Wickes Group plc (WIX) Earnings Call Transcript & Summary

Hello, and welcome to the Wickes Analyst Conference Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, David Wood, CEO, to begin today's conference. Thank you.

Well, good morning all, and thank you for taking the time to join us this morning. I'm here with Mark George, our CFO, and we plan to spend the next 50 minutes or so outlining our new capital allocation policy and of course, answering any questions that you may have. We have prepared a short slide presentation, and hopefully, you'll already have this in front of you. If not, it can be found in the Investor section of our Wickes plc website. But before we turn to the slides, let me give you a quick voiceover on our Q2 trading update that we've issued this morning. I'm pleased to say that we've had an encouraging first half performance. We've seen an improvement in like-for-like sales in the second quarter, up 3%. And despite the challenging consumer environment, group like-for-like sales for the first half were up 0.7% year-on-year. Core like-for-like sales were ahead by plus 2.3% in the second quarter with categories such as decorative and construction performing well and outdoor projects benefiting from a normalization of weather patterns. We have seen a particularly good performance from trade sales, reflecting continued healthy order pipeline for local trade professionals, as we continue to grow membership of our digital TradePro scheme. DIY sales has seen an improving trend as the period progressed, although remain lower year-on-year. In our Do-it-for-me showroom business, like-for-like sales growth on a delivered basis were plus 5.3% for the second quarter as we continue to work through the elevated order book. Orders in the first half were up modestly with Bathrooms again performing well. Naturally, we are keeping tight control on costs with savings flowing through as expected in distribution, logistics and store operations, and we continue to make good progress across our strategic growth levers. We have completed 6 store refits so far this year, and we're opening a new store in Chelmsford later this week with a further 2 openings planned before the year-end. Now if I could ask you to turn to the first slide of the deck, please. As I've just outlined, trading is on track, and we are comfortable with consensus expectations. Mark and I will now take you through the new capital allocation policy. This policy reflects the strength of the balance sheet, our confidence in our future growth strategy and our focus on delivering strong shareholder returns. We have updated our capital allocation framework to deliver an efficient capital structure and the key points of which are: the balance sheet target will be focused on a net cash basis, retaining at least GBP 50 million of cash at the year-end, which is typically our seasonal low point. We will continue to invest around 3% of sales behind our proven strategic growth levers. This is before the adoption of IAS38, which Mark will run through in a bit more detail later. And we plan to maintain the full year dividend at 10.9p. Going forward, our previous policy of a 40% payout ratio will be superseded by a new policy of 1.5x to 2.5x cover. And I'm pleased to confirm that today, we are announcing a GBP 25 million share buyback as we believe this is the best route to return surplus cash to shareholders. Finally, and again, Mark will talk in more detail to this, we are increasing the proportion of our Software-as-a-Service costs to support our investment in our IT infrastructure and capability. This will affect adjusted profit before tax over the next few years, although it won't have any impact on cash. If you could turn to the next slide, please. So Wickes has a compelling investment case, targeting double-digit total shareholder returns over the cycle. The cornerstones of this are mid-single-digit sales growth, profits growing faster than sales, a regular dividend and return of surplus cash to shareholders. On the first point, we operate in a large U.K. home improvement market, which goes broadly in line with GDP. In recent years, we've consistently grown ahead of the market, and we anticipate further market share gains, driven by our successful balanced business model and our proven growth levers. We expect to generate operating leverage as we grow the business. We have a very lean and efficient cost model and are highly focused on driving further productivity. As a result, we would expect to grow profit faster than revenue. I've already covered off the dividend policy with our new cover range of 1.5x to 2.5x. And the final cornerstone of our investment case is that after taking into consideration spend on maintenance and growth CapEx, we are a cash-generative business. This means that we are able to drive additional total shareholder returns by returning surplus cash to shareholders, and we're announcing a start to that process today. I'd now like to hand over to Mark, who will take you through the remainder of the presentation. Mark?

Thank you, David, and good morning, everyone. I'd like to start by setting out the 4 pillars of our new capital allocation policy and explaining the position on each of those in financial year 2023 as on Slide 4. So the first pillar is that we will have a strong balance sheet and we'll aim to have cash at all times. Specifically, we will aim to have at least GBP 50 million of cash at the end of each financial year, which, as David mentioned, is a seasonal low point in the annual cycle, and we'll show this in a bit more detail in a moment. So for 2023, in this pillar, we started the year with GBP 100 million in cash, and we will end the year at a broadly similar level. So as this is well above the policy of being at least GBP 50 million at the year-end, we deem this to mean that we currently have surplus cash. The second pillar is that we are a growth business, and we plan to invest to drive growth with a strong return on investment. In 2023, we expect this capital investment to be between GBP 30 million and GBP 35 million on a post IAS38 basis, which is around 2% of sales. On a pre-IAS38 basis, this would be GBP 40 million to GBP 45 million and around 3% of sales. More on IAS38 later. The third pillar is our intention to pay a healthy regular dividend each year, and we plan to operate with dividend cover of between 1.5x and 2.5x. In 2023, we are likely to be slightly outside of this range due to a low point in the cycle for profit, but plan to maintain the same cash dividend of 10.9p per share that we paid for 2021 and 2022 financial years. This higher-than-policy payout reflects the confidence in our business and the strength of the balance sheet. The fourth pillar is we plan to return cash to shareholders with an expectation of ending the year with around GBP 100 million of cash. We have surplus cash versus our new policy, and so we will start to return some of that cash to shareholders immediately. We have today announced a GBP 25 million share buyback program, which will start in the next few days. So I'll now take you through each of these 4 points in a little more detail. Before talking through our primary new balance sheet metric, I wanted first to explain why we're moving away from a target based on lease debt to one focused on cash. On Slide 5, we show the renewal profile for our leases, which, as you can see, is uneven. As a result of relatively few renewals in recent years and in the next few years, our lease debt is currently falling by GBP 40 million to GBP 50 million per year. From 2026 onwards, we start to have a lot more renewals and our lease debt will start to rise again. In contrast, our rent payments and therefore, our actual cash flows are stable throughout this period. In addition, our bank covenants with our RCF lenders are based on cash metrics, not lease adjusted ones. For these reasons, whilst being cognizant of our substantial lease obligations, our preferred metric for measuring our leverage going forward will be financial debt or cash rather than lease-adjusted debt. Moving to Slide 6. We set out here a little more detail on our cash profile as a business and why we set our new policy to be at least GBP 50 million cash at the year-end. Firstly, we want to have a prudent balance sheet that reflects the fact that we have lease obligations and operational gearing. As such, we want to operate with cash at all times rather than add financial debt to the lease obligations we already hold. The second consideration for us was our annual cash cycle. December is a low point in the year, with the average across the year significantly higher. As you can see in the chart on the right, in 2022, we averaged around GBP 150 million of cash compared to a year end point of GBP 100 million. When looking at sensitivity analysis for potential downside scenarios, we modeled our potential headroom versus the year-end load point. And that's why we've established our new policy based on the cash position at the year-end. Our intra-month cash flow can be up to GBP 40 million, and this was another consideration for us as we considered what we wanted our minimum cash balance to be. So overall, our view is that by holding at least GBP 50 million at the year-end, and I want to emphasize at least, we will remain in net cash throughout the year in a normal trading environment and we'll be able to remain in net cash even during a downturn. We will keep the RCF, but would not expect to utilize this except in exceptional circumstances, but it does provide a useful backstop an added level of protection. So overall, we believe this new approach strikes the right balance between delivering an efficient balance sheet and protecting against downturns in the economic cycle. Turning now to Slide 7 and our second pillar on capital investments, which is a growth business, and we have a number of proven growth levers across property and digital in particular. We expect to invest around 2% of sales in CapEx in the coming years or 3% on a pre-IAS38 basis. Our investments will be a mixture of maintenance and growth investment. The maintenance CapEx is essential to retain our market position and performance. And as such, we don't subscribe an incremental return on investment to this CapEx. If we didn't do it, the business would start to underperform. We then have other investment opportunities to grow sales and profit that will drive incremental returns. In property, our proven store refit program consistently delivered 25% returns, and we expect our new stores to deliver even higher returns, albeit with a slower payback. In technology, we will have 3 broad categories of investment: maintenance, sales driving and productivity. The maintenance will not drive an incremental return, but the initiatives to increase sales or reduce costs will do so. Our overall aim with our investment is to maintain and enhance the business' assets such that the blended overall return on investment exceeds 15% to ensure we can continue to grow shareholder value as we grow the business. On the right-hand side of this slide, we have shared a little more detail on our IT investment plans. We have successfully separated our IT systems now from Travis Perkins on time and on budget and it developed a very strong internal tech team. During the separation process, we took the opportunity to move all of our systems into the cloud, which has been a great step forward. We've now started our new technology road map, which will modernize the systems inherited from TP, will further improve the digital experience for our customers and it will seek to use technology in our operations to drive efficiencies. In terms of project investment in technology, we expect to spend around GBP 17 million this year, growing to around GBP 25 million per year from 2025 onwards. As we are now operating largely in the cloud and we expect much of our future investment in systems to be software-as-a-service, we anticipate that 50% to 75% of this project spend will now be expensed through the P&L in accordance with IAS38 clarification on expenditure on SaaS platforms. The accounting implications of this are set out on Slide 9. Let me take you through this. As I mentioned, we now estimate that 50% to 75% of our IT project investment will be expensed rather than capitalized. This will increase our P&L charge and decrease our CapEx by a corresponding amount. So there is no impact on cash flow. The higher P&L charge means that profit will be reduced in the short term. However, the lower CapEx leads to a lower amortization charge which in time catches up to offset the higher expense going through the P&L, but it does take 3 to 4 years to do so. In the table, you can see the effect on P&L, CapEx and cash in the next few years. At the bottom of the table, you can see an estimate of the impact on the PBT, which this year will be around GBP 8 million to GBP 10 million. So whatever number you had in your forecast for PBT for 2023, you should reduce by this amount. In 2024, there will be a similar sized adjustment and then the gap reduces in '25 and '26 as the lower amortization charge builds. From 2027 onwards, there will be no net effect. So the key takeaways here are that there will be a lower PBT for the next 4 years, but the cash will be exactly the same as if all these costs are being capitalized. Turning now to our third pillar of our new capital allocation policy for dividend. We're moving from straight payout ratio of 40% of profit after tax to a dividend cover range of 1.5x to 2.5x. The upper end of this range is obviously the same as the previous 40% payout ratio, but the lower part of the range enables us to be more flexible if we need to be. For 2023, we plan to maintain the same cash dividend of 10.9p that we paid for 2021 and 2022 financial years. Now this will be slightly outside the new target dividend cover range given the combined impacts of the lower profit this year and the new IT accounting, which lowers PBT further. Our intention is to maintain the 10.9p dividend until the profitability recovers sufficiently such that 10.9p is within the target cover range, at which point, we will review options around increasing the dividend or increasing cover. Maintaining the dividend of 10.9p in 2023 will result in a payment to shareholders that's more than GBP 10 million above what the previous policy of a 40% payout ratio would have paid, reflecting our strong balance sheet and our desire to give surplus cash back to shareholders, which brings us to the fourth pillar, surplus cash, which we set out on Page 10. Across the cycle, we expect to generate strong operational cash flow from the business that can fund the investment we need to grow, plus a healthy dividend and generate surplus cash beyond this. Our intention is that whenever we have surplus cash, we'll look to return this to shareholders to drive balance sheet efficiency and improve shareholder returns. As mentioned earlier, we expect to end 2023 with a cash level well above our new policy threshold of GBP 50 million at the year-end. And we, therefore, plan to start returning surplus cash to shareholders straightaway. And today, we announced the start of a GBP 25 million share buyback program, which will start in the next few days. The combination of the share buyback and maintaining the higher dividend payout shows the confidence in the business model and the commitment to capital discipline and strong shareholder returns. So just to end, on Slide 11. We end with a summary of the investment case that David started with. Wickes has a compelling business model in a large market where we continue to grow market share and deliver strong double-digit returns to shareholders. Over the cycle, we aim to deliver mid-single-digit sales growth. We will use operating leverage and productivity to grow profit faster than sales. We'll pay a regular dividend. And on top of that, we'll aim to return excess cash to shareholders. And in the immediate period, this will be via a share buyback program. That concludes the formal presentation. We'll now be happy to take your questions.

[Operator Instructions] We'll take our first question from Shane Carberry at Goodbody.

Three for me, if I may. Firstly, just from the consumer's perspective, I guess, one of the things that we've been hearing in the sector recently is potentially some customers kind of finally feeling the price of the inflation that we've seen over the last couple of years and maybe some becoming a little bit more price sensitive. I was just wondering if that's something that you've seen at all? And just how to kind of price competitive backdrop is generally? Secondly, on the DIFM side of things, look really kind of consistent and strong growth through Q2 and Q1 there, and like it feels like probably outperforming some of your peers in that regards. Can you give me just a little bit of color on what you're seeing in the competitive backdrop from a DIFM perspective? And then the last one for me. Just in terms of the capital allocation framework, I think, as you said there, Mark shows a lot of confidence in the business. I suppose why now being the kind of key question, what is it that you're seeing in one of the business or the market that gives you the confidence to kind of going forward this today, I suppose?

Thank you, Shane. Mark, if I lead on the first 2, you on the third and of course, chip in as I go. So I appreciate that, Shane. I think if I start at a high level, and I think about the consumer and where the mood of the consumer is at the moment, and it's probably worth thinking through each of the verticals actually, Shane, as I answer that question more broadly. So when we think of our local trade professionals, there remains a high degree of confidence in terms of the pipeline fill for those customers. So these -- they're confident. There's a decent percentage of those customers that have up to and even more than a year's worth of sort of like planned work that they've got visibility of. So there's a level of confidence there. And we continue to grow both that customer base and, of course, that overall sales profile. So I think confidence there. When we come across to DIY, the good news is, in actual fact, the rate of sort of like declining DIY is slowing, which is encouraging. But what we are seeing is consumers are definitely taking on more smaller projects rather than the larger home improvement projects. And we can see that and what they're buying and what they're telling us. So there's a little bit of thoughtfulness around overall project cost sensitivity. I think it would be a fair thing to say, Shane, more specifically through the DIY lens. It's always harder to call when we think about Do-it-for-me because it's such a highly fragmented market with a very long tail of independents. But what we can see in this sector is the very what we call the top of the funnel. So in terms of leads, leads have been in decline throughout the first half of the year. But encouraging those customers that are in the journey are much more serious. So it's almost as if we've shaken out a little bit of the window shopping, and the customer has got in the top of the funnel in terms of leads, do you have actually a much higher conversion rate and a higher average order value. So net-net, we find ourselves in a situation where actually demonstrated we've got growth in terms of delivered sales and a slight growth in terms of our order sales in terms of the first half. So there are fewer people in the market. We seem to be winning those people and converting them and the average project value does seem to be higher than normal. So that's sort of like how I think about the customer groups at the moment. So what we haven't seen, to code the words in your question was this, so like any kind of breaks on [indiscernible] through the lenses we see it through our customer base and as we talk to them through the mood of the nation. I think that sort of like picks off 1 and 2. I don't know if you want to talk to the capital allocation policy, Mark.

Yes. So -- thanks for the question, Shane. So I think the timing really has been less about what the market conditions are and more about us as a business as Wickes. So we've just gone through the point of being 2 years since demerger and becoming a public company. And through that period, we have obviously moved to a position where we're operating our own balance sheet and funding. And we have gone through a process of sort of working capital normalization during that period since the demerger and that's now got us to a position where we are very clear on our working capital cycle and our position. We've also, of course, had the major IT project, the transition away from Travis Perkins, which was a major cost but one that was well signposted, and it came in on time and on budget. But of course, 2 years ago, that was still a major project for us to go through. And probably the opportunity for me as a new CFO to come in and take a view as well to add to the thoughts of the Board. So all of those things coming together, it feels like now is the right time for us to be very clear. We've traded well through the COVID period and beyond. And we're gaining market share. We're very confident in our business model, and we're now very clear on our balance sheet and strategy with regards to capital as well.

We'll move on to our next question from Ami Galla at Citigroup.

Just a few questions for me. Maybe a follow-up from Shane's question. In terms of promotional activity in the market, what -- if you could give us some color as to what was the degree of that in Q2? And how do you see that in the start of the remainder of the year? My second question was mostly on demand. I mean do you see any pickup -- in terms of H1 trading so far, do you see any pickup of energy refurbishment demand projects going through in the pipeline? And the third one was just from the consumer perspective. Historically, over the last 12 months, we kind of heard an element of households postponing some amount of projects that you're potentially taking -- planning to go ahead with? Has that sort of delay really come to a halt and maybe to an extent households are a lot more confident of projects we're potentially planning in the pipeline? Any color there would be helpful as well.

Okay. If I -- Ami, could I just clarify the second question? I think I heard, the line was just a little bit distorted there. I think I heard was the question around energy-based projects?

Yes. So any refurbishment projects to kind of improve energy efficiency? Do you see signs of that picking up in the market so far?

Yes. I think let me start with that one then. I think there is -- there remains in the marketplace, and obviously, not surprisingly, it's always worth reminding ourselves that we do have the oldest and most inefficient housing stock in Europe here in the U.K. And we are a property-owned democracy. So there is a desire to make that asset more energy efficient. So I think we continue to see growth, Ami, in those categories that reflect people trying to improve the overall sort of efficiency for energy in their homes, particularly to insulation, draft excluders, et cetera. And we would anticipate that, that structural change in the marketplace, and that will just continue going forward, and we see that as a great opportunity, not just for the market, but more specifically for Wickes, not least given our sort of installation strengths when we think about some of the complexity of those bigger projects in time. Promotional activity is an interesting one because we are quite a promotionally lean business. As you know, we have this highly curated range. But also 2/3 of our business is own brand. So we have a really strong cornerstone of value in the first instance, which on top of we put a smattering of sort of like relevant promotions on the lines that matter most to our customers. So we're a very promotionally uncomplex business given the strength of our base business and the strength of our own brand, which is great for running the operation as well because we may have a much more efficient operation. It does mean our colleagues in store are actually focused on the customer and servicing the customer rather than changing things at the shelf edge. More broadly in the market, though, which was more pertinent to your question, yes, there is more promotional activity, I think it's fair to say. And that just may well be a reflection of the performance of those in the broader market. But we are seeing a fair bit of promotional activity. And some of that will be affected by seasonal patterns, very wet Q1, sort of like a dry Q2, but people need to move through seasonal lines and so forth. But for us, I mean, I dare I say it, we're quite promotionally benign business really just because of the strength of our overall value proposition. And then in terms of the consumer and just thinking about postponement, yes, it's true, we do see customers thinking about either delay or downsizing projects, as I sort of like referred to earlier, we're seeing the downsize to smaller projects. What we do here, particularly though from our trade customers is if somebody cancels a project, it very -- that slot very quickly gets filled just because of the length of their pipeline. So people are quite happy to jump the queue and get in. So most of our trade customers tell us, although they are experiencing some postponements it just very quickly gets rescheduled because they've got the time available and they can pull through somebody else's project. So I wouldn't determine that as a material sort of like characteristic of the marketplace at this moment in time, but we remain curious as to what will happen in the second half.

And we'll take our next question from Kate Calvert at Investec.

Three for me, if I may. The first question is that some of the other builders, merchants in the market have been talking about inflation slightly higher than the 4% you've quoted in Q2. Is there a mix effect there? Or do you think you've actually improved your relative price proposition? And what are your thoughts on inflation in the second half? Second question is to do with Do-it-for-me. You mentioned your orders were slightly up in the first half, were they up in Q2? And in terms of Do-it-for-me, how much of the elevated order book is left to deliver so you get back to a more normal size of order book?

Mark, do you want to lead with the inflation?

Yes, I can catch Do-it-for-me.

And maybe pick up with the final one?

Yes. So I mean the first thing to say is that we are always determined to provide the best price that we possibly can and be market-leading. As you know, we tend to be around 3% cheaper than competitors on a basket of products. And for us, what we have seen is quite rapid reduction in inflation, Q1 at 9%, Q2 at 4%. And what's driven that has been timber in many ways. There have been other factors, but timber has been in deflation. And timber is a really important category for us, not just because we sell it in its raw form, but also because of the kitchen units, its decking, its fence panels, its wooden flooring. So for us, there may well be some mix effects versus people in the merchant sector, which may have a slightly lower proportion of timber, hard to tell. But certainly, we're seeing reductions and we're passing those back on to our trade and our DIY customers. And that's why we're at 4% at the moment. Do you want to pick up orders or do you want me to pick up orders -- Do-it-for-me orders?

You can.

Yes. Do-it-for-me orders were up in the second quarter. And I think that's really encouraging in the environment that we see ourselves in. We -- as David said, leads are down, but conversion is up and average order value is up. We're not seeing any discernible trends where people are either trading down or the proportion of people taking finance, for example, hasn't changed. Our -- the proportion of people who are taking installation with their kitchen. And obviously, that's a slightly more expensive package from us, that's actually strong at the moment. So those sort of key indicators for us at the moment are healthy. And as David said earlier, it's hard to know where the rest of the market is because there's no particular market share data that we can point to. But certainly, we're pleased that we're in growth, albeit modest growth for the first half on an audited basis. And then the order book, yes, we haven't given a specific number. We'll probably do that at the interims, but we are working our way through the elevated order book. So we are still above the point where you might describe it as normalized. And I think by the end of 2023, we will be much closer to what normal levels would be. I think we'll probably still be slightly elevated, but largely that would have been worked through.

Can I just come back on inflation, in terms of what you're expecting for inflation for the second half?

We haven't given any specific guidance in the RNS. I think given the trend of 9 falling to 4 across Q1 and Q2, I would expect it to be between 0 and 4 in the second half.

We'll take our next question from Sam Cullen at Peel Hunt.

I've got 3 as well. First one is kind of a follow-up on that inflation point really. Kind of outside of the commodity products like timber, are you seeing any of your competitors kind of bring down prices on some of those products that have been sort of more structural increases, whether it's kind of multi-finish or [indiscernible] board. And if that -- if they do kind of bring them down, how do you think about the chances or risk of going into sort of overall deflation in the second half of the year or next year, if you kind of committed to being the lowest -- the lower supplier in the marketplace? That's the first one. And then secondly, just on the benefits of the kind of the SaaS service providers. And can you give us some examples of some of the kind of revenue and cost products rate capabilities that do you think that gives you? And then my last one is on kind of the buyback going forward. Obviously, I assume you're going to reassess this going forward, will that be on an annual -- on an interim basis? And just kind of a clarification around that GBP 100 million. The GBP 100 million for the year-end, I assume that's sort of before the GBP 25 million buyback. So it might be GBP 75 million, for example. And if that's correct, does that GBP 25 million equate to the sort of at least that you flagged, Mark, in your comments around sort of the -- at least GBP 50 million, i.e., we should see sort of a GBP 20 million, GBP 25 million buffer ahead of GBP 50 million going forward?

Mark, if I take the first and you take the second 2?

Right. Yes.