Nick Scali Limited (NCK) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nick Scali Limited FY '23 results. [Operator Instructions]. I would now like to hand the conference over to Mr. Anthony Scali, CEO. Please go ahead.

Good morning, everyone, and welcome to the FY '23 Nick Scali results presentation. Turning to the presentation on Slide 2. We have the FY '23 summary. Revenue for FY '23 was $507.7 million, up 15.1% on FY '22. The FY '23 revenue was favorably impacted by increased deliveries as the aging of the order bank reduced with lead times returned to pre-COVID. Profitability, the group gross profit margin of 63.5%, up 2.5% on FY '22. Net profit after tax of $101.1 million, up 35% in FY '22 and up 26.1% on FY '22 underlying net profit after tax. Written sale, well the total written sales orders for FY '23 were $437 million, down 7.8% on FY '22. Trading was volatile during the second half. June was a strong finish with FY '23 group written sales orders up 4.5% on June 2022. Cash and deposits are up $14.6 million to $89.3 million as at 30th of June after a $60.8 million dividend payments and $7.8 million land purchase. The final dividend declared $0.35 bringing the full year dividend to $0.75 per share. In August 2023, $20 million was repaid on corporate acquisition debt, reducing outstanding balance to $28 million previously in November that when we acquired Plush, that debt was $65 million. Turning to Slide 3. First half revenue was $283.9 million, driven by the large opening order bank at June 2022. Second half revenue was $223.8 million. The written -- first half written sales orders were $210.3 million. Second half written sales orders were $226.7 million. The first half written sales orders for FY '23 were up on the prior period due to COVID-19 induced closures during the first half of FY '22 and the inclusion of Plush orders for the whole period. Like-for-like store comparison is difficult due to COVID store closures in the first quarter but were negative when comparing the second quarter with all stores open for both periods. The second half written sales orders for FY '23 were down 16% on the prior period. Trading was very volatile over the half, although improved in June 2023, where written sales orders totaled $51.5 million, up 4.5% on the prior year. On Slide 4, we look at the financial performance. And important to note the gross margin for FY '23 was 63.5%, improving 2.5% compared to FY '22 due to the margin improvement for Plush and reduced freight costs. The Nick Scali FY '23 margin of 63.7% is 1.2% higher than FY '22. The past FY '23 margin improved to 62.7% from 54.8% for FY '22 with the realization of supply chain synergies. Relative to revenue, the cost of doing business was 35.7%, up 0.5% on FY '22. The Plush cost of doing business synergy realization completed in August 2022. FY '23 includes 11 months run rate on full synergy realization. Additional logistics expenses of $4 million in FY '23 to support peak volumes are not expected to recur. I'll now hand over Slides 4 and 5 to our Chief Financial Officer Sheila Lines.

Thank you, Anthony. Commenting first on the cash flow on Slide 5. The group generated $89.8 million from operating activities in FY '23 after payment of tax and amounts due on operating leases. This is an increase of 12.5% compared to $79.8 million in the prior year. The group repaid $7 million on the corporate loan facility taken out in November 2021 to fund the Plush acquisition and borrowed $7 million secured on property to fund acquisition of land for a new distribution center in Queensland will be built in FY '24. $7.8 million of cash was used for that settlement of land acquired and other capital expenditure for the year totaled $5 million. $60.8 million was returned to shareholders by way of payment of the FY '22 final dividend and the FY '23 interim dividend. Closing cash and deposits are $89.3 million at 30 June. Moving to the balance sheet on Slide 6. As I mentioned on the previous slide, cash and deposits totaled $89.3 million at the end of June, up $14.7 million on the prior year. Inventory in transit reduced $9.6 million compared to the prior year, reflecting the normalization of international supply chains after COVID delays in the second half of FY '22. And inventory on hand in the distribution centers also reduced $4.3 million compared to the prior year, primarily due against the reduction in delivery lead times. The book value of property increased $7.1 million in the year due to the settlement on the land purchase in Queensland. And as Anthony mentioned, in August 2023, after the year-end, we repaid a further $20 million on the corporate acquisition debt, reducing the current balance on that debt to $28 million. The group has $43.7 million of borrowings, which are secured on our property portfolio at less than 50% loan-to-value ratio. And I'll now hand back to Anthony.

On Slide 7, talking about the online business. The Nick Scali brand online written sales orders second half FY '23 of $14.5 million were up 15% on the second half FY '22. This has been driven by the enhancement in the e-commerce user experience, which are driving this growth. The Nick Scali brand online written sales orders for the first half FY '23 of $12 million was down 28%, cycling off the first half FY '22, where online benefited from temporary store closures due to the COVID-19 lockdown. In respect to the store network, there were new showrooms up for Nick Scali in Helensvale and Shepparton, Victoria. There's a new Plush showroom in Capalaba, Queensland. 3 Plush showrooms closed as part of the ongoing optimization of acquired Plush store network. And in August '23, a new showing open in Helensvale, Queensland, and we expect to open 3 new showrooms and 1 new Nick Scali showroom in the first half of FY '24. Page 9 is -- shows the detail of our property portfolio, which is [indiscernible] a very important strategy going forward. [indiscernible] the historical cost acquisition of $113 million at the current book value, which is acquisition cost less depreciation of $104 million. We are the historical cost values less depreciation, not the current market value. Key expenditure for this year will be the construction of the distribution center in Brisbane to support our ongoing growth, which is expected to be completed in the second half FY '24. In terms of recent trading. In July 2023, the orders were $39.7 million, down 8%, cycling off a strong July 2022. But on a formula is on an annualized basis, not for us, it was a fairly reasonable on -- that concludes our presentation, and we can now have questions.

[Operator Instructions]. Your first question comes from John Hynd from Wilsons.

Congratulations on a strong result. On -- if we can start with margins, obviously, a really strong outcome there, the Group. But given how volatile trading was, can you talk to us about perhaps was the strength that we're seeing in June and July that you talked to, was that a result of any out of season promotional activity to get those strong results? Or is that done with the current pricing structure?

No, there was nothing -- there was no abnormal discounting. Nothing really changed for us. It was just really a result of the traffic in stores. That's what was the difference. But we saw a big traffic up best in June and a pretty good traffic, good traffic in July. It's one of a very difficult months where we're down materially, the traffic was really down. So that's really more a result of the traffic in stores.

And do you -- I mean, do you think driving that was your expectations on interest rates? What was the feedback on the -- from your store managers on that significant jump in June in conversion rates?

Yes. It's the -- everyone is not really sure why that happened to be honest with you. And look, I think it's just -- look, May was a really tough month, and it's almost like people waited till June maybe because they perceived June's a month to buy furniture, everything's on sale discounted. But then you look at July, you thought that might have been softer than it was still down on last year, but still not a bad number. And that's just not explainable really. So I think we're going to just, for the moment, in the short term, we're going to see volatility from month to month. And that's typical of that. We're selling a very high discretionary product, particularly [indiscernible]. It's a big ticket in so you'll see that as people get concerned about things like interest rates and inflation.

Next question comes from Ben Gilbert from Jarden.

Just, can I understand that second half gross margins to great power comps are a bit over 65%. Historically, your first half has been seasonally stronger from a GM standpoint. Is that sort of a base level you think you can sustain moving forward? And that $4 million you're talking to, is that expected to all come in the first half? Or is that over the year from the [indiscernible] benefit?

Yes, no. So just going to the second point about the $4 million, the $4 million of logistics costs that we incur as were volumes into warehouses caused by shipping regularities that's cool. But we won't incur this year because it's stabilized now. But we don't think we will incur -- we don't expect to that we had in the past that -- so that's not in the margin. That's a logistics cost the $4 million, it's not in the margin. The margin -- look, obviously what helped the group margin was the big improvement in the Plush, which we always said we'd get to on that. And now with the volume synergies between the 2 brands, we think we're getting better value from our factories. And the freight did drop so that helps as well. Whether it's sustainable, we always take look, we would tend to target 61%, 62% margin. Anything above that is [indiscernible].

So there's a lot about that for the second half. Is that something you hope to cater for this year? -- only did what 65.4%?

Yes. Look, there is -- there will be some coming true -- we've got a long way to go in the half year I think the margins at 1% growth. The main focus to go to make sure we get revenue, but as I said before, the synergy from the volume buying, we're getting better value out of factories and very competitive. So that might remark out of the sustainment.

The next question comes from Peter Marks from Baron Joy.

Just to follow up on that point. Firstly, how are you thinking about how the competition might play into that and what you do on pricing there? And then obviously, the lower the dollar as well.

Yes. Well, the competition, I can't tell you what they're going to do. I can tell you what they are doing and some are discounting heavily. -- no. So just -- look, it's competition depending on how their pricing will depend on how they're trading up thing. The smaller retailers will discount more than the national brands. That's just normal in the business.

Okay. And then just on Plush. Can you give us a bit of an update on how the refurbishment is going? Like how many stores you've done now? What's the trading uplift you're getting there? And the other thing that is a bit contrary to mind, obviously, a few store closures in the half. Are they all done now for Plush?

Okay. So in total, we've refurbish 7 in FY '23 and another 6 in this half in terms of refurbishment. What was the second part of your question, sorry?

How are you seeing...

The uplift on those 4, Yes, look, we are seeing uplift, but it's difficult to measure because of the volatility in the business we've had month to month. But we are seeing uplift in those stores we're refurbishing -- now when you ask me this question probably what percentage is there store by store.

Your next question comes from Sam Teeger from Citi.

Anthony, great job [indiscernible] market. Just wondering, what was the final amount of the Plush cost of doing business synergies that you've been able to achieve? I know you've upgraded that amount a couple of times. And now the Plush is pretty much integrated. Are you thinking about future acquisitions?

Sorry, Sam, it was a bit muddy the question I think that you asked about one of the cost of doing business number in Plush?

No. So in Plush, now that it's fully integrated, what was the final amount of cost of doing business synergies that you've been able to achieve? I know because you upgraded that number a couple of times. And then following on from that now that Plush is integrated, how are you thinking about future acquisitions and the timing around that?

Yes. Look, I think the synergies was in excess of $20 million on Plush. In terms of future acquisitions [indiscernible] where lots of opportunities come up at the moment, nothing that we have on the horizon.

Is your taste in the target market for acquisitions or the country has [indiscernible]?

It's when you -- yes, look, it's something that's always interests us in the U.K. market because it's so similar to Australia. Yes, we could look at that. We -- I was there in June, looking at the various retailers there in our space. And it's a very similar market. So there may be potential acquisitions in the future there.

Next question comes from Ben Gilbert from Jarden.

Another one for me. Just cost inflation, hopefully, how you're seeing that and thinking about the outlook for this year because your costs obviously are pretty good in the second half, your low cost is actually down. But can you give us an idea of how you're thinking about CDB inflation and what the biggest focus are and where you see the potential to offset some of those headwinds?

Yes. Look, it's a challenging base. I think with in terms of the employment side, we're trying to be more efficient and have our pillar be more productive. -- because the prices have gone up. In terms of rent inflation, for example, as we come across these days, we are up to 15, 20 renewals a year at the moment. So we're hoping to have some reductions in those renewals offset from the increases we may get. On the marketing side, we're negotiating harder on getting reduced rates, dollar go further in terms of that. But it's very challenging inflationary impact on businesses is challenging at the moment..

Your next question comes from Sean [ Cassons ] from UBS.

Any just a quick question regarding your broader performance relative to the industry. Would you be suggesting that Nick Scali and Plush would be gaining market share versus peers? And are you seeing any signs of distress particularly among the smaller competitors just worried about retailers going out of business and referencing your comment around some people being more distressed and being more aggressive on the promotion side, please?

Yes. Look, I think, yes, certainly with acquisition Plush. And we continue store network growth. We gained market share on the store-by-store like-for-like basis, are we getting market share. So it certainly appears that happened in June, July. But it's hard to make it but we don't have any furniture businesses. But yes, and then I'm sure the smaller retailers are feeling it. Will feel -- will get more difficult, particularly with small store networks because their ability to source product will get more difficult as the volumes drop and their lead times will get longer. So we'll have a competitive advantage on that. But yes, look, I expect if things remain volatile as they are, there might be some consolidation in the next 12 months of the furniture industry.

Your next question comes from Mark Wade from CLSA.

Anthony, are you happy with the way the 2 different brands have performed and the way they're positioned in the market?

Yes. No, I'm very happy. Yes. Look, it's importantly for us is it's helping significantly on the supply side, particularly with factories. -- Nick Scali sofa business is around 68% of sales. It's just high for a furniture store, then you add Plush, which is 100% of sofas. So the volumes looking like factory are substantially more, thanks to the acquisition of Plush and the store network out. And -- that allows us to deal with more factories with more variety of look and better value. So -- and no, the refurbishment of Plush, it's certainly a much, much better experience with the customer in terms of merchandising, but we've improved the range in place. We've got more variety and price points, which they should -- they need to be a sofa specialist. And we'll continue to improve that with parties innovations that we'll bring into Plush over time...

The next question comes from Peter Marks from Barrenjoey.

Okay. Just want to follow up on that. Just to clarify if the Plush store closures are finished now. And then on the trading update, is there -- is it fair to say in July, that is the Plush is fairly flat and the scale is in decline? And is there any differences in trading that you pull out between Australia and New Zealand?

Yes. No, I don't think you're right there. I think that we're -- in terms of written sales orders, the year-on-year both brands are negative. And New Zealand was positive, coming off a tougher period. I mean, I think New Zealand got the effects of inflation much further and [indiscernible] because they were raising interest rates, much earlier and a lot harder. So it was a tough year, life in New Zealand. So now there's an improvement, but only slight.

And the store closures in places if you were optimizing the store network not current trading.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.