Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nick Scali Limited H1 FY '22 Results Conference Call. [Operator Instructions] I'd like to now hand over the conference over to Mr. Anthony Scali, Managing Director. Please go ahead.

Welcome to financial year '22 results presentation. So the highlights for the half were sales revenue $180.3 million, up 5.4% from the previous half. The acquisition of Plush completed in November '21 for $101.4 million. We have an outstanding written sales order bank at the end of the half of $174.7 million, underlying net profit after tax was $35.6 million, an interim dividend of $0.35 with a payout ratio of 84.5%. And the store network combination of both brands being Plush and Nick Scali is 108 showrooms, 62 for Nick Scali and 46 for Plush. Despite the elevated opening sales order bank at the 1st of July 2021, Nick Scali revenue was down in particular due to the COVID disruptions to 3 areas. First was this temporary store closures between July and November. The second one, importantly, was the lockdowns in countries where we have our suppliers, in particular, Vietnam, where 40% of our product resource from was closed for 3 months. And then lastly was the shipping container availability. There was a revenue of $21.7 million delivered from Plush from their order bank that we acquired on the 1st November. So the revenue was really down in respect of store closures where orders were lower and in particular, the Vietnam lockdown, which certainly impacted a lot of our lounge orders not being able to be delivered within the normal time period and hence, revenues went down. Without the Vietnam lockdown, we believe revenues still would have been up despite the store lockdown. When we look at trading and sales orders, total written sales orders for the half was $203 million, representing growth of 6.4% on the previous half corresponding period. So in respect to Nick Scali, during the -- in quarter 1, our trading capacity was reduced by 55%, whereby 55% of our stores were closed in New South Wales, Victoria and New Zealand. Total Nick Scali written orders were $171.8 million. That's down 10% compared to the prior year due to the closures over a 3-month period. Underlying like-for-like written sales orders actually grew by 4.9%. Total written sales orders for Nick Scali Online totaled $16.6 million, up 88.6%. Plush, the written sales orders for Plush totaled $35 million (sic) [ $31.5 million ]. That's for the 2 months since acquisition, which was November and December, up approximately 15% on the prior year for that corresponding period. So at the end of December, the order bank is up -- was a -- both brands is $174 million, which is up 70% on the prior year. The Nick Scali order bank closed at $123 million compared to $103 million, significantly also up on the prior year. Obviously, since December, when we look at the end of January, again, the order bank has increased to record levels. The order bank for Plush at the end of December was $51 million with similar ageing profile and days outstanding to Nick Scali. When we look at the financial performance, the underlying profit after tax was $35.6 million, down from $38.1 million in the prior year. Clearly, that was due to the closures and the supply problems with lockdown in other countries and hence, growing order bank. Underlying EBITDA was actually up slightly to $73 million and EBIT down approximately $2 million. I'll hand over the cash flow and balance sheet to our CFO, Chris Malley. So he'll take you through it.

Thank you, Anthony. Just talking briefly through the cash flow. Operating results delivered a net cash inflow of around $24 million net of tax and lease payments. As already mentioned, we acquired Plush in November for just over $100 million, and this was funded through existing cash reserves and a $65 million corporate debt facility. We were able to repay $10 million of the facility before the end of December, so we have an outstanding facility now at $55 million. In addition to this loan, we also took out a further $7.5 million property loan to fund the purchase of a new DC and showroom in North Queensland for $8.5 million. Other CapEx, I mean the orderly course of business was in line with our usual spend around $2 million, $2.5 million. And after paying dividends of $20 million, we finished with a cash balance at the 31st of December of $60.6 million. Moving on to the balance sheet. Most of the balances in the balance sheet naturally were significantly impacted by the Plush acquisition. Just looking at inventories, we obviously had an increase in inventory of transit of around $6 million. And our on-hand inventory increased by just over $7.5 million. This was all primarily in the Plush showroom inventory and our DC inventory remained similar to the level at the end of June. Intangible balances increased through the acquisition through the addition of a 38 -- a brand of $38 million and goodwill of $80 million. On the liability side, the deferred revenue increased with the inclusion of the Plush customer deposits that form part of the deferred revenue. And as already mentioned, our borrowings increased, and we have $62.5 million more borrowings on the balance sheet at 31st of December compared to the prior period. That's through the balance sheet. I'll hand back to Anthony.

Our online business performed strongly during the half. The written sales orders of $16.6 million, up 88.6% compared to prior year. This was supplemented by the online written sales orders of $2.4 million from Plush post-acquisition for the 2 months. The revenue was lower but still significantly up in the prior year of $13.7 million and an EBIT contribution incremental of $8 million. Plush online revenue was $1.8 million for the 2 months post-acquisition. The Nick Scali e-commerce offering was launched in New Zealand in October and will follow in Australia. And now we're just moving on to the Plush acquisition, which was completed on the 1st of November for $101.4 million on an adjusted cash-free debt-free basis. This was funded through debt $65 million, and existing cash reserves with $10 million of the debt we paid in December. Has a network of 46 showrooms across mainland Australia and over 280 employees. On acquisition, we acquired an order bank of $42.1 million. And since acquisition, November and December sales orders was $31.5 million in the 2 months post-acquisition. The contribution of $1.8 million to net profit after tax was recognized in the half. The opportunity for Plush is significant, in particular, supply chain synergies, the consolidation of suppliers, the optimization of shipping and inbound logistics, utilizing of the existing Nick Scali distribution facility, expected improvement in margin over a period and certainly, a significant store rollout to be executed. At the moment, store network consists of 62 Nick Scali stores, of which 5 in New Zealand and 46 Plush stores providing 108 total, and certainly, the target for Plush, long-term target is for 90 to 100 stores and to Nick Scali approximately 86 stores, bringing a total between 176 to 186. So significant rollout still ongoing. We're starting to build significant property portfolio, mainly consisting of retail stores, which acts as a hedge for long-term rent inflation, it now fits the historical cost of $98.5 million and a net book value of $91.2 million. These are at historical cost and have not been revalued at any point in time. So when we look towards the outlook, January trading service provides a strong foundation to revenue growth. January is our biggest month of the year, and we've significantly quite used last year. And in addition to that, we now have the Plush written orders delivering in the second half. Trading during January in Nick Scali was down approximately 6% with a 25% decline in store traffic as -- with difficulties caused by the Omicron variant. So really, the sales started off quite well. The middle January really fell off as I think people got very concerned about the rapid increase of Omicron impacting payroll. We did lose a lot of our sales people during those periods. All of our close contacts actually got the Omicron. However, we did see a remarkable improvement towards the end of the month and so we got less concerned. Plush delivered the sales orders in line with the previous year, which is a great result given the circumstances. And overall, the outstanding order bank at the end of January is 70% higher than the previous year, which we expect to convert to revenue in this -- in the second half. Our suppliers have reinstated normal lead times, and this should facilitate revenue growth over the coming months. However, we've got shipping costs, and the availability of containers remains uncertain and could be a obstacle in delivering our outstanding order bank. Still unknown though at this point. Whilst we expect the revenue to increase materially during the half, the cost of shipping could impact part of our profitability during the period. And that ends our presentation and happy to receive questions.

[Operator Instructions] Your first question comes from Mark Wade from CLSA.

The past 12 months has seen a lot of ups and downs. As it relates to consumer confidence and spending, Anthony, how do you think consumers will act as 2022 rolls on? And then hence, how you're positioning the business to make the most of that?

Yes. Look, I think in our industry, I feel it's fairly -- it's has remained pretty consistent. Once we're open, of course, some stores have opened, the business is at elevated levels. I think we'll remain -- the confidence will remain -- if interest rates don't go up, if house prices don't fall too much and people don't travel, I think we will enjoy the elevated sales we've been experiencing in the last 18 months, 2 years. Sure, Omicron outbreak does that confidence for a while. People are not too -- our store traffic was down, but the people coming was live. Conversions were a lot higher. Yes. So that's -- look, it's hard to read exactly, but it's just -- all I can tell you up to now week by week, it's still fairly buoyant.

Excellent. And then can we just revisit the original attraction or business case for Plush and contrast that 3 months on with your current observations?

Sorry, what was the beginning of the question?

Just looking at Plush and just trying to marry up what you thought you're going to getting into 3 months ago and how things are panning out?

Yes. And I think things are panning out really well. It's exactly what we expected it to be. I mean we're in the [ same industry ], so we pretty much understand it closely. And what I think is -- what we know for sure, there's a lot of opportunities for us to improve the business in terms of sales and in respect of margins. All good so far.

Your next question comes from Sam Teeger from Citi.

Just wondering, given the lead times that customers have been waiting, what are you seeing in terms of cancellation rates of people not paying the rest of the balance, too? Just trying to get a sense of how much revenue is just being deferred into the second half or potentially lost altogether.

Our cancellation rates are very, very minimal. So people are waiting. Look, during -- the lead times have improved now. Now we're quoting shorter lead times. Let's go back to when we reopened in October, November. I mean we are quoting lead times 4 to 5 weeks longer than we are now, and people are still buying as we -- in quarter 2, which we tried -- which was made in. I think the issue is, no matter where you go, if you want special made lounge, you are going to wait, you have to wait. People are accepting that, whether you buy a car, boats or furniture, anything special made is -- there is shortages of everything everywhere. So I think the consumer is being -- is understanding of that. And so yes, we've had very, very minor cancellations.

Right. That's good to hear. And do you think furniture retailers who manufacture domestically have taken share in the current environment? And I guess, given the lessons you've learnt through COVID, is there any appetite now to start some local manufacturing presence to reduce sourcing risk over the long term?

There is no local manufacturing. The local manufacturing presence here are very, very small factories that when sales cannot supply in quicker times. Actually, they're having issues because a local manufacturer has to either import the fabric or import the leather or buy from inside the Warwick, and their lead times is as long as the overseas. So I don't think they’re taking any market share at all. And the other problem is the value. The value proposition is not there for local manufacturing.

Right. And how many stores are you planning to open in the second half and just the mix between Scali and Plush?

Look, it's hard to put exact number. We're still in negotiations. We're hoping to open a minimum of 2. But certainly, in the next financial year, there'll be quite a lot more rollout in particular, Plush. The Plush opportunities are easier to act, to find because of the smaller footprint of the size of the flow.

So for '22, when you're saying a lot more, what should -- how many should we be thinking at the moment...

Look, I don't want to give you a number. But historically, the most we've opened 6 or 7 in a year sometimes. So I would expect that, at least.

Got it. All right. And maybe sort of to unpack some of it. Can you talk about what was the like-for-like sales growth for Nick Scali over that first half?

Yes.

What's the number?

4.9.

The sales order. The underlying...

Sam, are you talking about written sales orders?

Not written sales orders, actual like-for-like sales growth.

Can't play in. It's just too big results.

It is quite...

Yes. The written, it's not relevant because revenue was delayed because of factories closure for 3 months. So it just doesn't mean anything. It's more of what -- the trading is what really we think is relevant.

Your next question comes from Keegan Booysen from Jarden.

Just a couple of questions from me. Firstly, on Plush's gross margin, you said it's about 54.8%. I was just curious to know if there's anything over November, December that would sort of skew that number from an underlying margin for the group would be sort of, in other words, should we be expecting 54.8% as sort of the run rate gross margin ex movements in sort of shipping costs?

Look, in the short term, yes, expect 54.8%. In the long term, no, we expect to elevate that margin in Plush up towards Nick Scali's margin.

Are you saying that you expect that Plush margin to get to equal Nick Scali's margin or to get sort of trend towards it?

Yes, so not so until probably next financial year.

Again...

Yes.

That probably leads me to the second question just around the synergy profile. You've called out a couple of different buckets of opportunities around corporate costs and supply chain. I'm hoping you can probably give us some color around what you're exactly expecting the synergy amount to be in those buckets? And if you can sort of just give us some color on sort of where the main buckets are going to be?

Yes. Look, at this point, we're -- I'm not going to call out the numbers of the synergies, but if you look at it, they're certainly going to be there in the future on margin. It's going to be on distribution. There's going to be synergies, as you said, at corporate level. So we don't want to call it out until we complete our integration and make sure we certainly have a plan where we think it is. We were out and reconsidered it. At the moment, I don't want to actually call that number.

That's fair. And maybe just lastly on that, if you think about sort of where the synergies should start coming in first, it sounds like you're expecting gross margin to sort of take the most synergy in the near term? Is that sort of fair to say?

Correct. Correct.

Your next question comes from Tim Lawson from Macquarie.

Just really around the order bank, and you've obviously got some comments around there on the manufacturing side, but obviously, the containers are still an issue. So do you expect that we'll get a sort of normalization of the order bank at June? Or we still think that might be elevated due to logistics stock issues at that point?

Yes. Look, it's difficult to tell at the moment. The shipping lines -- we're in the hands of the shipping lines at the moment in how they -- how rates and where rates end up to. But we certainly expect revenue to be up in the first half and in terms of Nick Scali, and we've got in addition to that Plush. It's just the problem is how much of that revenue. We've got a massive order bank at the end of January, it's bigger than December. So it's now about how we ship. The supplier lead times are back to normal, so that's helping a lot. Our lead times of quoting to customers are shorter, so we certainly expect revenue for the second half to be up on first.

Yes. And then just with your existing order book, sort of how much allowance is there for sort of additional costs through the system thinking about sort of gross margin on that sort of order bank, and then what are you building into new sales in terms of costs, additional costs in the system from a margin point of view?

Yes. Well, look, the order bank has -- well, the order bank consists of orders written at a price. Now the price over October, November and even into January, where the prices did go up, have been elevated in both brands to allow for increase in shipping costs. But the issue is contract rates have really come off now and the Chinese New Year's traditionally a time when you enter into new contracts with shipping lines, and we don't know where they're going to end up. So there could be a situation. The risk to us, could be that the rates are higher than what we might have allowed for written orders, which could impact the margin a little bit. However, we might have a situation where the revenue is significantly higher in the second half, the margin is lower, but still profit's up. We don't know.

Yes. So you've got some allowance in there for higher cost, but the costs aren't fixed. So you've got some variability going...

Yes. But you've got a situation where there's a possible outcome at the second half. The revenue will be significantly up, but the margin will be down. It could be 300 basis points, but it's still going to be -- your profit will still be up. Revenue will outstrip that loss of margin. And that's something that, unfortunately, we've never been in the situation where we don't have a pretty good idea where shipping rates are. Unfortunately, we're just in that position at the moment, as I think most importers are, and we're not a cash and carry, unfortunately, which is worse for us because we cannot forecast [ at this ] point in time.

Yes. And the pricing you've been able to get through, that's pretty consistent across the sector, do you think you-consider doing similar things?

Yes, yes, definitely. The whole industry is up. The prices are up.

[Operator Instructions] Your next question comes from Aryan Norozi from Barrenjoey.

Just one on the pricing, probably you mentioned this at the start of the call, but I missed it. Just in terms of, can you quantify the mix of price versus volume maybe just roughly when -- what was the magnitude of price increases and how sticky do you expect them to be, please?

Yes. Look, I think the average transaction value is probably up about 5% from which I think is the result of pricing -- the volume, and look like it's marginally different.

Perfect. And just can you give us some color around the online strategy, your experience today? You’re obviously doing a good job in terms of growing and scaling that business? And maybe what your experience has been in terms of sales, mix and margin. Just any kind of snippets around the online business would be great, please.

Yes, I'll let John talk to that.

So I mean, the online business, we continue to see the mix consistent with what it has been, which is 70% of it relates to casegoods, 30% on lounges, depending on the campaign that we can choose slightly. I think since launching in New Zealand, not only have we seen kind of green shoots in the e-commerce side, but I think it's continued from the digital sales channel that we have as well. So we think that they can work harmoniously. And I think the other opportunity for us is as we get a better online presence is to drive more traffic back into the stores. We think that with a true omnichannel offering, the power of it is to increase the overall customers that hit the top of the funnel, whatever channel they might come from. So the online business, we will never see as a stand-alone business. We'll always see it deeply integrated with our store network. But I think what we've experienced in the last half is obviously lockdowns favorably impact online, but then there's typically a reset at a higher level following lockdowns as a result of consumer behavior. So we saw that continue, and obviously, we've been able to see that compared to Melbourne, which was locked down over the similar period last year.

There are no further questions at this time. I'll now hand back to Mr. Scali for closing remarks.

Yes. Look, I think in summary the revenue was down, unfortunately because in particular, supplier issues in Vietnam with the lockdown, where our largest lounge supplier is, and it certainly should have been a better result. But we're coming into the second half with a huge order bank. We've got the Plush acquisition now, and we're very excited about that and the opportunities that presents to the business and the scale. And I think overall, considering the lockdowns, I think the result was fairly good, just to be down approximately 6% on the previous year. I'd like to thank you for attending and I'll sign off. Thanks.

Thank you.

That does conclude our conference today. Thank you for participating. You may now disconnect.