Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Nick Scali Limited 2020 Annual General Meeting. [Operator Instructions] And just please be advised that today's conference is being recorded. But I'll now hand the conference over to your first speaker for today, Mr. John Ingram, Chairman of Nick Scali. Thank you, and please go ahead.

Good afternoon, ladies and gentlemen, and welcome to Nick Scali Limited Annual General Meeting. I'm John Ingram, the Chairman of your company. As you are aware, we are conducting this meeting today virtually, and I thank you for your patience and understanding. Firstly, I would like to introduce my fellow directors that are here with me today: Ms. Carole Molyneux-Richards, a Non-Executive Director; Mr. Stephen Goddard, Non-Executive Director; Mr. Bill Koeck, Non-Executive Director, who will be available to answer any questions on the audit later in this meeting. I'm advised... [Audio Gap]

No. No apologies, Mr. Chairman.

Thank you, Mr. Secretary. I will now proceed to address the meeting, followed by our Managing Director, Anthony Scali. After that, we will proceed with the formal business of the meeting. Ladies and gentlemen, despite the unprecedented circumstances presented by the COVID-19 pandemic, Nick Scali delivered a good result for the financial year 2020 with profitability maintained at the fiscal year '19 levels despite the decline in sales revenue. This was a result of the company's ability to effectively manage and reduce operating expenses in order to offset the decline in gross product margins as a result of the lower sales. A fully franked dividend -- final dividend of $0.225 per share, which was paid this morning, brings the total dividend for the fiscal 2020 year to $0.475 fully franked. This represents a dividend payout ratio for the full year of over 90%, which is broadly in line with the payout ratio of recent years. The company is well placed to benefit from the current burn in discretionary consumer spending on the home with the continued growth of the store network and investments in our online sales division, which commenced earlier this year. Due to our positive operating cash flow model and effective working capital management, the company has maintained its strong financial position over the past 12 months and, after the payment of today's dividend, has a cash on hand in excess of $70 million. The Board continued to access strategic opportunities to grow the existing business and to take advantage of any investment opportunities that may arise as well as maintain an acceptable return to our shareholders. In 2020 and following the sad passing of our former Director, Greg Laurie, we announced the appointment of Bill Koeck as an Independent Non-Executive Director with effect from the 1st of August 2020. Bill is an experienced legal adviser with over 40 years of capital markets and M&A experience, and his appointment will add significantly to the depth of expertise of the Board as well as -- as we look forward to grow the business and take advantage of the current strong trading environment. We are delighted to welcome Bill to the Nick Scali team. The Board recognizes that our people are our most important asset, and I wish to take this opportunity to formally express our thanks to Anthony Scali, our Managing Director, for his leadership, and the management team and all employees of the group. His dedication and commitment are critical to the success of the company. His dedication and expertise have enabled the company to flourish during the recent turbulent environment that we find ourselves in. Furthermore, as Chairman, I would like to also express my thanks to my fellow directors for their support and contribution to the success of the company. Finally, I would like to thank you, our shareholders, for your continued support. Whilst we aren't able to meet personally with you today, I thank you for joining today's meeting and invite you to contact me directly if you have any comments or questions about the company. I'll now invite Anthony to address the meeting to give us an overview of the operations of the company and an update on current trading. Anthony?

Thank you, John, and good afternoon, ladies and gentlemen. Financial year 2020 has been a difficult and extraordinary year with a number of enormous challenges faced by the business. During the first half, we had seen consumer spending on furniture fall as housing sales volumes declined. In January, we endured bushfires, followed by the closure of our factories across Asia, and by the end of March, we made the decision to close all of our stores as COVID-19 spread across Australia. Despite delivered sales declining slightly due to the continuous disruptions to our operations, we were able to deliver flat profit growth for the year. When we reopened our stores towards the end of April, sales orders grew materially when compared to the previous year. As outlined in the company's full year results announcement on the 6th of August, store trading in the 2 months following the temporary store closures was very strong, with written sales orders up 70% for May and June. This led to a record order book by the end of June 2020. Given our average lead time on sales orders is 8 to 11 weeks, the uplift in sales orders seen in the fourth quarter of FY '20 only translates to revenue growth and profit in the first quarter of financial year 2021. During the year, the company opened a third store in New Zealand, bringing the total store network to 58 stores. In New Zealand, Nick Scali has traded very well since its inception, and management will continue to expand the store network in both Australia and New Zealand. We continue to build on our long-term strategy of owning more of our own retail stores, and in May, the company purchased another retail property in Adelaide, which is currently being renovated and is expected to open in the second half financial year '21. This property will become our flagship store in South Australia and will replace our Mile End store currently in a large format retail center. We will continue to increase the number of retail stores we own and occupy in identified growth areas as opportunities arise. In April, we launched our online omni-channel capability which continues to grow and will make a significant contribution to profit growth in the financial year '21. I've been extremely pleased with the amount of customer activity we have seen online as well as the size of the purchases customers are willing to make, with an average order value in excess of $1,800 since inception, signaling the strength of our product offering and the trust consumers have when engaging with us. Case good product sales such as coffee tables, dining tables, bedroom furniture, represent our higher-margin product and, to date, comprise approximately 80% of total sales in online -- being the product categories that are more suitable for online transactions. This provides us considerable opportunities for further product category expansion as the platform develops. Our industry-leading transaction size and gross margin, combined with the existing logistical infrastructure across Australia and New Zealand, enables the online business to be extremely profitable from the outset and position our e-commerce offering positively relative to the competition over the long term. We are excited about the growth prospects of our digital offerings and will continue to look at ways to enhance our product categories and customer experience. Further to our trading update announced yesterday, for the first quarter of FY '21, recent sales orders continue to be materially up on the previous year despite the closure of our stores since August in Melbourne, and for 4 weeks during August in Auckland. Total sales orders for the first 3 months of FY '21 have been up 45% on the previous year, and this trend has continued through October. When excluding those stores closed in Melbourne and Auckland as a result of COVID trading restrictions, comparable store sales orders grew by 59% in the first quarter. It has become clear, given our comparable store sales growth, Nick Scali has achieved considerable market share gains across all categories since COVID. We believe this is a result of the growing strength of the brand and the increased perception of value by customers as we provide more transparency in product pricing through our digital channels. Further, online orders have increased by 47% for the first quarter of FY '21 compared to the last quarter of FY '20, and the company now expects the EBIT contribution from online in FY '21 to be materially higher than the $4 million previously announced in August 2020. The continued elevated level of sales orders has led to a revision of the net profit after tax forecast for the first half of FY '21. We had previously provided guidance in August that NPAT for the first half would be 50% to 60% more than the previous year. However, even allowing for delays in our supply chain caused by the current reduction of inbound shipping and the reduced availability of containers, we now anticipate that the first half net profit after tax for FY '21 will be 70% to 80% more than the financial year '20. Any delays in delivering orders as a result of supply chain disruptions will flow into the second half of financial year '21 as revenues. With the reopening of Melbourne tomorrow and given the continued strong sales order activity in Australia and New Zealand, we are confident our profit growth for the third quarter and second half FY '21 will be in line with the first half of financial year '21. The last 9 months have seen the company navigate an exceptionally turbulent environment. I would like to take the opportunity to thank all my colleagues for their hard work and loyalty to the company. I would also like to thank my fellow directors for their invaluable guidance and support.

Thank you, Anthony. We'll now progress to the formal business of the meeting and the resolutions before the meeting. The first item deals with the company's financial statements. It is to receive and consider the financial report, the director's report and independent audit report of the company for the financial year ending 30th of June 2020. No vote is required on this item. However, we would be happy to deal with any questions or comments you may have in relation to these reports or general questions to the Board or the auditor. [Operator Instructions] We will pause for a short period to allow time for the questions to be lodged, and then we'll respond. Thank you. We have no questions on the accounts, so we'll move to the next item, which is Resolution 1 and deals with the remuneration report of the company. The meeting is to consider the following as an advisory resolution: to adopt the remuneration report of the company for the year ending 30th of June 2020, as set out on pages 9 to 14 of the annual report. Under the Corporations Act, this resolution is advisory only and does not bind the directors of the company. As detailed in the Notice of Meeting, members of the company's key management personnel, directors and their closely related parties are excluded from voting on this resolution, other than in their capacity as an appointed proxy for a shareholder who is not excluded and who has specified how the proxy is to vote. [Operator Instructions] We will pause for a short period of time to allow the questions to be lodged. I will come back to you then. Thank you. There are no further questions. I'll now move to a vote on the matter. I'm advised that proxies have been received as follows: the adoption of the remuneration report, 42,407,328; open, 1,391,199; against, 461,539; abstentions, 121,999. Voting will be by way of voting function within the virtual meeting. We will pause for a period to allow time for voting. [Voting]

Voting is now closed. I declare the motion carried. Thank you very much. The next item is Resolution 2 and deals with the reelection of Carole Molyneux-Richards as a director of the company. The meeting is to consider the following as an ordinary resolution: that Ms. Carole Molyneux-Richards, who retires by rotation in accordance with the company's constitution under Rule 7.1(f) and being eligible to be reelected as a director of the company. Ms. Richards was appointed to the Board as a Non-Executive Director on the 26th of June 2014. She's a member of the Audit Committee and chairs the company's Remuneration and Human Resources Committee. Before voting, I would like to invite Ms. Richards to say a few words regarding her reelection. Thank you, Carole.

Thanks very much, John, and good afternoon, everybody. Well, all I can say is that over the last 6 years of serving on this Board, it's been an absolute pleasure and a privilege to watch this company grow the way it has, and I really do hope that I'm given the opportunity to continue to contribute to the company's success in the future.

Thank you, Carole. [Operator Instructions] We will pause for a short period to allow time for the questions to be lodged. There are no questions. [Operator Instructions] I'm advised that the proxies have been received as follows: for, 40,421,068 for; open, 1,391,429; against, 40,902; abstentions, 108,289. Voting will be by way of voting function within your virtual meeting. We will now pause for a short period to allow time to vote. [Voting]

Voting is now closed. I declare the motion carried. Congratulations, Carole.

Thank you very much, John.

The next item is Resolution 3 and deals with the election of Bill Koeck as a director of the company. The meeting is to consider the following as an ordinary resolution: Mr. William Koeck, who, having been appointed as a Director since the last general meeting, retires in accordance with the company's constitution rule 7.1(d), be elected as a director of the company. Mr. Koeck was appointed to the Board as a Non-Executive Director on the 1st of August. He is a member of both the Audit Committee and the Remuneration and Human Resources Committee. Before voting, I would like to invite Mr. Koeck to say a few words regarding his election. Thank you, Bill.

Thank you, Chairman. My background has been in the law, in corporate law, as a commercial partner in a large international law firm, Ashurst, which has offices in 26 countries. In my time, I have been the Head of Corporate and the Head of Mergers and Acquisitions and have had the privilege of working with many boards and senior management teams on their major strategic initiatives. And I have been greatly honored to be invited to join the Board and look forward to working with the Board and the senior management team here at Nick Scali. Thank you.

Thank you, Bill. [Operator Instructions] We will pause for a period to allow time for questions to be lodged. There are no questions. I'm advised that the proxies have been received as follows: 40,950,541, for; 1,394,062, open; against, 31,974; abstentions, 145,780. Voting will be by way of the voting function within the virtual meeting. We'll pause for a short period to allow time for voting. [Voting]

I declare the motion carried. Congratulations, Bill. Thank you.

Thank you, John.

[indiscernible] function within the virtual meeting to ask any further questions before we close the meeting. We will wait 30 to 45 seconds to allow us -- to ensure that we have all the questions, and we'll come back and address those questions. Could we have question one, please?

Yes. So Mr. Chairman, we have a question from a shareholder, so -- in 2 parts. So number one, "Outside of Victoria, what are you seeing in terms of competitor activity?" And part 2, "Mr. Scali, in February 2021, when you present your first half year results, will you have visibility of the sales performance for the second half year?"

I will have Anthony to answer the question.

Thank you, John. Look, in terms of competitor activity, we are not seeing anything particularly different to what has occurred even before COVID. All I can say, I would say, our lead times up to now have been better than our competitors, and they've suffered supply chain problems prior -- from the outset of COVID, and that's been to our advantage and probably one of the reasons we've had such strong same-store sales growth. In terms of the sales performance in the second half, it's -- by February 2021, we probably would know our sales outlook up until April based on our orders translate into revenue. So it's difficult [indiscernible] whole first half what sales it would be by February. So this is the answer.

Mr. Chairman, we have a second question from a shareholder. "Could you please help us understand the challenge with deliveries to your customers in a COVID-19-affected context? How stretched are delivery schedules compared to pre-COVID-19? Can you comment on what you see as the medium-term opportunity for your online strategy, revenue opportunity, given growth Nick Scali has achieved in the last 12 to 18 months?"

Okay. Well, thank you. At this stage, we're hoping to manage under the COVID conditions well, as you've seen. We don't see any particular challenges. There are challenges within the supply chain that's brought about initially when COVID first rolled out when China -- our sources from China and Vietnam had not returned to work under the normal time after Chinese New Year. But apart from that blip, things have been moving consistently, but the supply chain is now [ under a certain ] cloud with respect to shipping as problems on the Sydney, particularly Port of Botany. So that's -- that is all manageable within our forecast period. As far as the online, as I mentioned, and I'll ask Anthony to elaborate a little bit more on this, our online offering -- we revamped our online proposal and started investing in it earlier this year and changed quite considerably. So I'll just ask Anthony to fill out a little bit more on what our current position is on our online strategy.

Yes. The online strategy is really to improve our engagement with the customers and particularly website and more information that our customers will be able to see in terms of their orders and availability. We see enormous opportunity in online through product category expansion. And it -- so we will be developing this slowly as we need to ensure the capabilities of our website is enhanced enough to allow for larger volumes.

Thanks, Anthony.

We have another question. It's also in relation to supply chain. "Can you comment further on supply chain challenges and how Nick Scali is dealing with them compared to your peers?"

The current supply chain challenges are basically built around shipping, but it was paused about a month ago when Port of Botany had some industrial action that slowed shipping down, and all of the shipping companies bypassed Sydney. It's caused a logistic issue with empty containers that is being managed currently. We don't see that -- we see it will probably return to normal within the next month to 2 months.

Okay. And Mr. Chairman, we also have another question from a shareholder. "Hi. Any plan to use the current excess free cash flow to repay the property debt and make the company debt-free?"

The balance sheet is a fairly strong balance sheet. As I mentioned, we have $70 million of cash on hand. Our net debt is positive. There's no debt. If we offset the property borrowing from that $70 million, we have a figure of about $40 million surplus cash. So net of the current bank debt of the properties, our cash position is a positive $35 million. We are continuing, as Anthony mentioned in his speech, to look to purchase properties in stand-alone positions where we can establish our position in strong custom-built premises, and it's part of the strategy [indiscernible] as far as our operations are concerned.

And Mr. Chairman, we just have one further question. "Hi. Any plans to make online purchase on the website purely online, i.e., without customers having to make a call to finalize the purchase? What new categories Nick Scali is planning to enter next after [indiscernible]?"

Anthony, do you want to answer that?

Yes. In answering that question, yes, we do have a plan where it can be purely online, but we'll still always have that availability for the customer to talk to somebody about the product they're interested in. And that's very important, in particular, when customers are looking at lounges. I think a lot of customers need to understand what configurations are available. Yes, they're there on the website, but it's not that easy to understand that without the help of a salesperson. And we found that to be very successful, and we've had numerous amounts of customers congratulate us on the fact that they've got somebody to talk to through this process. However, we have realized a lot of customers don't need to talk to anybody and [indiscernible] necessarily. So yes, we will be ensuring that in the future you'll be able to just order your item purely online without talking to somebody. On new categories, at this point, there are a number of categories we're considering, but wouldn't like to flag those yet. All I can tell you is that they're in the pipeline, and you'll see these come through in the future.

Mr. Chairman, there's no further questions.

There are no further questions. I declare -- I thank everyone for their attendance. We look forward to real AGM next year. And I thank you for your attendance today and interest in your company. I declare the meeting closed. Thank you very much for your attendance.