Angling Direct PLC (ANG) Earnings Call Transcript

Good morning, and welcome to the Angling Direct PLC investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to the management team. Steve, good morning.

Good morning, everyone. Thanks for making the time this morning to go through the half-year results for Angling Direct PLC. We'll take you through the presentation that's up on the website, and then we'll leave a good amount of time at the end because we've got some pre-submitted questions and are happy to sort of take any other questions as we go through the presentation. I'll just skip on to Slide 3, the highlights, sort of to open the presentation. I think, overall, a very positive set of results against a pretty choppy and tricky backdrop. The year started when we were talking to shareholders and potential investors back in May, where we'd had a very challenging Q1, the backdrop of the Iran conflict really coming through and consumers normalizing to that. And then post that situation, sort of a very dry summer, much of the U.K. in drought conditions, which obviously impacts sort of angling conditions, particularly water levels and oxygen in the water. So against those much-publicized headwinds, we've been retaining and growing our customer numbers, and we think the sort of the strength of the sales and the strength of our earnings is testament to the resilience of the business that we've built over the last few years and is really giving us a platform to sort of increase the scale of growth and the scale of ambition, particularly in the U.K., for the business. If we look there on the tiles, one of the things we think that's most impressive is the scaling of the earnings, over-indexing our sales growth, 10% EBITDA growth against the backdrop of a tougher sales environment. How have we done that? We've been very disciplined in terms of making sure we leverage those scale investments we made in previous years. In particular, we spent over GBP 2 million on digital shelf-edge labeling across all of our physical store estate, and we invested in our fulfillment facility in the U.K. in terms of an automated packing capability. Both of those really helped us get into sort of driving operational gearing and getting those savings to drop through to our EBITDA performance. That, against, in terms of where we're going and the strength of the balance sheet, the cash you'll see on the left-hand side remains in a very strong position. It is our cash peak point at the half year. The working capital cycle means the end of the year is when we're most capital hungry and we have our lowest cash point. But notwithstanding that, we've built the cash position further while still, at the same time, driving accelerated returns to shareholders through our buyback program, which I'll talk a little bit more about later on. On this slide, we've set out where we are against our medium-term objectives, which we published, our upgraded medium-term objectives, back in May. It's worth reminding everyone that our previous set of medium-term objectives, we substantially delivered those within 2 years, giving us the opportunity to reframe the ambition for the business. I'm not going to go through and read every one out. But I think the important reference points on there are the U.K. business and GBP 125 million ambition. We are scaling those like-for-like customers in the U.K., 2.9% growth at the lower end of the corridor, but clearly set against those difficult conditions. We think that shows that we are delivering on consolidating this sort of category and market within the U.K. And indeed, we're pacing around a 4-year CAGR to deliver those medium-term objectives. And as we gather momentum as we go through the year, there's potential to exceed that. On the earnings side, again, I've talked about over-indexing that EBITDA earnings growth relative to the sales, leveraging those investments we've made to drive that return in. And at the same time, the CAGR on our earnings is pacing around 4 years to deliver that scale ambition of GBP 8 million. My AD, our loyalty program, continues to scale its numbers. We're nearly 700,000 at the half year. We've passed that number as we've gone through the last couple of months post-period end. We think that's a particularly impressive stat in terms of sort of the customer envelope we've now got that we can talk to digitally and physically. And our most valuable customers, our omnichannel customers, we continue to grow those. They grew 8.3% in the half, and an omnichannel customer is worth well over GBP 500 a year, and we continue to focus our sort of our data and our learnings into how we talk to and sort of extract more value from that customer base. Europe, we're doing what we said we were going to do in Europe. We think the European market will turn. We're retaining that optionality whilst reducing the drag on the earnings and the return on capital. The loss is reduced to around 7.5% of the U.K. EBITDA. And the ROCE reduction in terms of that drag has gone back to 270 basis points, and we're making further progress on that as we travel towards the full year. Again, our focus in terms of cash deployment and how we balance that European optionality is very much focused on what our free cash flow yield can look like and our medium-term return on capital ambition of over 15%. Interestingly, our share buyback component of how we're thinking about driving that medium-term return on capital, we've now deployed over GBP 4 million of cash. And we've acquired around 12% of the company at a price of 44p, which we think represents very good value for the shareholder base. And finally, Angling's largest responsible employer. For the first time, we are community fund that was part of our competition website, we've returned over GBP 20,000 back to good causes within the sort of angling community. We've had those voted on by our customers, and we're in the process of disseminating that cash to those various winners that we held across the 4 regions in the U.K. In terms of some sort of standouts in terms of the business review, we've sort of given some more fulsome detail on the next couple of slides. I'll just pick out a few of the highlights as we go through. On the left-hand side, the U.K. customer, I talked about the omnichannel customer and its importance and its value. I think, on a glass sort of half-empty, still over 40% of our store-only customers visit us once a year. On the glass-half-full side, that is a real opportunity for this business. The data and the understanding we're getting of our customers is increasing. We've seen over 14% failure of independent tackle stores over the last 18 months, and we're increasingly seeing those customers coming to us. In terms of our store footprint in the middle there, we've done 3 stores so far in the half. One of those is an acquisition. They're all delivering in line with the sort of the business case we set ourselves. As a reminder, we are very disciplined in terms of the return on capital we look for from those sites. As a sort of simplistic rule of thumb, a 4-year payback is what we target. We've done more work in terms of refining our data catchment model, our secret KFC recipe, as I referred to it. And actually, we're increasingly confident with the level of failure and our understanding of average customer spend, drive time, and postcode, we can access increasingly more catchments within the U.K. On the U.K. digital front, again, we continue to acquire customers. We've done a really solid job in terms of delivering increased customer numbers, using our digital marketing effectively and targeting those customers where we're making a positive contribution to the overall business and, at the same time, leveraging the investments we put in place, in particular, the first bullet point in the right-hand stack there, where fulfillment ratios have improved over 60 basis points year-on-year. Over the page, Europe, as I said, it's very much doing what we said we'd do, keep the option open. It's a scale market. It's over twice the size of the U.K., the Netherlands and Germany put together. Ensure that we reduce the drag of the losses. Ensure we reduce the cash drag on the business. Look at the efficiency of the capital we're deploying and very much reduce the drag on the free cash flow yield and the return on capital. We still think, from a medium-term perspective, it remains an attractive option. And therefore, we'll continue to deploy the strategy of lowest cost to retain highest optionality. On the commercial front, our own-brand story has been sort of a key component of what we've been building in this business in the last few years. That continues to go from strength to strength. It's over 15% of our gross profit penetration now, and the earnings from that brand grew over 20% in the half. We continue to refine our approach to our own brands, and we see there being more sort of further growth from an existing brand or a complementary brand as we move the business further forward. The bottom point in that stack, one thing that we've really benefited from this year is when we put digital shelf-edge labeling into the stores, that's enabled us to be more choiceful about when we change prices, who we match prices with, and how quickly we can deploy those into our physical store estate and then back onto our website. Historically, we have only changed prices twice a week. We're able to do that 7 times a week or beyond, once a day if we wish. And that's really helped us focus in on that contribution aspect of driving incremental customer growth, particularly into our digital offer. On the right-hand side, communities and sustainability. As I mentioned, the AD Community Fund, that's something that we're most proud of. We continue to scale that AD Win competition website. That's got the potential to go over GBP 800,000 this year, meaning we'll donate over GBP 40,000 to good causes within the angling community, and that's going to play sort of a core strand as we move forward in terms of how we're engaging and building the wider angling market. Now I'll hand over to Sam on the financials.

Good morning, everybody. So starting with just a few of the key financial headlines on the slide there in front of you, and we'll get into a bit more detail on the next couple of slides, but hopefully, this just gives you a snapshot to show that we're continuing to make progress in the delivery of those upgraded medium-term objectives. And just to pull out a couple of the other headlines on the -- if we start in the U.K., that as Steve has touched on, that's been delivered in H1 in the U.K. despite what's been a pretty challenging backdrop for us. But you can see that we continue to grow sales, drive that critical over-indexing of adjusted EBITDA growth, which has been challenging, particularly sort of as we move through the half and we saw a bit more sort of gross margin pricing pressure, which we'll come on to in a bit more detail. But then that's been more than offset by, as Steve has touched on, the investment in the digital shelf-edge labeling and the automated packing technology, alongside then our sort of continued robust cost base management, and that's really enabled that sort of over-indexing. You can see the European sales have gone backwards year-on-year. That is actually ahead of our internal plans, though, as we continue to focus on the value-accretive sales. And as a result, the European losses have improved by 20% to minus GBP 0.2 million, and it now represents just 7.5% of the U.K. earnings on a trailing 12-month basis. And then from a cash perspective, you can see there we're continuing to invest the cash to sort of underpin the delivery of those medium-term objectives. H1 is focused on new space. Again, we'll come back to that. And you can see there as well, we've also then returned excess liquidity through the buybacks, with GBP 0.4 million deployed in H1 and then a further GBP 3.1 million delivered post-period end. So moving on to the U.K. in a bit more detail. So you can see there U.K. like-for-like sales up 2.9%, with store like-for-likes. And here, we mean the stores excluding the FY '26 and FY '27 stores and the closures. So the stores were broadly flat year-on-year, minus 0.2%, and online was up 7.5%. Across both channels, H1 was shaped against that challenging backdrop, with Q1 trading impacted by the consumer reaction to the consequences of the Iran conflict, which sort of was the immediacy of higher fuel prices was the standout there. And then in Q2, we went into that period of record levels of low rainfall that saw drought conditions declared across many parts of the U.K., and that really impacted the angling conditions. Moving across the store closures. So we ceased trading in Beccles in late FY '26 and then Cheltenham in Q2 this year. And we closed both those stores because they couldn't deliver the right unit economics for the stores against our ROCE ambition. So it's better for us to take that stockpile and reinvest it in the business to drive an incrementally accretive return against that ambition. And then finally there, just the big green bar, the GBP 2.3 million, that's the new space. So that's the 6 new stores we did last year and the 3 we've done so far this year. And they continue to scale as an overall group in line with the business cases and each store sort of individually within its own business case planning corridor. So overall, you can see there revenue up U.K. 6.9% or GBP 3.5 million to GBP 54.6 million. Moving to adjusted EBITDA in that bottom bridge and starting with the gross margin. You can see that we've got a 40-basis-point decline year-on-year. So if you look at the bridge of that and start with the positive bridging components, we've got a 40-basis-point improvement overall because of our own-brand progression, continues to go well. Gross profit growth year-on-year of just over 22% and now just shy of 16% of our U.K. total gross profit, and that's up 200 basis points year-on-year at the half. And we also have a 10-basis-point improvement in the margin through new revenue streams. So these are things like our in-store services, where we do reel servicing and reel spooling, our commercial marketing income, and our new competition website, AD Win, as we continue to leverage that cost base as well as our My AD customer scale and reach. Moving to the negative bridging components in there. We've got a 60-basis-point reduction in the margin, reflecting the high levels of price discounting in the market, particularly over the second quarter. And we've got increasing amounts of data and insight on who is setting the pricing in the market around which SKUs in particular are being discounted. And that's enabling us to be increasingly choiceful in terms of where we focus our efforts and our resources from both the competitor and supplier perspective in that area. And then finally, the 30 basis points of higher shrink year-on-year. Now the primary driver of this is warranty claims on third-party products, where we've both got a higher amount of claims year-on-year and a higher level of unresolved supplier warranty claims. So we are seeing higher levels of warranty claims, but the key driver in here is the rollout of new third-party warranty claim technology we sort of deployed in the first half. That is initially slowing down the resolution time frames. But we think that with the more robust, comprehensive information that is used within that technology, alongside the suppliers engaging direct, we will see a much better resolution rate. So we've seen a bit of an initial slowdown, but we ultimately expect that resolution rate to come back and also actually provide us with better data and insight in terms of how we can have less warranty claims coming in and also how we can increase the claim resolution velocity with suppliers. And moving to the right-hand-side dashed blue box on there in terms of the cost base. So we continue to keep a tight grip on costs, and obviously even more imperative in a period where we've got some more gross margin pressure. But because of the significant work we've done in this area over the past few years to offset some pretty significant cost headwinds, it's obviously an increasing challenge to find more and more options in terms of that cost optimization. But all of our efforts still sort of stay focused on this to make sure that we're squeezing every pound of value we can out of the cost base. So starting in that direct cost ratio, and this is the fulfillment cost in stores and online as a ratio of sales. So think store and warehouse colleague payroll, paid advertising ratio, et cetera. So the ratio here increased by 1.4% year-on-year in the half, which under-indexes versus the inflationary cost pressures we're seeing. So I think a 4.1% National Living Wage increase, and payroll is probably over half of this cost in terms of direct costs. So this is really where we're seeing the benefit of that digital shelf-edge labeling and the AutoPack returns paying through for us, sort of offsetting some of that headline inflation in the direct costs. The channel cost ratio. So here, this is the overhead directly attributable to the online and store businesses. So for example, the store premises. This ratio is actually flat on a year-on-year basis. And actually, if you take out the new space, our spend is broadly flat on a pound-note basis as well, sort of reflecting our focus on really leveraging that cost base. On a similar note with the group overheads there. So that's where the sort of central overheads sit. So sort of think our head office functional teams, if you like, as a percentage of sales. You can see there that's actually improved by 90 basis points year-on-year. And on a last-12-month basis, we're now down at 6.3% of U.K. sales. And so that's well within our sort of 7% appetite in terms of what we need to deliver to hit those medium-term objectives. Overall, that reflects in U.K. adjusted EBITDA growth of 10% to GBP 4.5 million and that EBITDA margin growth of 30 basis points to 8.3%. Moving to Europe. As I said before, the sales are down a touch, ahead of the internal plans. And that has also delivered a contribution ratio. And by that, what I mean is the adjusted EBITDA prior to the overhead as a percentage of sales. That's actually improved by 100 basis points year-on-year, so really supporting that overall loss reduction plan and, alongside what is already a bare-bones overhead structure in Europe, is really what's allowed us to sort of get those losses down further by the 20%. And as I said before, we're down at 7.5% of U.K. adjusted EBITDA, down from 12.5% last year and 22.4% the year before. I won't dwell on this slide for too long. I'll let you have a look afterwards, but hopefully, it just provides a bit of context for sort of understanding where that first-half performance fits in and where we've come from over quite a short period of time. And then finally, just moving to cash flow and return on capital. So you can see the cash bridge at the top of the page there. Just to pull out a few highlights, you can see that we've got a working capital inflow of GBP 0.7 million in the half. So theoretically, in a steady-state business where we weren't deploying any additional working capital flexibility we've got in the capital allocation policy, for example, we expect about GBP 3 million inflow at this point because it's a working capital low point for the year. So that GBP 2.3 million variance against that GBP 3 million theoretical sort of reference point does reflect the flexibility of the capital allocation policy, both in terms of that new space where we've deployed about GBP 0.5 million into those 3 new sites we've done in H1, alongside some acceleration in the stock intake where we went deeper on some of the top 1,000 SKUs. And just as a reminder, that top 1,000 covers about 55% of our revenue, and we did that sort of earlier in the season at the outset of the Iran war just to underpin the peak trading period, given we didn't know where we were going to get to at that point in time in terms of how much flux that would cause us. And some of that still sat then on our balance sheet at the end of July as we headed into sort of the August and September trading period. On interest, if we park, alongside the IFRS 16 interest element, the underlying interest income remains sort of similar to last year at about GBP 0.2 million. And then finally, on CapEx, in the half, it's GBP 1.3 million. As you can see, GBP 0.6 million is roughly related to the 3 new stores, with the rest reflecting maintenance CapEx. And then you can see there on the buybacks, which we've already touched on. We've also given the adjusted free cash flow in that box on the right-hand side there, where we then strip out the investments in the CapEx and working capital for new space and then other investment CapEx, which there isn't any other in H1 this year, and the buyback cash flow to then sort of understand what that underlying cash flow generation looks like. And you can see there that continues to strengthen, with a GBP 5 million inflow of GBP 1.4 million higher than last year. And then finally, moving to group adjusted ROCE, continue to make progress here, 130 basis points up year-on-year on a trailing 12-month basis to 10.3%. And this is our focus area in terms of delivering on both sides of the equation. So you can -- and really the cocktail here is trailing 12-month EBIT growing at 25%, but the adjusted net assets only going forward by 0.3%. So really delivering earnings growth off a broadly flat balance sheet ex cash. And with that, I'll hand back to Steve.

Thank you, Sam. So back in May, as I said, we upgraded our medium-term objectives. We just set out in the presentation a reminder of how we chose to sort of move those objectives forward from the previous set that we put out in the market. Worth noting sort of the level of ambition that we've put in there, particularly around the earnings piece, around scaling those earnings by a further 33% over the medium term. Worth just referring back to, we substantially delivered the previous set of objectives within a 24-month period, and we're on a CAGR right now of around 4 years based on the May announcement date that we put out there. We've nuanced some of those around, particularly around Europe, where we very much are determined and committed as a management team in terms of leveraging the balance sheet where we do expand into Europe. We have got a very robust cash position. And our capital allocation policy considers what level of cash we need to retain to open up that European optionality should it manifest itself. Over the page, what we've done is some of the questions we often get is what are the key drivers that sit beneath those levels of ambition. So we've just set out on the page there some of the fundamentals that underpin each of those aspects in terms of those new broader medium-term objectives. In particular, the return on capital point is the one that I'm sort of most passionate about. That free cash flow yield and that return on capital does require us to sort of continue to strengthen the U.K. business, be very disciplined about how we think about the European optionality, look at what is an optimum cash-holding level that we need to hold for the business, challenge ourselves around that and, at the same time, return capital to shareholders where it's compelling to do so. We think buying 12% of the company for 44p represents fantastic value for the shareholder base, and we've still maintained a very, very strong liquidity position. And we continue to generate cash, as Sam just signposted with that GBP 5 million inflow number at the half. Over the page, current trading and outlook. Everyone will have seen that the weather was a bit more helpful over sort of September, which sort of gave us a bit of a shot in the arm in terms of there was some pent-up demand there, a little bit more fishing activity, a really strong performance in August and September. Underneath that 10.7%, there are some very solid like-for-like figures, particularly in the U.K. stores as we saw our customer base increasingly come back to us after being unable to sort of participate in the pastime over the summer with the very low levels of water and associated oxygen. We think that demonstrates the resilience in terms of our customer base and the strength of the sort of the customer moat that we're building for the U.K. business. Again, post period end, I've talked about the buyback. We did deploy more cash, as folks would have seen, to the date of the RNS that we put out last Tuesday. And subsequently, post the RNS last Tuesday, we've done some more buyback at what we think is a compelling price relative to where we believe the sort of the short- and medium-term value for the stock should be. The Board confirms that it is still trading in line with full-year market expectations. We are gaining customers. There is some discounting in the market, as Sam signposted. We do see the competitors making what we consider to be irrational decisions in some aspects of their trading. We'll continue to respond to that in a choiceful fashion, which we think builds long-term sort of sustainability for our business, but we're very much still trading in line with those expectations that we set out to the market, which is a U.K. business delivering over GBP 6 million of EBITDA and a European business losing no more than GBP 400,000. With that, that takes us to the end of the presentation. Thanks very much for listening. That takes us on to the questions.

Thank you, Steve and Sam, for updating investors today. [Operator Instructions] As you can see, we have received a number of questions during today's presentation. So Steve, if I could just hand back to you at this point to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Thank you. I'll let -- the first one is about free cash flow. So I'll let my CFO handle that.