Procook Group (LSE:PROC) — Interim Results

0:01 Good afternoon, and welcome to the PROCOOK GROUP PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, they can be submitted at any time by the q and a tab situated in the right corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives 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.

0:32 Thank you, Alessandro. 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'd 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. Just wanna reiterate a few things that are very clear in my mind now after a full year. So quite uniquely, we're a 100% own 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.

1:19 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 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 ecom, this unique proposition is really coming to life. We've invested in infrastructure over the last few years, both in this 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.

2:06 All of this is complemented by two 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 a support over the last three 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, 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 UK stores, deliver 100,000,000 sales revenue, and an operating profit margin of 10%.

2:57 There are four very clear strategic initiatives that you can see on the slide here. I won't go through all four today, but I'm gonna double click on the first two, accelerating profitable sales growth, and secondly, improve operating efficiency. Before I do that, I'm gonna 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 1,100,000, 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.

3:48 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 to 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 q three, the first eight weeks ending the December 8 showed continued momentum. So in terms of our new UK 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 four stores in the first half, followed by five further stores just in the last eight weeks, getting all those five stores in advance of Black Friday period and Christmas, obviously.

4:45 Additionally, we will open three 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 with all the retailers, and they're in shopping malls with the high traffic centers with a combined annual footfall of over 150,000,000 customers. Initial results on the store openings are encouraging, and they support our investment criteria of a payback in less than one point five years. To ensure our growth plans are profitable and appropriately, we have to to book support the PROCOOK brand, apologies, we've opted to close two of our smaller garden center stores, which is in line with the strategy we talked about before.

5:35 Finally, we're already looking ahead to f y twenty six 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% own brand PROCOOK products. And the expansion of the new electricals range phase three coming through the summer has proven and delivered well. And we have our phase four coffee category, first couple of assortment products landed in store in the last couple of weeks, and the full range will land in February with a a major PR launch to support it. Importantly, the new product launches and design refreshes mean that we've close to 10% of our range has changed over the last six months in terms of color, design ways, or just a general refresh to make sure that we're actually relevant for customers.

6:26 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, PROCIP quality and technical specifications. But the different PROCIP 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 of an expanded assortment up to 40 products in this area. We're probably not where we need fully need to be, and that's something we're aiming for for next year, but quite a step change on what we deliver 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. It means we launch products and categories in a very clear, defined timeline in line with customer expectations of seasonality.

7:25 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 a 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 a 120,005 star reviews in place currently. Online, we have a clear road map of technical enhancements to reduce friction for all customers, and we're seeing 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.

8:15 Across all customer touch points, whether it's in store, online, or through the emails 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 a more consistency around personality tone. And we're showcasing more lifestyle and inspirational messaging versus just simply value.

8:41 In the last six 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 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.

9:31 We've increased delivery frequency. We've replaced pilot 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 four 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, basically price lookups 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 would 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.

10:26 So with that, I'm now gonna hand over to Dan, who's gonna 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 four 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 percent up year on year, and as a result, we outperformed The UK kitchenware market by 4%. Equally pleasing was the fact that both retail and ecommerce 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%.

11:22 And in ecommerce, 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 ecommerce channel, taking our total revenue in that channel up to 9.4 percent year on year.

11:56 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 is plus 9.8% year on year, we've increased our customer base. Gross profit increased by 5.1% 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 twenty twenty four. These reduced margins by two ten 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.

12:51 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.

13:25 H one underlying operating loss is £300,000 higher year on year, reflecting the volume 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.

13:59 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 £900,000 swing, adverse swing year on year, driven by temporary unrealized foreign exchange losses in half one this year compared to gains in half one last year. Non underlying items are much reduced year on year, and they relate solely to the remnants of the IPO share based payments awards, which ended in November this year on the third anniversary of the IPO.

14:42 Net debt at the end of the first half was £4,200,000 with almost £12,000,000 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 1,300,000 capital expenditure in new stores during the first half. Trading performance in the first eight weeks of Q3 has shown improving momentum as we've gone through the eight weeks, following a slower start to the second half, which coincided with the budget event and also the later timing of Black Friday.

15:33 This particularly impacted footfall in retail stores, which has since recovered.

15:38 Across the eight 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%.

15:51 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 2025 remains unchanged. H2 brings around 60% of the full year revenue in just 24 of the fifty two weeks, whilst our cost base remains closer to fiftyfifty. And with efficiencies in marketing and customer acquisition as well as operational efficiencies, our cost leverage improves in the second half. This adds significant seasonal profit boost to the second half of the year, as you can see from the chart on this page.

16:38 Combined with the benefits of the new stores being open for the majority of the second half, improved margins from price optimization and foreign exchange gains and efficiencies that we've already delivered in the first half that continue for the second half, we remain on track and are confident in delivering on expectations.

17:01 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, two two pillars of which I covered earlier, are focused on the really long term profitable growth of the business. Our customer pro 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 UK, delivering 100,000,000 in sales revenue and a 10% operating profit.

17:55 Thank you very much everyone for your time and attention. We're gonna take some questions now. I think there's gonna be a few that will come up on the screen, and Dan's probably gonna read them out for us, and we'll we'll 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. Performance reported improvements in conversion and the fit 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 significant step change in the last probably six to nine months.

18:44 I would say that there's a lot more that is on the horizon and within our road map around technical enhancements. And I think the marketing efficiencies will continue to gain momentum as well as we look at more interactions and and

19:01 engagement with customers through social digital. There's a lot of work in process that's coming through in q three and into q four. So we're very encouraged by that. I see. And the second part of the question, given the typical profitability advantage of d to c ecommerce, 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

19:38 return on ad spend, cost per acquisition, and marketing efficiency ratios. It's a balance between new customer acquisition and repeat customer, 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.

20:04 We have a question from another Richard, interestingly. How do you foresee gross profit margins evolving over the next twelve months? Well, I'll I'll answer that one in 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 benefits of improved or price optimization where we see opportunity to

20:44 mitigate those freight cost pressures. Going beyond that, I think, is 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 in both UK and The US, but also the impact of, interest rates as they move between particularly UK and US, which is the main currency that we rely on. So, yeah, we continually monitor it, and we adjust our position as we need to. Do want me to take the next one? Mhmm. 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?

21:42 So as Dan alluded to, we did quite prudently bring in more inventory in preparation for peak period, which I'm 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 issues. So we feel we're in good shape from an inventory perspective. There's a there's a there's a comment here.

22:27 I'm not sure it's a question, but from Philip. So NPS does not measure measure recommendation. It's merely a backward looking customer satisfaction metric. Get without getting into the ins and outs, the way we ask the question around NPS is how likely are you to recommend PROCOOK to a friend or family member? It does not recommend it does not measure the actual recommendation. I agree with you on that front, Philip. And in in that sense, it is a satisfaction measure. It's helpful for us because we get lots of free text comments, and that helps us to address points of friction for customers and continually improve. We also have a a loyalty scheme, which is around recommend a friend, and you can receive, benefits from that, through we we work with a third party on our website.

23:18 So that's something else which allows us to drive up loyalty and also increase recommendations. We continually look to improve in this area. K. Chris Topher T. I was asking, with record active customers, how do you plan to further deepen customer loyalty and increase lifetime value? Great question. I think a lot of the improvements we're seeing to ecom and a lot more of the targeted focus around our email campaigns will address that in terms of lifetime value. There's a lot of other activities we have in the works around our marketing efficiency and investment going forward. But I would take from this positive is that we do have record active customers. And every month, month on month, for the last six months, we've been seeing that grow.

24:07 And, obviously, with opening new stores to complement ecom, we would see there's there's potential for that snowball effect with more active customers and new recruitment of customers coming in over the coming twelve months. We've got a question from Vaska. The apparent good progress being discussed, in the presentation seems out of line with my experience as an investor. I invested at IPO, but my shares are sitting down. Can you clarify the reasons for this? Right. Okay. So we'll just briefly touch on that. Yes, we IPO ed, back three years ago, and performance has been challenging. The UK market has not been easy. We're a discretionary part of that sector. That said, we've set out a very clear plan for recovery, and we're working hard to deliver on that plan.

24:59 And hopefully, what you can see in this presentation is those steps along that journey. Vasquez, thank you for being an investor, and I and I hope that we managed to deliver and succeed with what we've set out. K. I'll take the next one. It's from John s. He said, what risks do you see in achieving the targeted 100 stores and 100,000,000 revenue? Big question. There are medium term goals. I think what we've seen in the last twelve months is that we have a very good well oiled machine around opening new stores and and a good discipline around evaluating those stores as well. So that journey, I feel confident of. Obviously, there's sort of external market pressures that can come to bear on that, but I feel confident of that. And if we're in line with that, continue the momentum we have on ecom, still maintain ecom as a percentage of our business that we have today, we have a high degree of confidence in our medium term goals. So we we're standing true to that, and we believe it is a policy or set of goals that will last us through over the next three to four years.

26:07 Okay. And, we'll take one more question because we are we've we've done a number already. I think we're coming to the end of them. From Tim, this one, can you explain the reason for reopening the Amazon sales channel? Perhaps I'll just go back a little bit in the history, and then, talk about why we how we've approached it differently. We turned off Amazon sales post COVID, before IPO in summer twenty twenty one, and that was, following a period of strong performance on Amazon, and Amazon started to, well, lose market share at that point in time, and it became more challenging for us to work together at that point in time. And we decided, having listed the entire product range on Amazon and looked to the profitability that it it wasn't worth continuing with right then.

27:04 Subsequently, we've reassessed. We've reconsidered that. We now have a small curated range of around 80 products, on the Amazon marketplace. They are our some of our best selling ranges. They have, strong gross margins attached to them, and therefore, with even with the costs of working with Amazon, we can make a healthy contribution for those customers that do want to just shop and have confidence in shopping with Amazon. We want to be part of that shopping journey, and we may have some of them switch over to shop with us in the future. So we see it as helpful, and having that presence on Amazon adds credibility to our brand, we believe. So that's why we've gone back on in a small way, but we're doing it carefully, and it's profit generating.

27:50 And, therefore, we're quite comfortable that the performance is additive. Thank you. Alessandra, we'll hand back to you quickly at the end. Perfect. Lee, Dan, thank you very much for answering those questions as you can from investors. Of course, the company can review all the questions submitted today, and we will publish those responses on the Investor Meet company platform. Just before redirecting investors to provide you their feedback, which you know is particularly important to the company, Lee, could I just ask you for a few closing comments? Yeah. Sure. Thank you. Well, first of all, thank you for everyone joining the call. Hopefully, you will see from the first half year results that we're gaining momentum in the business. Both our short term actions and our long term plans for profitable growth are coming to fruition. And we had a a long exciting period of peak trading to go through Christmas, but the last few weeks give us increased confidence combined with the new store openings.

28:42 And what you're seeing clearly is an ecommerce step up in performance. So thank you again for your time, and we look forward to chatting to you probably early in the New Year. Lee, Dan, thank you once again for updating investors today. Could I please ask investors not to close this session as you now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations? It's gonna take a few moments to complete, but I'm sure you'll be greatly valued by the company. On behalf of management team of PROCOOK GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.