ProCook Group plc (PROC) Earnings Call Transcript

Good afternoon, and welcome to the ProCook Group plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received in the meeting itself; however, the company can review the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Lee Tappenden. Good afternoon to you, sir.

Thank you, Alessandra. Good afternoon, everybody, and thank you for joining myself and Dan on our first half results for ProCook. Before we get into the details of the results, I thought it would be useful to reflect after being here about a year in the role of CEO of ProCook. So first and foremost, I believe we have a genuinely unique customer proposition at ProCook. Some of you would have joined us early in the year. I just want to reiterate a few things that are very clear in my mind now after a full year. So quite uniquely, we're 100% owned brand product at ProCook. We're fully direct source in terms of taking out middlemen and costs, giving us the ability to deliver incredible value, 30% to sometimes over 50% value against leading national brands of the same quality. And on the point of quality, completely reassured now of the quality that we have across the board in all of our assortments, very low return rates, even coming through on our most recent launch of electricals, which we'll talk about later. So the combination of value, quality and very importantly, that customer service in our stores, which you don't necessarily receive everywhere else in such a fragmented kitchenware market represents a tremendous growth opportunity. And through the combined efforts of both stores and e-comm, this unique proposition is really coming to life. We've invested in infrastructure over the last few years, both in the store support center in today and the single warehouse operation, which is proving out more and more efficiencies as we're running into peak trading at the moment. All of this is complemented by 2 very important factors. Firstly, we have a very clear ESG agenda, which is important to us as an organization. We are certified as a B Corp organization and the support over the last 3 years for the real living wage. Secondly, starting to reinforce what is a very strong colleague engagement with more of a performance culture, and that's starting with the newly formed senior leadership team, which has now been in place for the last few months. So before Dan covers off in detail, I thought I would just look back a bit about what we said our goals were for the medium term to deliver this profitable growth. Very clearly, we set out over that medium-term horizon to open 100 U.K. stores, deliver GBP 100 million sales revenue and an operating profit margin of 10%. There are 4 very clear strategic initiatives that you can see on the slide here. I won't go through all 4 today, but I'm going to double-click on the first 2, accelerating profitable sales growth; and secondly, improve operating efficiency. Before I do that, I'm going to give you just a very quick set of highlights from the first half. So as I say, very pleased and encouraged by our performance in the first half, we have strong trading momentum that's reflected in continued market share gains. In terms of active customers, we now stand at a record 1.1 million, which is up nearly 12% year-on-year. And our sales growth has been driven through volume rather than retail price inflation, whilst maintaining our gross margin percent in line with expectations. Our new store openings are on track, and I'll cover that in more detail shortly. And our product development continues to yield positive results as we go into new categories and refresh existing. And with all of those moving parts, we've managed to achieve these results with real discipline on expenses, and Dan will cover that in more detail. I'm also pleased to share that above all, with all of the highlights of the first half, the most recent period of trading in Q3, the first 8 weeks ending the 8th of December show continued momentum. So in terms of our U.K. store network, that goal of 100 stores that we set out a very ambitious goal this year to open 10 stores. We will exceed that goal this year. We opened 4 stores in the first half, followed by 5 further stores just in the last 8 weeks, getting all those 5 stores in advance of Black Friday period and Christmas, obviously. Additionally, we will open 3 further stores between January and March. So inside this financial year, we'll have a total of 12 stores open. The locations of the new stores are phenomenally strong. A lot of detailed research has gone into the locations, adjacencies to those retailers, and they're in shopping malls that are high-traffic centers with a combined annual footfall of over 150 million customers. Initial results on the store openings are encouraging, and they support our investment criteria of a payback in less than 1.5 years. To ensure our growth plans are profitable and appropriately, we have to support the ProCook brand, apologies, we've opted to close 2 of our smaller garden center stores, which is in line with the strategy we talked about before. Finally, we're already looking ahead to FY '26 and identifying what that new store pipeline looks for the following year. In terms of our product offer, we continue to broaden our assortment. And remember, as I said earlier, it's 100% owned brand ProCook products. And the expansion of the new electricals range, Phase 3 coming through the summer has proven and delivered well. And we have our Phase 4 of coffee category, the first couple of assortment products landed in store in the last couple of weeks. And the full range will land in February with a major PR launch to support it. Importantly, the new product launches and design refreshes mean that with close to 10% of our range has changed over the last 6 months in terms of color, design ways or just a general refresh to make sure that we're actually relevant for customers. In terms of the promotional activity around Black Friday and Christmas, we took a different approach this year on Black Friday. It was the first year that we had purposely bought special buys of the same products with different pack configurations, so maintaining appropriate branding, appropriately quality and technical specifications, but the different pack configurations meant we were able to deliver compelling value and maintain a very healthy margin position. In terms of Christmas gifting, the first time we've launched a bit of an expanded assortment up to 40 products in this area. We're probably not where we fully need to be, and that's something we're aiming for, for next year, but quite a step change on what we delivered to customers for Christmas this year. And there's much more to come on seasonal ranges next year for summer with a very disciplined category review process means we launch products and categories in a very clear defined timeline in line with customer expectations of seasonality. In terms of customer service, whether online or in-store, we've reenergized our focus internally on customer service at every single point. We've introduced NPS in our stores and online. And through constant revisiting and looking at our results from customers on a weekly basis, we've managed to maintain a 4.8 score on Trustpilot with over 120,000 5-star reviews in place currently. Online, we have a clear road map of technical enhancements to reduce friction for all customers. And we've seen a real step change in conversion with conversion up 14% year-on-year with the most significant increases coming in the most recent trading weeks, which is encouraging. Across all customer touchpoints, whether it's in-store, online or through the e-mails our customers receive, our brand campaigns are really starting to look and feel different. We started this in autumn, followed by Black Friday and Christmas, and we're really clearly showing up now with more consistency around personality tone. And we're showcasing more lifestyle and inspirational messaging versus just simply value. In the last 6 months, we've been experimenting on the journey with digital social marketing, very encouraging results with our increased brand reach of 34% and our Meta followers have now actually exceeded 100,000. So a significant step change in our marketing efficiency as a result of these initiatives. The final piece I'll cover is around efficiency, and we talked about this on our last presentation on supply chain transformation and really trying to look at our network on a full end-to-end basis, right from the warehouse picking situation through to the backroom of the stores and even the shop floor of the stores, how do we drive efficiencies through our business. So in recent months, we've launched a pilot program to improve product flow to our stores. We've increased delivery frequency. We've replaced pallet deliveries with cages, which improved significantly handling for stores as well as potential loss or theft. And we started with an initial pilot of 10 stores and based on that success, in the last 4 weeks, we've rolled that out to a further 10, taking it to 20 stores in the south of the country. We have developed and deployed the handheld terminals, which you can see on the slide here, which will significantly increase our stock accuracy in-store as well as in-store efficiencies for basically price hookups and just managing our inventory in a better way. We believe the combined effect of these programs and some other initiatives in flight at the moment that we will improve not only our product availability and ultimately sales, but reduce our inventory by around 10% in our stores, making the store colleagues' lives so much easier, focusing all their time on customer-facing activity. So with that, I'm now going to hand over to Dan, who's going to give you a much more deep dive into the details of our first half financial results.

Thank you, Lee. Okay. We're pleased to report positive and continued momentum in trading during the first half with 4 consecutive quarters now of growth and revenue of 7.5% year-on-year for the first half. Total like-for-like revenue was 4.2% up year-on-year. And as a result, we outperformed the U.K. kitchenware market by 4%. Equally pleasing was the fact that both retail and e-commerce channels had positive like-for-like during the first half. Retail revenue grew by 1.9% like-for-like with new stores contributing a further 4.6 percentage points of growth to deliver total retail growth of 6.5%. And in e-commerce, revenue grew by 8.5% like-for-like, recuperating much of the disruption from the transition to the new website platform last year, aided by stronger conversion and improved digital marketing activities. The relaunch of a curated range on Amazon during the first half also contributed a further 0.9 percentage points of growth in the e-commerce channel, taking our total revenue in that channel up to 9.4% year-on-year. As Lee mentioned earlier, revenue growth was primarily driven by increased transaction volume and with 315,000 new customers acquired during the first half, which was plus 9.8% year-on-year, we've increased our customer base. Gross profit increased by 5.1% in the first half year-on-year and gross margins reduced by 160 basis points. This was in line with our expectations. This reflected a continuation of the majority -- for the majority of the first half of price investments for customers to improve value that we initiated first in H2 FY '24. These reduced margins by 210 basis points or 80 basis points when you net off the anticipated and indeed realized foreign exchange benefits that came through in the first half. We controlled discounting and promotions well, reducing the impact year-on-year by 20 basis points, whilst heightened shipping costs due to the Red Sea crisis has impacted first-half margins by around 30 basis points. The remaining block on the chart that you can see is related to product mix, and this is largely attributable to the growth in electricals as part of our business, which has a slightly lower margin and therefore, impacted our overall margin by 60 basis points. H1 underlying operating loss is GBP 0.3 million higher year-on-year, reflecting the volume growth and margin impact, whilst cost discipline has remained consistently strong, and we've reduced OpEx as a percentage of revenue during the first half by 120 basis points, mitigating inflationary pressures particularly in payroll, whilst also investing in areas that will support our continued performance and growth over the years ahead, such as digital marketing and new stores. Looking at the lower half of the income statement, finance expenses have remained in line year-on-year, whilst other gains and losses reflect a GBP 0.9 million swing -- adverse swing year-on-year, driven by temporary unrealized foreign exchange losses in half 1 this year compared to gains in half 1 last year. Non-underlying items are much reduced year-on-year, and they relate solely to the remnants of the IPO share-based payment awards, which ended in November this year on the third anniversary of the IPO. Net debt at the end of the first half was GBP 4.2 million, with almost GBP 12 million of available liquidity in cash and facilities. The cash flows for the first half included investment in inventory, which we brought in earlier and prudently to protect peak trading as a result of the disruption in the global freight markets. And this was largely offset by increased payable balances at the half-year date. As planned, we've invested GBP 1.3 million capital expenditure in new stores during the first half. Trading performance in the first 8 weeks of Q3 has shown improving momentum as we've gone through the 8 weeks, following a slower start to the second half, which coincided with the budget event and also the later timing of Black Friday. This particularly impacted footfall in retail stores, which has since recovered. Across the 8 weeks as a whole, we delivered revenue growth of 7.5%, continuing the momentum from the first half with like-for-like up 0.9%. Retail like-for-like was weaker as a result of the lower footfall, whilst e-commerce channel continues to perform well with like-for-like revenue up 7.7%. Our full year outlook for FY '25 remains unchanged. H2 brings around 60% of the full-year revenue in just 24 of the 52 weeks, whilst our cost base remains closer to 50-50. And with efficiencies in marketing and customer acquisition as well as operational efficiencies, our cost leverage improves in the second half. This adds a significant seasonal profit boost to the second half of the year, as you can see from the chart on this page. Combined with the benefits of the new stores being opened for the majority of the second half, improved margins from price optimization and foreign exchange gains and efficiency that -- with efficiencies that we have already delivered in the first half that continue for the second half, we remain on track and are confident in delivering on expectations. I'll hand back to Lee.

Thank you, Dan. So in summary, we continue to see strong momentum in the business in what is a challenging market. And as a result of that, we are continuing to see gains in market share. Our strategic initiatives, 2 pillars of which I covered earlier, are focused on the really long-term profitable growth of the business. Our customer proposition in terms of product and value continues to evolve and our new store opening program, coupled with the social digital marketing initiatives I talked about, will continue to build brand awareness. Recent trading performance that Dan just talked about gives us further confidence in our business model for the future towards that medium-term goal that we have shared previously of opening 100 stores in the U.K., delivering GBP 100 million in sales revenue and a 10% operating profit. Thank you very much, everyone, for your time and attention.

We're going to take some questions now. I think there's going to be a few that will come up on the screen, and Dan is probably going to read them out for us, and we'll take them between us. So we've got the first question that's come up from Richard, which is quite a long question, but good question.

So the website -- thank you for the feedback, Richard. The website is looking awesome, currently, very fast and very slick from a customer point of view. The performance reported improvements in conversion and marketing efficiency are encouraging. So thank you for that. And your questions then, firstly, do you think there's still room to continue achieving gains in these areas? That's the first question.

Very simply, yes, Richard, we do. I think we have made a significant step change in the last probably 6 to 9 months. I would say that there's a lot more that is on the horizon and within our roadmap around technical enhancements. And I think the marketing efficiencies will continue to gain momentum as well as we look at more interactions and engagement with customers through social digital. There's a lot of work in process that's coming through in Q3 and into Q4. So we're very encouraged by that.

And the second part of the question, given the typical profitability advantage of D2C e-commerce, is there scope for additional marketing investment to accelerate growth? Perhaps I'll take that one. So I think the marketing efficiency that we've been referring to in this presentation is encouraging. We continually monitor how much to invest and the return that we're generating from that investment in terms of return on ad spend, cost per acquisition and marketing efficiency ratios. It's a balance between new customer acquisition and repeat customers getting them back to shop with us again. We constantly monitor that and optimize as best we can. So I think it's an ongoing point. But yes, hopefully, if we improve efficiency, we can drive more sales. We have a question from another Richard interestingly. How do you foresee gross profit margins evolving over the next 12 months? Well, I'll answer that one in as far as we've given guidance. So we expect the gross margins to improve in the second half, as we just talked about earlier in terms of our full-year outlook. Within that, we expect to benefit from foreign exchange gains year-on-year. There will be some impact of heightened shipping, but also benefit of improved or price optimization where we see opportunity to mitigate those freight cost pressures. Going beyond that, I think, is sort of beyond the scope of today. But broadly, we anticipate the supply chain disruption will start to ease, and it has done already. And foreign exchange obviously remains volatile with the recent political changes in both the U.K. and the U.S., but also the impact of interest rates as they move between particularly U.K. and U.S., which is the main currency that we rely on. So we continually monitor it, and we adjust our position as we need to.

Another question from Richard L here, which is also with inventory levels up year-on-year, how confident are you of managing potential excess stock during peak trading periods? So as Dan alluded to, we did quite prudently bring in more inventory in preparation for peak period, which I'm glad we took that stance. That did give us a peak of inventory around September, October time. Our current trajectory of inventory intake and our sales projections mean that we will exit the year, our forecast is in good shape against our original inventory year-end budget. So we feel confident of managing that through. And we have a very clear clearance plan as part of every year's trading around January sales, which is not a surprise that will actually address any excess issue. So we feel we're in good shape from an inventory perspective.