Nick Scali Limited (NCK) Earnings Call Transcript & Summary

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

Thank you, and welcome to the Nick Scali results presentation. On slide -- On Page 2 of the slide, there is the financial year '22 summary. Plush acquisition, the acquisition of Plush-Think Sofas completed in November 2021for $102.5 million, with integration now substantially complete. Sales growth, written sales orders of $473.8 million, up by 18% on previous year and sales revenue of $441 million, up 18.2% on the previous year. This included 8 months of Plush sales orders and revenue contribution. Moving on to elevated outstanding order bank. The order bank at the 30th of June is $185.3 million, up 67% on the previous year, providing a platform for revenue growth in the first half of this financial year. Profitability, good for growth. We had a gross profit margin of 61%. Underlying net cost and after tax of $80.2 million, down 4.9% on the previous year. This has caused by the China lockdowns in the second half with delayed shipments of containers as our factories closed, and given that we -- our business, particularly around all customer orders that affected our deliveries around, I think, March April period. On Page 3, sales order and trading. As mentioned, total written sales orders of $473 million. By brand, Nick Scali is $375 million, Plush $98.7 million, which is a partial contribution for the year. Comparable written sales orders, Nick Scali was negative 1%, 0.3% Nick Scali Australia and negative New Zealand of 28.9%. You see on the page, outstanding order bank of $185 million, of which $133.5 million for Nick Scali, up from $110.9 million from the previous year. Plush, $51.8 million in Plush. Next page, revenue. Despite the elevated order bank at July '21, and similar levels of trading, Nick Scali revenue went down as a -- measures to COVID disruption causing delayed shipments, particularly during the lockdowns in Vietnam and China in Q2 and Q4 respectively. Plush delivered revenue of $88.8 million in the eight months to 30 June 2022. As supply chain issues eased in Q4 FY22, the Group was able to achieve record levels of deliveries. Next page, the financial performance. Nick Scali margin down 100 basis points, primarily this caused by the increase in freight costs -- and container costs. On the other hand, the Plush margin improved by 240 basis points. This is a result of their better controls in terms of margin leakage. Cost of doing business increased by -- relative to sales, increased by 280 basis points to 34.1%. This is a result of new stores and rising employment, but primarily because of the reduced revenue. The Plush cost of doing business represented 39.8% of sales for the eight months post-acquisition. And on an annualized basis, the cost of doing business is $53.1 million. I'll hand over the cash flow and balance sheet to Christopher Malley, Chief Financial Officer.

Thank you, Anthony. Looking at the cash flow. We generated $79.8 million from our operating activities, including lease payments, interest and tax. And we increased our borrowings by $58 million across the year. Initially, we took out a $65 million corporate facility to fund the Plush acquisition, of which $10 million was repaid in December. And a further net $3 million was borrowed to support our property initiatives acquiring a new DC in Townsville and refurbishing our Fyshwick property. The first acquisition, as mentioned, we acquired Plush for $102.5 million in November, using the borrowings and $37.5 million of available cash reserves. We spent $19 million on CapEx, primarily as mentioned on Townsville and Fyshwick, where we spent almost $40 million and a further $5.2 million spent on business as usual on CapEx maintenance items. We returned $48.6 million to shareholders through dividends and closed the year with $74.6 million in cash and deposits at the 30th of June. Moving on to the balance sheet. As mentioned, our cash and deposits were $74.6 million at the end of June. Our inventory balances increased. So our inventory in transit increased by around $10.5 million, $10.8 million as a reflection of increased orders in the elevated levels of the order bank leading to more inventory transits. With our inventory on hand, this increased as a result of the Plush acquisition, which added $6.6 million of inventory at a showroom level, and our DC inventory increased and we are currently holding more place to support the elevated order bank and deliveries in the coming months and also back to the delivery backlog at the end in the last quarter. Our lease assets and lease liabilities have increased by around $40 million as a result of the Plush acquisition, adding the Plush leases into our portfolio. The intangible balance increased significantly on the back of the acquisition was a recognition of a brand of $38 million and goodwill of around $87 million, increasing our overall intangibles balance to $129 million. Looking at the liabilities. Our borrowings increased as discussed previously. And our payable balance increased by around $30 million, largely to keep the reflection of the increase in inventory in transit, which is accounted for in advance -- and taken in advance -- liability in advance. Our deferred revenue balance increased from $53.2 million to $86.8 million, the revenue largely comprised of our customer deposits and that increases the reflection of the increase in the order bank at 30th of June. I'll hand it now to Anthony to talk about Online.

So the Online continues to perform well. Nick Scali sales orders of $29.3 million, up 59.9% on the previous year. That was helped by our temporary store closures and launch of the transactional websites. Written sales orders in the second half were up 35.8% on H2 FY '21 and is -- which is again reflective of comparable growth outside the lockdown periods. Before e-commerce offering launched in Australia in May 2022, driving growth in Online written sales orders in June and July. The Online turns very profitable for the company. The incremental EBIT contribution from Online transactions totaled $15.6 million in FY '22. In respect to the Plush acquisition and integration -- so we have seen some issues since completing purchase of the Plush-Think Sofas in November. As mentioned before, the margin is up 240 basis points and the annualized cost of doing business reduced has been by $5 million from $58 million pre-acquisition to $53.1 million. Further synergies. We expect in FY '23 the synergies expected gross margin will again be improved. This will be in line with that in the pricing -- replacement of 50% of range with new models and again allowing a wide price range. We'll be leveraging up our existing supply base for better value proposition from our suppliers. And so the cost reduction through volume buying and economies of scale. In terms of the cost of doing business, our target is $40 million per annum. That will be achieved by way of restructuring the retail operations to align best practices across both brands. The full benefit of cost-reduction initiatives implemented during FY '22 and additional FY '23 activities expected to drive further $13 million in synergies in this financial year. On Page 10 of the slide, you can see the entire store network, in total 108 stores, 46 Plush and 62 Nick Scali. The target is 86 for Nick Scali and the target is 90 to 100 for Plush. In the next financial year, we expect to open 6 stores, 3 for Nick Scali and 3 for Plush. On Page 11, we see our property, which on the balance sheet accounted historical cost, less depreciation. Clearly these properties -- the value is probably a bit high than the period on the balance sheet, but at the moment we maintained at historical cost. During the year, we redeveloped our Fyshwick site, creating new flagship showroom for Nick Scali and an additional 1,700 square meters of retail floorspace. And we acquired multi-purpose Townsville site, which is just a relocation for our showroom and new property which has a large warehouse and DC facility to support growth of both brands in regional Queensland area. So in terms of outlook, given the elevated order book at the end of June and the incremental sales revenue from the Plush business, the Company expects sales revenue for first half FY '23 to be materially above the previous year. July trading was positive with total written sales orders for the Group of $43.2 million, up 64% on July of the previous year. Given the current global economic environment, the business will face challenges in respect of inflationary pressure on operating costs over the next 12 to 24 months. Based on the current economic uncertainty, it is difficult to provide any additional guidance for the FY '23 financial year.

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

Just, Anthony, on that, this is kind of this glaring disconnect between we're seeing really solid sales for your business, the industry as a whole, generally, but yet consumer confidence is really weak in some of those these trends. What you put that down to? And is your middle class kind of customer more or less exposed in your view to higher rates and the like?

Yes. Look, it's certainly very difficult to understand why the consumer confidence is at such low levels, but it certainly is in line, it doesn't appear that the number could be rising, not very sure in the future. So there is a disconnect, as you said. Look, I think -- I believe wage growth is a lot normal that they reported with no signs of higher up. The unemployment is so low, I think we're not very confident that [indiscernible] low levels, but we're not so concerned. People [indiscernible] job. I can't afford my [ morning ] to kind of this. I don't see that stress yet, I don't think. Other important thing is going to be [indiscernible].

Probably as you said it's sitting on big buffers of savings and you haven't seen the job prospects create, probably still willing to keep going for the time being. What you put down in the New Zealand business in the Nick Scali brand down 29% versus all the just above...

That was all in the second half. Yes, we still -- when we go into the second half, we see it varies. I think the consumer confidence is very, very low. I know it's a small market, so obviously [indiscernible]. We're encouraging down the freight into New Zealand, a lot more than Australia where it used to be just about long ago. Freight cost has now gone up a lot, so really not sure [indiscernible].

And just last one for me. To the extent that you think some of those elevated sales orders that you're sitting on the order bank, to the extent that you might be able to kind of finally -- catch up?

Yes, we certainly -- we are catching up already in the side and that's already happening. There's wider issues with consignment though. The idea [indiscernible] for us at the moment.

Your next question comes from Peter Marks with Barrenjoey.

Just a question on the Online business. How are you thinking about the incrementality of those sales? Are you servicing customers outside your store catchment areas, do you think? And I'm interested to know what that business is running at Nick Scali in July?

Yes. I'll let John Austin to answer that. It is -- I think I know the answer, but I will let John answer through online because he knows very much, mainly this online.

Yes. So I think on continental stores, we provide the safety net for the stores. But I think the stores have given us growth into regional pockets, but we might not have a store network. So I think we've seen a customer is still very much an omnichannel experience as customers are still touching our stores and then going online or vice versa. Going online and then ending up in the stores. So we see is benefiting both positively. But at the same time, we're seeing orders being placed into regional markets that we don't have a store for kind of a long distance. So we see them kind of impacting [indiscernible].

Great. That makes sense. And then just on the extra CGs for Plush this year. I think you took out a layer of management and some marketing savings in FY '22, which is the first $5 million. Could you just give us a bit more color on what the big drivers are of that next bucket of $13 million to get it down to that $40 million cost base that you can get it down to?

Yes. Look, obviously, the logistics -- on the logistics side, we're integrating them into our warehouse. That's a big cost. That's going -- it has gone. And on the people side, senior management will be managing -- basically our middle management have taken over along the Plush processes. So it's really left what we left with Plush. It still have some site network managers and the actual managers recuperate and [indiscernible]. I think there's a little more efficiency on the marketing side as well, we're getting better value. But there are 2 areas. Obviously, the people head count and the logistics side of it.

And I think the $5 million is really, really crystalized in the last quarter. And so when you take a full run rate across the 12 months, it's that effect as well.

Your next question comes from Sam Teeger with Citi.

Good morning, everyone. Anthony, thanks for the presentation this morning. First question, just on New Zealand. I imagine the performance is weaker than what you've hoped for over there. Is it just the macro which is impacting the business? Or are there any company-specific factors that has made these harder than expected for you? And how is current trading over there impacting the rate you want to open stores there, I guess, of the 6 you're targeting for '23, how many are New Zealand stores?

Yes. It's still a very profitable market for us in the early levels. And as I mentioned, all stores are profitable. It feels like it's a macro because it's really not a lot change for us, the product will change radically. But that is all we have shown here. And that thing [indiscernible] New Zealand has done a something positive, including the freight. I think in New Zealand [indiscernible] because of the freight [indiscernible] that's been a real negative impact on the consumer, they can see really going up so much. It's not a comment on the New Zealand for the consumers that we have still in Australia.

Right. And sorry, I might have missed it, but how many of 6 in '23 will be in New Zealand?

None. Not. Nothing. We haven't been able to access some sites in the locations where we want. But we expect that to soon...

All right, cool. And then second question, it seems like your execution of the Plush integration is going really well. So looking at Slide 9, you did $5 million in '22, $13 million in the plan to '23 million which implies $22 million beyond FY '23. What's the time frame for that remaining $22 million? And how much do you think you'll be able to get in '24?

I think we want to bank it all by FY '23 for them. And then in FY '24, I think as soon as we really change the [indiscernible] we definitely have the business stressed to a point where we really now just focus on rolling out stores. And obviously logistics. So I think we've moved very fast on reducing costs. I'd say right now that we look to the month and cost of doing business are in line already [indiscernible].

In FY '23?

Yes.

Got it. And then last question. We normally can't ask you about August, given you historically report quite early, but given again a weaker set to go in the month, just any color you can provide around August to date? Has it been materially different to what you've seen in July from a written sales order growth perspective?

And look, I think we did -- yes, it is a bit of a -- I'm not in deciding it's inside of that, it's making some material change.

Your next question comes from Keegan Booysen with Jarden.

First one for me is just again about $30 million synergies and you're saying $5 million to crystallizing the last quarter from the cost side. I'm just keen to hear what the split between cost and margin is because it sounds like if gross line is up 240 bps for Plush and the target is 59%, can we expect that GM run rate to be reached by sort of second half '23 or first half '24?

Yes. But firstly, the $13 million synergies is just on the cost side, not the margin side. So the $13 million is only on the expense side. And then we've got margin synergies yet to come, which we did -- we said that. They will come as new cost comes to Nick Scali margins. And addition of new margin of $13 million.