Trading Update

May 14, 2024

Earnings release

Thanks everyone for being on this call, because I know it's been organized at short notice. Thanks to Equity Development for setting it up. I was keen to speak to our retail investor base after the RNS on Friday. Really, I suppose fundamentally to apologize for the. I really don't like disappointing investors. Obviously, institutions invest a lot of money in us, so that's a problem for me. I'm also always very conscious that retail investors, it is your money. It is money that you've earned, you've saved. So I was very keen to have this call. Chris Dent, our CFO, was on holiday this week. That was something that was already pre-planned, but I didn't really want to defer the meeting, the call till next week. I thought it was important to speak to retail investors as soon as possible. In terms of what's happened, well, we are here. We are pretty devastated, to be frank. Because really since January 2020, we've to some extent have defied gravity. We've dealt with a succession of external crises, going back to January 2020 with our factory base closing, then customers closing, then the shipping crisis, cost of living crisis, and then for the last couple of years, up until very recently, we've had resellers who've been significantly overstocked. We've traded hard through that extended period and delivered increase in revenue profitability and we've kept those dividends going. We just couldn't quite get there in FY 2024, and it really does come down to quarter 4. When we updated just over a month ago when we had our interims, we were assuming that quarter 4 revenues would be about 1 or 2% higher than the previous year. We were assuming some very modest growth in revenue for quarter 4 year-on-year. That was a bit better than, say, H1, where we were minus 4%. We didn't feel in any way that it was a particularly aggressive assumption. We'd seen retailer inventories normalize as of January, really. We'd seen consumer confidence on the way up, albeit from a low point. We'd seen steady really improvement in disposable incomes, which tend to benefit GM businesses like ourselves. Food inflation was dropping. We've had a long period where we've had wage deflation combined with high food inflation, which is a pretty toxic environment. You're talking about a smaller share of a smaller basket. We could see, we believe we were entering into a period where the basket was going to be larger because wages were going up in real terms with maybe more of a share for GM because food inflation is dropping. We still think fundamentally that's what's happening. The retail inventories are normalized, but we're not going to get the benefits of that until FY 2025. We were hoping for some benefits earlier in the year during this final quarter, but it's going to be fundamentally a benefit to FY 2025. What we have seen, for reasons which aren't altogether clear, is we have seen a slowdown in consumer spending. So despite the fact the consumer has more money in their pockets, for some reason, over the kind of spring period, we've seen them holding on to that money and not deploying that in-store or indeed online. Most commentators, most analysts, are presenting this as a kind of weather-driven blip. I sincerely hope they are right. But at the moment, because we cannot explain it, we thought it sensible to take the more cautious view that it is maybe more of a trend than a blip. We had seen it having an impact on our, what we call our near-term sales, so things like our call-off accounts, things like our online, and things like our regular stock accounts, the accounts which are more closest to consumer demand. When consumer demand moves, they tend to move quickest. Other parts of our business, like FOB, move more slowly in response to consumer demand. What we have seen is that part of our revenue drop, and we saw this really most clearly in the we saw some of it in March management accounts, which we reviewed in the middle of April. We have seen it more clearly in the April management accounts, which we had sight of Wednesday last week. We have looked at this drop in our near-term revenue. We have listened to the reasons which people have given as to why it is. We are not quite convinced that they are right, and we have assumed it is going to be a trend, and therefore will pull down quarter 4 revenue. Instead of that very modest 1% or 2% growth we are looking at, depending on which analyst is doing the work, it is probably more like a 7% to 8% decline in revenue in that quarter. It has also had a very direct impact on margin because those kind of near-term revenues tend to be higher gross margin. They do come with a higher operating cost, but of course, that operating cost is already deployed. What we are losing is we are losing the revenue, and we are losing that better margin, and therefore we have taken a more cautious view of our margin over quarter 4. It is that combination of lower revenues from those sort of near-term sources of revenue that we have, and the margin impact that that has had, which has led to the downgrade on Friday. We are more optimistic about FY 2025. Let me tell you why. We are seeing more normalized ordering from larger retailers off the back of their inventory levels after a couple of years really being back at something approaching a sensible level. That is already having, at this very early stage, having a good influence on our FY 2025 order book. I think the view we have is if the commentator analysts are right and the second half of this calendar year will be strong for discretionary consumer, then that is an upside. But even if these current, more difficult consumer conditions continue, the tailwind from the benefit of more normalized ordering arising from more sensible levels of inventories in retail, we are very confident will outweigh whatever headwind that might represent. Let me explain why with a simple example. If we have a retailer that is overstocked, they do not just reduce their intake by 5%, 10%. They basically shut the doors for a period until their stock normalizes. Often you can see drops of 40%, 50% for us as a wholesaler. It's often something which isn't kind of fully appreciated as we often look like a retailer, but we are very much a wholesaler. That can lead to increased volatility when retailer inventories are high. In a normal year, and when we all love to have a normal year, we have a portfolio effect with the business. So we have some retailers that might be understocked, some might be overstocked, and some might be in the middle. What we've seen since the end of the pandemic when the volatility of demand led to an across-the-board overstock is at the very extended period of unwinding of those overstock positions really from January 2022 through to January 2024. So we are much more optimistic about FY25. There's good signs of that in our order book which is why we did update. It is early, so a lot can happen. So far we're feeling good about FY25. I think also the fundamentals which are underpinning it, I think we do see continuing. We do see that we're through the worst in terms of a return to growth of disposable income. We do think consumer confidence is past the worst too and will continue to improve. I mentioned those retailer inventories several times already. That correction has happened. So the fundamentals of what we see will drive the order book of FY25 we see are there and we see that as a much better environment than we've seen over the last few years. In addition, of course, we've got our investments in Europe, and we do see significant growth in our European revenues as we move through FY25. Okay, that was, Hannah, all I had to say. I hope that was reasonably comprehensive. If you have any detailed financial questions, I'll do my best. Chris isn't here. I will do my best to answer them comprehensively as well. Good. Right. We'll steer from quantifying what normalized looks like. A couple of questions here on consumer trends driven by people favoring experiential holidays rather than GM, goods in general. Do you have any thoughts to share on that? Yeah. I guess the thought I have got to share is I think in a way we are all going to have to take our own view, aren't we, of this? I think that fundamentally, if you are a GM business and you are moving from an environment where people had less money every month and then food inflation was high, to one where the reverse is true, that at some point has got to be. It is certainly a more benevolent environment. Now, of course, where will people deploy their spare cash? I think that debate about will it be on stuff or will it be on experiences? I do not think, who knows is my view. If you look at the market research from earlier in the year and you ask people what they were planning to spend their money on, right down the bottom was hospitality and dining out, the consumer was clearly intending to. The novelty of getting out after the lockdowns had kind of worn off. Eating out is very expensive. The service levels are often quite poor. So that was right down the bottom of the list of people's priorities. Right at the top of the list were things like holidays. But kind of in the middle, maybe towards the top half, was investments in the home. So I looked at this and thought, "I will take that. I will take that after the last couple of years," definitely. And there is certainly some evidence of when people are not dining out, their entertaining at home. That can be beneficial for things like our kitchen business, cookware, which has had a very difficult couple of years, we can see is on the up, and that I think reflects that move. It is just at the moment, this spring has been very tough in terms of in-store and online, and I think we gave it a month. Okay, that is a blip. We gave it another month. No, hang on a minute. We have got to assume the worst here and factor that into our numbers. I say most commentators are more confident about the second half. At some point, they see these effects starting to come through. I very much hope they are right. When I see it, I will have a nice glass of Chardonnay that evening. But for the moment, I think we are assuming the worst in the short term. In the medium term, we are much more optimistic. Okay. You referred to significant growth in the FY25 order book giving you confidence while simultaneously having to adjust FY24 down four weeks after the last update. What is the typical mix between long and short lead time orders? This is a great question, and I think in moments like this you always reflect upon what could we have done differently in terms of communication. I think one of the things I have settled on is the business has changed over recent years, both for, I think, structural and cyclical reasons in the sense that if you go back to when we IPO'd in 2017, and I am taking a very much a high watermark here. 67% of our revenue, our gross revenue came from FOB business. For those of you who are not aware about what FOB is, this is where we hand the product over in the Far East, normally in full containers, and our customers, our retailers, do the importation. It is large orders ordered very far ahead, and made our order book very predictable. Now, as the business has grown its online business, for example, and other elements of our business, that has come down. But this year it is probably going to be about 20%. It is quite a big move. I do not think 20% is its normalized level. I think it will be somewhere between 35% and 40%. I think that 20% represents when retailers are nervous about their stock position and they become risk off, the one thing they look to cut first is those big orders placed further ahead, and they want to order product on a more hand-to-mouth, more predictable basis. I think it will not go back to 67% for structural reasons, but it will move back to, I suspect, 35% to 40%. Now, what that means is, and this is all part of over the recent years with all the challenges we have faced, trading hard, finding one challenge and having to find a solution to it, if retailers do not want to order FOB further forward, they want to order landed on a more hand-to-mouth basis, we have provided that option to them, and that has helped mitigate the effects of these sort of external crises. It does, however, mean a bit less visibility in our order book because we do have this sort of more near-term business as a structural but also cyclical large part of our overall mix. It is normally pretty dependable, which is why I think is the reason why I have never raised it in the past. I have never seen it as massively relevant because it has always been pretty predictable. Not over the last couple of months, last month or two, unfortunately. Okay. Helpful. Thank you. A quick glossary point. Can you explain what you mean by call-off accounts? Yeah. A call-off account is, they are typically larger retailers. I use Asda as an example. They will say, "We will list our product, your product for a six-month period." We will go into store. We will take an initial order for the store fill and their warehouse fill. Then as you go through the season, as people buy the product in store, we will then supply and top up their inventory. As I say, along with online and our regular stock accounts, it is the part of our business which is closest to consumer demand as a wholesaler. Often what they will do is they will give us access to a portal where we can see sell-through. Therefore, we can manage our inventory position. I do not want anyone to be worried about inventory here. When demand moves, we have the management processes in place that means we manage the inventory effectively. As I say, it is normally pretty predictable, not least because we take a cautious view. If a retailer says, "Look, you are going to sell 1,000 a week," we will assume, say, 750 in our order book, and then we will maybe keep a buffer on top of that. That is why it has never really been something we have had to raise previously, because it has always been reliable. Something has happened during the spring in store and online, there has been a stepped change in demand, which has become really apparent over the last month or so. It has affected those parts of our business which have an immediate impact on our revenue. But at the same time, we have not had the benefits in Q4 of the more normalized order placing from lower inventories, which is benefiting more on a forward order basis FY 2025. I hope that makes sense. I know there is quite a lot of moving parts in a wholesale business like ours, but I do apologize if it is confusing. Coming through loud and clear. Which product lines are responsible for the slower than expected sales? There isn't any particular. We're largely a home business, and it is across kitchen, floor care, laundry. It's pretty well spread. In the last presentation you declared that headcount was down from 395 to under 350. Was this via redundancies or attrition, and is it having any impact on the continuous improvement culture? No, not at all. It's been very clear, the headcount moves have been very much a sort of bottom up process than a top down. Where we've seen efficiencies, we've allowed typically through sort of natural attrition the headcounts. For example, if we've deployed a piece of kit that means that in a particular area we no longer need five people, we need four, we've allowed that headcount to float down through the normal natural wastage. Some of it is seasonal, by the way. We get our best people during this peak graduate recruitment season we're in at the moment. When we came back from Christmas, we said, look, we've deployed a lot of. We have 900 virtual robots in the business now, which I have to say some people find mind-blowing. We tend to be cautious during peak in terms of headcounts because we want to. That run into Christmas, we tend to keep the headcount pretty stable because we are looking after the customer and demand can move quite quickly. When we came into January, I said to all our line managers, "Look, we are just going to let the headcount naturally move downwards on the basis that we will build it back up a bit in our peak recruitment season," which is May, June, July, August. We do see that 350 is below the structural norm. It will float back up to about 365, I think. But even at 365 going into peak, it is still 30 to 35 heads below what we had in peak calendar year 2023. Okay. Last question, unless anyone out there has any more. Are there any contract criteria such as minimum sales volume for the Russell Hobbs license? If you are prioritizing fully owned brand sales, are you staying well above such limits? Yeah. Just to say, Russell Hobbs is a very important brand to us. I know it is typically about 10% of revenue, but 10% of our revenue is still a decent-sized number. It is great, particularly in Europe, in terms of opening doors. If people do not know the Beldray and Salter brands, they often do know the Russell Hobbs brand. It does play a particular but very important role in the business. We do have minimum guarantees as part of the license. We have many years ago overshot those, so we are well above those minimum guarantees. I think even with a decline in revenue, we would not have an issue there. Great. Well, listen, that is it for the questions. Thank you for that update. It is extremely appreciated, your transparency today. Thanks for all of you joining us at very short notice, and we look forward to further benign conditions going forward. Yeah. Thank you all. Thanks for your time today. Really do appreciate it. Cheers