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Edited Transcript of WHS.NZ earnings conference call or presentation 24-Sep-19 9:15pm GMT

Full Year 2019 Warehouse Group Ltd Earnings Call

Takapuna Auckland Sep 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Warehouse Group Ltd earnings conference call or presentation Tuesday, September 24, 2019 at 9:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joan Withers

The Warehouse Group Limited - Chair

* Jonathan Oram

The Warehouse Group Limited - Group CFO

* Nick Grayston

The Warehouse Group Limited - Group CEO

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Conference Call Participants

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* Andrew Steele

Jarden Limited, Research Division - VP of Equity Research

* Michael De Cesare

Nikko Asset Management New Zealand Limited - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. And welcome to the Warehouse Group Full Year Results 2019 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, Chair.

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Joan Withers, The Warehouse Group Limited - Chair [2]

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Good morning, everyone. I am Joan Withers. I am Chair of The Warehouse Group, and I'd like to welcome you to our financial year '19 results update. And with me this morning, I have our group Chief Executive, Nick Grayston; and our group CFO, Jonathan Oram.

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Nick Grayston, The Warehouse Group Limited - Group CEO [3]

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Good morning.

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Jonathan Oram, The Warehouse Group Limited - Group CFO [4]

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Morning.

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Joan Withers, The Warehouse Group Limited - Chair [5]

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And on behalf of the board I have to say, we are delighted to be delivering a result which is probably one of our strongest from a profitability perspective for a number of years. And we are really starting to see the effects of our transformation show through in our financial results, but also in our relationship with customers and suppliers and our impact on the environment. Our sales for the group in the financial year were up 2.6% on the preceding full year, and sales were up across all of our brands. Our adjusted net profit after tax was up 25.6% to $74.1 million, reflecting topline growth and the benefits of our transformation program. That adjusted net profit after tax actually includes $6 million worth of costs associated with the development of TheMarket, which is our new e-commerce platform, and we are excited by its potential as we seek to provide New Zealanders with access to local and international labels as well as alternative ways to shop. In fact, if you back out that investment from our result that would show a 31.1% improvement in adjusted impact year-on-year. I'm also pleased to let you know that the Board has confirmed a final dividend of $0.08 per share, bringing our total payout for the period to $0.17 per share. This represents payout of 80%, which is within the group's stated policy of 75% to 85% of adjusted net profit after tax, and it's a $0.01 improvement on last year.

In terms of our transformation, well, our transformation program continues to add rigor and discipline to how we work and to enable us to explore greater efficiencies. We've implemented 175 initiatives across merchandise, store performance, logistics, non-trade spend and other work stream, and the Board is impressed that we have been able to sustain the level of intensity in terms of the execution of the program over this period. While this is a result to be proud of, our commitment to this transformation program remains and there is still work to be done. This is necessary given the nature of the retail environment that is in a constant state of change. We are committed to our plan for improving the long-term profitability of The Warehouse Group, and we're confident that there is now both the trading momentum and execution capability for the gains within the business to continue.

In terms of governance, during the financial year, we appointed Will Easton to the Board in October 2018, and you may know that Will is the Managing Director of Facebook for Australia and New Zealand. And Sir Stephen Tindall has decided to take a further year's leave of absence due to his work commitments in America's Cup commitments, and Robbie Tindall will continue as his alternate during that period.

We're also pleased to announce that Renee Mateparae, who is currently the lead of the Future Connectivity scheme at Spark has joined us as part of our Future Directors Programme. And on integrated reporting on last year, remember, we introduced what integrated reporting would look like for the group. Well, this is our first year of integrated reporting properly executed, which reflects our commitment to improving transparency and providing shareholders and analysts with the widest possible view of our activities as part of good corporate governance.

I'm now going to hand over to Nick to go through the detailed results.

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Nick Grayston, The Warehouse Group Limited - Group CEO [6]

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Thank you, Joan. We are really pleased to see our transformation starting to deliver results. As a consequence, we were able to deliver our best operating profit results since 2011, and we believe that there is much more to come as we continue to execute. Encouragingly, while we have the support of our partners as coaches, it was our team who are executing the program and as such, we have built the executional muscle that will continue to deliver benefit. While this has enabled us to access pockets of value and has driven productivity, we see many, many more opportunities. Our strategy affecting the retail fundamentals has progressed, but we're now in the cadence of continuous improvement and we'll continue to develop our systems and processes. We've also progressed with regards to investing in our digital future with the launch of TheMarket as our new digital platform as well as investing and starting to modernize our core systems of record, information and engagement. But competition is intensifying, the needs of Kiwis are constantly evolving and there is much more to come on this to enable us to thrive in this fast-moving second digital age.

With regard to the brands, firstly in red, we're pleased to announce same-store sales growth of 1.5%. Online is going from strength to strength. In blue, we had a record year for profit, particularly pleasing to see the turnaround from the challenges of integration in the previous year. Noel's continued its profit growth and we really believed that we've proven the value of having made this investment a few years ago. With regards to the Torpedo 7 and 1-day, we still see lots of potential, but a lot more focus needed. Our new CEO, Simon West has brought focus on Torpedo 7 and 1-day has been integrated into our digital team where our expertise in web platforms resides.

In terms of progressing our transformation, our transformation and strategy is delivering. The transformation which we initiated in FY '18, ramped up through FY '19 and delivered results and drove change. We implemented centers of excellence, which has allowed us to build best-of-breed excellence and deploy around our various businesses around the theory of build once and deploy universally as we have done, for example, in our customer personalization engine. As you know, we moved to EDLP in Red, removing our customer and operating pain point and allowing us to take out unproductive cost. It hasn't all been plain sailing, but we're now seeing the results and finding the right balance and see room for limited seasonal promotions. We launched our structural transformation process internally branded Rise, which has touched many parts of the business, helped teach us a rigorous executional technique and access pockets of trapped value.

Now we are beginning to make it part of our ways of working. We are using the same techniques and methodologies to drive strategic priorities over the longer-term, not just near-term initiatives. It's still early on in the journey of improving our systems and processes, but we've started to implement WMS, our Warehouse Management System and are in discovery about a new ERP and are making the investment in a new platform for our websites. But this in itself is not enough to be competitive and we will need to continue to fix our retail fundamentals such as the continued improvement in our buying and sourcing capabilities and processes as well as invest in our digital future. Through a comprehensive process, the executive agreed our strategic priorities with the Board, and these will form the basis of what we call our big rocks for FY '20. It is exciting that while we are still acutely aware of the need to fix our retail fundamentals and invest in digital, we are now adding and delivering growth initiatives as part of our strategic priorities.

During the last year, as we have executed, we have built out a wider strategy further. The 2 pillars of fixing retail fundamentals and investing on a digital future are vital parts of that strategy. You may have heard me speak before about the paradigm shift that has occurred in the second digital age since supply-side excellence to solving customer problems. And this is what it looks like, powered by data and leveraging personalization, we are building a broader platform that will become a customer-centric ecosystem. This will include our improved stores and logistics capability that will also include a marketplace to increase our reach, this is why we just launched TheMarket. We are working on a new kind of loyalty program that will reward customers and help us to be here for good. This will include a mobile wallet, community and messaging and will be pulled together on an open platform.

In summary, this is about being the first choice for Kiwis to solve their needs and wants, much like Amazon and its prime ecosystem has become in the U.S. and other countries. People continued to be the absolute key to our success, but we will need to change how we act and think to be successful. The launch of TheMarket was a major step in FY '19 and an achievement that I'm immensely proud of. While it is important strategically, it also represents the future direction for how we work and deliver as a business. The future of work is changing. Traditional 19th century methods of command and control have been superseded to be replaced by empowerment and freedom within framework. But while it's not all doom and gloom, it will require people to change. As an organization, we recognize the importance of helping our people to evolve and grow.

Rise started to help us change our culture but we need to evolve how we work and think in order to be able to survive. As a consequence we have recently launched a set of leadership behaviors to guide us through this change. This is not just a campaign, it's a commitment by myself, our executive and all of our leaders. We will test our way into new ways of working and has set up some front-runners to work differently in order to help us learn.

I'm now going to pass you on to Jonathan Oram, who's going to take you through the group financials.

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Jonathan Oram, The Warehouse Group Limited - Group CFO [7]

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Thanks, Nick. So looking at Slide 16. We describe the first half as promising and I think the second half numbers show again the continuation of these green shoots and a solid FY '19 result. Noel Leeming and the Warehouse Stationery both recorded best ever full year results. The Warehouse showed some promising steps towards increased profitability, and Torpedo 7 had good topline growth. Sales for the group were up 2.6% versus 0.5% last year, reflecting sales growth across all our brands. What was particularly pleasing was Q4 ending up being our second strongest sales quarter, showing good momentum as we finished FY '19 and entered FY '20. Gross profit for the group was up 3.8%, but more importantly, gross margin percentage was up 40 basis points on last year. The Warehouse and Warehouse Stationery was standouts here and the margin improvement we are not seeing -- the margin improvement that we were not seeing in H1 is now beginning to come through. The cost of doing business as a percentage of sales was down but up in dollars, driven by upfront investment and the execution of transformation and investment in new capabilities.

As we have stated before, we expect some of these costs to come out in FY '20 and beyond. We noted at half year that within CODB, cost of doing business, that -- there have been good cost control within stores with costs -- store costs kept below 1%, and this trend continued in all the brands but Torpedo 7 where there was significantly higher costs, reflecting the growth of the store network. Overall, operating profit increased 22.9% to $112.4 million versus $91.4 million last year. And as Nick said, this is our highest operating profit since 2011.

Adjusted NPAT was $74.1 million versus $59 million last year, an increase of 25.6%. I'll come onto operating cash flow and I'll leave comments about the dividend to the Chair.

Looking at Slide 17, we had a strong start to the financial year and then a relatively flat Q2 with a very competitive Christmas trading period, so it has been very pleasing to see the second half recover to be stronger, the stronger of 2 halves despite the late onset to winter. The second half began to show the benefits of initiatives focused on gross margin improvement, with a 20 basis point reduction in gross margin percentage in H1 reversing to 100 basis point improvement in H2. This help flow to a -- flow through to a significant improvement in H2 profitability due to trading and also some improvements in the quality of our balance sheet.

Slide 18. To better show the underlying performance of the group, we adjust our reporting earnings for unusual items and we based our dividend on this adjusted net profit after tax number. The 3 adjustments that are seen here are: first, restructuring cost of $15.7 million, relating to the group transformation and in line with the guidance we gave at the FY '19 interim results; the second is profit on the sale of land adjacent to the Auckland Support Office of $11.8 million; and the third is the impairment of brand assets associated with the 1-day business an impairment of $5.5 million.

It's important to note the business -- this business is still profitable, but its profitability does not justify the carrying value of the brand.

Discontinued operations relate to the winding up of the Diners Club business, we sold the card issuing part of Diners in April, and we expect to see the merchant acquisition part of the business in December. We expect to realize further benefits in relation to our transformation program over FY '20, and we will see further restructuring costs of $18 million to $20 million in H1.

Looking at Slide 19, our balance sheet. The highlight of the balance sheet is the reduction in gearing from 25.3% to 13.6%. This is due to a significant improvement in operating cash flow due to trading, working capital initiatives and lower capital expenditure relative to last year. Net debt reduced by $86.1 million, the third consecutive year of debt reduction. Our balance sheet capacity provides for further investment and plan transformation and growth initiatives and though, expect to step up in capital expenditure, we are targeting gearing below 30% over the next 3 to -- 3 financial years.

Inventory is only slightly down, but within this there is a circa $20 million reduction in Warehouse and Warehouse Stationery inventory, which has largely been offset by increases in Torpedo 7.

Turning to Slide 20. Operating cash flows improved 83.5% on last year, the reasons we've touched on. Other areas to note here, our CapEx of $61.3 million, which is below guidance given at the FY interim. There has been a continued focus on capital allocation and there have been a number of planned transformation initiatives that are being pushed through to the early part of FY '20. It's also important to note that during the transformation, we were focusing on projects which have shorter-term payoff. Interest may not be down as much as you may expect given the gearing reduction, and this is because the reduction occurred largely in Q4 and we still have $125 million bond on issue which matures in June next year.

In terms of divestments, last year included the sale of Lunn Ave and the sale of Financial Services business. The proceeds from the sale of surplus land [or SSL] has yet to be received.

Looking at Slide 21, a bit of a more detailed focus on CapEx. Our CapEx spend as I note, it was less than last year, and we've seen a shape of our CapEx with a downweighting on what we spent on stores and distribution centers in previous years and an upweighting in information systems and spend on logistics.

Investment in stores reflected the execution of 6 Blue Sheds being integrated into Red Sheds and an additional 4 Torpedo 7 stores. Investment in the Warehouse Management System is the bulk of investments in logistics, the first phase of which has delivered improvements in online fulfillment metrics. IS and digital included expenditure on the market and our brand e-commerce platforms.

Now looking at each of the brands. This was Slide 23, it's just quick overview of the group, and I think the key thing to point out here is the core of our business remains The Warehouse, but with an increasing contribution from Noel Leeming.

Slide 24. For The Warehouse FY '18 was about implementing EDLP, and '19 has been about operating, optimizing our performance in an EDLP environment.

We also saw clear benefits from transformation initiatives, especially around merchandising, cost of goods sold and gross margin.

Overall, retail sales were up 0.6% on last year with a strong H2 performance despite a warmer than normal winter. H2 same-store sales growth was 2.2%. The standout categories have been general merchandise and this was offset to some degree by performance -- underperformance in head to toe, which was largely as a result of the mess over the summer period. After a very tough Q2 which resulted in gross margin percentage being down 20 basis points for H1, we saw strong growth in H2 with gross margin of 210 basis points above last year's result, resulting in full year gross margin for the year of 70 basis points.

Cost of doing business was largely held constant for the period reflecting good cost control in stores.

Looking at Blue, Warehouse Stationery, Slide 25. Warehouse Stationery delivered a record operating profit of $16.7 million, despite industry headwinds in the school stationary categories. Sales were up 1.8% than last year and we are most encouraged by the improvements in gross margin percentage of 220 basis points and very careful management of CODB.

All key categories have growth -- have had growth in sales and margin with an outstanding performance in print and copy. And during the year we also did 6 store-within-a-store integrations, bringing the total to 10 within the Blue network. We continue to proactively assess opportunities to undertake this integration across our portfolio of Red and Blue stores.

Slide 26, looking at Noel Leeming. FY '19 was another record year for Noel Leeming. Noel Leeming built on its excellent H1 result for the year and delivered sales growth of 5% with 22.3% growth in retail operating profit to a record amount of $38.1 million.

Sales from services continues to help differentiate Noel's offering and were up 11.4%, which includes increases in Tech Solutions and consumer protections of 10% and 12.1% respectively. There were strong category performances in home appliances, cellular, wearables and audio visual. Cost of doing business did increase slightly with new clearance centers being opened in Glenfield, Henderson and St. Lukes.

And finally, Torpedo 7 Group on Slide 27, which includes 1-day, has undergone a tremendous amount of change in FY '19 as we've continued to execute on building this brand.

Sales increased 5.6% and gross profit was up 1.2% on last year. Total sales of $172.5 million for Torpedo 7 Group has split $107.6 million for Torpedo 7 and $64.9 million relating to 1-day. Torpedo 7 experienced strong sales growth in Bike and Water categories and from an additional 4 new stores. We continue store expansion and investment in the business, so CODB increased 14.9%, and a resulting in an operating loss of $7 million for the group.

Overall good progress has been made on the brand positioning and store network expansion, but gross margin is well below expectations. And as Nick mentioned now, we have a dedicated leadership team under Simon West. Just a quick note on 1-day, its profitability was consistent with last year, however, as of note, we've made the decision to impair brand value of $5.5 million.

I'll now hand over to Joan for the outlook and comment on dividend.

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Joan Withers, The Warehouse Group Limited - Chair [8]

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Thank you, Jonathan. So FY '20 outlook. We speak to -- the financial year that we are now FY '20 to be a year where we will continue to see the benefits of our transformation program as well as investment in new transformation and growth initiatives. As we have said during the year FY '19, we observed some solid sales growth within the brands, and we expect this overall trend to continue, but with an increasing focus on gross margin and cost of doing business improvement. TheMarket is expected to generate an operating loss in the range of $14 million to $17 million, as we continue to develop the platform's functionality and offer and build scale.

As Jonathan said, in H1, we expect to realize further restructuring costs of between $18 million and $20 million, as we complete the current transformation program and again, as we've said before, expecting to have several years of CapEx in the range of $100 million to $120 million, but with gearing remaining below 30%.

We do expect continued headwinds from labor cost inflation, from fuel and currency and some increased volatility around the latter too. And of course, the earnings outlook for FY '20 will be dependent on the critical Q2 trading period and earnings guidance for the year will be considered at the end of this quarter.

Just to recap on dividend. Our dividend policy remains unchanged with a dividend payout ratio of between 75% to 85% of adjusted net profit after tax. The directors are pleased to confirm the final dividend for FY '19 of $0.08 per share, bringing the total dividend for the financial year '19 to $0.17 per share fully imputed and that's a $0.01 per share improvement on FY '18.

And as we said that payout represents 80% of the group's adjusted net profit after tax, the dividend record date will be the 22nd of November 2019, and the payment date will be the 5th of December.

So thank you very much for your attention, and we now invite you to ask questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today come from the line of Andrew Steele from Jarden.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [2]

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The first question for me is just on the expected operating loss for TheMarket. A little bit surprised as quite the scale of the loss and so was just wondering if you could provide a little bit of a color as to how to think about that for the year ahead? Is it that the costs are all front end-loaded and with some one-offs in there as well and as you scale up the revenue that should breakeven by the end of the year or is that -- is there another way I should be thinking about it?

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Nick Grayston, The Warehouse Group Limited - Group CEO [3]

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Okay. Good morning, Andrew, and thanks for the question. It's always a balancing act between -- with a legacy business like us, reinforcing the retail fundamentals in our traditional operating businesses and building new platforms for growth. As we seek to build out the wider ecosystem that makes us the first choice for New Zealanders when they want product. We wanted to extend our reach, which is an essential part of doing that and so that's why we decided to invest in TheMarket. One of the dynamics of the digital platform such as this is that they are relatively capital-light in the sense that we don't own the inventory. It's all owned third-party and we take a pass-through revenue and so that -- whilst there is some CapEx, the CapEx is more in terms of building the platform and then it passes pretty immediately through into operating profit. Now we've been very pleased with our initial launch, which I would tell you is the launch of a minimum viable product. It's going to take some more time to get to scale in terms of things like number of products we launch with 1 million SKUs and 500 brands that will potentially be 5x as much by the time we get through to Christmas, and so as we do in the modern digital age, we launched as an MVP with the intent of finding our customer reaction.

There's a lot of variables within the operating performance and one of the big ones is cost per acquisition and so that's a flexible cost that we can scale up and scale down, but balanced against that, as a growth platform, the digital businesses like this have different valuations and so mostly they looked at in terms of GMV, and GMV valuations of 1.5x are not unusual. So we think this is a strong value creation. It is predominantly an OpEx investment rather than a CapEx investment, but we're really encouraged by initial response from customers but a long way to go.

And I think it wouldn't be true to say that we expected to get to breakeven this year. We see as a multiyear investment, but as I've just said, we will behave tactically in terms of how we feed investment into that business based on how it performs and in the wider scheme of our capital investment, we don't see that as being a major drain and as we continue to improve our base business, we think that we've got the operating profit to be able to fuel that and continue to grow. I hope that answers your question?

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [4]

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Okay. So just to build on that a little bit. What sort of level of revenue would you need to be at a net business?

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Nick Grayston, The Warehouse Group Limited - Group CEO [5]

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We are not giving out those numbers at this moment in time. That's competitively sensitive.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [6]

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Okay. So we should just assume that it will be an enduring operating loss for the next 2 to 3 years at a minimum?

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Nick Grayston, The Warehouse Group Limited - Group CEO [7]

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Hard to predict, but that wouldn't be a surprise to us and would be in line with our investment decision to launch it.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [8]

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Okay, great. Just on your CapEx guidance, it's obviously a pretty big step-up on not just the year you've reported but for over the last few years. If I look at the split of where you spent CapEx in FY '19, is it going to be a similar proportion? Or is it going to be a much greater, as if -- I guess, the store investment remained constant in absolute dollar terms but you're investing the remainder of that increase into systems and logistics?

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Nick Grayston, The Warehouse Group Limited - Group CEO [9]

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So Andrew, I'll take that in general terms and perhaps Jonathan would like to comment more specifically. In general terms, we -- as we go through the transformation and we understand changing competitive patents and as we understand consumers buying in a different way.

There is certainly the realization that we have been under invested for many years. We will -- we do continue to look at opportunities to modernize our store fleet, but we felt very strongly that it was very important to be able to stabilize our financials and to show operating profit growth before we went out and made some significant investments at some point. I think the stores continue to age and we will be continuing to test our way into new store formats. We got a few exciting things in the pipeline with regards to those, but a lot of our base infrastructure is in need of modernization. Core systems that when you spend 6 months looking at the initial stages of how to invest in those core systems through a potential ERP, haven't decided to go down that route, but that would be a multiyear investment. We are in the process of replatforming our digital entities as well because it's really important that those work fluidly and in an integrated way. We've made the sorts of investments in data and personalization like Salesforce and Krux, and this year has started to invest in our warehousing and logistics capabilities. We built a state-of-the-art warehouse 20-odd years ago. It's essentially been operated using the same warehouse management system. We've been through the process and it's not complete yet, but we are fairly advanced in terms of updating that warehouse management system, but after that we're going to be looking at network optimization, we're going to be looking at things like automation, robotics. So I think I'll let Jonathan comment on the overall profile, but we feel like we are getting to the stage where we've proved that we can turn the business around, we're starting to see growth and it's now time to invest in the future.

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Jonathan Oram, The Warehouse Group Limited - Group CFO [10]

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Yes. So looking in terms of profile, we talked about an average spend of $100 million to $120 million over the next 3 years. So $120 million each year. I think that's probably going to be closer to $100 million in '20 and then gradually pick up over those 3 years. The split for '20 is likely to be closer to 50% in IS, I'd still say, logistics will be around 20% and stores 30% of that $100 million. And I'd expect over the 3 years that we'll gradually increase that spend in stores that IS will stay largely the same in terms of quantum.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [11]

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Great. That's very helpful. And just the next one I have is just on your working capital. It's obviously been a very large swing this year both on big cash inflows on inventory and payables. I was just wondering how should we think about this going forward. Obviously, that quantum of improvement is unlikely to be repeated, but do you see that you're at sort of stabilized point now in terms of your trade terms and your inventory management? Or is there further incremental gains to be made?

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Nick Grayston, The Warehouse Group Limited - Group CEO [12]

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So again, Andrew, I'll comment in general terms and I'll let Jonathan add, if he wants to. We have made some major moves this year particularly in terms of supply terms. Frankly we were noncompetitive. We had some terms that no one else in the global retail industry would -- has gotten -- I wouldn't say gotten away with, have failed to reap the benefit from. So it was a purposeful renegotiation with our terms and so that has reduced working capital. With regards to inventory, a lot of -- a number of the initiatives have been around the cost of goods reduction. This has been in the transformation. There have been others in terms of SKU reduction. One of the dynamics of a high-low business is that it has to keep rotating its inventory, which means that it has a broader SKU base which in turn means that it has less critical mass to buy and in addition to that, it has to move it around a lot. So and a lot of those things like SKU reduction and better flow of inventory and warehouse management system for example, will help us float better, better buying processes help to float better. Those are sustainable and I believe that there is more to come. We will continue to put pressure on our stock turn, and so I think there are some structural benefits, but I wouldn't expect to see the same percentage reduction going forward. Jonathan do you have anything to add?

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Jonathan Oram, The Warehouse Group Limited - Group CFO [13]

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In terms of payables, the terms that we negotiated, I'd say they are sustainable and there will be some modest increases on working capital coming out there, but the bulk of it has come through in FY '19 and the real -- in terms of further upside in working capital the real changes could come through in inventory as Nick has alluded to.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [14]

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Okay, great. And do you have a target inventory turn that you're working towards?

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Nick Grayston, The Warehouse Group Limited - Group CEO [15]

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We do, but again, we wouldn't be giving that out.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [16]

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Okay, thank you. And just finally for me, on some comments you've made in the pack on the headwind for the year ahead. You called out FX pressure, wage inflation and I think fuel -- I guess, all else being equal, what sort of gross margin impact would you expect I guess, the FX part to have, and do you expect to be able to fully offset that? And then what's your expectation on underlying wage increases for the year ahead?

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Nick Grayston, The Warehouse Group Limited - Group CEO [17]

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Yes, so hard to predict fuel and you know the volatility that's going on in the Persian Gulf at the moment. FX equally, we didn't expect it to be where it is and that has a material effect on how we buy overseas. You all have seen the -- as yet unratified agreement we have with First Union with regards to the living wage. We are pleased to be able to pay our employees a living wage. That said, the other intangible is, you would have seen from our competitors a lot of commentary on consumer confidence and there are a number of reports which show that to be toughening. So it's unquestionable there are those sorts of headwinds, and as we know, competition is also intensifying in terms of additional overseas players, Costco and IKEA to name but 2, we already have the best of European fashion apparel retail starting to hit. So a lot going against us, but I think that this result would have looked pretty sick without the transformation, and so we're very pleased that we have done it. There is a lot more to come, and so we're not planning for those things to be a net loss. We think we can more than offset them and continue to grow, because we are executing better.

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Jonathan Oram, The Warehouse Group Limited - Group CFO [18]

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Yes, in terms of FX, I think if you look at the half-on-half performance, and the fact that we've managed to significantly grow gross margin in the second half and that's as a result of many initiatives that are focused on gross margin. We are expecting that trend to continue. So I would expect we will be able to offset and absorb the FX increases that we will see in terms of overseas purchases.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [19]

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That's great. Thanks. I'm sorry, one more, and last question, but this is just really the last one. I know that you've highlighted the expected transformation cost. Just for 1H, does that mean we can finally expect that these are going to be your further restructuring costs in 1H, does that mean that we can finally expect that we will be free of these come 2H?

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Nick Grayston, The Warehouse Group Limited - Group CEO [20]

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Well, I think transformation is an ongoing thing. So like I said, I am not going to call it job done. We have a specific profit share agreement with our partners that is reflected in both what we've paid this year, which is the lion share of it, and some of that goes forward into H1. We have not finished transforming, and so there will be additional cost, but not as part of this engagement.

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Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [21]

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And I guess just to follow-up on that so it is ongoing in nature, and maybe this is a question for Joan. Should your dividend policy be excluding these restructuring cost when they seem to be of an ongoing nature?

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Joan Withers, The Warehouse Group Limited - Chair [22]

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Thank you, Andrew. I think capital management is one of the things that we look at very carefully. So as Nick and Jonathan have outlined, we've got significantly increased CapEx profile for the next few years. We will be watching the other lines in the P&L and thinking about what the requirements are going forward, and this year as you've seen we've made the determination that we will increase the dividend by $0.01 per share and I think that's the highest it's been since about 2014. So it is something that we are constantly keeping an eye on, and we don't embark on these relationships unless we are confident that we are driving value and as you've seen from the narrative, we are really starting to see the green shoots. So for the Board it's a matter of balancing the requirements of the business, investing in the deficits in terms of the infrastructural things that Nick has alluded to, but also we're also making sure that we are giving a fair return back to shareholders where we have got spare capital. And we are absolutely adamant that the restructuring exercises that we've embarked on at the moment are delivering value. So in terms of policy, we've deliberately not changed the policy at this time, but we continue to monitor that.

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Nick Grayston, The Warehouse Group Limited - Group CEO [23]

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I'd like to just -- sorry, Andrew, just to conclude on that one, I'd like to emphasize the fact that the -- what we paid for has been the upscaling of our workforce and helping us build the executional muscle internally. It's not the case that when the consultants leave so does the capability, and it's up to us to prove that, that has really stuck. We've taken the lessons around how we've executed this part of the transformation and are starting to apply them to wider strategic execution. And you've heard us say many times, I'm sure, but 1 for the plan and 9 for the execution and so it's really been about building that executional muscle. Thanks Andrew.

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Operator [24]

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(Operator Instructions) Your next question comes from the line of Michael De Cesare from Nikko AM.

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Michael De Cesare, Nikko Asset Management New Zealand Limited - Research Analyst [25]

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Congratulations on the solid result. My question was just around one of the headwinds you point to on Slide 29, the labor cost inflation as headwind. I was just curious about your point of view in terms of whether there could be any medium-term redeeming outcomes perhaps from greater discretionary household income in your target market? Or it might somehow?

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Nick Grayston, The Warehouse Group Limited - Group CEO [26]

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Michael, that's a good question. And it's one of the great unknowns. You would hope that the fairly rapid growth and the minimum wage and things like, I'd say, now there's awarding, the living wage will put some power into the lower end of the economy. It's a truism that we sell at least 75% of the population, in fact, half of the population comes into our stores on a weekly basis and so on the short term, it's unlikely that interest rate cuts are going to power much growth. Although in businesses like Noel Leeming with high tickets it may start to as those start to feed through, but I do think that there is a potential for us to benefit from the positive of increase spending power in some of our more challenged customer profiles. Really hard to dimensionalize at this point and we are not dependent on that happening in terms of our plans going forward.

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Operator [27]

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(Operator Instructions) There are no further questions at this time. I'd now like to hand the conference back to today's presenters. Please continue.

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Joan Withers, The Warehouse Group Limited - Chair [28]

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Well, thank you very much everyone for your attendance this morning, and we look forward to updating you further down the track on FY '20 progress. Thank you.