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Edited Transcript of SCS.L earnings conference call or presentation 17-Mar-20 9:30am GMT

Half Year 2020 SCS Group PLC Earnings Call

SUNDERLAND Apr 1, 2020 (Thomson StreetEvents) -- Edited Transcript of SCS Group PLC earnings conference call or presentation Tuesday, March 17, 2020 at 9:30:00am 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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Presentation

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

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Good morning, and welcome, everyone, to this webcast following this morning's trading update. If you're joining us via the webcast, you will actually be able to e-mail questions in, which we will pick up at the end. So moving to Slide 3. I thought before we start, we would just cover off the reason for the delay. In reality, Boris' announcement last night about people self-isolating from social events. And as we know, retailing is a leisure pursuit, and we're obviously a little concerned around what that's going to do to footfall and trading. Therefore, whilst we have done some modeling, we just feel we need to do some further modeling of a downturn on what we think the outcome will be. So we've also, in here, just reminded you all of our current cash position and our revolving credit facility that is available to us, so a total of over GBP 70 million.

So we'll just move on to Slide 4. This morning, we would have been talking to you around how positive, particularly the last 7 weeks have been and also how successful our winter sale has been. You can see that order intake for the past 7 weeks has been positive 3.3%, and actually, we now, after 33 weeks, are only 3% behind on a like-for-like basis and to remind everyone, that we were actually minus 7.1% after the first 17 weeks, so a significant improvement. And actually, really, we were gathering some very strong momentum.

We have, during the first 6 months, actually rolled out completely our new sales app. And that has actually generated over 250 million of bookings through it now. So it's working very, very well. This also really improves the whole customer journey, the information the customer receives when they actually place an order, and it's created a paperless process for the customer. A much more professional experience. This has, however, resulted in -- was actually removing administration from our stores. This, unfortunately, resulted in over 200 people being made redundant. But this, from the customer point of view, is improving the experience overall. And actually, we feel it's a real positive. And in what is some challenging times, obviously brings cost savings to the group.

Trustpilot, we're very pleased to be reporting this morning that we now have over 200,000 reviews, and we actually retain our excellent rating, really giving the consumer that confidence that they need. You will also see in the period that we've actually returned GBP 4.4 million to shareholders through the buyback and cancellation of GBP 2 million of our own shares. And again, on the 11th of February, Sun Capital Partners now no longer hold any shares in the group.

I'm now going to pass you over to Chris, who's briefly going to give you some headlines around the financials.

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

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Thanks, David. So compared to normal, my slides are slightly shorter. And obviously, we'll kind of fill these out once we get the interim results released. So I'm on Slide 6. So as you can see in the trading update, we've shown what the impact of IFRS 16 is. And as we indicated previously, what happens is the rent that it gets added back to distribution and administrating expenses, and we replaced that with a calculated depreciation and interest charge.

So what you see on Slide 6 is that actually you get a benefit at operating profit of the GBP 0.7 million when you move to IFRS 16, but it's -- there's a reduction in PBT. So the key thing that, I suppose, we've announced, if you look to the right-hand side, the pre-IFRS 16 numbers, so revenues gone from GBP 151.4 million to GBP 152 million in line with this gross profit risen from GBP 71.5 million to GBP 71.7 million.

Distribution costs have gone up slightly, obviously, driven partly by an increase in revenue, but also we've seen a bit of an increase in the cost of -- wages and a little bit in property. Admin expenses kind of come down. So there'll be more details on that in the full statement when it comes out. So overall, operating profit increased, and interest, we've had a little bit more income on them on pre-IFRS basis. So with regards to underlying EBITDA, what we're pleased, obviously, to announce at the half year that our EBITDA has gone from GBP 3.4 million to GBP 3.8 million.

Just moving on to Slide 7. So these are the financial highlights. So gross sales, and these are delivered sales. These aren't bookings. It's what we've delivered to the customer in the first 6 months. We've had GBP 160.1 million. Again, as noted before, an increase on -- to Jan '19. We just talked about the EBITDA movement. So this is on a -- for the continuing operation on a pre-IFRS 16 basis. So comparable to make it slight easier to be able to understand. That's driven an increase in our earnings per share. That's the kind of third year we've seen this increase at the half year.

Dave will touch on briefly kind of the value message. So we continue to focus on that. But even whilst we've done that and the promotions we've been running, we've managed to maintain our gross margin at 44.8%, so a slight reduction on prior year, but still in line with what we've had historically.

One of the things, obviously, that people are talking about today is the strength of the balance sheet. As you can see, compared to last year, we've got GBP 61.5 million, slightly lower than last year, but David just mentioned, we've spent GBP 4.4 million in the period on doing a share buyback. So if we strip that out, we would have actually been higher than this time last year. So -- and then final point is on dividend. You know that the Board have declared we will pay an interim dividend in line with the prior year.

Just moving on to Slide 8, which is the kind of final of my slide. It was really just to give an indication of the kind of cash balance. We've touched a little bit on the kind of previous slide what happened since last year. But you can see over the last 3 or 4 years, we have been building the resilience of the business. We've also been increasing the level of flexibility in the cost base. I would refer people to the year-end presentation, which does have a breakdown. And I'll just remind people that 76% of our cost base is flexible. We have a no-stock model. I think the other thing that David mentioned earlier is, we do have access to GBP 12 million committed revolving credit facility, which, at this point, we haven't drawn, but is available to the group if and when required. I'll just hand you over to David.

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

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Okay. If we -- thanks, Chris. If we can move to Slide 10, I just thought I would remind anyone that as -- that you've heard this before, but anybody who's joining us for the first time, we really are a value retailer, and we want to deliver value to our customers, and we do that through a number of these key ingredients.

Our product offer is very, very wide, as you can see, from GBP 299, which is our promotional offer piece, right up to over GBP 5,000 if you are buying leather corner group from La-Z-Boy with all the bells and whistles of power recliners, et cetera. So huge choice within the store. We do it with great authority. We have brands. So I just touched on La-Z-Boy, brands like G Plan, La-Z-Boy and then some in-house brands as well. So adds to our credibility and makes the journey around the store particularly interesting for the customer. We want to sit on key retail parks. We love to sit next to our competitors, so the customer can visit 1 location and actually have lots of choice. Easy ways to pay. We're offering long-term interest-free credit to the customer. And that means that the whole store is available to the majority of the customers coming through the door. They can take advantage of the interest-free. Service, and I touched on this earlier, that customer feeling confident about where they're shopping, and through Trustpilot, that hugely helps us do that.

Online, you're seeing growth in that -- in the statement this morning, but really it's still a big opportunity for growth for us. And -- but one of the things it does extremely well is it showcases all that value that we have. So customers doing research and over 80% of the people coming through our door are actually doing that research before they come shopping. So another very key ingredient.

So moving on to Slide 11. The business has a huge number of really great people. And we're happy to invest in those people. And during the period, we've actually strengthened our training facilities by actually putting some field learning people out there. We've also introduced third-party training with Steve Backley & Roger Black running a program called the Olympic experience. This, we're actually giving to our senior management team, but then we're flowing it through to all of our store management. So we know that the store manager and the people in store are absolutely key to our success. And as I say, we're very, very happy to invest in them.

We're also looking to grow our senior team, and really, we've just started this process to look for somebody to join us in a marketing role. And also, as we've introduced a lot of technology over the past 12 months, we believe now it's time to have somebody to lead that area for us. We recently carried out another cultural survey in the business, and we -- it really demonstrates that we're listening to our people. And we've been doing road shows around the country hearing what they've got to say and seeing how we can further develop and improve both their work environment, their ability to grow and develop and being promoted, and also how we can actually further enhance the customer experience.

So moving to Slide 12. Delivering exceptional customer experience. It really is our priority. We want our customers to really feel special and have a wonderful experience shopping with us. And this is borne out by the Trustpilot reviews that we're heading in the right direction. We actually -- Trustpilot have confirmed to us that we're actually ranked fourth most reviewed companies in the U.K. right now. And, as I say, we maintain that excellent reputation, which I think, particularly around times of uncertainty, is extremely helpful to the customer confidence.

I touched on earlier, the centralization of the administration. One of the drivers, and clearly, it does come with a saving for the business. But really, what we're aiming to do is for the customer to have an actual better experience, make people more available through more time, have a consistent message when they do want to call and support the customers through the entire process of purchasing from us. Again, I already touched on the new sales app that's done over GBP 250 million worth of transactions through it now. It really has streamlined the whole sales process. It's integrated into our call system, so that's improved speed and accuracy. And it enables the customer to have that paperless transaction, and gives them a lot more information at the point of purchase.

So moving to Slide 13, our product. We have a very strong supply chain. To the right, you can see, and this may be particularly significant in this current climate that you can see where the majority of our product comes from, over 58% from the U.K., 38% from the Far East and a very small amount from Europe, 3%. That really is our SiSi Italia product. We have that huge price point offer, as I touched on earlier, from GBP 299. And we're really promoting ourselves as the Home of Big Brands, and that actually has improved the experience in-store and the investors, as they actually do the floor walk, we've got very clearly defined areas. And the core range that we have allows us to continue to be very promotional and bring amazing value to our customers. All of the product is exclusive to us, and again, just to remind you all of the model, we purchase everything in sterling. So when we book an order, we know what the margin is on it there. We don't have currency debates the house around margin.

We are the key customer to those suppliers and we have no volume-based contracts with them. So we buy the floor stock. It comes into the store. We then take special orders for our customers from it. And now it's made-to-order for them, so no stock risk. As you can see, 95% of the orders are special order. We've added this in, because I think it's particularly of interest to people, how much product is coming from China. And our current order book had 29% in it. The reality is we have seen some delays, but we were made aware the customer traditionally would have been quoted 12 weeks for that order to be made and delivered into us. So after 2 or 3 weeks of the factory having the order, we were made aware to expect a 2- to 3-week delay. We have contacted all of those customers, so that goods had only been on order for 2 to 3 weeks, they weren't expecting it for a further 10 weeks, and explaining to them about the delay. The customers have been extremely understanding. I think, again, it's worth reminding everyone that the majority of our customers are in the replacement market. So they already have something to sit on. They're probably giving the room a complete makeover. So a small delay is not an issue. It's really just about keeping the customer well informed about their order.

So moving on to Slide 14, our marketing, we continue to be very, very aggressive and have lots of promotions, and we dovetailing it very much into the digital spend that we have. So it's a very, very strong messaging. You can see we spent a very similar amount to the prior year. It is all about creating that urgency and giving customers very good reasons to come shopping right now. And that has been very helpful to us, particularly through the winter sale and through the past 7 weeks.

We buy all our own media. And again, I think with the uncertainty around corona, we're talking to all of the media houses right now about being able to add or remove advertising. And they're all fully on board as part of our partnership with them. So we can be very swift afoot and -- to take savings. I think few years ago, as some of you may recall, when we had the base from the East, I gave the example that the weather -- the country was kind of closing down. And on the Monday, with an ad campaign starting on the Wednesday, I got on the train in Durham and by the time I'd got to York, it had all been actually pulled. So working very closely with those media houses. And I think it helps the fact that we do it directly with them.

The picture on that slide actually just shows how we prepared the store for the start of the winter sale on Boxing Day. You can see when a customer comes on to the retail park, we want to look exciting, busy, a great place to go shopping, a fun place to go shopping. And certainly, you can see it's pretty eye-catching compared to maybe some of our other competitors.

So moving on to Slide 15. You can see that in the announcement this morning that we've seen the biggest growth in this area. And we're continuing to invest in it. We've actually brought somebody in to lead that sales team now. And he joined us from Arcadia Group and Dan has made a really great start in the business, I'm delighted to say. We're continuing to see the customers doing that research. And as I said earlier, over 80% of the customers are doing research, and we can actually track them from actually going online to actually coming in and making purchases. We are in the process of building the new website, and I'm absolutely delighted with the progress the company that's doing it for us have made, and we scheduled to launch that in June, and it will be very mobile-driven, whereas the current website is less so.

So moving on to Slide 16. What we really have done is, we're being in total control of what we can actually say ourselves and what action we can take ourselves across the team. We've actually split our head office function now into 3 teams. One team is working in head office still. The other team is working in our disaster recovery center, which is just a few miles away from head office, and another 1/3 are working from home. And we've split it by function, so that the business can continue. Should we have an outbreak in either of those locations, the business can actually continue to support retail and distribution. So we've done that.

We are supporting the team on sick pay, and we are concerned about our customers, and we're making sure that we're keeping them absolutely fully informed of what we're actually -- what we're doing, and working closely with the suppliers. We actually have done due diligence on all of the U.K. suppliers to ensure they have all the components that we need to actually continue to manufacture. And actually, we have seen from them shorter lead times over the past few months, as I think we have been trading probably ahead of the market.

So moving to the final slide, you can see the increase that we've had over the first half. The amount of cash that we're sitting on is GBP 61.5 million. And as Chris said, that GBP 12 million of revolving credit working capital from the bank. We've been delighted with the trading over the past 7 weeks and the momentum that's brought and that has made the like-for-like now for the 30 weeks, as I said, only down 3%. We have, over the past few days, seen that decline in footfall, but conversion has actually been ahead. It was very strong again yesterday. So I think, really, it's just a watching -- really a watching brief now as to what the government do next, and it will be interesting to see what the chancellor has to say this afternoon, I think, on how they're going to support business. Okay, we'll...

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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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We've got -- we've had a couple of questions in. So David Jeary from Progressive Equity Research has asked what were the redundancy costs in total or recentralization and the reduction in colleagues. So if you look at the statement, you can see that there's a difference between the underlying operating profit and the operating profit of GBP 0.5 million, and that is the exception that it relates to the reduction in the 200 colleagues. So that's the kind of answer to that one, David. The second question David has asked is, what's the annual cost saving?

So if you look at -- we've brought some people into the center. So the net saving will be heading towards the kind of GBP 2 million mark. But obviously, that won't occur this year. It will be an annualized we kind of see going forward. I suppose the interesting thing for that, if you look at things like minimum wage and wage inflation, we don't think there's going to be a big reduction in wage costs. We just think that what we've done allows us to not see a increase for a period. So that -- they were the kind of questions I've got through David.

There is a question about what was like-for-like last week, but I don't think we're in a position to disclose that at present.

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

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If you have any more questions, we can hold for a moment. Please feel free to add them. I mean, I do appreciate you all joining us this morning, and as soon as we have any further update which -- on issuing the results, we will do that.

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

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And obviously, you can always come to us direct, if you've got any.

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David Knight, ScS Group plc - CEO & Director [4]

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Of course.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [5]

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And answer them if we can. We've got a question from Clive from Shore Capital. Can you elaborate more, please, on what you hope the web development will bring for ScS and by when?

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David Knight, ScS Group plc - CEO & Director [6]

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I think, Clive, the new website will be -- will have a lot more information on it. We're actually going to be offering flooring samples. The customer will be able to calculate their order much better. It will be much quicker to load. It will -- the new photography studio that we've put in place last year, the quality of the photography is improving all the time. And it will showcase that much better. And in reality, it will allow the customers there to navigate much better, and in reality, it will still drive them to the store. But we still see growth within the online sales team. We actually put in a new product last week and for answering the telephone more efficiently and dealing with calls, which actually we will roll out to other areas of the business, distribution, arranging deliveries, et cetera. So lots of good things going on in -- and as I say, absolutely delighted with the company that we appointed to do the work for us.

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Christopher J. R. Muir, ScS Group plc - CFO, Company Secretary & Executive Director [7]

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So one other question from Clive. Can you also outline how the business is expected to benefit from the new central team and how this will impact store operations? I think we just touched on previously the kind of the pound impact. I'd say that first thing that we're finding is as we've centralized the 100 small support teams, we are seeing there some more efficiencies we can bring into the business. So if you've got 1 or 2 things that they're fixing locally every day, you don't really realize it. But as we've centralized it, obviously, we've seen the -- seen some opportunities to improve processes, which will ultimately give a better customer experience, but also allows us to be more efficient. So I think if you look at the store operations though, now the customers, if they got any queries, come into the center. So it allows the stores to become more and more focused on the front door and delivering that great customer service, when they're coming looking for some new product.

Got another question coming from Kate. So Kate asked the question of what is the customer deposit element in the GBP 61 million net cash at H1?

We haven't disclosed this number. But actually, if you look at last year's results, which had a payment on -- received on account of GBP 25 million. It's -- given where trading has been, it will be a similar level. I think that was most of the questions. Obviously, if there's any follow-up, you kind of know where we are to contact details, either through Buchanan, Shore or direct to ourselves.

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David Knight, ScS Group plc - CEO & Director [8]

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Thanks, everyone. Again, I really appreciate you all joining us this morning. Thanks a lot. Bye-bye.