Pepco Group N.V. (PCO) Earnings Call Transcript & Summary

Hello, and welcome to the AGM for Pepco Group. Thank you for joining us. My name is Andy Bond, and I'm the Chairman of the Board of Directors. Before we get started with the main content, I invite our Company Secretary, Ned Staple, to run through a few technical considerations.

Thank you, Andy. My name is Ned Staple, and I will act as Secretary of the meeting. I have a few general remarks with respect to the order of the meeting. This meeting is held in person and can be viewed live via the company's website, www.pepcogroup.eu. If you experience any issues with the broadcast, you can send an e-mail to [email protected]. The meeting is conducted in English and is being recorded for the purpose of preparing minutes of the meeting. All members of the Board of the company -- all members of the Board and the company secretary are present today, either physically in this room or virtually from their home offices. I'm pleased to introduce you to [indiscernible], acting as deputy on behalf of Mr. [indiscernible], the notary acting as proxy for those shareholders that have elected to have their vote shared by the notary as their proxy. I further welcome Nathalie Habers from Mazars Accountants N.V., the external auditor of the company. Nathalie Habers will briefly comment on the audit opinion provided on financial statements. We have not received any questions from shareholders prior to this meeting. If you're viewing the meeting via the live stream, it's not possible to ask questions. The general meeting has been convened and is being held with the observance of the Articles of Association and applicable laws. According to the attendance list, holders of 476,734,261 shares are present or represented at this meeting. This is 83% of the company's issued share capital per the record date and per today. Each share entitles the holder thereof to cast one vote. Each shareholder represented has provided a proxy vote in advance of the meeting, and therefore, the results of the meeting for each resolution will be shown on the screen as we discuss each agenda item. I confirm that the general meeting can validly resolve on the matters included on the agenda.

Thank you, Ned. We continue with the second agenda item, which is the Annual Report and financial -- Annual Financial Statements for the Financial Year 2023. I will discuss the report of the Board and the current state of affairs of the company under Agenda Item 2.a. Our 2023 financial year can be characterized by contrast of highs and lows. The Business delivered a record financial performance with our highest ever revenue and EBITDA outturn alongside opening a record number of 668 net new stores across Europe. However, our financial performance did not meet our targets with our -- we set ourselves at the start of the year. The business faced an increasingly challenging customer and macro backdrop in the second half of the year with high inflation and interest rates across our core markets. So did not match the performance we enjoyed in the first half, leading to a buildup of stock levels in a high cost that impacted our profitability for the year as a whole. Trevor Masters stood down from his role as CEO in September 2023. And at the request of Board, I stepped into the role of Executive Chairman to manage the company until a successor is elected. Since taking on this new role, I have taken decisive steps to reorient the group, management structure and establish a new group executive committee to focus on the delivery of key strategic initiatives and address costs in the near term. I outlined my key priorities at our Capital Markets Day last October. The priorities include refocusing on customers in our core CEE business implementing a more targeted growth plan in markets where we already have a presence and reviewing underperforming areas of the business. In taking these actions, we aim to improve profitability in our core business, whilst enhancing cash generation in the delivery of a more measured growth, what I describe as doing less to achieve more. The underlying strength of our business model remains intact, rebuilding the health and profitability of our core stores will provide a foundation for sustainable and profitable growth into 2024 and beyond. The opportunities in our core markets remain significant. We will deliver them in a more measured way with an enhanced emphasis on capital returns and free cash flow. I'm confident we have the right strategy and leadership team to grow the business in line with our future expectations. I will now move to Agenda Item 2b, being the advisory note of the 2023 remuneration report. The remuneration report details the implementation and execution of the remuneration policy for the Board for the financial year 2023. Brendan Connolly, Chairman of our Remuneration Committee, will give a short explanation based on the information in the report. This does not relate to the proposal for a revised director's remuneration policy, which will be presented and brought to vote late in the meeting. So over to you, Brendan.

Thank you, Andy. There are 3 core parts of the executive directors pay, salary and annual cash bonus and a long-term incentive delivered in the company's shares. It should be noted that within the annual report, Andy Bond's remuneration is reported in the same way as the executive directors. Although Andy is a Nonexecutive Director, he temporarily performs executive duties whilst we continue our search for a new CEO. The REM report for financial year '23 describes unchanged salaries for Andy, Neil. Neil was ordered a cash bonus of GBP 600,000 following an assessment by the Remuneration Committee of his personal contribution during the year as the formal bonus objectives were not deemed to be suitable. No share awards are vested during the year for either Andy or Neil. The REM Committee has moved the company towards a more standard and recognizable structure of STIPs and LTIPs for the financial year 2024 and has agreed a move away from the VCP or value creation plan discussed at the AGM last year. This includes the rollout of the new group LTIP previously approved by this meeting. The REM Committee believes the REM outcomes to be fair and accurately detailed within the financial year '23 remuneration report.

Thank you, Brendan. Ned will now share [ the voting results ].

The results include votes in favor, votes against and votes abstained. According to the statutory regulations, votes abstained are considered non-casted votes. The votes are shown on screen, concluding that the General Meeting has approved remuneration report.

Thank you, Ned. Agenda Item 2c concerns the adoption of the Annual Financial Statements for Financial Year 2023, which ended on September 30, 2023. The financial statements were prepared in accordance with Dutch Law and the audit of the company's financial statements was performed by the external auditor, Mazars Accountants N.V. I invite Nathalie Habers to present the findings on the half of Mazars.

Thank you, Andy. We were engaged to audit the fiscal year '23 consolidated financial statements of Pepco Group N.V. As in previous years, these financial statements have been prepared in accordance with International Financial Reporting Standards and in accordance with Part 9 of Book 2 of the Dutch Civil code. We are not aware of any relationships between Mazars and Pepco that in our professional judgment may reasonably be thought to bear on our independence and confirm that the statutory auditor, the audit firm and partners, senior manager and managers conducting the statutory audit remained independent from the company in conducting the audit. We have safeguards in place that guarantee our independence. In the basis, our audit approach has been similar to previous year. Design and implementation of controls needs to be documented for all significant risks. Our audit procedures have been set up to obtain partial control reliance in areas where we deemed control testing relevant for the audit. As far as no reliance could be placed on controls or the auditor deemed a non-control reliant approach more efficient and effective, a full substantive audit approach was used. The materiality, the amount which could potentially influence users of the financial statements has been set at EUR 11.7 million, which is based on 7.5% of the net profit before tax. This was lower than last year, where materiality was set at EUR 16.7 million due to decline of profit before tax of the company. Our reporting threshold has been set at EUR 0.4 million. We have been using component auditors in several countries to perform the work on the local entities. We reviewed all of the component auditor -- audit files and were involved throughout the audit process in accordance with ISA Auditing Standard 600. The significant audit areas are those areas where we or the component auditors spend a significant amount of time. These areas were risk of fraud and revenue recognition, management override of control, inventory, valuation of goodwill and intangible assets and the consolidation process. Our auditor's report is included in the annual report starting at Page 139. We have issued a qualified opinion for fiscal year '23 with regards to the opening balance sheet. In previous years, we have issued a qualified opinion. The qualification is aimed at the inability for the auditor to obtain sufficient audit evidence supporting the reconciliation of inventory held at warehouses and the inventory included in the financial statements. There is a net unexplained difference of EUR 7 million in the opening balance sheet. Our auditor's report includes key audit matters. Key audit matters are those matters that in our professional judgment, were of most significance in our audit of the financial statements. We have communicated the key audit matters to the Board. The key audit matters are not a comprehensive reflection of all matters discussed. We have only mentioned the 3 most important matters, which are the carrying value of goodwill, existence of inventory at warehouses and the risk of bribery and corruption. For all key audit matters, we have included a description of the matter and a summary of the audit work performed.

Thank you, Nathalie. Ned will now share the voting results.

The votes are shown on screen concluding that the general meeting has to the Annual Financial statements for Financial Year 2023.

Thank you, Ned. We now continue with the Agenda Item 2.d. I invite Neil Galloway to explain the dividend policy for Pepco Group N.V.

Thank you, Andy. The group's dividend policy was outlined within the IPO Prospectus in 2021 and stated that the directors intend to commence dividend payments at an appropriate time in the future while maintaining an appropriate level of cover and retaining flexibility for investment opportunities as they arise. This statement sought to balance a number of factors, but all based on the foundation of the cash-generative nature of the group, which has been evident strongly over time. During the period, the business experienced a challenging year due to a weak consumer environment across the core markets, leading to lower revenues and higher inventory. We remain conscious of this tough trading environment where a healthy cash position provides useful protection for the company. Therefore, the initiation of a dividend remains under evaluation by the Board where it will continue to review the timing of implementation of a progressive dividend policy alongside fully exploring opportunities for growth investment. While market conditions remain challenging, our strategic objectives of driving like-for-like sales growth in our core markets, targeting more measured growth, making strong progress on recovering gross margin and improved rating -- and improving operating cost efficiency gives us confidence that we can deliver long-term cash flow and value to our shareholders.

Thank you for the explanation, Neil. In conclusion, no dividend will be paid for the financial year 2023. We continue with Agenda Item 3a, discharge of the executive members of the Board in respect to the performance of their duties during the financial year 2023. It is proposed to release the current and former executive members of the Board from liability in relation to the performance of their duties during this period. The discharge will be granted to the extent that such exercise is apparent from the financial statements of the relevant financial year or otherwise publicly disclosed prior to the adoption of such financial statements. Ned will now share the voting results.

The votes are shown on screen, concluding that the proposal to discharge the executive members of the Board in respect to the performance of their duties during the financial year 2023 has been adopted.

We now continue with Agenda Item 3.b. Discharge of the nonexecutive members of the Board in respect to their performance of their duties during the financial year 2023. It is proposed to release the current and former nonexecutive members of the Board from liability in relation to the performance of their duties during this period. The discharge will be granted to the extent that such exercise is apparent from the financial statements over the relevant financial year, otherwise publicly disclosed to the adoption of such financial statements. Ned will now share the voting results of this.

The votes shown on screen, concluding that the proposal to discharge the nonexecutive members of the Board in respect to the performance of their duties during the financial year 2023 has been adopted.

Thank you, again, Ned. We continue with Agenda Item 4.a. The authorization of the Board to have the company acquire up to 10% of the ordinary shares in its own capital as detailed in the agenda and the explanatory notes. Ned will now share the voting results.

The votes are shown on screen, concluding that the proposal to authorize the Board to have the company acquire up to 10% of the ordinary shares in its own capital has been adopted.

Sorry, we're on -- 4b, yes. We now continue with Agenda Item 4.b, the designation of the Board as the competent body to issue ordinary shares in the company up or grant rights to subscribe to ordinary shares in the company's capital or to restrict or exclude related preemptive rights. The designation relating to the maximum of 10% of the issued share capital and is for the term of 18 months and is customary for listed Dutch companies. The details of the proposed designation are further described in the Agenda and the Explanatory Notes. Ned will now share the results.

The votes are shown on screen, concluding that the proposal to designate the Board as the competent body to issue ordinary shares in the company's capital or grant rights to subscribe for ordinary shares in the company's capital and to restrict or exclude related preemptive rights has been adopted.

Thank you, once again, Ned. We'll now continue with Agenda Item 5 relating to the cancelation of ordinary shares in the share capital of the company as may be held by the company from time to time, as further detailed within the agenda and the explanatory notes. Ned will now share the voting results.

The votes are shown on screen, concluding that the proposal to cancel ordinary shares in the share capital of the company as may be held by the company from time to time has been adopted.

We now continue with Agenda Item 6. The proposal to appoint or reappoint nonexecutive members of the Board with effect from the close of the AGM for a term ending by the close of the AGM to be held in 2027. The membership of our Board has been reviewed by the company's Nomination Committee, which has concluded that the following appointments provided -- provide the combined experience expertise background and independence to effectively carry out the Board's duties and responsibilities to the company and its stakeholders. I'll refer to the explanatory notes to the agenda for further information on each proposed nominee. The proposed appointment is Sean Mahoney. And the proposed reappointments are Neil Brown, María Fernanda Mejía, Brendan Connolly and Grazyna Piotrowska-Oliwa. Sorry, and also Paul Soldatos. Ned will now share the voting results.

The votes are shown on screen, concluding that the appointments and reappointments under Agenda Item 6a, 6b, 6c, 6d, 6e and 6f have each been adopted.

Thank you, Ned. We continue with Agenda Item 7, the reappointment of external auditor, Mazars Accountants N.V., for the financial year 2024. Ned will now share the results of these votes.

The votes are shown on screen, concluding the proposal to reappoint Mazars Accountants N.V. as the company's external auditor for the financial year 2024 has been adopted.

We continue with Agenda Item 8. The proposal is to amend the long-term incentive plan of the company as approved by the General Meeting in 2022. Brendan, could you please provide a brief explanation.

I will. I refer to the agenda and explanatory notes for this agenda item. The changes proposed relate to the treatment of the plan upon a change of control. The Board believes that this amendment to the LTIP is necessary to allow for greater flexibility and to bring the plan in line with the current market practice.

Thank you, Brendan. Ned, will you share the results, please?

The votes are shown on screen, concluding the proposal to amend the long-term incentive plan has been adopted.

Okay. Thank you. Agenda Item 9 concerns the proposal to amend the company's directors' remuneration policy. Brendan, please may -- give you the floor to make some comments, please?

Sure. In accordance with the articles, the nonexecutive members of the Board have proposed amendments to selected items of the REM policy. The rationale for the change is to reflect the time and effort spent by the nonexecutive directors in their role and as members of the various committees on which they sit. I refer to the Agenda and Explanatory Notes for the full details of the amendments.

Thank you, Brendan. Ned will now share the voting results.

The votes are shown on screen, concluding that the proposal to amend the company director's remuneration policy has been adopted.

Thank you, Ned. We continue to Agenda Item 10, any other business. I conclude that there are no -- if there are no other questions or other items to discuss. The voting results shown during this meeting will also be published on the website shortly after the meeting. I'd like to mention that the draft minutes of this meeting will be available on our website at the latest 3 months after today. After that date, you have another 3 months to submit your comments prior to the adoption in the minutes. I now close the meeting. Many thanks for your attendance.