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

Good morning, everyone. Welcome. I just give you a short headlines of the agenda. So we will be giving brief headlines of the quarter 3 trading update. I have Neil Galloway here with me. And so after that, we'll take Q&A together. But before we do that, I'm going to take the opportunity to introduce Stephan Borchert, our new CEO. He already deserves a long service of walk because it's his second week in the business. As a reminder, Stephan has got a 3-month intensive induction program during which there will be a formal transition between he and I, or myself and him. So I will be stepping back to Non-Executive Chairman on the 1st of October. And in that interim period, I'd say there'll be a seamless -- hopefully seamless transition. So I'm going to take this opportunity to give Stephan the platform just to say a quick few words and then we'll get on with the formal quarter 3 trading update.

Thank you, Andy, and good morning, ladies and gentlemen. Thanks a lot for the intro. As you mentioned, it's day 9. I just counted it down. Yes, after my role as CEO of GrandVision NV, I'm super happy to have joined Pepco Group now. As Andy said, it's a 2- to 3-month introduction program -- induction program looking forward to -- and we'll then start to take over the role with the new fiscal year, and I'm very much looking forward to working with you. I think today, I keep it as short as it is, and we'll engage, of course, much more intensely than going forward.

All right. Well, welcome, Stephan, and thank you. I feel very confident about Stephan's contribution. So I look forward to working with him. So look, on to the formal quarter 3 trading update, it is a headline update because it's only a quarterly update. So I'll give you the headlines, and then myself and Neil between us will answer any questions. And I will subsumption from the formal release, obviously. So starting with top line revenue, 8% growth on a constant currency basis -- both brands and collectively on a like-for-like basis in negative territory, that really shouldn't be a surprise as that's what we flagged up in May. I think we also, more importantly, know the underlying reasons for that and our resolve in those matters as some of them are company specific. So let me get into a little bit detail there. Pepco's like-for-like at negative 2.7%, which is a slight improvement on quarter 2. I mean the 3 key component building blocks that, first of all, a mechanical issue, the timing of Easter year-on-year with some of these to falling into quarter 2 this year. Continued challenges around Red Sea impact on availability. And finally, again, as we've flagged it previously, progressively working through excess old inventory, meaning our inventory quality is not as high as it should be. And obviously, each of those factors will unwind at least somewhat during quarter 4. So I do feel more optimistic about the quarter 4 trajectory. At Poundland, a like-for-like of negative 6.9%. Really, this is substantially, if not exclusively around the disruption of moving from a company to group level sourcing of clothing and general merchandise -- that -- we understand the things that we need to do in terms of correction of ours. But again, hopefully, consistently, you've heard me say before that this will only really unwind into next financial year, but some signs of the thing we're certainly very clear what we need to do to address the issues there. And finally, Dealz, negative 7.3%, very much the same theme really around disruption of the product change, but also a very intense competitive environment in FMCG in Poland. More positively, the gross margin position in the business goes from strength to strength, both quarter-on-quarter and year-on-year, very strong gross margin improvements, particularly in Pepco. And then moving on to other matters in terms of growth, again, a very measured new store opening program as we highlighted. So I feel taking a step back, I feel in general terms, the messages we gave at the Capital Markets Day we're delivering very strongly on and moving to a platform of more profitable growth. So the same-store cash profit per store, what I call 4-wall EBITDA is growing and strengthened as we said at half 1. That is now back to pre-COVID level. So by the end of the year it should be higher than pre-COVID levels, and that new store opening program, meaning we're opening a more considered number of stores, which will allow us to deliver strong return on invested capital. And that store opening program really focused primarily in CEE. That will mean our CapEx for the year is down quite dramatically. And we may want to talk about the details in Q&A, but it's down quite dramatically. And finally, before opening up for questions outlook, we are reiterating our guidance of EUR 900 million and that really is built around a very strong underlying performance in Pepco offsetting some tougher performances in impairment. So you can imagine that roughly 20% year-on-year profit growth at group level is some higher than that at a Pepco level. And then from a momentum point of view, we see particularly in Pepco an improving sales trend in quarter 4. So consistent with what I've said before, we see the business [indiscernible] this year in a stronger like-for-like position. So yes, look, just finally, stepping back, I think we've made good progress this year against refined strategy of doing less to achieve more. As I've said, a more moderate level of growth but conversion into much stronger profitability and free cash flow. And as we enter the last part of the year, we see momentum improving. And so into next financial year, I think we'll see the business in good financial and operational strength of good health. And I'm sure there's a few questions, so I'll pause there and ask who would like to ask questions.

[Operator Instructions] We will take our first question from Alison Lygo of Deutsche.

Two, so kind of interconnect, I guess, thinking about sort of supply chain and stock coming in. I wonder if you could talk a bit about that. And so both in terms of whether we have any risk in terms of late rising sort of summer stock but also how you're thinking about forward planning to make sure you've got the stock in for kind of key events like Halloween, I guess, what is starting to appear on the horizon now and just be kind of confident in terms of that seasonal timing. And then the next one sort of connection part of that, how you're thinking about managing that balance of the strong gross margin tailwinds that you've got coming through, but also getting that slower moving older inventory out of the business like whether we should be thinking about gross margin investment, yet help how you're thinking about those 2 moving pieces...

Okay. Good questions. On the supply chain side, we have definitely taken the right actions to improve our availability. So look, if we go backwards, I mean, first of all, as is well publicized, I mean for every business, there's been some degree of delay in bubbles of stock flow because of the fact that the Red Sea has been very disruptive, people in ship stuck around Africa, and everyone has done a job to recover availability. Our position is somewhat accentuated at least a part of our inventory by the fact that we actually ship into 3 European ports. Gdansk in Poland, Koper in Slovenia and Constanta in the Romania. Those -- the latter 2 ports are significantly smaller than the very, very large Northern European ports. And they have, therefore, because the smaller had semi-unique issues with the congestion that that's caused. So the 2- or 3-week delay that goes -- that comes from going around Africa has been accentuated even further in those ports as some of our inventory has been up to 4, 5 weeks late. Now that bubble is now [ sub-stand ] behind us, Alison. So the issues we've seen in quarter 3 will abate in quarter 4 and into next financial year. But it definitely did cause a bubble, which everyone saw, but we probably have had it a bit worse than others. As far as how that's going to impact seasonal sell-through, very confident that the demand has actually been very strong on with our products in stores. Similar apparel has been in double-digit like-for-like growth when we've had the right products. The demands out there we're selling product well, even though it's late, and we don't see risk to the year-end numbers based on markdown. Looking forward, like everyone else, we've taken the right, I believe most of the people who not have taken the right action in shipping product from the far East early. And so we do not see a risk to our product availability into the final quarter of this calendar year, our quarter 1 financial year. I think as we may -- I believe we've floated by half 1, perhaps the most practical issue, if there is an issue, is the fact that it will impact our year-end inventory position on our balance sheet because we have pulled inventory forward. So our cash need to invest in inventory will mean our cash position will be lower than it otherwise would be in our inventory position would be higher than they otherwise would be. So I think we'll be in good shape for quarter 1 availability wise. And then the other thing to think through is the fact that everyone is taking the same actions of pulling inventory forward means that you are seeing spikes in spot rates of freight upwards towards $8,000, so a significant increase. Again, we are not flagging up risk to our forecast as a consequence of that we feel we're able to manage that for now within our financial forecasts. And so I wouldn't flag that up as an issue. In terms of the second question about like-for-like and gross margin. Look, I think this is -- I genuinely don't want to feel defensive in answering this question. It's been a fine balance this year between the most important issue in our core Pepco business. It's been about rehabilitating our gross margins. We lost 500 basis points somewhere along the way. And I think the team has done a tremendous job recovering those -- and if anything, ironic, you may slightly overshoot those and may have slightly under-invested in driving sales. But that for me is a good position to be in. We have totally rehabilitated our gross margin, and we're starting to see signs that our like-for-like should improve into quarter 4 in our core Pepco business. Will we need to invest gross margin in further marking old stock then no, that's built into our forecast. And we're seeing those -- that old inventory clear nicely. And as that old inventory clears nicely and we see new inventory coming in, sequentially, we should see sales improve. So it's always been a fine balance this in getting the right aspiration for sales and gross margin. But I think in balance, we've done the right things recovering the margin. We're seeing sales start to improve, and we are clearing that stock very well. So I don't see a risk moving into next financial year of having the same story of, oh, you keep telling is about old. We should have cleared all of that inventory in Pepco during this financial year. I think that covers what we're probably about 10 questions actually -- that gives you a clear view, yes.

Yes. That was very clear.

[Operator Instructions] There are no questions coming through. I will now hand it back to Andy for closing remarks.

Okay. Well, look, I'm grateful for a bit of time back -- since -- and this is the first thing. I think I remain very confident that the structure we set out at the Capital Markets Day, more measured growth leading to strong profitability and free cash flow. That is the right strategy for the company. We're making very good strides -- a few things still to sort out, and I'm very confident we'll see continued improvement in our underlying business into quarter 4 and into the new financial year. And again, welcome to Stephan and look forward to working with him. So look, I feel very confident about the future of the company and look forward to speaking to again alongside Stephan and Neil some time shortly. Thank you.