Ultimate Products Plc (ULTP) Earnings Call Transcript & Summary

Thanks, everyone, for being on this call because I know it's been organized at short notice, thanks to Equity Developments for setting it up. I was keen to speak to our retail investor base after the RNS on Friday. Really I suppose fundamentally to apologize for the -- I really don't like disappointing investors. Obviously, institutions invest a lot of money in us. So I kind of -- that's a problem for me. But I'm also always very conscious that retail investors, it is your money. It is money that you've earned, you've saved. So I was very keen to have this call. Chris Dent, our CFO, was on holiday this week. That was something it was already pre-planned, but I didn't really want to sort of defer the meeting for the call for next week. I thought it was important to speak to retail investors as soon as possible. In terms of what's happened, we are pretty devastated to be frank, because really since January 2020, we've -- to some extent, of defined gravity, we've dealt with a succession of external crisis, going back to January 2020 with our factory base closing, then customers closing and the shipping crisis, cost of living crisis and then for the last couple of years up until very recently, we've had resellers who have been significantly overstocked. And we've traded hard through that extended period and delivered increase in revenue, profitability, and we've kept those dividends going. We just can't quite get there in FY '24. And it really does come down to quarter 4. When we updated just over a month ago when we had our interims, we were assuming the quarter 4 revenues would be about 1% or 2% higher than the previous year. So we were assuming some very modest growth in revenue for quarter 4 year-on-year. That was a bit better than, say, H1 where we were minus 4%. But we didn't feel in any way that it was a particularly aggressive assumption. We've seen sort of retailer inventories normalize as of January really. We've seen consumer confidence sort of on the way albeit from a low point. And we've seen sort of steady really improvement in disposable incomes, which tend to benefit kind of GM businesses like ourselves. Food inflation was dropping, and that tends -- we've had a long period where sort of -- we've had wage deflation combined with high food inflation, which is a pretty toxic environment. You're talking about a smaller share of a smaller basket. We can see we believe we're entering into a period where the basket was going to be larger because wages are going up in real terms with maybe more of a share for GM because food inflation is dropping. And we still think fundamentally, that's what's happening. The retail inventories are normalized, but we're not going to get the benefits of that until FY '25. We were hoping for some benefits earlier in the year during this final quarter. It's going to be fundamentally a benefit to FY '25. But what we have seen, for reasons which aren't altogether clear, is we have seen a slowdown in consumer spending. So despite the fact that consumer has more money in the pockets, for some reason, over the kind of spring period, we've seen them sort of holding on to that money and not deploying that in-store or indeed, online. Most commentators, most analysts are presenting this as a kind of weather-driven blip. I sincerely hope they rise. But at the moment, because we can't explain it, we thought it sensible to take the more cautious view there is maybe more of a trend than a blip. We have seen it having an impact on our -- what we call our near-term sales, so things like our call off accounts, things like our online and things like our sort of regular stock accounts, the accounts which are more or closer to consumer demands. So when consumer demand moves, so they tend to move quickest. Other parts of our business like FOB move more slowly in response to consumer demand. And what we've seen is those step up part of our revenue drop and we saw this really most clearly in the -- we saw some of it in March, management accounts, which we reviewed in the middle of April, and we've seen it more clearly in the April management accounts, which we had sight of Wednesday last week. So yes, we've looked at this drop in our near-term revenue. We've listened to the reasons which people have given as to why it is. We're not quite convinced that they're right, and we've assumed it's going to be a trend, and therefore, we'll pull down quarter 4 revenue. So instead of that, very modest 1% or 2% growth we're looking at -- depending on which analyst is doing the work. It's probably more like a 7% to 8% decline in revenue in our quarter. It's also had a very direct impact on margin because those kind of near-term revenues tend to be higher gross margin. They do come with a higher operating costs, but of course, our operating cost is already deployed. So what we are losing is we're losing the revenue and we're losing that better margin, and therefore, we have taken a more cautious view of our margin over quarter 4. And it's that combination of lower revenues from those sort of near-term sources of revenue that we have and the margin impacts that, that had, which has led to the downgrades on Friday. We are more optimistic about FY '25. And let me tell you why. We are seeing more normalized ordering from larger retailers off the back of their inventory levels after a couple of years really being back at something approaching a sensible level. So that is already having -- at this very early stage, having a good influence on our FY '25 order book. And I think the view we have is, if the [ documentation ] analysts are right and the second half of this calendar year will be strong for discretionary consumer, then that's an upside. But even if these current more difficult consumer conditions continue, the tailwinds from the benefits of more normalized ordering arising from more sensible levels of inventories in retail, we are very confident we'll outweigh whatever headwinds that, that might represent. And let me explain why with the simple example. If we have a retailer that's overstocked, they don't just reduce their intake by 5%, 10%, they will basically shut the doors for periods until their stock normalizes. So often you can see drops of 40%, 50% for us as a wholesaler. It's often something which isn't kind of fully appreciated as we often look like a retailer, but we are very much a wholesaler. And so that can lead to increased volatility when retailer inventories are high. In a normal year, and when we all love to know have -- when we all love to have a normal year, we have a portfolio effect with the business. So we have some businesses -- some retailers that might be understocked, some might be overstocked, some might be in the middle. What we've seen since the end of the pandemic when the kind of volatility of demand led to it across the board, overstock is at the very extended period of unwinding of those old stock positions really from January '22 through to January '24. So we are much more optimistic about FY '25. We've had -- there's good signs of that in our order book, which is why we did update. It is early. So a lot can happen. But so far, we're feeling good about FY '25. I think also the fundamentals, which are underpinning it, I think we do see continuing. We do see that we're through the worst in terms of a return to growth of disposable income. We do think consumer confidence will -- is past the worst and we'll continue to improve. I mentioned those retail inventories several times already. That correction has happened. So the fundamentals of what we see will drive the order book of FY '25. We see over -- and we see that as a much better environment than we've seen over the last few years. In addition, of course, we've got our investments in Europe, and we do see significant growth in our European revenues as we move through FY '25. That was kind of all I had to say. I hope that was reasonably comprehensive. If we have any detailed financial questions, I'll do my best, but Chris isn't here, but I will do my best to answer them comprehensively as well.

Well, we'll steer from quantifying what normalized looks like. But a couple of questions here on consumer trends driven by people favoring experiential holidays rather than GM foods in general. And do you have any thoughts to share on that?

Yes. I mean I guess the thoughts I've got to share is I think it's -- I think the way we're all going to have to take our own view, aren't we of this? I think that fundamentally, if you're a GM business and you're moving from an environment where people add less money every month and then food inflation was high to one where the reverse is true, that at some point has got to be -- it's certainly a more benevolent environment. Now of course, where will people deploy their cash? I think that debate about, will it be on staff? Or will it be on experiences? I mean I don't think who knows is my view. If you look at the market research from earlier in the year and you asked people what they were planning to spend their money on, right down the bottom was hospitality and dining out those -- the consumer was clearly intending to see -- the novelty of getting out after the lockdowns have kind of worn off -- eating out was very -- is very expensive. The service levels are often quite poor. So that was right down the bottom of the list of people's priorities. Right at the top of the list were things holidays. But kind of in the middle, maybe towards the top half was investment in the home. So I looked at this and thought I'll take that. I'll take that after the last couple of years, definitely. And there is certainly some evidence when people aren't dining out, their entertaining gets home. That can be beneficial for things like our kitchen business, cookware, which -- cookware, which has had a very difficult couple of years is we can see is on the off. And that, I think, reflects that move. It's just at the moment, this spring has been very tough in terms of in-store and online. And I just didn't -- I think we gave it a month, okay, that's a blip. We gave it another month, now hang on a minute. We've got to assume the worst here and factor that into our numbers. I say most commentators are more confident about the second half. At some point, they see these effects starting to come through very much of the right. I will -- I'm just going to -- and when I see it, I will have a nice [ cost of chardonnay ] that evening, but for the moment, I think we're assuming the worst in the short term. In the medium term, we're much more optimistic.

And you referred to significant growth in the FY '25 order book, giving the confidence while simultaneously having to adjust FY '24 down 4 weeks after the last update. What is the typical mix between long and short lead time orders?

So this is a great question. And I think in moments like this, you always reflect upon what could we have done differently in terms of communication. And I think one of the things I've settled on is the business has changed over recent years, both for, I think, structural and cyclical reasons in the sense that if you go back to when we IPO-ed in 2017, and this is -- I'm taking a very much a high watermark here 67% of our revenue came from our gross revenue, came from FOB business. So for those of you who aren't sort of aware about what FOB is, this is where we hand the product over in the Far East, normally in full containers and our customers, our retailers do the importation. So it's large orders, ordered very far ahead and makes our order book -- made our order book very predictable. Now that was perhaps -- as the business has grown its online business, for example, and other elements of our business that has come down. But this year, it's probably going to be about 20%. So it's quite a big move. I don't think 20% is its normalized level. I think it will be somewhere between 35% and 40%. I think that 20% represents when retailers are nervous about their stock position and they become risk off. The one thing they look to cook first is those big orders placed further ahead and they want to order product on a more hand-to-mouth, more predictable basis. So I think we -- it won't go back to 67% for structural reasons, but it will move back to, I suspect, 35% to 40%. Now what that means is -- and this is all part of us over the recent years with all the challenges we faced, trading hard, finding 1 challenge and having to find a solution to it, and having to -- and if retailers don't want to order FOB further forward, they want to order, landed on a more hand-to-mouth basis. We've provided that option to them, and that helped mitigate the effects of these sort of external crisis. It does however mean a bit less visibility in our order book because we do have this sort of more near-term business as a structural but also cyclical large part of our overall mix. It's normally pretty dependable, which is why I think is the reason why I've not -- I've never raised it in the past. I've never seen it as massively relevant because it's always been pretty predictable. Not over the last couple of months, or last month or 2 unfortunately.

Okay. Helpful. A quick glossary point. Can you explain what you mean by call-off accounts?

Yes. So a call-off account says we're typically larger retailers. They will say -- I use that [ Astra ] as an example. They will say, we will list our products, your product for a 6-month period. So we'll go into store. We will take an initial order for the store fill and the warehouse fill. And then as you go through the season, as people buy the product in store, we will then supply and top up their inventory. So as I say, along with online and our regular stock accounts is the part of our business, which is closest to consumer demand as a wholesaler. Often, what they'll do is they will give us access to a portal where we can see sell-through. And therefore we can manage our inventory position. So I don't want anyone to be worried about inventory here. We are -- when demand moves, we have the sort of management processes in place that means we manage the inventory effectively. As I say, it's normally pretty predictable, not least because we take a cautious view. So if a retailer says, look, you're going to sell 1,000 a week, we'll assume, say 750 million in our order book. And then we'll maybe keep a buffer on top of that but we -- and that's why it's never really been something we've had to raise previously because it's always been reliable. Something has happened during the spring in-store and online. There has been a sort of a step change in demand, which has become really apparent over the last month or so. It's affected those parts of our business which have an immediate impact on our revenue, but at the same time, we've not had benefits in Q4 of the more normalized order placing from lower inventories, which is benefiting more on a forward order basis in FY '25. I hope that makes sense. I know there's quite a lot of moving parts in the wholesale business like ours, but I do apologize if it is confusing.

Coming through live and clear. Which product lines are responsible for the slower-than-expected sales.

There isn't any particular -- we're largely a home business, and it is across kitchen, floorcare, laundry, it's pretty well spread.

And in the last presentation you declared that headcount was down from 395 to under 350. Was this by redundancies or attrition? And is it having any impact on the continuous improvement culture?

No, not so. And we -- it's really very clear the headcount moves have been very much a sort of bottom-up process to the top down, where we've seen efficiencies, we've allowed typically through sort of natural attrition, the headcount. So for example, if we've deployed a piece of kit that means that in a particular area, we no longer need 5 people, we need four. We've allowed that headcount to float down to the normal natural wastage. Some of it is seasonal, by the way. We get our best people during this peak graduate recruitment season we're in at the moment. So when we came back from Christmas, we said, look, we've deployed a lot of -- we have 900 virtual robots in the business now, which I'd say, some people find mind blowing. So we tend to be cautious during peak in terms of headcount because obviously, we want to -- that run into Christmas. We tend to keep the headcount pretty stable because we're looking after the customer and demand can move quite quickly. When we came into January, I said to all our line managers look, we're just going to let the headcount naturally move downwards on the basis that we'll build it back up a bit in our peak recruitment fees, which is sort of May, June, July, August. So we do see that sort of 350 is below the sort of structural norm. It will flow back up to about 365, I think. But even at 365, going into peak, it's still 30 to 35 heads below what we had in peak calendar year '23.

Last question unless anyone out there has any more. Are there any contract criteria such as minimum sales volume for the Russell Hobbs license? And if you're prioritizing fully owned brand sales, are you staying well above such limits?

Yes. So I mean just to say Russell Hobbs is a very important brand to us. I mean, I know we -- it's typically about 10% of revenue and -- 10% of our revenue is still a decent sized number. We really -- it's great in terms of -- particularly in Europe in terms of opening doors, people say, if people don't know the [ Belgium ] Salter Brands, they often do know the Russell Hobbs brand. So it does play a particular but very, very important role in the business. We do have minimum guarantees as part of the license. We've many years ago, overshot those. So we are well above those minimum guarantees. And so I think even with a decline in revenue, we wouldn't have an issue there.

Great. Well, listen, that's it for the questions. So thank you for that update. It's extremely appreciated your transparency today. Thanks for all of you joining us at a very short notice. And we look forward to further benign conditions going forward.

Yes. Thank you all. Thanks for your time today. We really do appreciate it.