Poundland Group's (PDLDF) CEO Jim McCarthy on Q4 2015 Results - Earnings Call Transcript

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Poundland Group PLC (OTC:PDLDF) Q4 2015 Earnings Conference Call June 16, 2016 4:00 AM ET

Executives

Jim McCarthy - Chief Executive Officer

Nick Hateley - Chief Financial Officer

Kevin O'Byrne - Chief Executive Officer (Designate)

Analysts

Dave McCarthy - HSBC

Pradeep Pratti - Credit Suisse

Charlie Muir-Sands - Deutsche Bank

Anisha Singhal - Morgan Stanley

Sunita Entwisle - Citi

Simon Irwin - Credit Suisse

Kate Calvert - Investec

Jim McCarthy

Good morning, everybody, and thank you sincerely for coming this morning. Before we start, I’d just like to say that I’m sure you saw the announcement from Steinhoff regarding a possible offer for Poundland, and our response, which was to advise shareholders to take no action. I’m sure that you will know better than anybody actually that there is nothing that I can say about that today. Otherwise I would be in breach of the takeover code.

So, let’s get on with the presentation, a challenging year for us, but one that in many ways prepares the ground for future growth.

Strategic progress: The transformational 99p Stores acquisition is just that. It adds five years growth in one move, and there is a significant incremental EBITDA opportunity of at least £25 million. Our long-term position is strengthened. We've enhanced our position as a price-led volume-driven value retailer. We have 906 stores, 53% more than a year ago. Strong in the South of England, and a growing presence in retail parks; and as you will know, retail parks are performing better than high streets and shopping centers and have a Spanish trial that is ongoing.

Scale will become more important as time goes by, and this acquisition deal with 99p is truly transformational. Successful discounters thrive on scale to differentiate and underpin value for money. We have a strong brand in a growing sector. It’s loved by customers, 95% brand recognition. The value general merchandise sector continues to grow, and in our view will continue so to do. Discount is part of the nation’s shopping routine absolutely firmly embedded, and I think that behavior is global in fact.

So, if I turn to the financial highlights, you’ll all appreciate a year of challenge and frankly not reflective of the efforts put in by our team. The acquisition was disruptive, but other influences have also impacted. Black Friday and the growth of online in general, high street footfall as shopping behaviors changed, foreign exchange impacts on the euro, and competition recalibrating and simplifying their pricing architecture, so almost a perfect storm. So, our plans for the current year and the future are very important.

Full year '16 performance, sales were up 18.7%, but like-for-like for those reasons that I have just described to you, were down 3.9%, underlying EBITDA as a result minus 4.1%. In the context of that, disruption from 99p integration and challenging trading conditions. Full year '17 is a year of consolidation, after all of that frantic activity in the previous year. So, the good news is that we now have one business with over 900 stores. We have fewer store openings planned for the year as we focus on the basics in the business, especially new and exclusive, and amazing value products. We’re going to focus on improving our core performance, devoid of the destructions of a very-very challenging integration program at pace. And we’re going to consolidate the benefits from that acquisition through this year.

So, the heading says a transformational acquisition is completed, and you’ve heard that many times. I think somebody said, it really compares, if you can think about it in this way, to a wedding, a new baby, divorce and moving house all happening in the short space of time to you. God forbid it does. But that’s the sort of challenge that we have. Huge efforts, changing situations and circumstances, and all at the same time, all of those things that we are talking about happened at the same time. So, it’s worth reminding ourselves I think of the upside, five years organic growth in a four months conversion program.

In September 15th, the acquisition was made. The second largest single price operator was brought into the Poundland family. 252 stores were acquired, 235 of those were converted with 17 closed. We now have within the Group 130 stores inside the M25 and a total of 350 stores in the South, an area where the population is forecast of course to grow most significantly. And in our view, the competitive market is less challenging for us.

The acquisition adds £350 million worth of sales in full year '17. That’s really important because as I said earlier to defend and to add, so defend against competition is to add value by doing so you need scale. So you have to have this sort of growth. £25 million of incremental EBITDA underpinned with the main benefits coming in trading terms, reduced rents and those scale benefits that we refer to. Two thirds of this will be generated in full year ’17. That scale brings opportunity to improve our offer. So the key question guys is would we do it again if we have the choice, absolutely would, categorically, yes. It’s right to the future of the business and an enabler that unlocks commercial benefits to deliver amazing values consistently for years to come. So strategic investment, we added 313 stores in one year, six a week. If there were an entry in the Guinness Book of Records for this type of activity, I think we have a very good chance of being that entry.

We opened 79 new stores gross in the UK and Republic of Ireland. Retail park store numbers increased by 60% in the year to 139, and the Ireland rollout was accelerated where we performed very well. Five stores were opened in Spain that’s an important future opportunity, 10 stores at year-end, the 11th opened in Benidorm last week. We’ve increased our sales area by 64% and we launched the transactional website in September 2015. There was a lot gearing on. On the website, we have to be in this channel, much to do, but in my view over the longer term, this will deliver much. Black Friday opportunity, multi-price deals mainly incremental opportunities. We’re still learning, still early days, but we’re making good progress.

You can see it from the picture there, when we get it right, we really get it right. This was a sell-out on stationary where I would describe as day low product, sold out. Solar light bulbs, a new innovation for us, sold our hundreds of thousands. Live flowers, sold out; so when we get it right, we get it right at scale. Lots to do, we've got to get that focus back, and we’ve got to work on the product, and we’ve got to provide amazing value consistently without any distraction. So a year of consolidation, pause for backlog while we get back to basics absolutely essential for this business.

And at that point, I think it’s time to handover to my colleagues Nick Hateley, our Group Financial Director.

Nick Hateley

Thanks, Jim. Good morning all. Okay, as Jim said, this has been a transformational year for Poundland, that has an impact on our accounts. And to be honest, we’ve got a more complex set of accounts to try and describe than in a normal year, and obviously lead to the acquisition that occurred back in September, but I’ll do my best and to try and take us through this bit-by-bit so we can get some transparency over where the numbers have come from and what they actually mean.

Now, you’re going to be hearing some different definitions as I go through this presentation, and I just want to touch on those quickly. The first thing is that we tried to create a comparable Poundland set of numbers. So this is really excluding any impact at all from the 99p acquisition and the adjustments we’ve made to classifying brand amortizations to financial instruments. This is really heavy accounts would have been presented last year. The second area is then looking at underlying profitability, and the couple of adjustments that are going to be as shown in the accounts this year are the 99p Stores that have been converted and are actually operated for a period as Poundland stores, because, obviously, they’ve joined the Poundland family and their trading performance in the period is an underlying profitability for us.

We’ve also reclassified brand amortization following discussions with our auditors that was previously non-underlying; it's now come across in to underlying, and finally some financial instruments, a small number there that again has been reclassified following some discussions. That’s going to be the underlying numbers that I’ll be going to talking through. And then of course, it being an unusual year, we’ve also expanded significant amounts of money in non-underlying costs. And I’ll just give you the three examples that we’ve got on here. We’ve got 99p Stores trading, so that is the costs associated and the lost associated with the pre-conversion period. This is when they were operating as 99p Stores before they were handed over to Poundland and converted into Poundland store. As you can imagine, there was a lot of disruption into the business during this period in the 99p business as we converted 190 stores. So that is going to non-underlying.

Spain is a trial and it's been going on now for a couple of years, but we’re still trailing our business model over there and consistent with previous years, we're putting that into non-underlying. And then we have all the costs of conversion associated with the 99p deals, again sitting in that category. So having just spoken about the definitions, let me just take you through some of the numbers. In terms of comparable Poundland performance, we delivered sales of 1,164 which was an increase of 4.8% on prior year, and those sales delivered underlying pre-tax profits of £37.8 million. Now, that is down on last year's performance which was around 43.5. And let's just move onto then look at the sales breakdown to get to the total sales that we've shown on this chart. Comparable Poundland 1,164, 99p converted stores, so these are stores that have operated as Poundland over the period, about £50 million coming from those stores, 99p Stores trading delivering £96 million in a very disruptive period for them, and Spain coming up with 16 million, coming down to 1,326 for our Group sales over the period, which was an 18.7% increase on prior year.

Looking at the underlying pretax profits column, the 37.8 coming from comparable stores; £2.3 million is being generated from the Poundland converted stores in the period, brand amortization costing us 1.1, and a small benefit coming through from the financial instruments. So the underlying numbers you will see in our income statement, coming in at £39.2 million. Non-underlying, and you can see the total there of 33, so our overall performance coming in a £5.9 million. So the complex situation will be lots of numbers in the RNS and the prelims that you've seen, but that was just trying to take you through quite slowly, how we've treated these various categories to try and make it easy to understand the underlying performance, the comparable performance, okay.

Okay? Just moving onto some other stats, you will see on this chart that we've got the various sales outcomes, 18.7% total sales growth in the period, underlying sales growing by 9.3%, and comparable sales growing by 4.8%. As Jim said, a challenging year for the business and for the reason that were articulated earlier, and our like-for-like sales growth came in at minus 3.9%. In terms of the H1, H2 split a minus 2.8% in the first of the year with minus 4.9% in the second half of the year. You can see the underlying and comparable EBITDA numbers there, that an underlying level EBITDA fell by 4.1%, at a comparable level, we fell by 9.4% to £53.8 million. Comparable profit, we've already talked about in the previous slide.

Now in terms of the dividends, our proposed final dividend is 2p, that's in line with the cover and that we had in last year, and on a comparable EPS basis, of course that's where that's coming from that 2p, and it's line with our cover. As I said from last year, reflects that performance in the period, and I think strikes the right balance for us as a business, so that's where we're coming from on a dividend.

In terms of KPI performance, we ended the year with 896 stores in the UK and Ireland, and further 10 in Spain. And Jim mentioned as earlier, we opened 69 new stores in UK and Ireland, and a further 10 in Ireland during the period, so 79 stores being opened in the period gross. We closed 19 stores, some of those with the impact of the 99p acquisition. So taking opportunities where we have stores very-very close to each other that were cannibalizing to actually get rid of one of those stores to increase the overall EBITDA coming from that particular location. And with 99p Stores, we acquired 252 stores; and at the end of the period, we've closed four of those. There are more to close and to dispose off as we go forward.

In terms of the debt, I'll just highlight that on this page, and we ended up in our statutory account with a debt of £12 million. Now, that is flat a little bit there and I did speak about this at the Q4 announcement, and that's flattened by the timing of rental payments over the Easter period. You'll recall that our year end actually finished on Easter Sunday. So rents that were due on the bank holiday on the Friday, actually got paid the following Tuesday. So I think it's only fair and reasonable to add the £20 million pounds also of rent back into that debt figure to get an underlying debt position for the business at the end of the year. And obviously, the swing in performance over the year has really been driven by the requirements to integrate 99p Stores into our space. It's a combination of things. We've got CapEx that we've spent on converting those stores. We've got a lot that we've had to fund and some working capital requirements that we needed to really get the business back into the shape that it needed to, to be in.

In terms of sales and ATV growth, we've spoken about that already 18.4% growth in the UK and Ireland on a constant currency basis 17.9%, at an actual level. And the ATV, you can see is growing marginally in the period. I think there is a few things going on there, we have opened more deal stores and retail park stores in the mix in this financial year, which has helped us, they tend to operate with higher ATVs. And we are continuing to develop our conditional spend offering stores as well. These are high price products that you can buy once you qualify buying the product for a pound, and that has helped us I think with our ATV growth. Comparable customer numbers have grown by 3.4% with total customer numbers growing following acquisition of 99p Stores by 27%. Okay. And in terms of gross margin and overhead trends, I think, so good news here really, we maintained our gross margin within the fairly tight range, you can see over those three years. We ended the year with 37.3% gross margin performance.

And on the cost side, you can see our cost did grow actually from 33.2% of sales to 34% of sales. There was a couple of things going on in there; one, I’m pleased to say that where we have variable and controllable costs, we're managing very well. So as sales will be coming into a little bit of pressure. We did manage to put those costs in place and drive in the right direction. But obviously with the like-for-like performance that we had of 3.9% and certain fixed costs very difficult for us in the short-term to control those, and therefore that’s impacted the overall ratio during the period. But controllable variable costs I think the management continues to do pretty good job in keeping those in control.

The revenue bridge, I mean I won't dwell on this too long. I mean that's just really helps you work you through FX as impact of at around £5 million on us in the period, our like-for-like sales reduction of 3.9%, around £35 million worth of impact. Then, some growth coming through from the new space at the annualization of what we've opened in prior, plus the new stores that we opened last year and giving us this £92 million of benefit then we got the 99p Stores conversions. This is the Poundland operated stores and then finally the 99p [rump] estate, so to speak that was trading as 99p Stores up to the point of conversion, so coming to £1.3 billion with the sales.

In terms of the profit bridge, Phil’s actually helped with this. This is trying to again, help you with an understanding of the overall performance, maybe, compared to some of the models that, that you guys have been using. So what we try to do here is, we try to get to a comparable PBT and explain where that comes from. And some of that is coming from the FX impact of £3 million. We thought it was going to be a little bit higher when we updated you at the half year. But in fact the euro rate for us recovered a little bit in the second half of the year particularly in the final quarter.

So that impact ended up being 3 million, and this space generating around £8 million with the benefit like-for-like minus 9.4. And it gets us back to the comparable PBT, so we haven’t included in here the impact to the brand amortization and the financial instrument movement, just to try and draw a picture that you might recognize. Then, we have these two elements, the £2.3 million with the benefit coming from converted stores and the minus 12 coming from the pre-converted stores. Okay, so some of you will have got to the sort of 28 number also in your forecast, it's just really still trying to help us all on that journey what is, as I said quite a complex set of numbers.

Okay, a little bit on 99p Stores' transformative deal, the cash cost has been higher than we anticipated because the additional working capital we needed to inject to recover the stock and creditor position that we inherited. Now, some of that was picked up in the completion accounts mechanism. You will note on this chart that the shareholders despite that being an acquisition cost of 55 million. The shareholders only actually received £8 million and 2.5 million of that was actually in the form of shares.

So the majority of the £55 million was actually kept within the business. Some of that was used to pay the debt holders, the banks 24.6 million, and the rest of it really was trying to repay the working capital position. In the end, we actually just put a bit more working capital into the business than anticipated, and you can see that's circa £35 million or so that we got there. So it was spent a little bit on working capital, but we needed to get the stores trading that what we have to do. And the other elements I think to highlight to the capital expenditure and I’ll take you through that in a bit more detail on the next chart. Originally, we’d indicated we were going to spent about 15, I think it’s going to be more like 24 now, and I’ll go through that in a moment, but there is some good reasons to that.

Anyway, so you can see the costs there, the acquisition payments, the equity holders of 8 million, some fees 2.5 the debt repayment say to the bank 24.6 CapEx. The trading losses, which is the net of the Poundland bit plus 99p bit. And then we’ve got the non-underlying integration costs. In terms of guidance for this year, we think about another four or so, on CapEx, finalizing the conversion of the store set. And in non-underlying, we still coming in with this 25 million overall with around 10 million in extended this year, this is an estimate. We can’t be precise, really that's for convert in the final stores, and the trading losses associated with those stores in the period, and also running down the head office and closing the head office over the period. So it’s going to depend on, on how that we exit the leases, and how that actually looks to the end. So that’s the number that we’ve got at the moments, but of course, it will be what it will be once to get through that process.

And, okay, I think it’s probably on that one. In terms of the capital expenditure on 99p, I'd I say our original thought was would convert around 210 stores and that would cost around £15 million. We spent a bit more, as you can see we’ve converted 25 more stores, which gives us about 1.2 million of additional costs. The fabric of the stores in the sales obviously we haven't been able to do any detailed surveys. And when we got into the stores, we found out that some of them weren’t quite where they needed to be, they needed quite a lot of work getting them up to scratch. In some areas and you’ll see the 1.2 on staff and cash, and in some areas it did have separate cash offices to manager’s office and we always think it’s better to segregate those for obviously maintaining our cash discipline to controls within the individual store environments, so invested in some in that which we think is a good investment.

The LED lighting and CCTV, we’re doing more across our Poundland estate. We’re retrofitting LED lights into our stores and getting great returns. So we thought we do that in the 99p estate and it costs us 1.3 million or so. And CCTV, we have quite a sophisticated CCTV system within the Poundland business with lots of cameras, 21 cameras in each store, and all linked into various algorithms. So you can see what’s happening at the till point, you can access the cameras to see what’s going on. And we decided actually when we looked at the CCTV systems in detail, that actually we could get more value in long run and reduce that stock loss run by reinvesting in our facilities, in our CCTV back into the 99p Stores, but obviously with the cost of that 1.6 million.

And then finally, we’ve opened 6 Poundland and more stores, these are quite large stores which were previously Family Bargains stores or 99p Plus Stores. And we decided to actually put some capital into those stores to make sure we’re presenting the products in the best way. And if any of you visited those stores, you’ll see that the look and feel of those stores is certainly different to our Poundland estate and of course because that bigger shops with more square footage that require more fixtures and fittings and more investments. And so that’s the multi-price trial there. So we spent more on CapEx, and we injected more working capital into the business. But we’ve still consider this to be a fantastic deal for us, transformative deal for us, and the EBITDA that Jim talked about earlier at least £25 million, I think, we think gives us a great return over the years. And as we say, this is taking at the second largest single-price operator in the UK and gives us lots of strategic advantages going forward.

Our capital investment overall, and you can see the 99p Store conversion being the major jump year-on-year and £45 million or so of CapEx spending extended. And we continue to invest, I think that’s the key message that we are investing in the future of the business. We’re about to open a distribution centre, pretty much opening it as we speak in Wigan. There won’t be a lot of capital going in on that particular project because of the way that we’ve got the funding arranged. The capital will be funded. But we need new systems, so we are putting in a new warehouse management system, and we think that will drive efficiency initially into our Wigan operation and then luckily through the entire business.

So some of the investments you're seeing here, we think are going to give us a long-term advantage and since warehouse systems, we’ve also got new stock systems going in to our store Estate, we're trialing self service checkouts which is important part of our mitigation of the national living wage. So, there is lots of stuff going on, but it is forward focused, and it is an investment which you think is going to give us a great return. We expect CapEx this year to return to sort of normal levels around £25 million or so. Okay, Jim I think, it's back to you on current trading. Thank you.

Jim McCarthy

Well, thank you, Nick. And now turn to current trading. Total group sales were up plus 30.1% to £300.9 million. Underlying sales for the 11 weeks ending the 12th of June 2016, increased by 28.6% to 294.5 million, and sales in Spain accounted for 4 million in 10 stores. Outlook and guidance for full year ’17, as anticipated trading in Q1 was affected by the 99p Stores disruption and a decline in high street footfall. We expect Q2 will follow a similar trend as we bet in those conversion and work on the restoration of our core capabilities focusing on those. We expect some improvement in H2, as benefits from conversion crystallize and those core activities where we’d be focusing impact. Up to 30 net new stores in the UK and Ireland, several new stores in Spain, so guys it really is right this year that left is more.

We now look at the non-underlying charges. Trial store cost in Spain cost 2 million to 3 million. We have the cost of opening the new Wigan distribution centre, 350,000 square foot facility, and we have the double running costs at North Hampton prior to closure, and that’s about 3.5 million. Wigan opens this month and will deliver cost benefits and efficiency, and North Hampton we anticipate will close in the early part of 2017. The integration cost of 99p Stores will be around £10 million. I think as Nick has articulated, capital investment will be around 25 million, that’s core business completing the conversion program and the investments in Spain. So that brings be on to the summary, and an element of repetition here but I think it’s really important that you get this firmly in your minds. We believe it to be so. 99p Stores acquisition truly transformational, five years growth 40% more stores in one move.

A significant incremental EBITDA of at least £25 million is confirmed. We opened 60 net new stores in the UK and the Republic of Ireland. The rollout in Ireland is accelerating. Our Spanish trial is extended to November. We will add more stores and as part of a number of things that Kevin will talk about later this year. Full year 2016 Group financial performance was impacted by market conditions and the conversion program and Q1 has continued that recent trading pattern. So as anticipated, half one as we shared with you is challenging, but we expect half two to show some improvement. We are strategically well placed. We have a strong ground in the growing discount sector 900 stores, there is a scale opportunity. We're well represented now in the South of England an area of former weakness and we have a growing number of retail parks, an area of retail which is improving all the time.

Before we go onto the Q&A, this is of course my last results presentation. And I would just like to thank you for your interest in Poundland and your support over the years. And I personally wish all of you here and those that aren't here today that I have interacted with over the 10 years every health and happiness and success. So it's time for the Q&A, and we're happy now to open that up.

Question-and-Answer Session

Operator

Q - Dave McCarthy

Two questions, one is on Spain, you've obviously got ongoing losses there. Can you give us an indication of how those losses are being incurred? If we look at you across, say, three levels you've got fully costed level, whereby you're including head office costs and so on, you've got a marginal cost level and then where you're just looking at local central costs and then at the store operating level and related to that can you give us some indication now of how the stores are maturing there or do they start off at that mature level? And then the second question is we're seeing in the grocery trade an increasingly to what the retailers are calling medium, low pricing and there is a range an increasing range that they saw previously they have been charging almost twice a price that you guys have charged but now their core pricing is coming down to your level, is that impacting you and in fact continues do you anticipate it continuing to impact you? So, a couple of easy ones to start with.

Jim McCarthy

Thanks, David. I think, if you take one, Nick and I'll try and answer two, David.

Dave McCarthy

That's okay.

Nick Hateley

You're going to start with two first?

Jim McCarthy

No, you start with number one.

Nick Hateley

Okay. Yes, Spain, it's an interesting one, Dave, because what we've got at the moment is we've got an incomplete model over in Spain, but just taking each of the component part together I will do my best try and explain it. And we've invested in a Spanish team and that's first thing so that's the largest part of the investment that we're making over there and we've got a country manager, we've got processing people over there, we've got retailers over there and managing the store state. We've got HR resources over there, so we're trying to create effectively a head office over there that can really help us expand rapidly once we get the off to the point that we need it, so that's the biggest costs that we got over there.

In terms of the stores, well I would say it's an incomplete situation at the moment and I will give you some reasons why when you look at the store possibility. We have a small distribution capability over there and so we're partner with DHL and we are very recently actually being able to get to a position where we can pick by store. Historically we've been bringing all of the product or the vast majority of the product through the channel tunnel all the way down through France and Spain and of course distribution costs associated with are just not what you would come up with if you were normalizing the situation going forward. We did get some local supply that's around 30% of the product stat of locally supplied with that small distribution capability we can bring in pallet of jobs product for example break it down, and get it out to the individual stores that we're operating, we're operating 11 stores in Spain. And now we've opened one last week in Benidorm.

But there are other things in there as well that just don't tell the full story yet, so for example we're still labeling products because all that product is coming from the UK rather being sourced locally, which is where we would want to get to right around distribution capability over there, we're having to put labels on the back of Coca-Cola tins. Again, that's margin costs. And then finally in terms of the margin we're generating over there, it's much lower than we think it would be. And going forward just simply through the volumes, that we're actually able to access through the market. So we've got costs effectively going through the head office, we've got an incomplete model at the moment, which we’ve been working on. We’re making progress but there is more to do. Maturing stores, I think was the other one, wasn’t it, Dave? You mentioned maturing stores?

Dave McCarthy

Yes, about the grocery prices.

Nick Hateley

Okay.

Jim McCarthy

Yes. I can try and take that one, David. I think it’s marginally easier than the ones you just asked Nick to explain. This is clear I think. Firstly, I would say that there is, how can anybody argue that the grocers, and I include the big four plus the others, they’re all resetting prices. And it is a very competitive market place and I can see in all of that. Our research tells us that there is a different shopping mission going on here. You can see that in our ATV, our ATV is less than £5, supermarket typically at the moment around 24, and I think Aldi and Lidl are round about 18, David. I think you’re the most of the strong, but I think it’s about £18, so I think I’m quoting you, actually, on that. And for £18, they’re getting more items than they are in the big four for £24. So there is a lot going out. But different shopping machines.

So I think what I know, our research tells us that the value differential that we have at the moment is a strong as it has been. Any bounces about a bit from week-to-week and so on and so forth as you’d expect because certain market changes in the prices. And they’re trying to find the leaders and pulleys that make a difference to them. I think the big battle brand so far has been in that fresh and chilled area with some tactical headline grabbing prices on some of the dry goods so to speak.

Now, we don’t do a lot of chilled and stuff, it’s something, perhaps, there is an opportunity going forward in possibly. And grocery only accounts for around about 16% of our turnover. So our strength is general merchandise. And I think it’s already been identified over the years and more recently, that, that probably is the area which we need to have a real, really good go about headline-grabbing general merchandise deals amazing value, seen value in some cases. And after this Q&A, I got some things I can sure lead to demonstrate what we’re doing in some of those areas.

Now we’re not ignoring grocery at all, because as we said over the year, it has got, that grocery bit is, and FMCG bit is something that can bring people in and the halo effect of the value permeates across the whole piece. So that is also works and we’re resetting our grocery range this month, so there some work going on there as you would expect. But I think there are different shop admissions, general merchandise is where we’re going to be concentrating a lot of assets, but not ignoring the opportunities that are within food.

So I think that’s what I would say and you’ve also got some people doing, some really aggressive pricing. Iceland is one of those. To get a Warburton’s loaf for 50p, I mean that is well below cost. So how sustainable some of those things are what impacted has not sure. But I think for us, we have to be creative, we have to negative, we have to be very careful with the perception of value is communicated properly. And I think that maybe where we’ve lost a little bit during the year in terms of the perception. The reality is that we have got as much value differential today as we have problems to get. So I hope that answers the question Dave.

Dave McCarthy

Yes. And just on a personal note, good luck, best wishes for your future. And we’re going to miss you you’re a great personality. Thank you.

Jim McCarthy

Thank you very much. I really appreciate that David. Thank you.

Pradeep Pratti

Pradeep Pratti from Credit Suisse. I have a couple of questions. One can you talk about your medium term store target because you haven’t mentioned the 1,300 UK store target and the 100 Ireland store target? Are they still relevant, given the pressures on the high street? Second one on your like-for-like, could you probably give some color on how the retail parks are doing? Are they, in the parks, still like-for-like territory, and what the gap is with high streets? And finally maybe could you give some more detail and breakdown on the 25 million cost synergies? What are the individual lines, I think that’s not as much detail, more detail than in the previous releases?

Nick Hateley

Well, maybe you should do the store targets, Jim. I’ll do retail parks and synergies, because they’re not going to take long.

Jim McCarthy

Thanks for your question. 300 stores is the number that we’ve always quoted. But and its right that you ask the question, we have to look at that again. That number was, actually, it was a conservative number was always based on a conservative number from two pieces of research, a number Javelin, which was repeated a couple of times, and the PWC research as well. And I think for up until the last 12 months was clearly the number depends on having it size. And we felt that number was actually an understated number, but you’re right the market is changed. And I think it is right now is part of Kevin’s review, actually, for this business, to look very hard in the UK, so Northern Ireland, Scotland, Wales, England, at the number that we think, we can open profitably driving those historic cash returns from that operation. So that actually, by definition means, the importance of developing Irish market and international market, going forward, is more relevant to our future growth. And you can bet your life that we’re putting a lot of thought and a lot of attention, and Kevin will be leading that thinking and he will share his thoughts on that and what we will do later this year. So, in terms of -- then I think that’s a very sensible approach, I think that 1,300 number will change, and I think sensibly so.

Okay, and moving on to like-for-like on retail parks, we don’t break that down, we’ve obviously using internally. We don’t break that down to the market. But I mean you will be aware the footfall into retail parks has actually been growing, it’s been showing some decent numbers actually over the last 12 months or so, whereas the highest rates has been under bit of pressure. And where we are at the moment is that we’re not really a destination to people, I don’t think, I think it’s part of the shopping repertoire. Therefore, where the footfall is, they will be popping in to maybe one or two shops and then will be part of that journey for them. So you could probably conclude that if retail parks are showing footfall growth then that’s a key area for us.

What I would add is that I think there is a great opportunity going forward to trade retail parks differently using some of the experiences and the things that we’re learning around mostly price and what we can potentially do in those locations. So we’re not, I mean, I’ll let Kevin take this up and talk about it. But for me, we have a great opportunity to do more on retail parks. Historically, we’ve really put the Poundland offer into those locations. So, very similar offer to what you’d find on the high-street and patently it’s a different kind of mission. So we’ve got more to do there, more opportunity going forward.

Unfortunately, on the synergies as well, we’re not going to break that down into all of the component parts. What I can is explain what those component parts are, and there is lots of moving parts in that equation. And the purchasing synergies, so this is where we’ve been able to take those two cost files, bring them together, go out into the market and say look, you were charging penny less of that particular product, we want the same deal. And in fact because we’re now offering you a consolidated volume, we want a bit more than that deal. And we’ve been very successful actually in getting some real traction with our supplier base on that, so that is going to be a material upside opportunity for us in the synergies.

The property synergies are ongoing really. Where we have opportunities to bring stores across and assign them from 99p stores into the Poundland estate and in past they’ve been at the wrong rental level. We have been able to have conversations with landlords to encourage them to move with us and help us and try and create a location that we can find very profitable with that particular location. And they are still getting a rental income very sensible for that. So, again, we’ve had some success in that area. I think there is a bit more to do, not all the deals have been done. And we will continue to work on that without property direct and go up a bit over the next 12 months or so. I think that’s going to be a longer term synergy opportunity for us.

The third area is obviously store performance. And you’ll have seen that we’ve broken at the sales and profit that comes from some of the early store conversions. Now that’s not necessarily representative, just in terms of the halo effect and all the other things that’s going on over that period of time. But it helps us underpin I think around 25 million within the store performance numbers are going to be okay. And then on the other side of the equation, we’ve got some incremental head-office costs. Whilst we’re closing down Northampton, the offices there and the distribution centers there. And obviously the people will be leaving that where appropriate they’ve been offered opportunities with us. So we’d have to bring in additional resource into the Poundland business in order to offset some of those reductions. And some of that’s just pure volume. So we have to bring in additional area managers, because we’ve got another 250 stores to manage, so all these different moving parts and when we started all that in our numbers we get to this at least £25 million of the EBITDA going forward.

Charlie Muir-Sands

Thanks very much. It’s Charlie Muir-Sands from Deutsche Bank, first question, was your hopes for the second-half is better. How much really predicated on stabilization of high-street footfall as opposed to significantly driving your ATV? The second question was just to get a little bit more clarity on Spain. Is the £2 million to £3 million loss the all-in trading loss or is that just the cost due to the unusual cost base? And finally I appreciate, it’s incredibly early days. But can you give us any sense of your thoughts on multi-price? Now that you’ve put the Poundland mainly above the door, and then how that could be incremental or substitution to that 1,300 stores market, which may well go down? Thanks.

Jim McCarthy

I’ll do one and three, and if you can do Spain number 2, Nick, that would be great. Number one hopes to the second half, we expect the second half to improve from half one. And how much of that is predicated on a stabilization of high-street footfall, I think it’s quite dangerous to think about the high-street footfall, stabilizing or rising. So we have what we have to do.

What we know is that the number of people that go pass the stores, they don’t come into the stores, so there is an opportunity in the shrinking cake to take more market share. And that's really going to be driven by the strength of our offer. I think particularly in general merchandise and particularly on events. You’ll recall that last year in Halloween when we have that range, excellent range, actually it was about 10% like-for-like just both. So we know even with those high street footfall numbers being depressed, when we get it absolutely on the money, people come in. So I think the ATV is important. And it's linked to the multi-price question, and please I’ll try and answer this one at the same time in a way I could, but they correspond.

Lot of work going-on on product, and I will share some of those with you afterwards if you have the time. But there is also a rich theme of data coming after the small number of multi-price stores. So let's just be fair with ourselves. It is a small number. It's only six. But that's enough to give us data. And I give you an example from that, just one example, I don't want to bore you. One of the best sellers, right at the top of the list and we get them in the hierarchical order each week, and the buyers get them every day. I got to get them every week was compost. And we decided that we would put pallets of compost and the retail parks, outside at two pens. So you buy something you have to stick with, got. So the opportunity is not just in the sort of pure multi-price type of retail proposition. And we now have lots of larger stores.

I think for me, and what Kevin thinks is going to be the most important thing going forward, it's the future rather than the past. But I do think that the data has a read across to our other stores. Personally, I wouldn't focus on the name above the door, because that's part of the trial that we could call it, whatever we like actually, as long as the offer is absolutely on the money and we're learning all the time. I think that's where the value is, either in a standalone operation, and that's an option, and/or in fact, I think they are very, very closely linked. What can we do with the data that comes out of that across the other 894 stores if you take the 900 number it's slightly more than that, so that to me is where it is. And I am personally, I am optimistic about the opportunities that that data gives us.

Nick Hateley

Okay, Charlie, in terms of the Spain question, I thought I’ve covered that earlier actually. But what we've got there is just £3 million. The largest element of that is the cost and the team that we've got. We've got quite a large central team, and I think we need to give Kevin a bit of time, and we need to assess where we're going to go with this. But we've got the capability, I think, to accelerate if need to be. And that's really where the loss is coming from at the moment.

Charlie Muir-Sands

[Indiscernible]

Nick Hateley

No, that's everything as is. But, as I said, it's an incomplete model at the moment, Charlie. So it's labeling costs for example, we wouldn't have those if we eventually run into significant roll-outs over there because we've been buying products locally with Spanish labeling on the side.

Anisha Singhal

Hi. It's Anisha Singhal from Morgan Stanley. Just two questions, firstly, going back to the stores estate in the UK. How many loss making stores do you have in your estate there? And then secondly, I know it's too early days, but if you could comment on any findings of your transactional Web site?

Jim McCarthy

Well, I don't have the actual number of loss makers. It's always been historically very small. One of the great benefits of Poundland actually. And what I can tell you, truthfully, is when we make the acquisition, we had a lot more loss making stores and we put those into profit as quickly as we could. And that's why we accelerated the program through that four-month period, which is just six-week, wow, just per year that is a six week, four months. You're talking about massively numbers north of that.

And our loss makers, generally speaking, as I say, it's always been handful of stores. And that's been, I've been in retail 40 years, I haven’t had that many employees actually, certainly about three to four, I think. But that's been always been the lowest part of the all time, the lowest number of loss makers, and the secret in the other retailers is always to adding in at the top and top way to the bottom. So, that would be my response on loss markers, and the losses that they generate, the small number of stores, compared to what I have been used to elsewhere is very small numbers.

So, generally speaking, you're talking about six figures of numbers, you're talking about 10,000, 15,000, that sort of stuff. And of course, the other thing I would say is even with depressed high-street and the changing market and with the casualties that are occurring, we've seen some recently, haven't we, and there is a few more to come, I think. The winners will become stronger and the losers will fall by the wayside. That is absolutely sure. But the market also has to react, I think, overtime, and that will be reflected in rents, and lease terms, the length of leases, and so on so forth. And I’m not a clairvoyant. But I would say that over the next decade that are going to be much more flexible leases for a lots of properties. But we do tend to go where the traffic is the highest, because we want to be in amongst all of that. So, that’s the only caveat I would add to that.

Nick Hateley

The other one was transactional Web site, Jim…

Jim McCarthy

Yes, I forgot that one. Transactional, how could I? Transactional Web site, well, we launched in September 15th. And I think it will be fair to say that we are learning. We think that the Web site needs to be easy to navigate, and we’re doing things on that. We do lot of research on it. The operation itself works really well. We have good partners in handling and distribution. We are refining our range or our assortment that goes through that. And we are applying some creative thinking to the opportunities that are bound from it.

It does make a contribution, albeit small. So this isn’t, to come back to your question on shops. Is it a loss-maker? No, it’s not. It makes a net contribution to the business. But it is relatively small. But, we’ve talked about the growth in online earlier. And it would be remiss, I think, of Poundland not to absolutely explore the opportunities that online gives, because customers want to use that channel. Now we have two brands, we have Poundland, Dealz, at this point in time. And we have the flexibility therefore to do lots of different things.

We’re also now learning about multi-price through the six trial stores. And as I said, whilst we’ve got a read across in 900 bricks-and-mortar opportunities, as we stand today, we also have an opportunity on higher priced products. So again, this is one of the areas that the new Chief Executive, Kevin O’Byrne is giving a lot of thought he has more experience on these things than I do. And I think there will be some value that comes out of that. But Kevin will form his thoughts on it, and we’ll inform later in the year on his thoughts on online Spain and all the other things that interest this audience.

Sunita Entwisle

Hi. Sunita Entwisle, Citi, just a couple of questions. So we’ve been talking about ATV. And the Group ATV is up slightly, but you talked about mix of the Dealz and the retail park format helping that. On the high street, on its own, how has ATV developed over the last year? And secondly, can I just confirm the like-for-like definition. Is that ex-cannibalization? And if it is, can you quantify what the cannibalization effect has been over this past year?

Nick Hateley

In terms of definition, store comes into the like-for-like pool once it’s been operating for 14 months, because we have this very early spike in performance, which we take out in that equation. And if we open a store in same time or same locations and we take that into the equation is also like-for-like. So it’s quite tricky, actually, for us going forward for the next 12 or 18 months or so, because if you think about what we’ve done with 99p, we have put quite a lot of overlapping stores into our estate.

So our like-for-like pool, using that definition, is actually going to be a little bit smaller than it historically would have been. And certainly I think for us it's a discount retailer operating in this field. We’ve got to get our heads around total growth around the entire estate and not just worry about the like-for-like stores, because we’re going to have, whether it’s 45%, or so 40% of stores outside of the like-for-like pool for a period of time. So we’re thinking total growth going forward rather than like-for-like. So that’s the first question. In terms of the high street, and we’re not breaking that down. But again, I think you can follow your nose on that really. Our like-for-like performance has been down on the high street. So you can work that out probably.

Simon Irwin

Hi, it’s Simon Irwin from Credit Suisse, just a couple ones. Could you just talk a little bit about the performance of your own-brand ranges relative to the third-party ranges? And also, can you give us a little bit more color about conditional offers? It feels, going into stores, that there is significantly more conditional spend offers within the store. Can you say that, whether that is the case and also just give us a little bit more flesh on how much more you are doing?

Jim McCarthy

Yes, on own-label range, I mean own label is, for us, is generally in general merchandise. So the most recent launch of a new range of own label would be Charlie Dimmock gardening. And, as I said earlier, when we’re on the money, we’re on the money and that is doing really, really well. Now in fairness, just to give a balance to it, Simon, we’ve had some favorable weather conditions for that. So Charlie’s range, which he worked very closely with us on, has been flying out. And included in that, I can show you one of these. This is for pound obviously, and that is a solar light-bulb, and hundreds of thousands of those have been sold here. So own label is very important, is a differentiator. The margin tends to be richer. And we will continue to develop that, so some good stuff going on there.

And of course, and I think the conditional spend piece, we’ve been very careful with that in our Poundland stores. You have to spend a pound to be able to qualify for that. But the value is so compelling, so profoundly persuasive, that these conditional spends sell quite well. Within the range of those products, there are some clear winners. So we’re also learning from that. We have a lot more data now because of our six, 12 stores on the multi-price. So there is lots of stuff getting on to find the sweet spots here.

And I think it would also be fair to say that the execution of the conditional spend in our stores is sub-optimal. It varies. We haven’t really got it absolutely where we need it to be. And that’s something that we are working on internally. But this is a feature, I think, for us going forward. It’s Kevin’s call of course it’s not my call. But I think there is a rich stream of opportunity there. And, it is at the moment, not where we would wish it to be. But it’s becoming more important. And for me the qualifier with this conditional spend as an important part of that in Poundland, in a traditional Poundland store.

Simon Irwin

Thank you very much…

Jim McCarthy

So, you’ve been waiting patiently there…

Simon Irwin

Yeah, it’s just back of the day. Wish you well in the term.

Jim McCarthy

Thank you very much. Thank you, Simon.

Kate Calvert

Thank you very much. Kate Calvert from Investec. Three questions, on your current trading statement, you’ve given underlying number of 28-odd percent. Can you give us the comparable sales growth for this core business and the performance of that? Question number two, can you give us an idea of how value affected availability was in the core Poundland store, and how it changed between the first quarter and fourth quarter? And then just coming back on the conditional promotions, do you have a penetration in terms of baskets or penetration of sales that these conditional offers account for?

Jim McCarthy

Kate, maybe I misunderstood in terms of the comparable, first of all. What we got is total Group sales were up 30%, which is 309 million. There is around 6 million, which are not underlying sales, so that’s the combination of Spain plus the 99p trading in the final period before they became Poundland stores.

Kate Calvert

Right. So if you stripped out the converted stores, what would be rest of the Poundland been doing?

Jim McCarthy

No, we’re not -- we’re just talking about the Poundland Group now.

Kate Calvert

Right, okay…

Jim McCarthy

From this moment on, 99p stores has gone.

Kate Calvert

Okay.

Nick Hateley

You want to do availability, Jim, or…

Jim McCarthy

Yeah, it can be, I’m happy to do that. On availability, Kate, you’re quite right, we did flag that we had problems with availability. And I think your question was first quarter versus fourth quarter, so first quarter would have been the April through June here. So that was normal, fairly normal. It got worse as we’ll probably have to prepare in anticipation. And then if I give you one example, at one point our grocery availability from DCs was down below 60%. So there was some serious challenges there and getting the right stock in the right places. So we had an empty one in North Hampton with all those conversion program going, we’re trying to align price and product codes, all that sort of stuff, it was everything was going on.

And more importantly, unbinding or unbundling the supply-chain because the credit insurance at 99p had been withdrawn and therefore that was why some of the other thing when we got there the cupboard was there. 20% of the warehouse had stock in it, by definition, slow moving stock, and suppliers that were not prepared to deal. Now, it wasn’t as quick in unbundling that as we would have originally anticipated on the basis that we get 99p stores as one entity and Poundland in its pure form as a Company separately. And that gave us the flexibility, or gives us the flexibility, on property and things like that that we need to make the right commercial decisions.

So, suppliers that are happy to deal with Poundland, not so happy to deal with 99p even though it is under the umbrella of the Poundland business. So it took us quite a long time to unbundle all of that and get the stocks in. So a lot of complexity, we found these -- it actually was quite complex. Those availability levels are now moving towards normal. And when Wigan opens this month, I think, that will enable us in the future to rebalance the network and to have pretty much the same ranges in each of our distribution centers, which again bring us benefits, so that availability piece improving massively over where we were. We’re getting back towards the norm, still a few areas that we have to do things with. But are they material, no, not at this moment. Availability is not, at this moment, a material issue.

Kate Calvert

And in terms of conditional promotions, the participation you've currently got at the moment?

Jim McCarthy

I don't split that number out, do we at the moment. I mean, in fairness, as you would expect, it does this depending upon what your offer is. So, we do a Duracell offer which is terrific, I mean, just fantastic value. We do that at £3, a lot of Duracell batteries at £3. And there is other stuff that go I am not going to say being listen to what all these products are, because that would give my competitors an advantage and certainly not intending to do that.

So, it does do that. It is to an extent opportunistic, but I refer again to this data library that we're now able to achieve out of the multi-price stores, which gives us a little bit more clarity. And even I think s regions and stuff like that, so there’s bit going on all the time. But I do think that this is a great thing that we've done. I think it will get stronger. It is suboptimal at the moment for all the reasons that I have described. And I think we will get better and better and better at that. But we don't split that number out.

Kate Calvert

Thank you. And best wishes for the future.

Jim McCarthy

Thank you, Kate.

Jim McCarthy

Any more questions, is there anything on the line? No, well look, guys, I hope I haven't missed anybody, have I, no, none, great. And that brings us, you might be very pleased towards the end of presentation. And if I can find my sheet, I’ve just got to wrap it up.

So, we're just about now I think out of time, there is no Q&A or no questions coming from the balcony. But just before we wrap it up, Kevin O'Byrne is here sitting in the front row and he would like and feels it is appropriate, and I absolutely agree, to say a few words to you. So I am just going to hand over to Kevin now and give him the stage for Poundland for the first time.

Kevin O'Byrne

Thank you very much, Jim. Good morning, everyone. I am delighted to be here this morning. And I thought I just share a few initial thoughts. And I've been in the business now for a few weeks, and listening and learning. And I have the opportunity to get into the operations, spend time in logistics, our operations in Ireland, in Spain, in the Far East, meeting key suppliers. And most importantly, meeting lots of customers and a lots of store colleagues, as I have visited and worked in many of our stores.

And my first impression of the business is this is a very good business. We have a unique brand and a much loved brand that has shaped the discount sector in the UK. And this brand resonates with the millions of customers who come into our shops every week, many new customers I've been speaking to. And I've also being struck as I've got around the business about the teams I’ve met, the passion for the business, their energy for the business, and the retailing flair that's in this business, and that's very, very encouraging.

Now, we know that we've got some challenges, and I think they've been outlined very well this morning. We're very clear, I know these challenges. We're very clear. The market has changed and we need to adapt with that market. The 99p deal, which has given us enormous scale uplift in a short period of time, which is fantastic, has clearly been more disruptive and absorbed more cash than we anticipated. But these challenges aren't very clear don't affect my view of the long-term prospects of this business.

Retail is challenging. I've worked in retail for many years, and I am personally relishing the opportunity to get into those challenges with the team in the business and tackle those in the coming weeks and months. I have really been struck by the hunger in the business for same change and the wish for the teams to move on and tackle these, but the real pride in the business is that we're pride in the brand and I am looking forward to engaging with the teams in doing that.

Now, having acknowledged that we’ve clearly got some challenges, there are some obvious opportunities in this business. And my plan will be to focus on a number of areas. We're going to focus on the offer. We're going to focus on efficiencies. And we're clearly going to focus on our returns. On the offer, there is a number of areas that we can concentrate on. We can sell fewer SKUs to simplify the offer for our customer. We can focus more on our general merchandise sales in the mix to differentiate our offer more. And Jim touched on some of that. And there is some clear opportunities there.

We can also do more on own brands in our FMCG ranges, which allows us to reinforce our value credentials for our customers. And of course, there’s that big question that’s on everyone’s mind, multi-price. This needs serious consideration. There are some great examples in other retailers who’ve managed that very well from a single price point. And we’ve got lots of learnings, as Jim said, around the multi-price. The one thing we just need to be very careful as we execute that and think about that, is having make sure that we keep the integrity and the simplicity of the model very clear for our customers and in our stores. But I think there’s some answers to that.

On efficiency, we clearly need to simplify the business and use technology and systems to reduce our manual processes, and importantly, make the business more agile. That’s very important. And of course, a business that sells fewer SKUs is inherently more efficient. That’s important. And on returns, we will continue our focus on cash returns. We will have a laser focus on each and every, returns from each and every store in the portfolio, and that’s absolutely critical.

And as you would expect, we will extract every penny of value from the 99p deal. So there is some challenges. There is some opportunities, and clearly, there is some work to be done. And I’m looking forward to getting into that in the coming weeks and months. I’m also looking forward to coming back and explaining to you and our investors more detail about those plans as they evolve and as we put more meat on the bones, and we’ll do that in due course.

That’s all I really want to say this morning and looking forward to July 1st. And I’d like to just, on a personal note, thank Jim for all his help and support as I’ve got into the business and start to understand the business and of course wish him a very happy and healthy retirement. Thanks very much.

Jim McCarthy

Okay, guys. Well, I think you’ve probably just heard why I’m retiring. We have an exceptional candidate as the new CEO of Poundland, and I think he articulated very, very well some of those things that he’s learning and that he’s going to be applying. So I’m going to leave it at. I’m going to be around for a little while. I’ve got some products here. This is a product-led business and this will give you a little bit of a feel on what we’re capable of doing and what we are doing. So thank you very much for listening. Thank you for coming. And that’s the end. Thank you.

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