ProCook Group plc (PROC) Earnings Call Transcript & Summary

Good morning. Welcome, and thank you for joining us on ProCook's FY '24 Interim Results Presentation. My name is Lee Tappenden. I'm the recently appointed CEO of ProCook. I'm joined today by our CFO, Dan Walden. Before we start the presentation, just a brief introduction for myself. I joined ProCook around 12 weeks ago, having spent over 25 years in retail, primarily with Walmart in the U.K. market, Asia and North American markets. Extremely happy to be here at ProCook, and we're going to kick off now. Before we go into the numbers, just maybe a few minutes on my first impressions after being here a short period of time. ProCook has a really unique business model, having 100% ProCook-owned brand products, all directly sourced from overseas. We have the ability to affect everything from end to end within the ProCook world, which is a fantastic unique competitive advantage. We're a specialist retailer with product quality and range that is absolutely outstanding. I understood we had a high-quality product before I started, but having joined and see the low product returns, it really does resonate with our customers. The challenge we face, however, is that our brand awareness is particularly low. Unprompted brand awareness for ProCook is sub-10% and even prompted is no higher than 30%. So there's a massive opportunity for us to grow brand awareness. In the time I've been here over the last 12 weeks, I've got to meet all of the teams in the store support center. I've actually got to meet all of the store managers and the regional managers as well as the warehouse team. And I would tell you, my time in stores, in particular, showed what outstanding customer service we have today. And not only outstanding customer service, but the level of product knowledge we have with our colleagues in stores is just phenomenal. And it's a real point of difference that we will focus on even more going forward. Over the last couple of years, the ProCook leadership team have done a great job building out infrastructure and a well-established foundation for the future of growth, building out the store support center here and moving to a single warehouse operation in Gloucestershire will really set a strong foundation for the future. If we move to the next slide now, we're [indiscernible] details. I'll just give you a few highlights from the first half. Granted, I was only here a few weeks of this first half, I'll cover just a few headlines. Our revenue for the period dropped 1.2% if you exclude the Amazon EU marketplaces that we've now exited. That's in a really difficult consumer backdrop, and we know how tough consumer confidence is at the moment. That number of revenue dropped 1.2% meant that we held the market share and within the channels between stores and e-commerce, we actually drove market share gains in our stores with a slight drop-off on e-commerce, which is in line with what we're seeing in many parts of the marketplace. In the first half, we launched our new Electricals range Phase 1, which was comprising of toasters and kettles and great success in terms of the first few weeks sales and importantly, great recognition from Good Housekeeping who awarded us #1 spot for kettles and joint #1 spot for the 2-sliced toaster. So great recognition for the product design and sourcing team on getting those new range of electricals in our stores. We launched our new website at the end of September, and it's fair to say we had a few teething challenges around technical issues, customer experience, which have now largely been resolved, and we're seeing improving metrics across the board, in particular, conversions up 15%. We've opened 2 new stores, one in Trafford Park Manchester, the second in Watford, and both stores have come out of the gates very strong and on expectations with a further upside store opening Q4 in Cheshire Oaks. A couple of financial highlights. In line with expectations that Dan would have shared with you in the past, gross margin improved significantly by 570 basis points, a couple of tailwinds around supply chain and freight improvements as well as the ability for the teams to renegotiate lower costs with our suppliers. And finally, in the face of tough inflationary pressures on labor and all other costs in the business, opening up the store support center and moving to a single warehouse, we're on track to deliver the GBP 3 million cost improvements that we would have shared with you on our last time we chatted. So I'm going to pause for a moment now and hand off to Dan to go into a few more details around the 1H results.

Thank you, Lee. Okay. Well, I'll get started with our summary of our performance in the first half. Inflation has remained high through the first 28 weeks of the year, before were only recently dropping below 5%. And this has continued to impact consumer spending and created unpredictable and volatile trading conditions. We started the year with a strong Easter event, followed the market through May and into early June when the heatwave in the U.K., the first glimpse of summer, came through, which weakened customer demand. We performed well over the summer holiday period with a strong summer sale event and favorable weather year-on-year. We launched our new website, as Lee said, at the end of August. We experienced some teething issues and combined with the strong warehouse sale event that we held last year through late September and early October, which created very tough comparatives, we fell backwards against the market during the September and October period. Our technology and e-commerce teams have worked really hard to improve performance across the website in time for the Black Friday campaigns. In the market, we've seen continued price increases which have been offset by reductions in volume. Overall, we've held our market share with e-commerce underperformance being offset by stronger performance in our retail stores. As a result, our revenue of GBP 26.3 million in the first half was down 1.2% year-on-year for our core U.K. business, excluding Amazon EU. In e-commerce, the Amazon EU impact was worth GBP 700,000 in the first half. And our core U.K. website was down 14.6% year-on-year due to lower sessions and conversion as a result of the transition and teething issues associated with the website launch. In retail, we've delivered nearly 8% total growth, with 2.6% like-for-like performance and the benefit of 3 new stores opening last year. Overall, our performance is beginning to stabilize and showing an improved quarterly trend. Gross profit margins have improved as expected towards a more historical norm of 67% for the first half, benefiting from the unwinding of the heightened shipping costs post COVID, which were held in our stockpile as we sold through stock and as we've reduced our stock position. The gross margin trends just shows just how deep and prolonged the impact on margins have been. Other impacts include price increases, which have been partly offset by cost price reductions negotiated with suppliers, reduced promotional discounting year-on-year and the impacts of adverse foreign exchange movements year-on-year. Underlying channel profits was 16% this year compared to 8.8% last year, supported by the stronger gross margin percent, cost discipline and the exit of Amazon EU. Despite the cost headwinds, we've held operating expenses flat year-on-year. This has been supported by a GBP 3 million cost improvement program, which we are on track to deliver in full. Underlying losses improved year-on-year. Gross profit margins and cost discipline have supported this. Our net finance expenses have been driven higher year-on-year by higher interest rates and a higher average net debt position in the first half. We have benefited by foreign exchange gains this year, which have partly offset this increase. Non-underlying expenses of GBP 1.5 million include transition costs associated with our move and the dual-running into our new store support center. It also includes IPO share-based awards which were issued at the time of IPO and are nonrecurring. We assigned the first of our 2 preexisting distribution center leases to a new occupier, new tenant just after the first half, and we continue with active marketing of the second site at this time. We've also managed cash in a very disciplined way. We've invested in areas that will support our long-term growth and our performance. Free cash flow -- free cash outflow of GBP 0.3 million was after GBP 1 million of capital investment in the new support center and also in new stores and has been supported by continued reduction in inventory, whilst we've maintained 95% -- over 95% availability for our customers. Net debt at the end of the first half was GBP 3.2 million with available liquidity of GBP 12.8 million. In the 8 weeks since the second half, the performance has continued to improve. We've delivered 1.5% revenue growth, outperforming the market. Having solved the majority of the website transition issues, we have delivered a strong and robust Black Friday campaign, growing by 4% year-on-year and outperforming the market. Retail continues to perform well with positive like-for-likes and total growth of 10%, supported by the new store openings that have taken place just after the first half. As we look forward to the remainder of FY '24, it's clear that the macro backdrop will remain highly uncertain. We expect full year revenue to be similar to or slightly ahead year-on-year, representing modest top line U.K. business growth. We expect gross margin percent to be approximately 65% for the full year. This reflects the lower margin rates that we achieved in the second half of the year with discounting and promotional activity for Black Friday and the January sale in particular. Cost investments will continue to add to total OpEx for the second half and the full year as a whole. We are working hard to mitigate these pressures through efficiencies and they will be partially offset by our GBP 3 million cost investment program -- cost improvement program. Non-underlying costs will be GBP 1 million to GBP 2 million for the full year. From a cash perspective, we're expecting broadly flat working capital and GBP 2 million capital investment across the year as a whole in relation to our new stores and our store support center. At this point, I'll hand back over to Lee.

Thank you, Dan. Very good. I'm now going to take a couple of minutes just to talk a little bit of -- a bit more detail on the strategic progress in H1. So 6 areas to talk about. I've already mentioned that raising brand awareness is a key focus and a key opportunity for us going forward. The marketing team launched a major campaign with Matt Tebbutt from Saturday Kitchen earlier this year. And in the first few weeks of that campaign, we saw over 30 million impressions. This is a campaign to build long-term brand awareness that we complemented by additional programs with Meta to be a little bit more experimental from where we've been in the past. Secondly, I talked a lot about my experience in stores and how impressed I was with the customer service there. And we've been rewarded with an increase back to our 4.8-star Trustpilot rating. The stores continue to deliver great service, at the same time, has been very disciplined around scheduling and rotas to make sure they manage expenses for that first half and continue to do so going into the second half of the year. And very recently, we've been certified for the third year in a row with The Great Place to Work for 2023, which is a great achievement. We've talked, both Dan and I, over the last few minutes about the 2 new stores with the third planned later this year, that's given us confidence for an accelerated new pipeline of stores in FY '25, which we are consciously working on as we speak. The website launch. We've learned a lot from that over the last few weeks, and we feel very confident going into the final peak trading period for Christmas. All key metrics are back on track, and we're seeing sessions and traffic ahead of last year over the last few weeks. The success of the first wave of electricals, again, gives us confidence for the new wave, Phase 2 and 3, that are coming next year with product already on its way to us and [indiscernible] our shops before the end of the financial year. That new range will include everything from air fryers to food processors, hand mixers, blenders, choppers. So a great new assortment that's coming to our stores, that will also complement some new cookware, colored cookware ranges, we launched as well as new premium knife sets. And finally, the move to a single warehouse has really benefited supply chain efficiencies not just product availability to customers ordering online, where we managed to not miss a beat going through Black Friday. Also to store delivery performance has been absolutely on point, but they managed to do that whilst reducing pick, pack and ship costs by 12% year-on-year. So a great result from our supply chain warehouse team. In terms of priorities for growth, looking forward. I see our growth agenda for the future will shift to a much more customer-focused business. Firstly, resetting our customer value proposition. Ensuring we have real clarity around good, better, best assortment in terms of price and product ranging. But at the same time as doing that, make sure we do not miss anything around product quality, which we're known for as a brand. Next, improving our brand awareness, which we talked about, will be critical. And to do that, we're going to build out the digital marketing capability within the team as well as playing much more heavily on social media. Product development and category development, whether it's expansions of categories or new launches like I talked about, the electricals would be a key part. In addition, you'll see us play in seasonal areas that historically, we have not having much more focus around summer campaigns and Christmas campaigns with new products to match those times of the year. Our confidence in recent store openings, not just the last 2, but some of those subsequent to that, gives us this confidence to accelerate the pipeline going into FY '25. And as I say, there will be an obsession internally around making sure the user experience online is best-in-class. Fundamental to all of this is the ability to operate a business with real discipline and every single function of the business will operate around a cost discipline to make sure that expenses stay firmly in control as we go through the second half of this year. So in summary we've had good strategic progress, and we have done that and improved our trading metrics in the short term during a very difficult period for consumer confidence. Our recent performance has been underpinned by strategic progress in 3 key areas: I would say cost discipline and management, new product launches over the first half with more to come in the second half and those supply chain efficiencies that I talked about in moving to a single warehouse. The renewed focus and a step change around customer-first will be evident in 3 areas: improving even further our customer service and training programs and enhancements in our stores; increasing that brand awareness around digital and social capabilities; and thirdly, the assortment and category resets to give real clarity of offer and ease of shop for our customers, both online and in our stores. So in closing, our strategic progress to date, our renewed focus on the customer and a clear U.K. store expansion plan give us confidence for the long-term growth prospects for ProCook. So with that, from Dan and myself, thank you very much for your time and attention.