Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Good day, and welcome to the Nick Scali Limited First Half FY '23 Results Call. [Operator Instructions]. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Anthony Scali, Managing Director, to begin the conference. Anthony, over to you.

Good morning, everyone, and welcome to our results presentation. So we turn to Page 2, FY '23 half year summary. With respect to sales growth, sales revenue of $283.9 million, up 57.4% on the first half FY '22. Written sales orders of $210.3 million, up 3.4% on half year in the same half. Important to note that in the first half, it included 2 months of Plush revenue and written sales orders after acquisition in November '21. Profitability. The gross profit margin was 62%, up 1% on the FY '22 and up 2.5% compared to the second half FY '22. Underlying net profit after tax of $60.6 million, was up 70.2% on the half FY '22. Record deliveries due to the outstanding order bank at June 2022 and 6 months of Plush. The balance sheet and capital management. $7.8 million Queensland property acquired for new distribution center, to be completed in FY '24. Property debt increased $7 million. $7 million was repaid on the corporate debt facility to acquire Plush. Interim dividend of $0.40 per share fully franked. Plush acquisition. Integration complete with IT and distribution now fully integrated. $20 million run rate synergy savings on pre-acquisition cost of doing business realized. New product range continued to improve gross margin in first half FY '23 to above 60% from 54.8% pre-acquisition. Plush store refurbishment commences second half FY '23, to be completed by second half FY '24. On Page 3, revenue and written sales orders. The revenue, as mentioned, was $283.9 million, growth of 57.4%. The record deliveries achieved in the first half were driven largely by the opening order bank at June '22. Quoted delivery times for new custom orders have recovered to an average of 12 to 13 weeks. Written sales orders for the first half, $210.3 million, a growth of 3.4%. The Nick Scali brand sales orders declined 3%, cycling off strong first half FY '22 demand after lockdowns lifted. Plush sales order policies now fully aligned to group. Deposits now required and restrictions apply on cancellation after the cooling off period, point-of-sale system integrated to Group in December '22. The phased transition of Plush policy from acquisition to December 2022 impacts the comparability of written sales orders for periods before January 2023. Financial performance. Group margin, as mentioned, improved 1% compared to FY '22 and 2.5% compared to FY '22 -- second half FY '22. Nick Scali first half '23 margin of 62.5% is consistent with FY '22. The Plush first half FY '23 margin improved to 60.5% from 54.8% for FY '22 with the realization of supply chain synergy. Cost of doing business. Relative to sales, cost of doing business fell to 32.3% compared to the first half of FY '22 35.2%. The Plush cost of doing business reduced from pre-acquisition $58 million annualized to $38 million due to synergies realized. Page 5, I'll hand over to our Chief Financial Officer, Sheila Lines, to take you through the cash flow and balance sheet.

Thank you, Anthony. Commenting first on the cash flow on Slide 5. The group generated $35.1 million from operating activities after payment of tax and amounts due on operating leases. This is an increase of $10.9 million compared to the first half of last year. The group repaid a further $7 million in the half on the corporate loan facility taken out in November 2021 to fund the Plush acquisition. In November 2021, the corporate loan balance was $65 million, and at 31 December, the balance outstanding is reduced to $48 million. Borrowings secured against property increased $7 million in the half, and the funds were used to complete settlement on land in Queensland where a new distribution center will be constructed. The deposit on the property was paid in FY '22. Other capital expenditure in the half totaled $3 million. $28.4 million was returned to shareholders by way of payment of the FY '22 final dividend, and closing cash and term deposits of $68.9 million at 31 December. Moving to the balance sheet on Slide 6. As I mentioned on the previous slide, cash and deposits totaled $68.9 million at the end of December. Inventory in transit has reduced from $22.5 million at the end of June to $13 million in December, reflecting the high volume of deliveries in the half. The book value of property increased $7.7 million compared to June, primarily due to the settlement on the land purchase in Queensland. And deferred revenue decreased in the half by $27.6 million to $59.2 million at the end of December, and again, this reduction also reflects the high volume of deliveries in the half. I will now hand back to Anthony.

Thanks, Sheila. We now turn to Page 7 of the Nick Scali brand online. I'll hand it over to John Austin, our Chief Operating Officer.

Thanks, Anthony. In January 2023, online sales orders were $4 million, which is 13% above the same period in the prior year. Online sales orders of $12 million for the half, which cycling off a period where we benefited from store closures due to the lockdown. The continued growth of online is to be driven by enhancements to the lounge buying experience and improving the average transaction value through product bundling. The contribution to profit from Nick Scali online in the first half of '23 was $14.1 million, delivered a contribution of $8.1 million, a 57.5% margin on the revenue delivered. I'll hand back to Anthony to continue on the store network.

So on Page 8 with our store network, where during the half, we opened 2 stores, 1 new Nick Scali store in Helensvale and 1 new Plush store in Capalaba, bringing the total remaining at 107. Two Plush stores were closed, the reason being we felt the location and the size of the store is wrong for the brand going forward, and they weren't providing much of the contribution regardless. The long-term target for Plush is 85 to 90 stores, 5 to 10 in New Zealand. And for Nick Scali, our long-term target is 86, bringing a total store network of a target of 176-186 stores. On Page 9, we talk about the Plush retail initiative and the background of this is the new-look Plush store, which was our Capalaba store. The Plush stores have, with due respect to the previous management, an atrocious display and no merchandising plan at all. And the new look Plush has a merchandising structure, has a much more organized and structured look. And from the results of Capalaba, demonstrates to us that they are really working with a lot stronger conversion rates in their existing stores. And this was launched in late -- on Boxing Day in December 2022. So we can see the sale of the new product range have driven margin to over 60% from pre-acquisition of 54.8%. We've introduced quick-ship options to selected sofa models. And the initial evidence suggests, as I mentioned, material increase in customer conversion as a result of the improved Plush showroom concept. FY '23 outlook. January is our strongest trading month and was better than our expectations. We had anticipated a slowdown compared to COVID-19, the COVID-19 boom, yet trading remains better than pre-COVID-19 despite rising interest rates. Nick Scali brand January written sales orders were 12% below January '22 and 23% above pre-COVID-19, January '20. Plush traded well in January, and we expect continued improvement in conversion rates with new product rollout and visual look for the brand. We expect to open 4 new stores in the second half of FY '23, in addition to the 2 opened in first half FY '23. The second half FY '23 result will depend upon trading during February to April, and at this point, it is difficult to provide further guidance. I'll now leave at that -- open for questions.

[Operator Instructions] And your first question comes from the line of Mark Wade from CLSA.

Congratulations on the company's record interim results. Look, some of the market, if you don't mind me asking, if this as good as it gets for this part of the current cycle? And I'm just kind of going off the final few months in the half, the customer probably pulled back a bit. Can you maybe help us understand what's happened in those final parts -- those final few months in the half of the business?

Yes. I mean I think in the first quarter -- the half, our stores were opened. So it's a very difficult period compared to the last -- to the previous half, given stores were closed for 3 months and then you reopen with a boom in particularly in October, November that year. So I mean, very difficult period to compare to, I think. We look back -- we try and look back really at pre-COVID, where we are pre-COVID because as we feel now it's more normalized, obviously, in terms of stores remaining open, and it certainly remains better than pre-COVID at this point. Then the consumer -- in terms of the impact of rising interest rates, hasn't really led the consumer to the degree we had expected. And I guess that's -- 1 reason has been the low unemployment rate, recorded low unemployment rate and significant material increase in wages and salaries, which are occurring.

Okay, so that's kind of helpful as a bit of a factor. Good one. And the -- Yes. And 6 months ago, the middle class consumer of yours in New Zealand is under a bit of pressure. Sales were down about 30%, in Australia, a lot more resilient. I think, look, roll forward to today, how does the attractiveness of those 2 markets in your rise today and the impact that might have on the long-term plans for each market?

Look, I think New Zealand, yes, they -- I mean, a smaller market, and I think they've been certainly -- we've suffered a bit more there than we had expected, but now it seems to actually pretty stable. It's not improving at this point, so it's not impacting our growth plans there. The limitation of store over in New Zealand has been purely accessibility and not getting the -- there's still -- funny enough. There seems to be a lot of pressure on rents there. All the developers and landlords, their expectation, we believe, is a little bit too high at the moment. So the way for [ their mark ] is by us actually acquiring sites. Yes, we're still very focused on the store network rollout in New Zealand and Australia in equal proportion.

Okay. Very good. And the -- you mentioned at the end of the call on the -- was it Capalaba, the new Plush store and the response to the increased conversion, which is terrific. What -- just give us a bit of a sense of what that could mean for the brand as a whole given you're really putting the foot down on the rollout and the refurb if you've got those kind of conversion rates in those newer stores?

Well, obviously, it's -- to us, that's -- the most crucial thing now is to get conversions up. And the way to do that is, obviously, by having product at the right price and making sure you get your margin -- and the way to get the conversion up is product and presentation in price, and that's what we're doing and really focus on that. And I think, yes, it will make a material difference on the profitability of Plush over time. So we're very -- we intend to refurbish 4 stores a month going forward and more done by the end of the year, hopefully.

Wow, that's a lot. It sounds like it's really tracking well. If I could squeeze the final one in. The gross profit margins are really solid. Operating cost margins have come down. I mean, I'm guessing that gives you a lot of comfort up -- with the supply chain costs, et cetera, that have really tanked, that you've got a lot more comfort to flex the profit line independent of sales. Is that a fair summation of how you're feeling?

Yes. Look, I think -- no, look. The cost percentage in fairness is the percentages dropped because of the revenue growth, because 80% to 90% of our costs are in it. Does not -- it appears like we've done a big one, we haven't. But there's certainly some flex in distribution cost reductions, employment account going forward, as you can imagine, in the salary and wage growth. So we're focused on trying to be more efficient going forward because of particular wage growth that we've got in front of us going forward.

I think the angle was getting at was like the freight costs have come off materially for the business, and I imagine that's helping offset any of those kind of other cost pressures. And so I figure that...

Well the freight costs, certainly, it helps the margin, the gross profit margin cost of goods. Yes, certainly.

Okay. I'll leave it at that.

Your next question comes from the line of Peter Marks from Barrenjoey.

Just a question, first on the Nick Scali brand. Sales about 23% ahead of pre-COVID now. Is it safe to say that volumes are now back to pre-COVID levels, and that the growth is being driven by price? And then secondly, what do you think happens with price going into the second half, with your price and also industry prices as those freight rates come off?

Yes. So the price that we've -- in January, we had reduced some of our prices already in January, so the volumes are almost at pre-COVID levels. And what we found in some of the product where we reduced the price back almost to pre-COVID level in some of our key products, that the volume actually grew significantly. So we're actually more positively believe that will get more volume growth in product as we are able to offer lower prices on a lot of our existing products.

Okay. That makes sense. And then just on Plush. What -- can you give us some sort of idea of how big the impact of the new cancellation policy has been on the written orders or the sales of that business? Because obviously, we can see what revenue it did pre-COVID, but it's hard to get a sense of whether this business is just going to be a smaller but more profitable business, or if the top line -- or if you can hold on to that top line and improve conversion rates?

Yes, no. We think -- well, what the problem was that the written orders were not written orders most of the time, a lot of time, because they didn't have deposits or they were -- and we saw from the cancellation rates and then the policy they had that you could return it once it's delivered if you didn't like it. It was significant, but we never went back and adjusted the written orders, if you like. So it just all -- it was a complete mismatch of unreliable data on the written orders. So our view is, yes, we had to get the cost base down. We had to get integrations implemented, which we've done. Gain all those synergies. We had to get the margin up because we've got the ability to do that through our buying power, which we have done in better buying, and we've already got to that. And now our focus with the refurbs and the new product and the marketing that is now focused on getting the top line up. So I think the business, no, it will not be a lower volume in the long term. Our aim is to get a higher sales per store than it had, particularly pre-COVID.

Right. And those cancellation rates, like they used to be 15% to 20%. So you need to lift conversion rates by about that much to offset that, right? Set them out?

Yes. Well, they weren't real orders, that's the problem. Growing the sales is all about the deposits, but that's not an order. That's not a sale. So my view is that when we adjust for that, we're really there where we work in terms of that -- it's just not comparable, just how to understand the data. Look, these systems are very floored. Their accuracy was very bad. And we knew that...

Your next question comes from the line of Sam Teeger from Citi.

Anthony, Sheila and John. Anthony, you just talked about lowering prices in January. Can you give us some color in terms of what percentage you cut the prices by? And any comments overall just in terms of how rational you see the market right now?

Yes. Look, in terms of price reductions, it was -- depending on the product -- because of the freight coming off, we were able to do that and the suppliers have not increased prices to us. It was in the range of 5% to 10%, but there will be further reductions going forward as we come off our low FX rate and get into the higher current rate. So over time, we'll get -- I think during COVID, we were able to pass on significant price increases because the market was so strong, but we have product we bought for certain prices that we're able to return to now back in pre-COVID levels. So great sales remain great sales for years sometimes, so that's as good for us. I think it's good for the business. In terms of your question about the rationale, was it? Sorry.

Just -- yes, how rational do you think the industry right now is in pricing? Are you leading the way with the reductions? Are you seeing other real competitors discounting very aggressively? Just any color around that would be good.

Yes, look, not really, not -- their behavior doesn't seem to change. There are some that are -- rationales that they're always there, particularly depending on how the business is. Look, I think the industry will lower price, they have to, to remain competitive. The market will just force that. And -- no. And yes, that's how I see it at the moment.

Got it. Sounds like it's becoming a good time to buy so far. In terms of the dividend, it seems to be a little bit softer than expectations. Should we read that in terms of the company may be wanting to keep some powder dry for more acquisitions now that Plush is pretty much integrated, or is it more of a function of the top line softening so you guys are just a bit more cautious on the outlook?

Yes. Look, so it's certainly higher than last dividend, but it is only an interim dividend. And look, we have debt, the Plush acquisition we'd like to reduce. We don't mind property debt, which is the stand-alone facilities. We don't like corporate debt. So we're hoping to pay some of that down further. And yes, being in interim, we want to just see how we progress. And yes, there's always profitability of another acquisition. We're certainly looking at -- we'd like to make some more property acquisitions, retail slots and stores. But still a reasonable payout ratio, we think, based on where the year has come to be.

True. And just for the Plush refurbishment program, how much in CapEx should we be assuming over this calendar year for that, and just any return targets that we should be factoring in?

It's probably around $4 million -- on the refurb for that -- that will be all the Plush stores, so we're pretty efficient in that sense.

And that would be over the next 12 months.

Yes.

And then any returns that you're assuming you'll get on the back of that?

Well, we look at the profitability by store, including asset depreciation and accounting for any sort of start-up costs. So that's how we look at the profitability, and including taking into account the CapEx to set the store up and the incremental margin on a new store in the network is healthy. Or as Anthony said earlier in the presentation, on the 2 Plush stores that were shut in July, simply put, if they're not, then we could close them. That based on the sites we select on location, demographics, proximity to other of our branded stores, we're very confident on the economics of new stores and the refurbishment of the existing Plush network.

[Operator Instructions] Your next question comes from the line of Rachael Harwood from Macquarie.

Firstly, just on the order bank, because it seems to have begun to normalize given the delivery reducing, could you maybe just comment on how this is currently sitting in? And do you expect further unwind in the second half?

Rachael, your question wasn't very clear but...

Really not clear, your line.

I think it must be regarding the order bank normalizing?

Yes. Sorry, I think my headphones disconnected. It seems like the order book is unwinding. Where do you think that this is currently sitting in? Do you expect any further unwind in the second half?

No, I think it's -- No, I think it's pretty much where it is now. There's not -- the lead time in the order bank is back to normal, so bank up, yes.

Yes. Yes, makes sense. And can you maybe just comment on your trading into Black Friday, any discounting there and how you saw the trading? And do you expect this to have pulled forward any volume from January?

Look, it was pretty good. And yes, certainly, a good period. So we had Black Friday for a few years now where it just got better and better. It could possibly pull a little bit out of January, bring it forward. Very difficult to tell that.

Yes. No worries. And then you commented on the Nick Scali brand sales in January. Is there any commentary on how this looks as a group as a whole?

No, there was no commentary on that.

And the reason for that is because Plush, as Anthony talked about earlier on this and as we've said in the deck, that January '23 really isn't comparable to January '22 because of the previous policy in Plush. And as we said in the deck, it from January '23 onwards that Plush will have branded stores, will have reliable comparisons on a like-for-like basis. It's a business like-for-like under its sales order basis for Plush.

Your next question comes from the line of John Hynd from Wilsons.

If I can just perhaps drill down further on some of the questions earlier on revenue, could you help us understand perhaps performance by store over this period? The Scali brand -- are they still running at that sort of [ 5.5%, 5.8% ] per store? And given what we've learned about Plush since you've bought it, what's the -- how are you thinking about the true revenue per store run rate with the Scali, I guess, control over the whole business now?

Yes. So your first question, I'd say for the half, the Nick Scali revenue per store would have been up clearly because the order bank delays we had. And in respect to Plush, look, difficult to add to that exactly at this point because we really want to see where we land up at refurbs or a new product and the conversion across the whole store network at this moment. But given the signs of the new Capalaba store and 1 other store we refurb, it's -- they're trading above -- they're in the top 5 at the moment, yes. So that -- and they're not stores in prime positions. So we'd rather wait before I call that out to you, and probably let you know around October.

Okay. No, that's -- I mean that's fair given, I guess, the work that's going into them. I mean, from our perspective, thinking about forecasting, what's possible? When you bought them, the run rate was -- I don't have the number in front of you, but X, is it fair to assume that given the cancellation rates and the returns were higher, we should have -- that should sort of -- X less the 20%, 25% should be our starting level...

Not if you're talking on revenue because revenue, that's why -- their revenue was never high there or has never got near that.

Yes. That's right.

So we don't take it off the revenue, but you've got to allow for a COVID boom, right?

Yes. Okay. And then I just wanted to get a better handle on inventory, if that's okay. There's obviously been a softening year-on-year, and that's driven by the cycle but also inventory in transit as well. I'm just trying to understand how we should think about the balance, given you've added Plush as well. Does it have a shorter cycle or inventory cycle, how does inventory look?

Yes, it should have a much shorter [indiscernible] cycle. Yes, it should have -- varies.

It's the new normalization, yes?

Correct. Yes. So that -- I don't carry the case because when Nick Scali does in bedrooms and dining chairs, so you have to have inventory -- and we said that being more critical today that you do need inventory. You gain sale by having inventory.

With the Plush banner?

No, with Nick Scali.

Your next question comes from the line of Keegan Booysen from Jarden Group.

First question for me is just around more clarity just on the Plush policies and the impact on the orders particularly around November, December? Because if you look at the order bank to November, it implies that the written order sales are down about 15% in November, December. Now I appreciate that's like in COVID months as well and a bit inflation. But if we just look at that just how the Plush policy would have impacted that, should we expect that to have dampened that number or increase it?

Yes. So if you go back to last year, it was a site -- so that was a period where all stores were closed for 3 months, and then we reopened in October and November, which in Nick Scali and Plush, it was an absolute boom. So it's very hard to compare to the period what you're looking at and then annualize it.

[indiscernible] with respect to the policy changes, whether or not policy changes because obviously [ we announced that ] in January, whether that improves the 16% decline in November, December, also made 16% of work?

Yes. Look, I think -- look. I think the way to look at Plush is, I think more along the way, John Hynd of Wilsons -- what's the average sales order going to be per store of Plush as a business, what the revenue number is going to be going forward? And it's clearly not that -- the amount you're talking of the normal run rate for October and November comparatively.

Yes. Okay. And then just the second one as well, just around the synergies. So it looks like, again, called out a lot more synergy than anyone had expected to execute really well. Can I just get a bit of an idea just around the spread between CODB and [ PM ] basically, what's variable on sales? And what some of the fixed costs that we can expect to retain in the business?

It was hard to hear you. You sort of disappeared, your voice. Could you repeat that?

Yes, yes. So sorry [indiscernible] realized were about $20 million annualized? And to get an idea around the split between CODB i.e., what's fixed in the business that shouldn't come out? And then what's been driven as well along growth margin, so what's variable to sales?

Yes. So the synergies are purely cost based, right? That -- just costs that have come out of the business and that's been indeed by people, a lot of people, all the senior management, there -- employment and distribution. We've integrated the distribution as we've left the distribution centers that Plush we're operating out of and they are fully integrated into our distribution centers. So the employment line has been enormous, and the cutting of that and not having distribution centers paying rent for. You got that?

That's -- Yes. No, that's great. And then just the last one. If you can you give us any color on just the size of January, given it's the largest month in your financial year, and how that is relative to the rest of second half '23?

Yes, it's very important for the second half. It's a big month. The second biggest month is June for us. It's certainly in the realms of 50% on a normal month in your average.

This concludes today's Q&A session. I would like to turn the call back over to Anthony for closing remarks.

Yes. Thanks for attending our results presentation. And -- thanks for attending. Bye.

This concludes today's conference call. You may now disconnect.