SCS Group PLC

LSE:SCS

Earnings Call Transcript 2022-Q2

[Steve Carson, executive]

So in terms of agenda, I will quickly cover the highlights. We'll then get into the financial review, which Chris will lead, as always. I'll then talk about where we're at with our strategic growth plan and then finish with a summary and outlook. And just to remind you that bottom of this screen, you'll see a tab, Q&A, so if you've got any questions, please pop them in there, and we'll pick them up at the end of the presentation.

So next slide, please, Chris. And again, so just in terms of highlights, I think the headline for me is you've maybe all had an opportunity to see and read the statement this morning. But we've had a strong half 1 order intake, and therefore, the group is well positioned to end the year in line with market expectations.

So in the first half, we've rolled out our growth plan throughout the business, and I'm really delighted with the strategic progress that we've made across all areas within that. And clearly, the bulk of the presentation from me will be going through the detail of that. In terms of performance, pleased with our 1-year like-for-like order intake of 16.6% and 2 years in line with that achieved in the 26 weeks to the end of Jan '20. We've got a super strong order book at GBP 148 million, double the size it was at this period in January '20.

Customer, clearly super important to us, and we've managed to maintain our excellent Trustpilot rating and actually with an improvement in our underlying trust scores. So it's moved to 4.7 out of 5. So we're really pleased with that. ESG is clearly an important part of any business. So we've continued to make progress with our ESG strategy, and again, I've got a couple of slides on that later. We've got a strong balance sheet with cash of circa GBP 88 million. And therefore, I'm sure you've seen that we've been delighted to announce a 50% increase in our ordinary dividend to 4.5p and that we've commenced a GBP 7 million share buyback program. And just to finish where I started, I guess, on track to hit market expectations.

So I guess for me, really pleased with the 6 months, great progress on the strategy, good order intake, super strong order book, doing a great job for our customer, good progress with ESG, strong balance sheet, allowing us to increase the divi and start a share back program and on track to hit market expectations.

So Chris, I'll hand over to you to take us through the financials.

[Christopher Muir, executive]

Okay. Thanks, Steve. So good morning, everyone. And as -- what we'll do in the next few slides, several slides we've used in the past, we'll just run through a full kind of half year. And we're actually going to compare most of the slides versus the 6 months of January 2020. So trying to compare it to a pre-pandemic period. So as you can see last year, there was a real impact of coming out of the lockdown with regards to the sales and the profit.

So if you look at kind of first half, our sales were down GBP 8.6 million compared to the same period to Jan 2020. So it's over 5%. And as Steve has already pointed out, the order book is double the size it was at the end of Jan '20. So that means there's about an extra GBP 74 million of the bookings sitting in our order book to be delivered in the kind of forthcoming months. Now if we delivered those in the first half, that GBP 151 million would have been around GBP 60 million higher. So you can see the potential impact or the impact that, that longer lead time has had on the kind of first half results.

However, when you look across to the right, you can see that actually the business historically has always made a small profit -- or a modest profit loss, sorry, in the first half of the year, and that's made its money in the second half of the year. And that was driven by the fact that we have a significant investment in the first half in advertising. So the late autumn campaign and the winter sale, and we deliver those in the second half and where we do spend less on advertising. So we've always had this kind of first half, second half split and that is to be the case kind of this year as well.

Looking in the middle gross margin, which is something we're pleased with. Our gross margin for the 6 months ending Jan '22 is 44.6% and that compares to a similar position where we were at 44.8% in the 6 months to Jan '20. Now that is despite seeing significant cost inflation, both raw materials, labor, and shipping costs, and that has been driven by our current price management, so we are pleased to get to the half year with a margin line with what we've achieved historically.

If you then look across kind of the profit before tax or a loss before taxes for the first half and we'll touch on this in a couple of slides. We do kind of bridge that, but that has been driven by that reduction we've seen in sales -- delivered sales in the first half. So again, this is a timing impact. It then has a knock-on effect with regards to EBITDA, a similar reduction we've seen there. And then that drops through to, well, loss per share.

Steve's touched on cash, we'll come through -- kind of talk through some of the moving parts on that. I think for me, it's -- it has -- that delivered sales has really kind of impacted this year's results, but -- as Steve has said, we've got such a large order book. It means it gives us great confidence that the second half will be very strong and we'll finish the year with a decent profit in line with market expectations.

We'll just look at a breakdown of sales. And really, there's not a massive amount of change in here with regards to participation. Furniture in-store, furniture remains -- gone from 82% in the first half of FY -- of HY '20. And it was 8% last year, and it's 81% this year. So probably not a major surprise that continues to be the core element of the business. If you look at flooring, it was now 12% in the first half of '20. It dropped last year, just under 10%. That's again just over 10% this year. So a slight increase participation wise. Steve will touch on later, there are -- it is an area of continued focus, flooring, we still feel there's an opportunity there. And there's a couple of things that we're doing to try and capitalize on that.

Online, again, probably won't be a massive surprise to feel that we're starting to see that participation grow. It was only 6.1% in the first half to January 2020. And it's now at 9% for the first half of this year. Now we do expect the full year to probably be double digits, early double digits with regards to online participation. And whilst we're trying to talk about omnichannel, we do appreciate that the kind of customer habits are changing. I think they've reverted a little bit since the lockdowns eased, but we still see it as a critical part of our future growth plans.

So looking at loss before tax. So again, comparing this to the first 6 months in the end of Jan '20. So we made a loss in that period of GBP 0.6 million. So the biggest red bars, as you can see on the left is that gross profit. So that's the reduction in sales that we saw of over GBP 8 million, but at 40% plus gross margin. So you see that large reduction. Then if you work your way across from the left to right, distribution costs, even though we delivered a bit less, they have gone up, which is in line with the well-publicized cost inflation we're seeing in distribution and certainly around the driver and operatives we have had to increase what we're paying them to retain them, and that has settled down the level of attrition that we've seen in that area of the business. So pleasing, but yes, we have seen an increase year-on-year.

Marketing costs have gone up slightly. We spent GBP 14.5 million in the 6 months to Jan '20 than what we've spent in this year, GBP 15 million. Then the mix of that's changed slightly. We are spending -- and so we've spent around 10% of our marketing cost has been on digital. This year, it will be closer to 20%. So a lot of that increase has been driven by our continued investment in the digital space.

Payroll costs, whilst they have gone up GBP 0.1 million, there's 2 main parts of that: Our performance rate payroll costs, because revenue and profit is down, have fallen by GBP 0.8 million, and we've seen a general wage inflation of 0.9, giving us a overall increase of 0.1. Government support. So that doesn't -- there's no furlough in there. That all relates to the business rates relief. So we had GBP 1.9 million in the first 6 months. Obviously, nothing in the 6 months of Jan of '20. And in the second half of this year, we'll get a further GBP 0.7 million, so it will be GBP 2.6 million for the year. And then that will be -- that scheme finishes at the end of March.

Probably the other big movement in there, if you look at depreciation, amortization rates, heating and lighting, compared to where we were in the 6 months to Jan '20. There's 2 probably key moving parts. One is the fact that as we impaired some of our right of use assets, so this is the new IFRS 16 accounting, we have to capitalize the future lease payments on the balance sheet. And as we've impaired those over the last couple of years, that means that the charge that we write off going forward is slightly lower. Certainly that was in the first 6 months of Jan '20. And the other thing that's impacting that, which has offset some of that saving is the fact that our heat and light costs are going up, which won't be any surprise anyone could call.

We historically spent just over GBP 3 million on heat and light. So you can kind of do your own math to some extent on what we think that will be. But for the full year, we think that we might be closer to GBP 4 million, and we're obviously just working on what we think that potential heat and light cost may be in the following years.

So there's flexible cost base. This is a slide we've used now for a number of years, and positively, as we see sales grow up or down, we see a fair proportion of our cost base move and almost mechanically with that top line movement. So 73% of cost base is variable sales, slightly very similar to what we've had historically. And as you can see to the left, you can see the current moving elements, that's the distribution cost market and performance rate payroll costs.

Just probably worth pulling out a couple of the key movements to the first half of '21. So if you look at marketing costs, that's a good an example that they actually was increased this year by GBP 3.5 million. But if you think about what I mentioned earlier around the investment during the autumn and certainly in the winter period last year, we were in lockdown. So the business obviously dialed back a level of investment we were doing. So when you compare the GBP 15 million we spent this year, really, again, should be looking at the first half of HY '20 and that's where that GBP 0.5 million increases.

The payroll performance rate, payroll costs. So this time last year, the first 6 months, we spent GBP 9.6 million, and they have dropped 40% to GBP 5.7 million. Now again, if you think about last year in the earlier slides, you've seen we've made a record profit in the first half, and we had a record level of delivered sales. A large proportion of that number is commission, which we counted on sales. So that should not be kind of any surprise that does rightsize itself.

Ultimately, having this level of flexibility in the cost base is important to us, and it's something we will strive to maintain because it does not help when we see any kind of downturn in trading or any upturn, it's much quite predictable with regards to where the profit will end.

Just looking at the cash flow, the movement, obviously, there's a lot of kind of moving parts, but the position was we increased the cash from the start of the year to the end year by GBP 0.2 million. Capital expenditure, which I know the analysts have got kind of high plus GBP 7-plus million in their models. We spent the first 6 months doing some of what we class as our CapEx and maintenance spend. We have been putting together our business cases around the further investment, so we will see that number increase in the second half. But as you can imagine, we're just making sure that it's judiciously reviewed before we'd commit to that capital.

Working capital of GBP 12.7 million inflow. We saw a slight increase in our trade payables, as you can see in the results. It was largely driven by the kind of timing of inbound of supply. And the other big movement was we saw an increase in customer deposits of just under GBP 9 million, and that reflects the size of the order book that we finished at Jan '20.

Capital and interest only. So in the old days, we call this as rent payments, but obviously we've changed that now to IFRS 16. But if anyone compares to what we've paid in the past, it's about GBP 3 million higher than we would historically have paid, and that is because over the last 2 years, we've been taking rent deferrals from our landlords where we haven't been paying them a full amount. They have largely been repaid. We've paid. So in that GBP 16 million, there's GBP 3 million worth of rent deferrals that have been repaid in the first half, and there's a further GBP 0.4 million that has been paid now. So by the end of the year, we'll have no rent deferrals that we owed to landlords, we're kind of back up to speed and are all paid up.

Purchasing shares was something we did for the LTIP. Tax is an outflow, which you might ask why, back when we made a loss in the first half but because we are predicting to make a loss in line with market consensus, which was GBP 14 million. We have to pay payments on account throughout the year, substitute GBP 2.1 million outflow. And that dividend is the kind of final dividend of 7p that we announced last year.

Just something we've shown just on the left, you'll see it -- we have actually disclosed and people have asked us before what's our average cash being in the period. So you can actually see our average cash was higher than the opening closing at GBP 93.4 million. So no matter how we look at our kind of cash, it's -- we're in good shape, and it's one of the reasons that we've increased the shareholder return to the -- for the half year.

So just touching on that and ultimately, hopefully you read this, we have increased the interim dividend by 50%. And we've -- for the first time ever, we've launched a GBP 7 million share buyback program, which will commence immediately and take place over the next 12 months. We continue to look at internal and external investment opportunities and Steve will touch on the kind of areas that we are looking at with regards to the strategy. But we still feel there are potential opportunities to invest the cash we have sitting on the balance sheet. But as you can see from the announcement today, we are willing, where the return is right, to give further kind of capital returns to shareholders.

So we're in a great position. Strong second half coming with regards to the order book and the kind of resilient balance sheet would be my summary before I pass it back to Steve.

[Steve Carson, executive]

Thanks very much, Chris. So then just getting into the strategic growth plan. So next slide, if you could, Chris.

So this slide, you will have seen a number of times over the years. The key ingredients for the business, it's as relevant today as it has been before. So I'm just going to skip through it, the range of price points is super important, particularly with consumer confidence right now. So we'll -- we carry on with our entry level at GBP 299.

Easy ways to pay with interest-free credit. We've got our brands with our long-term relationships with them. Customer remains at the core. I talked about Trustpilot earlier. It's super critical that we're on the right retail parts, clearly. And online has always been important, and I think just grows its importance as more customers research and shop online.

Next slide, please, Chris. So the growth plan, you'll know that we announced this 6 months ago after a comprehensive business review. You'll maybe recall that we engaged colleagues up and down the business with it, at all levels to help us build it. So there's really good engagement with the teams with the growth plan.

We've got 6 key segments and our new purpose, helping create the home you love. And just to remind you, the 6 segments quickly. So at the foundation there, we've got customer and teams. Up in the top middle we have the products that we're selling, so Inspiring ranges, either side, the 2 channels that we sell from digitally and through our showrooms. And then in the middle about strengthening the core, so about building on the business fundamentals that we've already got there and sweating them as hard as we can.

Next slide, please, Chris. So outstanding team. I guess for me, people and teams absolutely remain at the heart of the business. And we have brought in some great external talent over the last few months, as well as reviewing, calibrating and promoting some of our best internal talent.

So we focused on 3 key areas within the organization in terms of the team, please: Commercial, digital and our people team. So we further strengthened the commercial team. We've -- there's been some internal promotions in there, and we've also brought some high-caliber, external individuals in with deep knowledge in the furniture sector as well as -- just last Monday, actually, somebody to head up the flooring division for us. So we're super excited about the commercial team and where they're going to bring us to.

Digital, I'm really pleased with the progress we've made there. So in terms of expanding capability and capacity of that team, I'll call out 4 areas on here: in trading; in marketing; user experience and data and econometrics; and I've got a slide on digital, I'll cover more in a few minutes. We've also grown our people team to help us bring the people in that we've just talked about. So with recruitment and onboarding new into the business, but also those that are currently in the business that we're looking at and supporting with people development and also just engagement across the group. And clearly, they're -- part of their role is to help support this whole segment.

And I've mentioned internal talent. So we've launched our new, year long moving up development program, and our first set of participants are well on their way to becoming our future store managers. So really pleased with where we're at with that. And finally, you'll all be very aware of the challenges that we've had with logistics and drivers across the country and the industry. So we've spent a fair bit of time thinking about how we engage with that population, communication, training and so forth. But on top of that, we've done an enhanced reward for the drivers and the operatives to improve retention and seeing good positive results from that at this stage. So overall, really delighted with the progress that we're making on outstanding teams.

Next slide, please, Chris. So just moving over to the customer, in terms of really listening to the customer and then thinking about how do we improve that customer journey. So as I said on the highlights, really I'm delighted to have managed to not only maintain but keep pushing on with our excellent Trustpilot rating. And also, over the last few weeks, we've enabled reviews at a local store level. So the first time that we've done that.

Top right, maybe many of you are aware of WISMO, Where Is My Order. So we have added a track your order functionality to the website, so the customer can go on and see where we're at with their order. We've only recently introduced that in the last number of weeks. And to give you a sense of it, 35,000 customers that used that last month alone. So clearly, great for the customer and also super helpful in terms of our customer experience team.

Speaking of the customer experience team, they have undertaken City & Guilds' accredited training over the last number of months. so that we continually push on to improve the standard of service that we offer there.

Clearly, the quality of the product turning up in the customer home is super important. So to try to get it absolutely right first time, we've introduced predelivery inspections, as well as trialing new ways of transporting the product into our customers' homes. And clearly, all of that helps support our Trustpilot score.

And then down at the bottom, you may recall last time I brought you through the work we've been doing with Experian and the various Mosaic groups and how we profile the customers so that we stayed absolutely focused on our core customer. Well, we've gone even further and deeper, and we've just finished a qualitative and quantitative feedback and research, and we'll be working through that in the coming weeks and months.

Next slide, please, Chris. So Inspiring ranges. And I guess what I really wanted to reiterate here is that value for money on our value-focused proposition continues to be at the core of the business. So at the last time we were together, I talked about Laurence Llewelyn-Bowen. We just launched that. We're really pleased with how that's performed. And on top of that, have just launched our new range of botanicals. And you see one of them there in that picture, that's one of our Bloom products.

On the right-hand side there, you'll see that we've also launched as part of our living range, our new quick delivery sofas with a lead time of just 2 weeks. So for the customer that's looking for a product super quick, we now have some options for them as well. We've also been trialing dining and how we do dining a little bit differently. So we've been putting dining altogether in a handful of stores. We put it in various parts of the store, front back side, walkway through, et cetera, and we're monitoring that closely to see what we can learn from that. And on top of that, we've launched 20 new flooring products with an entry price point, in fact, a market-leading price point of GBP 4.79 a square meter.

And the last point really on this slide, it's super important to bring everybody in the journey with us, including our third parties and our suppliers are super important to us. So we've had a supplier day where we've went through, in detail, the strategy with the suppliers to -- super feedback from them, done a lot of Q&A, and we also launched our supplier handbook.

So I think just to summarize where we're at with Inspiring ranges, we continue to focus on value with new products in sofa, dining and flooring as well as quick delivery sofas. Thanks, Chris.

So digitally optimized. There's 6 words in the red box there, right people, right tools, right partners. And I'd say that's really been the focus over the last 6 months, particularly the first 2, right people. So we're just about at full complement for our digital team now. And with those individuals now in, we have reviewed each and every tool that we used, and we have reviewed each and every partner that we have.

We've also opened our new digital hub in Coventry, first week in January. So we're delighted to have that opened. And that really gives us the opportunity for the digital team to connect fully face-to-face, in person with our customers and with the retail team and get real-time feedback. I also think it shows real intent in terms of our digital ambitions.

At top right, we've significantly increased the amount of AB testing that we're doing now. We've got the team fully on board, and that allows us to do many of these on a daily basis, take the learnings from it and then implement them into the website.

We've also started to really get after the data and build our econometric model. And we're using that analysis to help us ensure that we're attracting new customers. We've also added, excitingly I think, product reviews to the website. And I think probably most of you, any time you look to buy something, go on holiday, whatever, you'll have a look at product reviews and see what the customers are saying. So I'm delighted we've got Lee's now live, it clearly will make a difference for the customer, whether they're purchasing online or deciding to go into a store.

And then finally, I mentioned about working with new partners, for example on social media, and we have launched our first influencer campaign a couple of weeks ago. We've also got third parties looking at the efficiency of our paid search investment and also search engine optimization, just to call out 3 of many there.

Thank you, Chris. And then engaging showrooms is about investing in our showrooms to create a simpler, more inspiring experience. And I mentioned earlier about the detailed customer feedback that we've been doing. One of the things that came through on there was that they felt that our stores were cluttered. So in a handful of stores, we are decluttering them. So removing a number of points of sale, removing where we have duplication of occasional ranges on display to create a cleaner, more modern experience for our customers. We're clearly going to use data and customer feedback to help us understand what's working and what's not with that and what we might roll out in the future.

On top of that, we're working with a third party to help us design a concept store. It's a third party I've used before, really excited with the progress we're making. We'll take the learnings from the various store trials we're doing, as well as some new ideas on top of that. So we'll look to get a new concept store up and running.

We've also relocated in the last few weeks a couple of stores. So we've relocated Doncaster and Rotherham to more newer, modern units in newer retail parts, so improved locations, and we've managed to reduce cost whilst doing that. And we've been using Experian and catchment analysis to help us identify several new sites, so white space opportunities. So we're actively exploring loads, as we speak, in terms of the opportunity to open some new stores.

So my summary on here would be that we've got a number of trials going on in stores. We've got our concept store that we plan to get open this summer. And we're looking at the network in terms of relocations, any potential closures and on top of that, new white space opportunities.

Thanks, Chris. On the last segment, strength in the core. And as I said at the beginning, this was about trading the existing business model, driving sales, protection -- protecting margins, looking after costs and therefore staying lean. So we really dialed up our focus on our data-driven approach with both people and tools so that we identify trends quickly and respond to those. So the sorts of thing we look at there are conversion, add-ons, finance. We look at them on a regional level, at store level and a colleague level.

Top right would be -- maybe a good example of that where we've used line-level margin analysis tools to help us really focus on price elasticity the margin for our products. And clearly, over the last 6 months with inflationary costs, shipping costs and other challenges. And as Chris said, margin in line with prior years. The team have done an absolute excellent job with those tools, working with the commercial team.

Also on logistics, we've used the tools to help us minimize our cost per drop. And on top of that, using it to help maximize customer experience. And then just in terms of cost lines, we're using the tools to look at all the cost lines that we can, including compensation and allowances and stock write-offs. And finally on here, we have relocated to a larger, brand-new, purpose-built distribution center in Doncaster to support our future growth. Thank you, Chris.

So just moving on from the wheel and moving into ESG. I think we've made really great strides in the past 6 months, and we're clearly committed to driving further change. Just to shoot down the slide quickly, its -- sustainability is now a standing agenda item on every board. We've set up an ESG steering group, where we're defining targets and setting out the sustainability road map. We've been through training, Chris, I, the rest of the Board and the SMT, so that we're really clear about what we should be asking about, talking about and what good looks like.

We've had some great wins where we've got 100% of our laminate and wood flooring ranges now made from responsibly sourced timber. You'll also be aware of our SpringBond recycled underlay. So we've now gone through the barrier of 100 million bottles that we've utilized in there, and we'll try by year-end to get to 2 million on there. The team in terms of social justice, do a fantastic job on many elements. We continue to focus and support the foundation of light in our home city of Sunderland, colleague support, food banks, donations, volunteering and finally on here, we're going to report in line with TCFD requirements in our annual report later on this year.

Next slide, sorry, Chris. And we -- I just tried to lay out some of the targets for this year, for this summer end of this year, beginning of next. And you'll see we've already achieved the first 3 on there. So 100% renewable electricity now used across the business. We've now got certification with FIS, so the Furniture Industry Sustainability program. And I've just mentioned the flooring to you, and you'll see a number of other targets set out there. So great strides, I think, with ESG, and we will continue our focus on it.

Next slide, if you could, Chris. And again -- so I guess just in terms of summary, I'm really, really pleased with the strategic progress that we've made with the plan across all focus areas. We've strengthened key teams and have called them out, commercial and digital as well as the people team. We've got a really strong order book at GBP 148 million, double the size it was in January '20. Chris has talked about the strong balance sheet at circa GBP 88 million, and therefore, we're delighted with the 50% increase in the divi at 4.5p and commencing the GBP 7 million share buyback program.

And the last and final slide. So in terms of outlook, I guess it's there in the red box, the Board remains confident in the future success of the business. Our 2-year like-for-like intake for the first 33 weeks is in line. Cost inflation and supply disruption, they continue to present challenges, but we managed them super well in the first 6 months, and we will carry on with that level of focus for the remainder of the year.

As always, it's a well-run business. We will remain focused on both strong cost control and cash management. We're very aware that there's a potential impact on consumer confidence. We hear about that every time we turn the television on or read something. So inflationary pressures there and the conflict in Ukraine. And we remain focused on delivering that strong order book through the second half and therefore, remain on track to meet full year expectations.

So thanks very much. That's the end of the presentation.