then the second one is just, obviously, your CapEx sort of tails off. If you just have flat impact, I mean, we sort of think through 5 years out spinning off huge cash flow. Even this year, it's only 10.5% gross stock yield. How are you thinking around dividends? Investors, at the moment, are really chasing yields. I don't know if (inaudible) multiples. So how does the payout ratio? And given the balance sheet is so strong, what does dividend look like moving forward, please?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [58]

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Yes. Look, you're right. If we continue -- if we don't have a need for CapEx, and yes, we’d be generating a lot of cash. There is a possibility that payout ratio could lift. Yes, I’d say you're right. And then it depends. At the moment we're looking -- there's nothing set in concrete. The CapEx at the moment is budgeted less than it was last year, but there are some property opportunities, which really bring long-term benefit to the business, as you know.

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Operator [59]

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Our next question comes from [Kay Pierre] from [Land Trading Capital].

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Unidentified Analyst, [60]

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First of all, I would like to know, could you please give us more ideas about the trends of overseas expansion apart from New Zealand that we already know?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [61]

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Look, at this point, we aren't looking at any other overseas expansions right now. But that's not -- necessarily means it won’t in the long term. But in the short term, we're not looking at that.

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Unidentified Analyst, [62]

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Okay. So what you mean is maybe in the one or 2 years, we won't see any new stores opened overseas except New Zealand, is that right?

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [63]

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Yes, that's probably correct unless a great opportunity came to us.

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Operator [64]

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(Operator Instructions) We have no further questions at this time. I'll pass back to your presenters.

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [65]

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Okay. Thank you very much.

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Christopher Malley, Nick Scali Limited - CFO & Company Secretary [66]

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Thank you.

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Anthony J. Scali, Nick Scali Limited - MD & Executive Director [67]

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Thank you.

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Operator [68]

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Thank you so much. Ladies and gentlemen, that does conclude the call for today. Thank you so much for your attendance. You may now disconnect.