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Edited Transcript of SCS.L earnings conference call or presentation 1-Oct-19 8:30am GMT

Full Year 2019 SCS Group PLC Earnings Call

London Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of SCS Group PLC earnings conference call or presentation Tuesday, October 1, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. R. Muir

ScS Group plc - CFO, Company Secretary & Executive Director

* David Knight

ScS Group plc - CEO & Director

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Conference Call Participants

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* Clive W. Black

Shore Capital Group Ltd., Research Division - Head of Research

* Emmanuel de Figueiredo

LBV Asset Management LLP - CIO

* John Stevenson

Peel Hunt LLP, Research Division - Analyst

* Peter Swelley

Finn Capital Partners - Analyst

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Presentation

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David Knight, ScS Group plc - CEO & Director [1]

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Good morning and welcome. Can I also welcome the people joining us on -- via webinar? I'm David Knight. I'm Chief Exec at ScS, and I'm joined this morning by Chris Muir, our CFO; and also our nonexec Chairman, Alan Smith. I'll shortly pass over to Chris, who will take you through all of the financial slides, but I wanted to just talk through the highlights before we move on to that. It's been a real year of great progress inside our business in many areas, which has really helped us deliver these strong results this morning and increase our resilience. You've also seen, again in the statement, that our margin has been maintained, which was a growth on 2017's margin. Our online business, again, huge focus on this during the course of this year as we develop our digital offer. We've now opened our new store in Kirkcaldy very successfully. And really, this again just supports this -- our strategy of only opening on quality retail parks.

We've -- it's been a real year of implementation of technology across all areas of the business, both in store, in delivery and in the surveying and upholstery teams. And again, we'll come on to the detail of that very shortly, helping really just enhance all the customers' entire shopping experience with us.

During the course of the year, we had a very orderly exit from our House of Fraser concessions. Obviously, a difficult time particularly for our colleagues that we lost but absolutely the right thing for the business to do at this point.

I'm now going to pass you over to Chris, who will take you through all of the financial details.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [2]

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Thanks, David. So if we're on Slide 5, so people following online. So it [pretty] really impressive to get kind of we've delivered results little slightly ahead of market expectations in what is a challenging environment. In sales, we've grown by 1.8%. Now if you look at our kind of like-for-like growth, which has been 4.2%, sales are slightly below that mainly because of 2 reasons: think about last year, June, July, we had a challenging 2 months there for the opening count we brought into the year, which are our kind of delivered [turns] were slightly lower; and second, we closed 2 stores. So we closed our store in Reading, and we just closed one our stores in Edinburgh. So that's impacted the kind of delivered sales in the year.

We look at EBITDA, this is ScS only. So as David mentioned, before we closed House of Fraser. So in our results, we classed that as discontinued operations. And as you'll see from the notes last year, overall, we lost about GBP 5,000 while we exited the House of Fraser, so kind of we managed an orderly exit of that business.

So EBITDA progress at ScS. We grew from GBP 19.1 million to GBP 19.7 million. In the last 2 years, that core SCS business has grown by 22%, the EBITDA in that business, so real kind of strong progress. Earnings per share in the year is up 13.1%, or in the last 2 years, just under 30% growth in that earnings per share number for the group.

Gross margin, which David touched on earlier. In 2018, we actually saw that gross margin in our ScS business go from 44% to

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We've had a little bit of pain with regards to the cost of interest-free credit going up as 12-month LIBOR has increased. But actually, we've managed to offset that with some slightly better supply terms and some slightly improved stock management. So we managed to maintain our margin at 45%, which is one of the reasons why we've got a beat against kind of market consensus.

Related to cash, we've got a separate slide on this, and we'll talk about our cash, and we can give you the average balance on the year and all those kind of good things. But actually, the year, we increased up by GBP 9.5 million. So we closed the year at GBP 57.7 million. We do have customer deposits in there, which equate to GBP 14.7 million of that balance. But ultimately, the business itself has a large and growing underlying cash position.

Dividend, 3.1% up, but our final proposed, obviously, needs to be voted by our shareholders is a final 11.2p, I think really for us, and we debate this -- the whole kind of level of cash and level of dividends, for us and the board is very confident kind of where we are, the strength of the balance sheet and where we're going. So to increase our dividend at this point was a real positive for us.

Just move on to Slide 6. So this is our -- we break down this, again, the continuing operations. You'll see that phrase used a lot this year. This is kind of ScS. Furniture, pleasingly, in store returned to growth and what is in a flat or a slightly declining market. We talked about the 2 stores and the opening order book, which impacted a little bit this year.

Flooring was down 1.2%. Again, from the information we get from global, we think and it looks like that market is continuing to decline, and we are actually still taking market share. But it's the first year where we've seen a slight decline in that business after a number of years of strong growth.

Online. It continues to kind of accelerate, David will touch on a little bit later some of the things we've been doing in that area which can improve things up now 22% in the year or nearly 50% in 2 years. It's a real area of progress.

I mean, so overall sales-wise, we're pretty pleased with where we've got to in what is a challenging market to continue to see that growth and continue to take market share in our core markets.

EBITDA. Just to give you a bridge that's similar to what we kind of talked about last year. So again, ScS only so at GBP 0.6 million. Gross margin, we've talked about. Distribution, which we do see as a flexible cost. It moves around -- the last 2 years, it's been 5.2% of our gross sales number. For us, I suppose that was a pleasing result because, as you'll see later in the presentation, that average order price actually went down, and we -- there's a reason for that, we went after that value product. We think that's the right end of the market to be at. But that meant we actually delivered more to get the same revenue. So to hold at 5.2% was a real positive. What you -- what obviously we don't talk about but actually in regards to the space, the warehouse costs, people costs, they are going up. So we've had to work quite hard to maintain that 5.2% cost of sales.

Marketing. We've been pretty disciplined in this over the last kind of 2 or 3 years. We're spending about 6.7% of turnover. It's something we will increase or we will reduce if we see that top line moving kind of either way.

Payroll at GBP 1.6 million. Predominantly, this was driven by the impact of national living wage and small pay increases that we've given during the year, about GBP 1.1 million of that increase is that. There was GBP 0.2 million driven by the auto-enrollment as the contributions from employees grows, 1% to 2% to 3%, so that caused a little bit. And as we'll touch on the next slide, our performance-related pay went from GBP 14.3 million to GBP 14.6 million, and that is driven, as we'll touch on in a minute, that was driven by top line gross profit and EBITDA. So as they've improved, we've seen a slight increase in that area.

On other costs. We saw a slight reduction in other costs largely property related. We're starting to see some -- which other people have mentioned, we're starting to see some reductions in some of the retail space, some of the rent we're paying. But that is generally on the -- not on the strongest parks, we're seeing that. And that's -- some of that savings was offset by a slight increase in utility costs. But overall, a GBP 0.3 million reduction.

So flexible costs slide. This is a slide, actually, we've probably had now in for 3 years. If you compare it to the one we had last year, which had House of Fraser, it's actually -- the level of flexible costs has gone up. It was 75% last year, it's 70% -- 76% this year.

As a business, we have stock on the balance sheet, which is about GBP 19 million, but that's predominantly stock in our showrooms. We don't buy lots of sofas hoping someone's going to buy them, where they're all kind of built to order. So a lot of our cost base is flexible. So you can see on the schedule, we've identified what we see as flexible so that cost of goods sold, distribution costs, marketing costs and performance-related payroll. Just to give you an idea on that GBP 14.6 million on the performance-related payroll, GBP 7.5 million of that is commission we pay to our sales team. So on average we're paying 2.25% commission on our sales. And the other GBP 7.1 million is driven by gross profit and EBITDA. So if we do see that gross profit and EBITDA coming off, you'll see that element rightsize itself pretty quickly.

The top half of the GBP 7.5 million commission will [be predominantly] based on turnover. The second half will rightsize itself if profits don't move forward. So it gives us a real -- as for us as a business, if turnover grows, then great. If it doesn't, there's a rightsizing of that cost base.

We touched a little bit on rent rates, heat and light in other payroll. So we kind of won't cover that again.

Just moving on to cash flow. So as we touched on earlier, we grew cash from GBP 48.2 million to GBP 57.7 million, a GBP 9.5 million increase year-on-year. Just looking at some of the moving parts. So in CapEx, we spent more this year than last year on the stores. We have started to -- including GBP 0.7 million on a full department refit for all our flooring areas. So they've all been redone. That sounds like a big money, lot of money, GBP 700,000, but actually, that's on 100 stores, so it's not a significant investment. And actually, we got some manufacturer support while we did that. But we spent a little bit more year-on-year with regards to tidying up the stores and making sure they're kind of a great environment for the customers to shop in. We spent more year-on-year, as David touched early, on technology. So we've got 4 pieces of new mobile technology now out in the field. We've also had to invest in kind of back-end with regards to infrastructure, servers and things like that to ensure that those new bits of software run at the right kind of speed and kind of are resilient.

Working capital. Two main elements to this. We saw an inflow of nearly GBP 4 million. GBP 1.5 million of that was due to closing HoF where we sold the stock down, so we turned that into cash. And about GBP 2.5 million of that is relating to an increase in customer deposits. So year-on-year, that last 2 months, we saw -- we had a really strong period. So therefore, customer deposits have increased.

In tax and other, just so people know, the tax is about GBP 2.7 million. We've -- we are now earning interest on the money, as you would expect. We are putting some of that on deposit to ensure we get the kind of right level of return. And then there's a noncash item GBP 0.7 million, which relates to our shared bonus kind of charge. So yes, real -- a real -- again, a real positive.

Just to touch on briefly, our kind of negative working capital model. And most of you in the room are aware of this, but if you come in and buy a sofa and about 50% pay by cash or credit card and 50% take by finance, we'll always take a deposit. So on the day you order, you kind of pay the deposit. And now on average, we deliver products about 8 weeks later because they're all built to order.

If you're a cash or a credit card customer, you'll pay the start balance before we deliver that good to you. If you're a finance customer, which again I can say is about 50% take finance, we get the money from the finance house 2 days after we deliver the products. We then pay our suppliers, on average, about 45 days after they've delivered the goods to us. So in all instances, we have got the cash in from the customer or the finance houses before we pay our suppliers. So we have what is called a negative working capital model but obviously, it's positive for the group as regards to our cash flow.

So the second slide on cash we thought it was appropriate to put it in this year. So we finished the year at GBP 57.7 million. We have no debt. We do have a GBP 12 million facility with Lloyds, which runs to November 2021. We've never drawn on it, and the intention is to never draw on it. But we've had that since we [floated] it in 2015. We often get asked a question how much of that GBP 57.7 million is customer deposits? And actually, show when they do and [now] exclude that. So as I say, this GBP 14.7 million at the year-end is customer deposits.

A couple of other things that people have asked in the past and we've thought would be useful to share. If you look at our average cash balance throughout the year, it's about GBP 57 million. So we do have movement, peaks and trough, but actually, on average, it's about GBP 57 million. So the year-end position is pretty representative of what we see throughout the full year.

If you take out customer deposits throughout the full year, you're probably sitting at about GBP 38 million average. So even without our customer deposits, we're sitting with a healthy cash balance. And if you look for the low point of cash in the year, it's about GBP 38 million.

So there are just 2 or 3 kind of metrics we often get asked, and we thought it would be useful to share with people just to get an idea of how much money we do sit within the balance sheet at different points during the year.

Final slide for me is looking at on Slide 11, which is shareholder returns. So as we've talked about before, positive for the business is actually, we're increasing the dividend. And we're increasing the cover levels, both on an earnings basis and also on a cash basis. So as we continue to grow, that's something we'll look to do. The -- over the last 2 years, we've increased the dividend by 13.6%, which is in light with -- in line with what we've seen with regards to our earnings growth and our profit growth in the core ScS business.

Just as a bit of a kind of -- we introduced this last year. Since we floated in 2015, including the 11.2p we're proposing to pay, which is kind of November this year, we've actually returned 76.1p to the shareholders. So if you'd had a share on Jan 15, which you'd paid GBP 1.75 for, you would have had nearly 44% of your initial investment returned in dividends to-date, obviously plus then you've got your -- kind of your increase in the share price growth. So we would like to think that's a pretty, pretty strong return but something we need to come to, to focus on.

I'll just hand back to David.

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David Knight, ScS Group plc - CEO & Director [3]

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Thanks, Chris. I thought we'd just take a look at the market, and we've got Global here, so it's some of their numbers. You can see actually on Slide 13 how we've grown our market share, now at 9.3% on upholstery and 2.6% on flooring, having just entered the market in 2012. We're growing in actually what is a shrinking market. So really, I think, underlies the strength of our value offer. You can see that Global is saying that the market has reduced by 2.5% in that period, but we've seen an increase of 7.3%. And on flooring, you can see the reduction has been 5.5%, more dramatic than upholstery, but we've seen an 11% increase in that period.

It is a challenging market right now. And you can see the graph has actually been negative all the way through this period. It has become a little bit tighter, but we believe that actually, our very focused value offer actually performs well in what is a challenging market.

Housing transactions. This really doesn't hugely affect the sofa market, but we believe it does particularly affect the flooring market because people, if they're moving, they can take the sofa with them, whereas on flooring, if they move, they tend to replace the flooring there and then. So I think when we get to the flooring side though, you will see how well positioned we are now, ready for any upturn in the housing market.

So moving on to, actually, what are the ingredients that have helped us grow over the past few years. As I just said, we're very, very focused on that core customer. We're very focused on the value offer and delivering a brilliant experience. And we do it really through these key 6 areas: so we have a massive range of price point starting at that value at GBP 299 but right up to buying a La-Z-Boy branded product at over GBP 5,000. We introduced brands because we believe that also helps with consumers' confidence. And you'll see when we get to the slide, we've actually widened the brand offer as we try to be recognized as the home of brands.

We want to be on those key retail parks. The Star made reference to in Kirkcaldy that we just opened, that was on a list of a very small number of stores that really matched our demographic across the U.K., where we knew we could get a very good return and our offer really appealed to that consumer. We offer credit. And as Chris said, 50% of the customers pay cash, 50% take credit and having that long offer of interest-free can make the payments so easily and can allow customers to trade up if they wish or budget for what they want to spend.

The service Trustpilot. As you've seen, we've talked about this many times, we get a 5-star rating, and that is partly through the development of our people actually having a great, great shopping experience and the work we're now doing online, we know lots of people are doing research. So these are the key ingredients that have helped us grow and develop the business.

So just moving on to Slide 15 and our people. Last year, we appointed a new HR director because the importance of having people that actually give the customer confidence when they shop, a good experience when they get delivery and should they have a problem, a good experience when our upholster visits them, it's critical particularly in a tight market, in a challenging market. So we've focused very much on people again this year. We've actually put 2 people, 2 in the north and 2 in the south, out into the field to help us interview, induct, grow, develop, train these people, which is a new addition -- additional support to our HR and people development function.

We have also brought in some external people to help us. And I keep getting the names mixed up. It's Steve Backley and Roger Black, their organization, the Olympians, and they've now started a 12-month program, both with our senior team and with our retail management team. And what we've actually done is we've put some of our senior head office team on this as well and mixed them with our retail because we believe we've got to get all of the functions more engaged with the retail front-end. And actually, as I keep telling everybody, if the till isn't ringing, we've got a problem. So the more people understand the importance of the customer experience and the till ringing, the better.

So we've actually put the mix together in a different way, which we haven't done previously. We've also looked at how we can reward people in a different way. We're giving them extra holiday now. We're actually -- we've introduced this benefit scheme that more than half of the team has signed up to where they can go shopping, book holidays, et cetera, and they're going to save, on average, around GBP 1,000 a year. So grossed up, that's a substantial saving for them.

So we're looking, again, at how we engage with them. We did this Denison's survey last year, and there were some real practical things from the shop floor that we could improve our processes and give them a better understanding and communicate with them better. So people, a very key ingredient in our success and one that we don't take for granted and one that we really -- is very important to us.

You'll also see on there, we streamlined our retail. We actually took what we had, we used to have a structure where we had the commercial director, a sales director, divisional controllers and regional managers, we took the sales director and divisional line out and just put one Head of Retail, so bringing us closer to actually our whole retail operation and allowing them to communicate better with us. And again, we believe in a challenging market, that's very important.

So moving on to our customers. I describe them as the salt of the earth, they're very hard working people. They're looking for that real value, and they're looking to have a really brilliant experience when they visit us, and we want them to fit because it's -- after a car, it's their second biggest purchase. So we want them to really enjoy that whole experience.

You can see on here the stats on Trustpilot. We were one of the top 10 retailers to reach 100,000 reviews last year when we sat here. We're now at 160,000 reviews. So it's a very sizable number that are reviewing our performance. And you can see that actually, the satisfaction rating has gone up in the last 12 months, again, against a very big number. But we -- of course, we get 1-star reviews. But actually, every 1-star review, we look at it, we analyze it, we understand why it happened. And actually, we get back to that customer to somehow find a solution to why they didn't have a great experience and learn from it.

We're in the process of centralizing our support function because we want the customer to have a seamless journey, and we want them to be communicated with well throughout the entire transaction. We've touched on the technology. So we've actually improved the shopping experience in store, much more electronic, completed on tablet now. Everything is e-mailed to the customer, very visible what they've ordered, what the combination is, when delivery will be, again, to improve their satisfaction. We've put fleXipod and Paragon into our logistics to ensure, one, we're optimizing the routing; but two, to actually enable us to get the customers to sign electronically rather than actually having all the paper and just made that whole operation more efficient.

We've also introduced Kirona into our upholstery network. And this is where actually, they don't know where their next job is so we can constantly be rerouting them if we get an urgent customer on the phone that, for instance, the recliner action on a power recliner has locked open, we can reroute somebody there and get there very, very quickly to actually deal with any issue they have. So really important that the customer has a much better shopping experience from start to finish, and we're able to maintain that rating.

Moving on to the stores. We've told you many times, this isn't about just putting flags up. We're actually looking for those prime retail parks and Kirkcaldy, which I've already covered, being a really good example. We're trying to improve the experience in store. We've actually spent time and effort in making the brands feel more concession-like. But actually, when you get into the store, you can see them, they're more visible, how we've created them. We also now have made sure that as you enter a store, all of the ad lines are in prime positions. We've identified hotspots. And actually, we're making sure that when you come in, if you're responding to an advert, you actually know you're in the right place instantly. And if you're not responding to an advert, we've shown you that great value right up-front, which we believe is very important.

We've also took some of the point-of-sale off the product. We're letting you breathe a bit more so that you can actually see the quality and the features of it by introducing price cards on a stand. But these are actually even stronger than when they were on the product because it's very, very visible. The price is a little larger on there. So again, showing the value. We've seen conversion improve, again, this year. That's through our people, through the development of the people, but also through the development of people -- the -- through customers actually doing research online, which we'll come to, and the strong offers that we've got.

Chris touched on, the average order value has reduced slightly, margin has been maintained. We're just buying it a little bit better. We're making sure working with those suppliers that we can generate the volume if they're giving us the right product at the right price. And again, passing that great value on to the customer. You've seen sales per square foot grow, though, to GBP 229 from GBP 224. So we're doing a number of things but all having positive effects.

We've touched on the new stores already, I think, and the opening of Kirkcaldy. We currently have a list of about another 10 locations that we would really like to be in, but we're waiting for the right opportunity in those locations. Kirkcaldy was actually an ex Mothercare unit. But on that park, we've got competitors like Sofology or Furnitureland, Tapi, so it's a real destination.

So moving on to supply, to product. As I've already said, we've got that wide range of choice. We actually are further developing our offers, the Home of Big Brands. We've introduced a new British brand that is actually our own called Inspire, and that's just launched a few weeks ago. And we've brought in a third-party brand called Celebrity, which complements our G Plan offer, it's for a slightly younger customer than G Plan was or is. And our core range, it's that value across all of those price points. So from our ad lines, right up to some of our more glitzy-type product. All the product is exclusive to us so we have nobody dictating margin to us.

To remind everybody, we buy all of our product in Sterling. So when we order a product in, actually, we know exactly what the margin is going to be right from the start. We're not subject to exchange rate changes. And we use an outside company to actually source and supply all the products from the Far East so they actually manage that supply chain. We pay on the same terms from the Far East as we do in -- on all the other suppliers, therefore, giving you that negative working capital model.

We don't buy stock, so it's really just our display models. That allows us to try new trends, new looks, and actually, all we have to clear is the original floor stock. We did, and we've got all this way without mentioning Brexit. But we thought we'd actually just remind you, again, of the countries of origin of the product on the pie chart on the top of that page, still principally a lot coming from the U.K.

So moving to flooring. As Chris said, we've spent about GBP 700,000 refitting the departments, really look very, very smart. We're doing it with real authority and a really wide choice of product. We actually though, in the background, have been restructuring our ops team and actually how they give more support to both our stores, our surveyors, who visit the customers' home and actually the monitoring of the fitters. So again, that's been a real refocus of what their priorities are. We actually -- because the fitter is the last person to touch the customer, this is an area that we have spent a huge amount of time on in the last year and actually employed somebody to look after these self-employed fitters. Now to be a fitter for ScS, you have to be accredited by ScS. So we have built in every one of our 9 distribution centers, actually a mock staircase, a mock room that's got a radiator in or area where they have to produce something where they show us how they join a carpet, and you actually have got to pass through that process before you can actually go and fit for ScS now.

So again, we're trying to ensure that the whole quality experience of flooring is very, very good because that's a customer that actually, whilst our average order value on flooring is around GBP 600, the cycle on a sofa is about every 7 years, I think, Global say, that the replacement market? The reality is, if you give a good experience on flooring, that could be a customer that's going to come back to you for many more rooms in the house and actually could spend more with you on flooring in that 7-year cycle than they actually do on sofas. So very, very important that we actually deliver that to the customer that great experience.

And with any of you, I think some of you have visited our stores, but we do flooring with great authority. We have over 120 ranges. So actually, special order flooring, that's actually higher than the number that currently you would find in an average Carpetright. So we're doing it with real authority, real choice and actually, we've got great partnerships with a lot of these leading flooring suppliers now. And very shortly, I'll show you an ad of a new product that's about to launch from Associated Weavers, and we actually have it exclusive on the retail parks certainly up to Boxing Day. So ahead of Carpetright and ahead of Tapi, and probably just demonstrates the importance and -- how -- their view of ScS as a flooring specialist. We again -- we haven't got it on here, but we've just actually won the Interiors Award again for Floor and Retailer of the Year. That's the second year in a row.

We have no stock, again, on flooring. So we don't have this huge machine of having to hold large volumes of stock, cut it, distribute it. We actually -- everything we order is sold to a customer. So again, that allows us to introduce ranges literally at a flick of the switch. And so we can bring a new product in, no stock risk if it doesn't work because we haven't actually ordered any.

So moving on, how do we get the customers in? It's a very broad mix of advertising. So it was -- it's TV, it's radio, it's national press, it's local press. We've seen a few tweaks to it this year. For instance, we used the Evening Standard in London, we've now switched to the Metro because we believe it's certainly -- circulation is as strong, and we get national coverage with something like The Metro so at a very similar price, a very similar cost. So broadly, our mixes remained very consistent.

It's about really those targeted campaigns, those making sure lots of eyeballs are seeing the ads and actually creating a lot of urgency in the commercials, which I'm going to show you a few -- in a couple of moments. It's all about that clear messaging around value come now and the product. And we've now got a much closer relationship of having brought digital in-house, and I'll cover what we've done there in a second. We actually now have very joined-up campaigns. So a campaign will be flagged first on Facebook, it will then, when we do launch it, it will appear the same on the website as it does in the TV ads and there we actually have countdown clocks now on the website. So if a promotion's coming to an end or an offer's coming to an end, we'll be telling them because we know lots of customers are doing research.

I thought -- I'm just going to show you, just very quickly, 4 different ads. We've got the current campaign that is running right now, which is a Spice Girls song. We went for Spice Girls because they've been very topical recently. And if they're good enough for Walkers crisps, I think isn't it that they're good enough for ScS. So we've used a famous track, and we believe it has really strong standout.

(presentation)

So that's pushing the big brands. Last week, and I'm sure we're going to come on to current trading, it's got to be one of your questions, I suspect. Last week, we ran this ad, which is a campaign that's always successful for us.

(presentation)

So very short, very sharp, very aggressive. Now I touched on the new carpet that is going to be exclusive to us. We've made a very different ad for that, something that you probably wouldn't associate with us, and we'll quickly show that. We couldn't just turn on the lights, [Tilly], because the colors in this are not too bright.

(presentation)

The -- very different for us but we believe it'll have real standout. The actual media schedule for it is very strong. It's predominantly going to be on channels like Sky. It's going to be on the Discovery channel. It's going to be around customers that we believe are particularly interested in the current -- in the environment. Just so you know, we haven't gone mad. We're going to show you -- just quickly show you the Black Friday ad that returns us back to our more normal comfort zone.

(presentation)

So again, this is -- the SEDNA one will be mixed with our normal core ads going out. We've run it as a completely separate campaign so we haven't diluted in any way, shape or form what we were going to spend on our core advertising. In fact, the SEDNA is an extra investment to just see whether we can actually make it work. And I believe, actually, when you see the point-of-sale in store and the stand, the actual display stand, it's absolutely fabulous. And value-wise, we ran a carpet from Associated Weavers last year, which was first-to-market as well that was GBP 35. So we don't believe the price point at GBP 29, including the free fitting, actually will be a restriction to consumers shopping. So that just gives you a flavor of what we're doing there.

Move on to Slide 21, which is our digital offer -- our digital offering. As you can see, we've grown sales substantially. It's still a small part of our business, and we believe that the experience in-store is still absolutely critical. We just know a lot more people are doing research, and therefore, it's got to be a shop window for getting customers to the store. So really, this -- our website is -- still its main purpose in life is driving people to the bricks-and-mortar. When they get to the store, they actually -- the average order value is higher, the margin's higher. So the period of finance the customer takes is a bit lower. So actually, we want to continue to get them to the store. And in reality, a -- our core customer, who is spending on average over GBP 1,500, wants that experience, but they want to do a lot of research first. And actually, it is our opportunity to be on a level-playing field with many of our competitors because you don't only research one site.

So we decided last year to actually bring the whole process in-house and be in much more control of it. So we've actually done that. We've brought in a new head of e-commerce, and we've also brought in a new head of online sales. The function operates in a very different way now. We actually -- we have specialists in each area. So the purchasing of pay-per-click, et cetera, and managing the social media is very different to a year ago.

We've also built our own photo studio, allows us to be more proactive around -- particularly around getting something photographed for social media. And it means we're in total control. We were doing this externally. It does actually -- it's better value in truth. We've built in one of our distribution centers. It makes the whole process much easier as well. So that's a really good step forward.

We further developed our current website. The dwell time is improving. We're getting less bounce rates. So we can see really good progress on that. We're now in the process of developing a new website, which will launch at some point during this current FY '20 financial year, but we won't switch it on until actually we're absolutely ready, and we know it's absolutely right. Why would we when we're seeing good growth on the current site? So I think really, that basically covers digital.

Certainly, the other thing I would highlight there is Trustpilot. Again, in that environment, it's really, really valuable that the customer can feel confident they're looking at a good retailer.

So to -- just to really conclude on FY '19. I hope you can see the progress we've presented to you, what we've actually been busy doing and actually seeing growth through the year. Cash building, increase in that underlying profit, positive like-for-likes, and really, the investment we've made in the technology. And Chris explained that we're planning to increase the dividend again.

Just moving to FY '20, which we've now had 9 weeks of. I thought it would be helpful if we just broke it down for you what we're actually seeing out there in the environment. We actually traded very, very strongly through May, June and July. And they were against fairly weak comparables because the prior year, we'd actually had the European Cup, and we'd had a pretty hot June weather-wise, June and July last year. We started August pretty strongly, where we were perfectly happy. And then we were heading towards August bank holiday, where actually, we have a 2-week campaign, even though this is a key 5-day piece of activity.

The weather just completely and absolutely beat us despite our best efforts. And actually, I was out and about on Bank Holiday Monday, and unfortunately, on the retail parks, I can tell you, they just -- the car parks were just dead. And it wouldn't have actually mattered what we'd actually done. I think unfortunately, all we really created over that time was a bit more brand awareness for the customer when they are going to be in the market. What they weren't going to do was they weren't going to give up what was probably the best weekend of actually the entire summer.

If you exclude that period, the like-for-likes will be about minus 4, which I think one of our -- the #1, they keep telling us. And our sector actually reported last week that I think they were about that number. I think they were a similar number. I think that's right? Anybody? Yes. If you've read the DFS statement last week.

Then we started our Autumn campaign, which began at the beginning of September. And I think really, those first couple of weeks, the news, et cetera, was dominated by what was currently happening in -- happening on the political scene. And customers really just felt a bit unsure about what was actually happening. We've seen it improve over the last 2 weeks. And actually, the trend with attention, attention, which started last Wednesday, we've seen an improving market and probably coming back to similar numbers that we were experiencing through the summer.

Clearly, what we just don't know sitting here right now, unless somebody can tell me, what we really don't know is what's going to happen in the coming few weeks. What we do know is when -- particularly, if you look at the last few days, we've got the right product, we've got the right offer. We've got the right people. What we need is just the consumer to be feeling okay. And if the consumer isn't feeling okay, this is a time when actually, they want to go to somewhere they can feel safe and confident and assured about shopping. And that really is us. So I think we're continuing actually to gain market share in a declining market. And really, that will be our position after 9 weeks. I think we -- it's kind of watch this space. Okay.

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Questions and Answers

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [1]

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Okay. So we've got -- if you ask questions in the microphone there, please. This is recorded.

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David Knight, ScS Group plc - CEO & Director [2]

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Or you can give us a song.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [3]

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Yes.

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John Stevenson, Peel Hunt LLP, Research Division - Analyst [4]

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John Stevenson at Peel Hunt. A couple of questions to kick us off. Can you talk about the market? I'm sorry I missed the start of the presentation, the AOV piece, is that customer-driven or is that actually the range focus has become more value driven? And just linking that in on the flooring sales. Tapi and Carpetright are both sort of knocking chunks out of each other. To what extent has that affected your trading position this year? And final one on the mighty IFRS 16. Obviously, that's to come for the year ahead. I mean, is there anything in there in terms of owners' lease provisions that are coming through the P&L at the moment in terms of a credit that will drop out and there will be an issue beyond the normal sort of IFRS '16?

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David Knight, ScS Group plc - CEO & Director [5]

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Well, we'll split this out. I'll do the easy question, the IFRS. The -- we have actually been more promotionally aggressive, John, over the past 12 months. But really, in partnership with the suppliers. And yes, we've probably driven the AOV down slightly. But I think really, that has still given us that positive increase in EBITDA. So it impacted a little on logistics because we've had to do a few more deliveries. But overall, I think the AOV is still within that band, it's 3.5% in reality. And if you think where we started with AOV, if you went back a few years, it was probably about GBP 1,300. So now to be at GBP 1,550, I'm not worried about the AOV at all.

On the Carpetright and Tapi situation, as you -- you're absolutely right. They're kind of at war with each other, whether that's people, whether that's prices, whether that's offers. Actually, I would like to see them have many, many more advertised promotions while they're doing battle with each other because anything that stimulates the market, we price check them every week, in some cases, we're checking them every day. I can categorically sit here and tell you our top 20 carpets are better value than either of them right now, and some of them are quite similar. So I think they're going to continue to be at war with each it appears.

And in the longer term, hopefully, we'll be the beneficiary of that. By ensuring the people that do shop with us, we have got the accredited fitters, we have got the surveyor going out, they're choosing masterpiece to actually plan the size of the room. So I think, as I say, you're absolutely right. I was in a Tapi last week. They had an event last week, which was half price and get another 30% off at the till. But overall, they didn't seem to have a great customer flow on the day I was in there. Carpetright this week are having a flash sale which ends today, and we've ensured, over the weekend and today, that we've got some activity going on in store, where we sit near a Carpetright.

On our IFRS, Chris?

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [6]

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So IFRS 16, there's actually -- I've got a slide to help me. So on Slide 24, this is the kind of P&L impact. So this is the impact at the end of '19. Obviously, we don't apply it until the financial year '20. In the actual announcement, we talk about the '20 impact, which is P&L wise. With regards to your second question around onerous rent, we have about GBP 0.5 million -- well, we have GBP 0.5 million of onerous lease provisions sitting on the balance sheet at the end of '19.

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John Stevenson, Peel Hunt LLP, Research Division - Analyst [7]

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Well, it's not massive.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [8]

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It's not massive, no. So very small. I mean, we've always had 2 or 3 stores which don't make us money, and that's what we're providing against. That hasn't really changed.

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John Stevenson, Peel Hunt LLP, Research Division - Analyst [9]

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(inaudible)

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [10]

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Yes. We haven't got to -- we've haven't got that level of onerous rent sitting in the balance sheet.

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Peter Swelley, Finn Capital Partners - Analyst [11]

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Peter [Swelley] from Finn Capital. Apologies for turning up late. So picking up your comments about taking market share in a declining market, can you just talk about who you would be getting that market share from? And then if you -- we can put that into the context of what DFS was saying last week that they grabbed a big 3 percentage point in market share, if the estimates are accurate, and there's a lot of movement within that. So just your observations about what is happening with various competitors that would help explain such movements? But specifically, who you might be -- have gained from and who you might gain from in the coming period?

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David Knight, ScS Group plc - CEO & Director [12]

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I think the market is still quite fragmented. You do have a few key players but then you've still got a very large independent market, which actually, for the -- probably for the last 2 or 3 years, have not been spending in the same way, Peter, on actually promotions, advertising. These are really small businesses. I'm sure we're taking a chunk from them. I think we've also seen some benefit from Harveys probably trying to reposition themselves to being a bit more like Next. If you go in, the offer is nowhere near as value-driven as it was historically. So I would say principally, independents and a bit from them.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [13]

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Yes. I think -- yes, I think DFS, I mean, obviously, Fabb left the market as well.

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David Knight, ScS Group plc - CEO & Director [14]

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Yes, yes.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [15]

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A little over a year ago now.

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David Knight, ScS Group plc - CEO & Director [16]

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Fabb.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [17]

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Fabb Sofas, which is probably not much different to what Sofology is in that sort of space with regards to the product and the offer, so I imagine Sofology has taken some of that customer base as well.

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Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [18]

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Clive Black from Shore Capital. You did well to mention Brexit just the once. Given this chaotic situation we're in at the moment, it may be worthwhile just reminding us your exposure to a new regime if tariffs were introduced from third countries?

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David Knight, ScS Group plc - CEO & Director [19]

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Yes. Yes. As you saw on the pie chart, almost 60% of our product is U.K. -- is U.K. based. So that probably helps us. The 38% then coming from the Far East, and that leaves a really -- a very small exposure to European tariffs. So I don't think that's really issue. A huge percentage of our customers did actually vote to leave, and we have seen, despite that consumer confidence over the past couple of years, many of our customers believed we were going to leave and it was all going to happen. They're probably a bit unsure now what is going to happen, and I think clarity -- the sooner we get clarity, the better.

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Clive W. Black, Shore Capital Group Ltd., Research Division - Head of Research [20]

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Just on that, as you guys know, so the -- your market campaign, to what extent are you committed to your sort of peak spots from Boxing Day to (inaudible). And if we end up with election in January, what's the synergy?

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David Knight, ScS Group plc - CEO & Director [21]

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We haven't actually booked any yet. We're in discussions with them. But even if we had booked them, even if we had booked them, John, and whether you recall, when we had the Beast from the East last year, we were absolutely committed to running a campaign that started on the Wednesday. On the Monday, I was out in the snow in Durham station waiting to get on a train, and I thought actually, who the hell is going to come out on Wednesday. By the time the train was in York from Durham, we had pulled it all, and we deferred it till the following week. So we didn't take the cost saving, we just were able to move it along. So I think all of those media houses, we have incredibly close relationships with. We buy a lot of that media ourselves. We don't do it through a media house as such, media buying house. So we can literally speak to the right people at the right moment.

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Emmanuel de Figueiredo, LBV Asset Management LLP - CIO [22]

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Emmanuel from LBV Asset Management. Three questions, if I may. The first one is just following on the independents. Could you give us your best estimate of what you think is the share of independents at the moment in the U.K.?

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David Knight, ScS Group plc - CEO & Director [23]

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I think actually, Global probably can answer the question better.

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Unidentified Company Representative [24]

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I'm not entirely sure.

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David Knight, ScS Group plc - CEO & Director [25]

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I think it's around 60%.

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Emmanuel de Figueiredo, LBV Asset Management LLP - CIO [26]

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60% still.

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David Knight, ScS Group plc - CEO & Director [27]

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Yes. It's certainly between 50% and 60%.

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Emmanuel de Figueiredo, LBV Asset Management LLP - CIO [28]

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Okay. And my -- just 2 more questions. The other one is on the online, do you have any statistic on how much of the -- this omni-channel thing, so how much maybe of the journey starts online and then converts to in store? Do you have any way of...

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David Knight, ScS Group plc - CEO & Director [29]

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We believe it's around 80%.

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Emmanuel de Figueiredo, LBV Asset Management LLP - CIO [30]

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80%?

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David Knight, ScS Group plc - CEO & Director [31]

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80%. We're doing actually something with -- with Google, where we can actually track the customer that researched online and then shops in store. So we're starting to get data on the conversion. The conversion is that the conversion of those customers appears early indication that it's pretty high because they've gone there with real purpose.

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Emmanuel de Figueiredo, LBV Asset Management LLP - CIO [32]

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Okay. And the final one is, we've mentioned where -- who could be losing shares. What's happening to Amazon and eBay on their effort on furniture? Are they winning shares, is it stable?

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David Knight, ScS Group plc - CEO & Director [33]

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I think many, many years ago, we were asked a similar question about Tesco and actually, I think there is that mail order customer. And I'm sure that maybe some of the AB demographic maybe happy to purchase something at a reasonable price online. But our core customer, because it is that such a large purchase for them, they want to be absolutely sure they're buying the right thing. And to do that, they've got to touch it, feel it, sit on it, et cetera. I think the Amazon one is probably more likely to affect people like Argos that have been around for quite some time, just not quite as trendy a name. So...

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [34]

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I think if you look at Sofa.com, so it's a great example there. Started in one store, predominantly online. But actually, as they tried to move across the country, they found they had to open more locations because people did want to come in, touch it, feel it and sit on it before they purchased it.

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David Knight, ScS Group plc - CEO & Director [35]

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Well, MADE.com have done the same thing, haven't they?

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [36]

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Yes.

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David Knight, ScS Group plc - CEO & Director [37]

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And Loaf. They're finding they're having to open stores.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [38]

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It's a very tactile purchase, I mean, and flooring is even more tactile. It's very difficult to sell flooring online, which you think might be easier but people want to feel it. And even with a sample operation they still want to come and see a bigger swatch and touch it in store.

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David Knight, ScS Group plc - CEO & Director [39]

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I think the other thing is when people enter that area, they think it's probably quite a very simple process -- simple order with a high ticket value. But in reality, if you actually have a problem with a sofa, it's -- if you're going to -- if it's returned, it's virtually worthless. And actually, what you need to do is you need to be able to keep it in the customer's home and you need to actually resolve it for them. And actually, you see these third-party companies going and doing that where they're using self-employed upholsterers, and their desire is to get a decent-size order because they're self-employed as opposed to actually trying to find simple solutions for the customer. And again, I don't know what the return rate is currently for somebody like Argos but they've actually moved to even more of a budget product to try and mitigate what will be a return that's actually going to go probably in the bin or to auction and get very small return for them.

Anyone else? Okay. Thank you all very much.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [40]

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Yes. Thanks for your time.