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Edited Transcript of WHS.NZ earnings conference call or presentation 14-Oct-20 8:15pm GMT

·51 mins read

Full Year 2020 Warehouse Group Ltd Earnings Call Takapuna Auckland Oct 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Warehouse Group Ltd earnings conference call or presentation Wednesday, October 14, 2020 at 8:15:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Joan Withers The Warehouse Group Limited - Independent Chair * Jonathan Oram The Warehouse Group Limited - Group CFO * Nick Grayston The Warehouse Group Limited - Group CEO ================================================================================ Conference Call Participants ================================================================================ * Christopher Byrne Craigs Investment Partners Limited, Research Division - Senior Research Analyst * Lily Zhuang Jarden Limited, Research Division - Assistant Analyst of Equity Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to The Warehouse Group Limited FY '20 Annual Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Joan Withers. Thank you. Please go ahead. -------------------------------------------------------------------------------- Joan Withers, The Warehouse Group Limited - Independent Chair [2] -------------------------------------------------------------------------------- Hello, everyone, and good morning. Welcome to The Warehouse Group 2020 Annual Results Presentation. My name is Joan Withers, and I'm proud to be the Chair of the Board of the Warehouse Group. With me on the call today, I have our group Chief Executive Officer, Nick Grayston; and our Chief Financial Officer, Jonathan Oram. Turning first to Slide 4. So 2020 at a glance. The financial year that we've just completed posed challenges and complexity that we could never have anticipated, testing our ability to comprehend changes to harness and deploy resource and to execute successfully in what was a dynamic and volatile environment. But in spite of the myriad of curve balls that we've been thrown, we have not deviated from our strategy, and in spite of unprecedented disruption, we've been able to respond to an uncertain trading environment and weather the effects of COVID-19. The group's results in the financial year '20 provide evidence of the gains that we've achieved by initiating changes that keep our customers at the center of everything we do. Group sales were $3.2 billion for the FY '20 financial year, which was an increase of 3.3%. The FY '20 was in fact a 53-week retail operating year compared to 52 weeks in FY '19. So normalizing for that, sales growth was up 1.5% compared to an equivalent 52 weeks. Sales growth was particularly driven by growth from Noel Leeming and Torpedo 7. The group's reported net profit after tax was $44.5 million for the year, and that was down 32%. And that result included $67.8 million received in wage subsidies. If reported net profit after tax is adjusted to exclude the wage subsidy, the group would have made a loss of $4.3 million. The group adjusted net profit after tax was $80.7 million, which was up 9% on FY '19. That underscores the underlying strength of our brands and our operating performance, and I think it's a credible performance in a year which faced so much disruption. We finished the year in a strong financial position with a positive net cash balance of $168.1 million compared to a net debt balance of $72.2 million at the end of FY '19. And due to good working capital management, cash preservation in response to COVID-19 and a strong trading performance following the 7-week lockdown period restrictions. Excluding the 7 weeks impacted by store closures during COVID-19 lockdown periods, our stores across the group experienced 2.3 million average customer store visits per week. What changed most potently during the COVID crisis was the rapid escalation in online shopping. We were able to provide an important service to New Zealanders in terms of being able to supply essential goods online through The Warehouse, Warehouse Stationery and Noel Leeming to enable Kiwis to live, work and learn from home. Our online sales grew 55.2% in the full year compared to FY '19, so making up 11.4% of our total group sales. As a component of that increase in online sales, we also saw 103.2% increase in Click & Collect sales, and we're very proud of our delivery and fulfillment of customer orders through that channel. Turning to Slide 5. The scale of the challenges presented by the arrival of COVID-19 in New Zealand cannot be overstated. Our people at every level in the business had to rapidly adjust and do things differently. We were already well down the path of change. And COVID-19 has not altered our direction, but it has accelerated the pace at which we travel. As the nation prepared to enter into alert level 4, the government focused on health first, and we completely supported that approach. We were, however, required to close our store doors for 7 weeks during level 3 and 4 lockdown period. Kiwis quickly took to online shopping and during alert levels 4 to 2, we fulfilled 1.26 million online orders, which is an increase of 167% over the same period last year, and we had 105 of our stores operating as fulfillment centers. Notwithstanding the increase in online shopping, all our group brands suffered a significant reduction in sales greater than 30% in April, with the exception of TheMarket.com. The group received $67.8 million in wage subsidies. This was invaluable for us and enabled us to continue paying our 11,000 employees their full wage and salaries during the lockdown period when our stores were closed. And I'm going to speak a little bit more about that shortly. We're very proud of the resilience of our people and the way they demonstrated that during these extremely uncertain circumstances that have been created by COVID-19. And I want to make a special acknowledgment for the work of our fulfillment teams have done to meet the massive increase in online sales demand. In 2020, we still continued our sustainability journey, and that's embedded in our vision to build New Zealand's most sustainable, convenient and customer-first company. We now have over 6,000 products in our stores, which have sustainable attributes or packaging, and they account now for over $100 million in annual sales. One of our sustainability targets is to divert 85% of group operational waste out of landfill by 2022. And in this financial year in review, we diverted 77%. And we also raised $3.9 million to donate to New Zealand charities and communities during the financial year. And that brings the total raise since 1982 to more than $71 million. Turning to Slide 7, the impact of COVID-19. As I just mentioned, the move to level 3 on March 26 closed our stores to the public for 7 weeks. And the impact of that was a loss in sales for the period of the lockdown of $265 million, which represents a 67% decrease on the same period last year. As covered earlier, we employ around 11,000 people at a cost of over $500 million per annum. The group claimed a $67.8 million COVID-19 wage subsidy on behalf of our employees across our brands, excluding the TheMarket.com. The receipt of the wage subsidy was crucial to the group maintaining its workforce through a time when we were close to customers and faced unprecedented sales uncertainty. We were able to continue to provide 100% of pay to our employees. On average, the wage subsidy actually equated to around 55% of our normal wage and salary expense over the period to which the subsidy applied. On the 26th of March 2020, when it was evident that the impact of COVID-19 was going to be significant and ongoing, the Board decided it was in the best interest of the group to cancel the previously declared interim dividend. That was not a decision that was taken lightly. But given the level of uncertainty and the need for preservation of cash flow, it was the prudent and appropriate course of action. We certainly hope we're through the worst of the pandemic in New Zealand. However, it's clear that the economic implications will reverberate globally for years to come. All businesses need to react to the new and evolving reality, and we are committed to weathering the storm and ensuring we can serve our customers through the channels that work for them. Now to Slide 8, which is talking about the repayment of the bond and our cash position. A significant reduction in working capital and COVID-19-related cash preservation measures reduced our debt levels significantly to a positive net cash balance of $168.1 million at year-end compared to the net debt position of $76.2 million at the end of the FY '19 year. However, since balance date, our cash balance has reduced to around $80 million as working capital returns to more normal levels. In March, the group increased its banking facilities by $150 million, thus extending total banking facilities to $330 million and allowing the group to repay the NZX-listed bond of $125 million on the 15th of June 2020. On dividends, well, I talked a moment ago about our decision in March to cancel the interim dividend, and due to ongoing uncertainty about the future retail trading environment and the potential of further COVID-19 lockdowns and resultant store closures, the Board has taken the decision not to pay a dividend for the FY '20 year. Now subject to trading over the critical Q2 period and any further alert level restrictions and adverse economic impacts of COVID-19, the group hopes to return to paying dividends in line with its dividend policy during the current financial year FY '21. Moving now to our people on Slide 9. The group has been through 2 significant restructuring processes, which were in place well before COVID-19. Firstly, at the store support office with our flip to agile; and secondly, with our store operating model changes at The Warehouse. Those changes, although very difficult for all involved, were necessary for the group to remain competitive. We are extremely focused on the health, safety and well-being of all of our people to increase the number of our team members who go home safely at the end of their workday. And in that regard, our severity -- the Severity One events decreased 38% this year. In 2020, we implemented an employee Net Promoter score and developed processes to define future career developments, performance and remuneration. We are very proud of our diversity and inclusion culture throughout the organization. We maintained our Rainbow Tick accreditation and achieved the Accessibility Tick accreditation this year. The representation of females and senior leadership positions increased from 21 in 2019 to 25 in 2020, and we launched the lean in circles to provide leadership development and peer-to-peer mentoring for women to work towards gender equality. In September, we announced our retail wage commitment entitling employees at The Warehouse with at least a year's worth of service to receive a pay increase to $21.15. I'm now going to hand over to Nick, who will discuss the process we've made on our transformation journey and our flip to agile. -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [3] -------------------------------------------------------------------------------- Thank you, Joan, and good morning, ladies and gentlemen. Moving to Slide 11, progressing our transformation. Staying the same is not an option in retail. For more than 3 years, we have been dedicated to transforming our business and the transition to an agile way of working during 2020 is critical to building New Zealand's most sustainable, convenient and customer-first company. We are still in the process of fixing our retail fundamentals and have strengthened our ability to capture, manage and utilize data. We can track initiatives and implement quicker, more accurately and ensure that we have clear line of sight in order to maintain scrutiny that our investments are indeed adding value. We access customer data and insights that enable us to identify shopping behavior so we can respond with speed and precision. Decisions are well informed, taken quickly and implemented at pace. At the end of August, we flipped to our agile way of working, Phase 4 of our transformation process. As part of Rise, we have completed 282 transformation initiatives to date, and while this phase is nearly complete, we will continue to embed our agile way of working into the business in order to realize full benefit. We continue to focus on Phase 5 and 6 of our transformation journey by improving our systems and processes and enhancing digital initiatives and customer experience. There is still some way to go, and we continue to invest in our people, technology and initiatives to achieve the benefits of our transformation is designed to deliver. It is worthy to note that the investment in the digital future is not finite, as this area continues to develop at pace. Moving to Slide 12, on agile ways of working. As mentioned, after 6 months of testing processes with our front-runner tribes, we moved to our agile way of working at the end of August this year. The improvements we have made across the business over the past 6 months in the lead up to this new way of working, enabled us to adapt quickly and change the way we work during the COVID-19 level 2 to level 4 lockdown periods. We were able to open 30 The Warehouse and Warehouse Stationery stores and 75 Noel Leeming stores as fulfillment centers to cope with the demands of increased online shopping. Our new agile way of working will empower our teams to deliver solutions quickly and put our customers right at the heart of everything we do everyday. It will enable the business with speed-to-market, collaboration, innovation and productivity. It will ensure a consistent and continuously improving way of working across all category areas supported and led by the expertise of our chapter leads. It provides the basis for collaborative and customer-centric design innovation, capability and investment. And it will make our company the best place to work. Moving to Slide 13. Our values. Our values have evolved this year to simplify what matters most to The Warehouse Group and our people. First and foremost, we put the customer at the center of everything we do. (foreign language), or think customer. This is what we live and breathe and is at the center of our vision to build New Zealand's most sustainable, convenient and customer-first company. It is at the core of our ecosystem that enables frictionless shopping experiences and creates greater customer value over time. (foreign language) or own it. We take responsibility and ownership of our actions. We walk the talk and make things happen. This is completely aligned with the concept of freedom within framework, giving empowerment that drove our decision to go agile. And lastly, our focus on sustainability is unparalleled and is embedded in our vision. (foreign language) or do good, means being one team for our people, our planet and our communities and also as a company being here for good. Moving to Slide 14, our ecosystem. As we've seen in the second digital age, companies that have switched the paradigm from supply-centric, focusing on what they do, to customer-centric or solving customers' problems, have become dominant and have built immense shareholder value. Whether it's Amazon's Prime ecosystem, WeChat or Alibaba in China or legacy retailers who are fighting back against digital disruptions such as Walmart or Target in the U.S., all of these ecosystems but customers at the center of everything they do and find ways beyond the tight confines of their own network to satisfy their needs and wants. They're all powered by data and driven by personalization. With the successful launch of TheMarket.com this year and the progress of the creation of our own group loyalty program, Giveit, along with the progression of our strategy to fix the retail fundamentals and to invest in the digital future, we have made significant steps towards the execution of our vision of becoming a dominant ecosystem for New Zealanders while staying true to our values. Moving to Slide 15, some of the key metrics by brand. Despite issues with online fulfillment and a shortened Christmas trading period, The Warehouse had a reasonable first half with 1% sales growth. However, this was tempered in the second half by the impact of COVID-19 restrictions and required store closures. This resulted in flat sales growth for the year compared to sales growth of 0.6% in FY '19. As discussed, online sales grew significantly this year as New Zealanders took to online shopping when they were not able to go to stores, and this trend continued even outside of COVID-19 lockdown periods. The Warehouse online sales grew 50%, Click & Collect fulfillment within that grew 60%, while retail sales processed via The Warehouse app grew 96%. Warehouse app sales now account for 38% of The Warehouse online sales. The Warehouse retail operating margin also improved this year, up 60 basis points to 5.6%. For improved products and services, and due to a number of actions that we harvested from Rise, like initiatives, such as the negotiation factory, price optimization and many more. Moving to Warehouse Stationery. Warehouse Stationery sales were also impacted by store closures and trading disruptions due to COVID-19, with sales in the first half, up 0.8% but down in the second half, resulting in full year sales only up slightly at 0.1% year-on-year. On the other hand, while online sales were down in the first half of 2020 by 3%, Warehouse Stationery online sales saw a significant uplift in the second half as customers took to buying products online to enable working and learning from home during lockdown periods. Online sales grew 25% year-on-year compared to FY '19, while Click & Collect fulfillment grew 76% compared to FY '19. Mobile web-based sales increased 65% year-on-year. Warehouse Stationery retail operating margin improved significantly this year, up 230 basis points to 8.5% due to improved margin management, leveraging many of the same benefits accrued in Red as well as growing higher-margin categories such as furniture, which, of course, benefited from people enhancing their home offices due to increased working from home during COVID-19. In addition, we opened a new store in Lunn Avenue and announced the closure of Te Awamutu along with the conversion of 7 stores and stand-alone to SWAS or store within a store. Moving to Slide 16 now. Key metrics by brand, Noel Leeming and Torpedo 7 were the key drivers behind our group-wide 3.3% sales growth this year, with Noel Leeming sales up 9.2% and Torpedo sales up 10.7%. Noel Leeming experienced exceptional growth in online sales of 145% as customers required tech products to support working and learning from home but could not always come in store. Online Click & Collect fulfillment there increased 130%. We've had particular focus this year on our tech service and expertise offering alongside our Noel Leeming products. Our growth in associated product tech sales service increased 19% year-on-year. We have spent time and effort improving our mobile website capability across the group, but particularly with Noel Leeming and Torpedo 7, and this has resulted in increased Noel Leeming mobile web-based sales of 196%. Noel Leeming also launched its own app during the year. Typically, engagement and conversion improves in an app environment as we saw it do in Red. Noel Leeming retail operating margin also improved this year, up 50 basis points to 4.6%. Store consolidations did result in some closure of Noel Leeming stores during FY '20, including 3 in Auckland, Takapuna, Henderson and St. Lukes, but these were replaced with the opening of our new store in Lunn Ave. Likewise, the closure of 2 stores in Christchurch, The Palms and Papanui were consolidated with the opening of the new store in Northlink, where we can present an improved customer experience. Moving to Torpedo 7. We opened 4 new Torpedo 7 stores this year in Westfield, new market, Rotorua, Tauranga and Northlink, Christchurch. However, these were partially consolidated by the closure of 2 Torpedo 7 stores in K-Road Auckland and the #1 fitness store in Christchurch. This net increase in Torpedo 7 stores increased our footprint and contributed to sales growth of 10.7% or 9.2% on a 52-week like-for-like basis. As with our other brands, we saw incredible growth in Torpedo 7 online sales of 72% and Click & Collect fulfillment growth of 127%. Torpedo 7 mobile web-based sales increased 77%. However, as Simon West took over the business and executed the necessary actions to return to profitability this year, operating costs were higher due to the store expansion program, investment to support future growth and asset write-down costs, resulting in our retail operating for Torpedo 7 decreasing 360 basis points to minus 7.7% for FY '20. Additionally, Torpedo 7 faced the greatest restrictions of what they're allowed to sell during the COVID-19 lockdown. We are very encouraged by the impact of the actions taken and the benefits have accelerated as we progress through FY '21. Turning to Slide 17. TheMarket. The Warehouse group was very pleased to launch TheMarket.com website on the first of August 2019. This is a collaboration website offering users over 2 million products from 3,500 local and international brands through over 650 merchants. We also launched TheMarket Club in November 2019, which provides members with all the latest products and offers and free shipping for orders over $45. In its first year of operation, TheMarket.com attracted 7.8 million online traffic sessions, generating $1.45 million in sales revenue in its first year. Consistent with our business plan, TheMarket.com did make an operating loss in the first year of $14.7 million. Based on current performance and in line with our business plan, we expect TheMarket.com to breakeven within 2 to 4 years. I'll now let Jonathan talk you through the financials for the financial year in more detail. -------------------------------------------------------------------------------- Jonathan Oram, The Warehouse Group Limited - Group CFO [4] -------------------------------------------------------------------------------- Thanks, Nick. Just to note, as we go through the financial section of this presentation, the FY '20 numbers are presented pre any impact of IFRS 16, so that the comparison with FY '19 is on a like-for-like basis. The impact of IFRS 16 in this first year of adoption is a $1.5 million benefit to reported NPAT. As Joan and Nick have highlighted, FY '20 has been an extraordinary year, and when looking at our full year performance, that has to be kept in mind. The impact of COVID on the second half means that you need to look at our first half to see more clearly the benefits of our transformation investment. As Joan mentioned, sales for the group were up 3.3% or 1.5% when you exclude the 53rd week. I will touch on these in more detail in a couple of slides. Gross profit was up 0.6%, and gross margin was down 90 basis points. This, of all our financial metrics, is the one we're least happy about, after making very good progress in H1, with gross margin up 110 basis points. There have been several COVID-related impacts on margin. Cost of doing business was up 0.2%, but down 90 basis points as a percentage of sales, and this is relatively flat because of the wage subsidy. Excluding this, growth in CODB reflects significantly higher fulfillment costs, salary and wage inflation between FY '19 and FY '20, including the 53rd week, and ongoing investment in TheMarket and Torpedo 7. Overall, retail operating profit increased 3.9% and reported NPAT was down 32%. Turning to Slide 20. Slide 20 better shows the impact of COVID on the full year result. We had a very strong start to the financial year with all brands achieving H1 sales growth and overall sales growth of 2.6%. In the second half, we achieved sales growth of 4.1%, which would have been 0.3% if we exclude the 53rd week. With respect to gross margin, the first half with an improvement of 110 basis points in margin really showed the benefit coming through of the margin improvement initiatives with The Warehouse's margin up 160 basis points and Stationery's margin up 230 basis points. H2 last year is where we began to see some of these improvements come through. So when you compare H2 FY '20 to H2 FY '19, which has COVID-related impacts of product max clearance activity and quality of closing inventory and therefore, provisioning, the gross margin percentage is down 310 basis points. Cost of doing business improvement reflects the impact of a wage subsidy and the COVID initiatives such as rental relief and removal of incentives in the second half. Turning to Slide 21. This graphically shows week on week, the percentage change in sales on last year. We have included this slide to demonstrate 2 things. One, the significant impact on group sales of the first COVID lockdown, with overall sales down 67% or $265 million when compared to the prior year for the same period. In particular, the impact is on The Warehouse limited, where there was a complete shutdown initially had the impact of us having to reduce our forward orders by 25%, and that explains some of the issues we've had with closing inventory in terms of quality and therefore, provisioning. Secondly, what this shows is the sales left post lockdown, which has been significant. And this is -- but this has been consistently reducing since then. And although we think some of this could be sustained through a change in consumer spending makeup, we have no certainty on how long we will see the benefit of this. Slide 22. This better shows the underlying performance of the group through our adjusted profit where we exclude unusual items to give a better feeling for the underlying performance of the group. There are a number of things this year that have coincided, being our transformation program, COVID and the introduction of IFRS 16. Touching on some of the major amounts. There's $22 million in relation to restructuring costs around Rise. This is as per H1 result and it relates to a transformation program internally known as Rise, which is now complete. The second restructuring element is in relation to agile, again, $22 million. This relates to the transition to an agile way of working and the restructuring that has happened towards the end of the financial year, which is comprised of redundancy costs of $13.7 million; asset impairments from store closures of $4.4 million and consultancy fees of $4 million. We also have the closing out of interest rate swaps, $6.4 million and the impairment of the Torpedo 7 brand of $2.5 million, which current profitability didn't support the carrying value of the brand, but does not reflect the group's intentions with Torpedo 7, which is to see it reach profitability. And then finally, we have the adjustment for IFRS 16. The impact on the P&L, which is to take the lease expense, which is recorded with an operating profit traditionally and then split it into depreciation on the right-of-use asset, still within operating profit, and interest on these liabilities below operating profit, but within NPAT. There's a lot more disclosure on this in our financial statements, and I'd encourage you to refer to them for further explanation. So overall, we end up with an adjusted profit of $80.7 million versus $74.1 million last year, a 9% increase. Slide 23. Looking at the balance sheet, there are a few items I'd like to call out. First of all, the significant reduction in inventory levels relative to FY '19 of $124 million. This reflects actions taken during COVID lockdown and subsequent strong demand. Inventory levels are rebuilding as we approach Christmas. Secondly, the increase in trade and other payables. This reflects the timing of the 53rd week in the payment cycle and inventory ordering post the first lockdown and overseas creditors initiatives and with a total increase there of $77 million versus last year. And finally, IFRS 16, you'll see some large items in relation to that. In terms of the right-of-use asset of $774 million, lease liabilities of $935 million. And most importantly, there's a movement in retained earnings of $108 million, which is a one-off adjustment that we had to book through our accounts this year. Slide 24 on cash flow. There are 3 things to touch on here. First of all, is the operating cash flow, which was up a significant amount, $126.2 million, reflecting the decline in working capital. Secondly, $40 million in relation to restructuring costs. And the third item I'd call out is the dividends paid reflects the payment of the final dividend from last year. And there was no -- as Joan has alluded to, no dividend paid before the full FY '20 financial year. Slide 25, we have a bit more on CapEx. When you look at our cash flow statement, you can see we spent $63 million, which was significantly below the guidance of $70 million to $90 million we gave at half year. And that was due to the deferral of nonessential CapEx around COVID. The group continues to invest in platforms and system enhancements, such as replatforming brand e-commerce sites onto a group platform, continued investment in The Warehouse Management System and the development of group loyalty platform. The level of system spend will increase in FY '20 as we complete WMSG, the group e-commerce platform and commence our ERP project. Expenditure on stores included the opening of The Warehouse and Warehouse Stationery and Noel Leeming at Lunn Ave and Noel Leeming and Torpedo 7 stores at Northlink in Christchurch as well as 3 Torpedo 7 stores in Tauranga, Rotorua and Westfield Newmarket. Going forward, we expect to return to the previously issued guidance of between $100 million to $120 million per annum per CapEx. Now looking at divisional performance. If you look at Slide 27, it gives you a snapshot of retail operating profit across the group's brands. And I'd just highlight that within the $33.6 million loss we have for other, we have the $14.7 million of operating loss in relation to TheMarket. Turning to Slide 28, in terms of The Warehouse. The Warehouse after a strong H1, where sales grew 1% despite losing a week between Black Friday and Christmas, sales ended flat for the year and down 1.6% when removing the 53rd week. Sales over the 7 weeks of the first lockdown were down 78.5%, before returning to growth of 26.2% and 11.5 weeks thereafter. The standout area of performance for The Warehouse was gross profit, which in H1 increased 5.4%, while gross margin grew 160 basis points as a result of work being undertaken to improve our terms of trade as well as the benefits delivered by greater pricing discipline in an EDLP environment. For the full year, gross margin was down 70 basis points, driven by write-offs associated with store closures during the level 4 lockdown. And therefore, the category impacts on groceries, green gardening, Easter confectionery. There's also a targeted level of clearance activity in Q4 and a higher level of provisioning at year-end. Operating profit grew despite the gross profit decline due to a 4% decline in CODB, which included the government wage subsidy received during the COVID lockdown. And next touched on the store movements for the year. At Slide 29, looking at Warehouse Stationery. After a record year in FY '19, Warehouse Stationery started the first half with very strong momentum, sales up 0.8%, and gross margin for H1 was up 250 basis points. Despite the impact of COVID, Warehouse Stationery achieved a small lift in sales overall and was able to grow gross margin by 50 basis points year-on-year, delivering a gross profit of $114.4 million, which actually is the best gross profit the business has achieved and indicative of what it could have done at an operating profit level under all circumstances. Retail sales for H2 were down 0.6%, with sales over the 7 weeks of lockdown at level 3 and 4 down to 74%, have re-returned positive growth of 13.7% in the 11.5 weeks following. Standout categories were furniture, which was the beneficiary of requirement of Kiwis to work and study from home between the lockdown, which was up over 20%. Retail operating profit, which includes a subsidy received as a result of COVID, was up to 36%. Turning to Noel Leeming. Noel Leeming's also had a record year in some areas. Sales broke the $1 billion mark, growing 9.2%. And gross profit was $221.1 million. You need to remember that before COVID, Noel Leeming performed very well through major trade events of H1, with its best ever Black Friday and Boxing Day sales period. Significant part of the performance was driven by the acceleration in online as the business provided customers with the products and services they acquired to enable them to work and learn remotely as well as essential home appliances for food storage and preparation. Noel Leeming online was particularly strong and next touched on some of those metrics. It's one click-- one -- sorry, 1-day Click & Collect proved to be very popular and a credible proposition with customers during the lockdown. Gross profit margin at 21.9% was over 80 basis points lower, and that reflected the sales mix due to a higher sales and low margin technology products, particularly in Q4. Our top-performing categories with double-digit sales growth on last year included computers, computers accessories, audio visual, imaging and small appliances to a pretty broad uplift. And the services division also delivered pleasing results in FY '20 with revenue growth of over 19%. And once again, next touched on the major store movements there. Finally, turning to Torpedo 7and Torpedo 7 group at least, which is made up of Torpedo 7 and 1-day. Torpedo 7 has been through some very significant changes in FY '20 when you see still network expansion and increased operational installed network investments support future profitability. Group sales were $191 million, an increase of 10.7% on FY '19, with strong same-store sales growth of 10.4%, influenced by accelerated online sales, particularly in Q4. Gross profit dollars increased by 1% included additional one-off stock provisions of $5.3 million and further write-offs as the business looks to exit and refines some of its existing categories. T7 did experience strong sales in bike fitness categories, particularly in Q4 as demand accelerated for these categories during lockdown. High operating costs were driven by store expansion investment in a number of key areas to support future growth and profitability as well as one-off costs of $2.6 million in relation to asset write-downs. Operational loss increased to -- increased by $7.7 to $14.7 million. But if you were to back out the performance of 1-day and the inventory and asset impairments, or adjusted for, Torpedo 7's performance did improve on last year's number. During the year, 4 new T7 stores were opened, the details of which Nick has touched on. And look, in terms of 1-day, sales were down on last year, following a very challenging first half with some logistical issues around the Christmas period. The online retail has performed well during COVID lockdown though, and is focused on streamlining fulfillment to deliver cost savings and improved our customer experience going forward. That concludes the financial section, and I will now hand over to Joan to address our group outlook. -------------------------------------------------------------------------------- Joan Withers, The Warehouse Group Limited - Independent Chair [5] -------------------------------------------------------------------------------- Thank you very much, Jonathan and Nick. So just to our FY '21 outlook. So the first weeks, 9 weeks of this financial year, we've seen sales increase about 6% on the same period for FY '20, inclusive of the recent Auckland lockdown. There has been a gradual reduction in the elevation of sales since the end of the first lockdown as pent-up demand and the impact of wage subsidy mortgage holidays subside. There does appear to be some benefit to retail spending due to the reduction of alternative spending options, in particular, the ability to travel, how long these impacts remain is, of course, uncertain. The outlook for this current financial year played a part in the decision not to pay a final dividend. We do remain cautious about economic activity and the trading outlook and the critical Q2 trading period, which includes Black Friday, Christmas and Boxing Day, they're going to be more important than ever as we see a greater risk in the second half relative to H1. But with the benefit of a strong balance sheet and agile ways of working, we will continue to invest in our transformation with a focus on our core systems, digital platforms and store footprint, in particular, the SWAS program, store within a store, which Nick talked about. As we stated at the end of FY '19, we expect to have several years of capital expenditure in the range of $100 million to $120 million. We do expect further costs in relation to embedding our agile ways of working of around $8 million in this current financial year. TheMarket.com will be in the second year of its business plan, and we expect an operating loss of between $12 million and $14 million as this business continues to scale its platform. Torpedo 7 is also in a second year of a turnaround plan, but we expect the business to be profit contributing in FY '21. And as I said earlier, depending on trading, the group hopes to return to paying dividends in line with its dividend policy in this current financial year. As has been the case in previous years, we will consider giving guidance for the full year result at the end of the first half of the financial year beyond the Christmas period. So that concludes the formal part of our presentation this morning. Thank you all for your attention, and I will now invite questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question today comes from the line of Lily Zhuang from Jarden. -------------------------------------------------------------------------------- Lily Zhuang, Jarden Limited, Research Division - Assistant Analyst of Equity Research [2] -------------------------------------------------------------------------------- So my first question just has to do with, obviously, the group has been undergoing the transformation process. I was wondering if you can maybe give a rough quantification of the expected savings around like the restructure to begin with. -------------------------------------------------------------------------------- Joan Withers, The Warehouse Group Limited - Independent Chair [3] -------------------------------------------------------------------------------- Nick? -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [4] -------------------------------------------------------------------------------- Yes. So the transformation, as you'll see from the slide is wide-ranging and includes lots of different elements. And so what we've done this year in terms of fixing our operating model, both in stores and the switch to agile in SSO is just one small part of it. If you go back to the previous part, the part that we branded Rise, which was about extracting pockets of value, 292 different initiatives executed, that net -- that basically paid back in 6 months in terms of both gross margin, benefits and savings. But not all of that flowed through to the bottom line because of all the headwinds that we knew that we were facing in terms of increased rents. Specifically, we've seen since FY '17, 20% increase in wage rates in our Red stores, for example. So we're very happy we did that. We got a complete payback of the fees plus a return of 1 inside the year that we executed that. We -- this has been about making sure that we take out additional costs to keep a lid on those costs going forward and maintain at current levels of CODB. Jonathan, do you want to comment any more on that? -------------------------------------------------------------------------------- Jonathan Oram, The Warehouse Group Limited - Group CFO [5] -------------------------------------------------------------------------------- I think the key point is going forward looking at potential inflation on the cost base, it's our ability to actually moderate that. So the explicit benefits in terms of restructuring need to be put in that context. It's not as simple as saying there's a $20 million, $30 million reduction on the current cost base. -------------------------------------------------------------------------------- Lily Zhuang, Jarden Limited, Research Division - Assistant Analyst of Equity Research [6] -------------------------------------------------------------------------------- Right. Yes. So the second question I have, just in relation to, obviously, in your previous announcements and given COVID headwinds, you've delayed CapEx. So $60-something million this year versus the $100 million plus guided to previously. So my previous thinking on this was that the additional CapEx that you held back given the circumstances would have to be spent in the future years, but evidently and the outlook at the CapEx per annum is going back to a $100 million to $120 million. So I guess I just want to confirm whether the fact that you've spent less than normal CapEx in FY '20 means that there is or isn't a CapEx catch-up, which means that potentially in the next couple of years, CapEx is probably higher than $120 million. Just wanting to confirm if there is like a push out and that -- the level that the delayed CapEx will need to be spent. -------------------------------------------------------------------------------- Jonathan Oram, The Warehouse Group Limited - Group CFO [7] -------------------------------------------------------------------------------- Yes. So the CapEx of $63 million in FY '20 is around what we've spent in the last few years. At the end of FY '19, we gave guidance that we thought on average, we'd be spending $100 million to $120 million over the next 3 years. I would say we put that out by 1 year. So I'm now saying going forward for the next 3 years, I'd expect, again, on average, a spend of $100 million to $120 million a year. And the split of that is approximately, I'd say, over those 3 years, I'd expect 30% of it to be in relation to our stores and production center and properties and then 50% approximately in relation to IS projects, and the balance in relation to logistics. -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [8] -------------------------------------------------------------------------------- And supply chain generally. And from my point of view, the most critical thing is our ability to execute against those CapEx projects, which is exactly why we've transformed our operating model in our central office, which is all about being much crisper about execution, cutting out the hierarchy and making sure that there's accountability for executing against those projects. -------------------------------------------------------------------------------- Lily Zhuang, Jarden Limited, Research Division - Assistant Analyst of Equity Research [9] -------------------------------------------------------------------------------- Absolutely. And then a third question, just around working capital management. So obviously, inventory came down and is normalizing to probably historical levels now. In terms of trade payables, I may have missed it if you touched on this earlier. So trade -- we -- I see that trade payable days have increased. So would that be a permanent increase due to, say, the ponent negotiations with suppliers? Or do you expect it to come back to about normal levels? -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [10] -------------------------------------------------------------------------------- It's probably of the difference of $77 million versus FY '19. It's probably circa half of that, so say $30 million, $35 million higher than it would be normally. And that's because there's a catch-up we've seen come through. We -- as we've talked about previously, we have had a trade creditor initiative where we did extend the terms in our overseas trade creditors, but some of that benefit was already evident in the FY '19 numbers. -------------------------------------------------------------------------------- Jonathan Oram, The Warehouse Group Limited - Group CFO [11] -------------------------------------------------------------------------------- Yes. The other thing is that it was a 53rd week as well. So there's a timing differential between last year. And so that extra week puts us in the middle of a payment cycle as well, which make -- does cloud the picture a little. -------------------------------------------------------------------------------- Lily Zhuang, Jarden Limited, Research Division - Assistant Analyst of Equity Research [12] -------------------------------------------------------------------------------- Yes. That makes sense. And sorry, just one last question from me. So in the presentation, you have mentioned that you hope to return to paying a dividend in line with your dividend policy in FY '21, obviously, given -- like, given COVID and whatnot putting that into consideration. But I was thinking like with your expected step-up in CapEx, is there any consideration at all around resetting that dividend policy? -------------------------------------------------------------------------------- Joan Withers, The Warehouse Group Limited - Independent Chair [13] -------------------------------------------------------------------------------- It's a very valid question. And I guess what we just pointed about this year is our decision not to pay dividends for -- in relation to FY '20. I think we will -- we've had the existing policy, which relates to adjusted net profit after tax between 75% and 80% for a number of years now. And I think it will be appropriate to review that as we go into this financial year. We are certainly very cognizant of our responsibilities to all of our stakeholders, and this year has been very challenging in terms of balancing those requirements. Think as much as anything, what we've seen over the last couple of years, and you alluded to it, as we had excellent balance sheet management, you've seen where we ended up the financial year in terms of being in a net cash position of $168 million compared to a deep level, I think, of around $78 million at the same period last year. So it really just relates now to how we trade in this financial year. And as I alluded to in the presentation, that critical period as we come up to the major trading events of the year, which are Black Friday and Christmas, going back to school. So we hope to give clarity, both in terms of ongoing policy. But also with some specificity about this year as soon as we possibly can. -------------------------------------------------------------------------------- Lily Zhuang, Jarden Limited, Research Division - Assistant Analyst of Equity Research [14] -------------------------------------------------------------------------------- Right. So would it be too early for me to say that you may provide guidance around the dividend policy review at the half year results? -------------------------------------------------------------------------------- Joan Withers, The Warehouse Group Limited - Independent Chair [15] -------------------------------------------------------------------------------- I hope by then that we have got clarity on that, Lily. I think that's something that we would definitely want to be looking at. I think as much as anything, the dividend signaling is about our confidence in the company going forward and the investment that we've made over a number of years now in terms of transformation, the agile flip are, of course, designed to make sure that we are here and set for purpose for the next 100 years. The work the team has done I think this year, in spite of COVID and positioning us now as we've -- (inaudible) trajectory in e-commerce in about 6 months so -- sorry, in 2 months, here is a lockdown period. So we've really had an unusual situation this year, but I think the Board are all convinced that we've made the right moves. We've made the investment. But now especially after FY '20 lack of dividend, there obviously is a need to look carefully at what we signal to our shareholders going forward. -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [16] -------------------------------------------------------------------------------- Yes, Lily, typically, we don't give guidance until the half year because of the massive uncertainty in a normal year around Christmas trading and the timing of summer to which we're very sensitive. I can't imagine a more complex environment in which to be able to make those predictions. And whilst there has been a bounce back of sales post lockdown, as we've seen in Europe, for example, the trajectory of COVID had eased up and it's particularly when the weather had gotten warm and when it got cold again, you see what's happening now. And the impact of lockdowns is very significant. And so we're hoping that we'll have a much better picture once we get through Christmas. But we're anticipating some tough times ahead, which is why we've been prudent about cash management. Going back to your previous question a little on inventory. We are running our inventory more tightly. We had to make some decisions as we went into lockdown about some assumptions around how long we'd be closed and how much inventory we wouldn't be able to sell. And also a big uncertainty about how the business would be after those lockdowns. And so we are playing catch-up on inventory. So we feel like we're going to be in a reasonable condition for Christmas. We've desensitized the profile of that inventory for Christmas. So more emphasis on basics, less on highly seasonal product. So we feel like we're positioned correctly going forward. -------------------------------------------------------------------------------- Lily Zhuang, Jarden Limited, Research Division - Assistant Analyst of Equity Research [17] -------------------------------------------------------------------------------- Great. And then -- sorry, just one more question on -- regarding inventory sourcing and, I guess, the kind of supply timelines, there's no concerns around potential delays given COVID or in terms of that? -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [18] -------------------------------------------------------------------------------- It's a very good question again, Lily. So for Christmas, we have some concerns, but I wouldn't say that they're major. And those concerns relate much more to international shipping. As you know, about 70% of our business is direct sourced. And so a lot of those products for Christmas, most of them have actually left the factory. But the international shipping system and where containers are, is what you might call very highly geared. There are certain ports, for example, like Singapore that works at 97% accuracy. So it doesn't take much to unbalance that flow of containers around the world. And so there are a couple of categories where inventory is arriving a little later than we'd want it to be. But by and large, we think we'll have most of what we need for Christmas. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Your next question comes from the line of Chris Byrne from Craigs Investment Partners. -------------------------------------------------------------------------------- Christopher Byrne, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [20] -------------------------------------------------------------------------------- And well done, getting through a very difficult time, particularly in retail, which was pretty hard. So as mentioned it's been a pretty trying 6 months. Just in terms of your sales trends obviously picked up very strongly. It's quite a good chart that you've got there in terms of weekly sales. I see that sort of tapered down to sort of more normalized levels now. I mean can you give us sort of a breakdown of what's still going very well and where you're seeing some softness? Can you sort of -- it'd be interesting to know whether there's some divergence going on there. And I guess, why you are being reasonably conservative going into Christmas, Black Friday, all those events, when I guess the housing market is so strong in New Zealand? Just some more ideas around that would be good. -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [21] -------------------------------------------------------------------------------- Yes. Chris, I'd be very happy to. And it's a very, very interesting question. Firstly, we will be announcing first quarter sales on the 12th of November. So we'll be -- you'll get more specificity then. But the areas that have been clear winners have been things like electronics, for example, where specifically, the need to work from home and home schooling during lockdown, made people need to refresh their ability to do so. And so those sorts of products have done specifically very well. Equally things like desks and office furniture in Warehouse Stationery have benefited a lot. But more generally, as people spend more time in their homes, there's this phenomenon that a lot of people are calling nesting, which is very much about sort of making your home better. We're starting to see a benefit at the moment, for example, as the weather improves in green gardening. And so I think those sort of home-related and electronics-related, anything related to work and school from home, the ability to be able to Zoom as people have wanted to keep in touch during lockdown, those have all been good. The other thing that has been good on the apparel side has been sort of much more casual wear, nightwear, a lot of -- obviously, we have a lot of sweatpants. Formalwear, not so much at the moment. And so people obviously focusing on comfort as they spend much more time at home. The other thing that's been very interesting and that I think that there'll be a good tailwind for a while to come, is with people not being able to travel abroad. People are getting out and enjoying their own Kiwi backyard and that's helped the Torpedo 7 business. Particularly, but the leisure categories, particularly as it relates to outdoor, there's a worldwide shortage of bicycles, for example, because of the massive trend towards cycling as there's been much less traffic on the roads during lockdown and people wanting to exercise, which has also had a benefit on the world's carbon footprint. But I think as we see caution about opening our borders, we'll see a little bit more of a trend of that through the summer here. -------------------------------------------------------------------------------- Christopher Byrne, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [22] -------------------------------------------------------------------------------- Okay. And just on, I guess, quickly on Noel Leeming, which has been a screamer of a business for you guys over the last 5, 6 years. I mean, where does it go to from here? I mean, it's growing strong, has it get to the point where there's a decent case for stronger store rollouts? I mean, how do you how do you see it from here to continue this growth? Any risks upside? -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [23] -------------------------------------------------------------------------------- I mean, we will continue to improve stores. And what we did in Christchurch, for example, with the opening of our new Northlink store. Was a consolidation of Papanui and The Palms, both of which were relatively small stores to be replaced by a sort of a much more modern, larger store? And so we -- I think there will be a trend to sort of more exciting, more retail retail entertainment. You might have seen our store in Newmarket, our new store there, which is quite spectacular. But also a sort of more of a omnichannel approach, particularly in electronics, where you've got a lot of branded product. People do a lot of research online. They do a lot of price comparison, they do a lot of price comparison in store. But one of the things that we highlighted was the increase, even in a year where we couldn't go into people's homes, of services. And so as tech becomes more and more complex, people need help with that -- with installing and fixing that tech. And so that's definitely a growth area. But the mix can be challenging. The mix on smartphones, for example, particularly from Apple, is not as rich as it is in, say, white wear or other electronics. And so there will be some mix challenges, but we still see considerable runway for improvement in [nulls] because those guys are a, taking market share; and b, they're executing excellently and really passionate and motivated sales force. -------------------------------------------------------------------------------- Christopher Byrne, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [24] -------------------------------------------------------------------------------- Okay. And on the flip side, Torpedo 7, I mean, this is a business that does $200 million of sales now in a category that arguably is doing quite well and is quite attractive. When do we see sort of, I guess, you've talked about maybe going into profit next year, but I would -- you'd expected to get to the scale now where it should be generating quite good profitability. What are the couple of large things that we're possibly not seeing as to why this is such a good opportunity? And what's going to take it to generating really good margins? -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [25] -------------------------------------------------------------------------------- We do think with Torpedo 7 that there is more runway for stores. We see it sort of as a 30 to 35 store chain potentially. We see an opportunity to move into other categories. We've done quite a lot of category editing. We've taken out a lot of historical-aged inventory. As you know, we've written down the brand. So the provisioning and asset write-down has taken a major chunk out of this business this year. But it is now, we feel, positioned right. And more specifically, the things that you won't see that have happened behind the scenes, better buying and inventory management processes and that will help us stop creating the bow wave of aged inventory. And so as I said, we do expect that business to return to profit in this financial year, and that will remove a major headwind to the group. -------------------------------------------------------------------------------- Christopher Byrne, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [26] -------------------------------------------------------------------------------- Yes. Okay. And you're quite confident that -- I mean this is above -- you expect that in this category, you've been in the business for quite a while now that if you can't make money at sort of 10 stores and then you can't just -- more 20 stores. What sort of level should we -- what are we looking at here to think that this can make money? -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [27] -------------------------------------------------------------------------------- Yes. The need is to enrich our margins in this business, even more so than sales, but sales are growing, but our margins are growing significantly ahead of sales and quite spectacularly at the moment, but you'll see more detail in another good quarter. -------------------------------------------------------------------------------- Christopher Byrne, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [28] -------------------------------------------------------------------------------- And I see some of the stores are doing better than others? -------------------------------------------------------------------------------- Joan Withers, The Warehouse Group Limited - Independent Chair [29] -------------------------------------------------------------------------------- Sorry, Chris, what was the last question? -------------------------------------------------------------------------------- Christopher Byrne, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [30] -------------------------------------------------------------------------------- Are there other stores that are doing really well and some that are not so well? The sort of -- does that give you confidence that it is a business model that works? Like are there 5 or 6 or 7 of the stores that are just going really well? -------------------------------------------------------------------------------- Nick Grayston, The Warehouse Group Limited - Group CEO [31] -------------------------------------------------------------------------------- No, there's variability. There are a couple of stores that give us concern out of the entire portfolio. But the majority of the stores are doing very well. But even those concerning stores are showing some really good improvements. So great improvements all across the Board. Simon West has really got his team focused on the right things, I think, and they're motivated, and the trajectory is really, really strong. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue. -------------------------------------------------------------------------------- Joan Withers, The Warehouse Group Limited - Independent Chair [33] -------------------------------------------------------------------------------- Well, thank you very much, everyone, for your attendance this morning, and we look forward to giving you further updates as we proceed through the golden quarter. Thank you.