Softcat plc

Good day and thank you for standing by. Welcome to the soft cut results for the six months ended 31st January 2022 conference call. At this time all participants are in listen only mode. After the speaker's presentation there will be the question and answer session. To ask a question during the session you will need to press star and one on your telephone keypad. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Graham Watt. Please go ahead.

Thank you, Nadia, and good morning, everybody. Graham Charlton, I would like to welcome you to this morning's SOFCAT briefing on our first half fiscal 2022 results, and we thank you for your interest in SOFCAT. Before we move on to the performance and results of the first half, I'd like to take a moment to reflect on the Russian invasion of Ukraine. We are deeply saddened by the humanitarian crisis unfolding in Ukraine, and we fully support any actions that can bring peace back to the people of Ukraine at the earliest opportunity. It is encouraging to see so many people and countries across the world support the plight of the Ukrainian people, and we draw strength too from the personal actions our people across SOFCAT have been taking, and our charity team are raising funds for DEC, Disasters Emergency Committee, which supports humanitarian disasters all over the world, including the Ukraine. We sincerely hope that this appalling human suffering being felt in the country can be ended as soon as possible. Returning to the topic of today's call, I'm pleased to report that in the first half of fiscal year 2022, we have again delivered strong profitable growth and taken market share, whilst at the same time invested in the business and made further progress in the execution of our strategy. The team at Softcat continue to manage the challenges of the chopping and changing pandemic restrictions really well during the first half, and I'd like to thank each and every one of the team for their contributions, their resilience, their positivity, and ultimately their performance. It's been great getting back together again within our own team and those of our partners as the restrictions have been lifted. Moving to the SoftCap business slide, please. As with previous briefings, I'd just like to take a moment to describe our business for those of you less familiar than others. On this slide, you can see our full year fiscal 2021 key numbers, just to give you a sense of the scale of the business. And we've added to that some half-year reported numbers on our headcount and customer base. So in describing our business briefly, Softcat is the leading reseller of infrastructure solutions and technology products and services in the UK and Ireland to both the businesses and public sector communities. We served a customer base of 9,700 customers at the half-year end, focusing on the customer segments of enterprise, mid-market, and public sector. We operate a simple model with a clear strategy which we aim to execute effectively to commitments. And we work very closely with a strong portfolio of over 200 vendors, providing our customers with choice and solutions that are fit for their specific needs. Where we don't have resources or capabilities ourselves, we're happy to partner with third parties to complete the solution for the customer. We operate out of now 10 offices in the UK and Ireland and the US, and have branches in Singapore, Hong Kong, Australia, and the Netherlands. These offices and the branches support what we call our multinational business. Think of it as a mechanism to sell, fulfill and facilitate the overseas needs of existing and potential customers in the UK and Ireland. And from a cultural perspective, we foster a culture that thrives on putting people, putting our people and our customers first. And we believe that by working hard to deliver the highest levels of employee engagement and commitment, that this in turn allows us to deliver exceptional customer service. This essence is well captured in our purpose statement, we help customers use technology to succeed by putting our employees first. Our culture is a key positive differentiator in what is a fragmented market and we're pleased to receive further recognition in the period for the strength and positive impact that culture has on our employees and on our business. Our growth continues to be wholly organic and has been sustained throughout our 29-year history and this is something we're very proud of. Our cash conversion is strong, we are debt-free, and we are strongly cost-conscious, but that is balanced with an eye on the future and the need to be almost continually investing to secure and deliver our longer-term growth ambitions. What we're trying to achieve is simple. We want to be a great place to work and grow faster than the market by taking share. If we could move to the next slide, please. Those comments take me nicely to our first half fiscal 2022 summary results. I'm not going to run through each of the numbers except to reiterate that we've again delivered strong double-digit organic growth at the same time as we've continued with our robust investment program in internal systems, tools, and people. We're always looking to build skills and capacity for the longer term. And in the last 12 months, we've backed that up by growing our average headcount by 10%. We made share gains in the period and benefited from strong and focused execution. We also made further positive progress across all of our key performance metrics, including productivity as measured by gross profit per head. We added new customers, and having set a very high bar in the previous year, have now reported 66 consecutive quarters of organic year-over-year income and profit growth. The balance sheet is strong, we have no debt, and cash conversion remains high, so we're pleased to have announced an interim dividend of 7.3 pence per share up 14% on the prior year. If we could turn to the next slide now, please, entitled Business Update. When we invest, we don't have a bias to any particular segment or technology in our business, as each and every one of them present outstanding opportunities for future growth. So it's very pleasing to deliver double-digit growth across the board. We saw more customers further emerge from the pandemic, and it was particularly pleasing to see enterprise customers deliver a second successive quarter of accelerating growth year over year. This breadth is a source of great resilience in our model, and in the event that challenges emerge in a particular area, then we're exceptionally well positioned to compensate with growth in other parts of the business. Our model worked well during the pandemic restrictions, but I think everyone agrees that you lose something when you can't meet your colleagues and partners face to face. As well as getting enterprise back to growth and accelerating, we've seen the number of transactions increase too, and we see that flow into our gross profit performance. Back in May last year, we reported customer net promoter score at 59 and customer satisfaction rates at 95%. And in October this year, we reported employee net promoter score at 52. And these key measures compare favorably to the market and to our own pre-pandemic levels. We said we'd continue to invest in headcount despite the pandemic, and that is what we did. We added a further additional 296 heads across all functions in the period since the start of the pandemic as we look to support and grow our capabilities and capacities across the board. I believe we are one of a very small number of companies recruiting at this level. And as in previous updates, we feel that we've got positive momentum in the business as we continue to emerge from the pandemic and invest further. We've seen progress in our cloud offering and performance, principally in partnerships with Microsoft and AWS. And as I said, our enterprise sales are accelerating Our device lifecycle management has matured nicely, and our multinational business has kicked on too. And from a market perspective, we're seeing continuing demand across all segments for all of our IT priorities and services, and the technology trends we've seen in the last couple of years remain consistent. Organizations are continuing to enhance their customer and employee experiences through digital infrastructure spend, and they need to manage distributed workforces in hybrid working environments whilst at the same time looking to deliver productivity improvements. Cloud migration continues to be a driver of growth, most often in a hybrid multi-cloud environment. There's growing demand for data insights, and customers need to protect and secure their systems and their data. Areas such as remote working, education, conferencing, and collaboration are yet to be fully built out across many organizations. The workspace has a complex set of needs that need supporting, so it's not just about the device. It's about the network bandwidth, the connectivity, the security of connection, the access and storage of data, the telephony and accessory and apps to support. And we're still at a relatively early stage of the 5G rollout that will enable the delivery of real-time intelligent outcomes at the edge and drive much higher levels of sensor penetration into our environment to provide insights, productivity, efficiencies, and better outcomes for our businesses and our planet. So there really is a lot to look forward to. Component shortages in the supply chain have led to a relatively modest increase in order backlog for some elements of hardware, although we anticipate that this will gradually unwind over the course of our next financial year. Remember, these shortages impact only parts of our hardware sales, which were particularly strong in the period, making up 40% of our revenue. Whilst we've recruited well, finding and recruiting talent in the market isn't getting any easier. and we've responded quickly and decisively by adding resource to our recruitment team, we've widened our university coverage, we've expanded our apprenticeship program, and we've shortened the recruitment lifecycle. We've also responded by announcing an increased level of pay review for this year, and we're looking further at the salary structure for sales, specialist, and support roles, including entry-level salaries and structured progression, and we'll announce these internally in April. The other key area we have on our minds is the crisis in Ukraine. As I noted earlier, we are managing and evaluating the business impacts as they unfold. We've taken steps to strengthen our own cybersecurity protection, and we've been advising our customers too. We're monitoring risk of supply disruption and customer trading risks and making sure we implement all sanctions on the supply of technology. It's too early to say what the impacts will be, but we'll be monitoring things very closely throughout as the situation develops. And as I also said earlier, we sincerely hope the situation in Ukraine is positively resolved very soon. We can move to the next slide, please, entitled Strategy Update and Progress. Our strategy remains consistent with previous years. Grow our customer base by introducing new customers to our capabilities and expand our share of wallet with existing customers. It's straightforward and relies on focused execution and investment. Technology and consumption models are continually shifting, so we are constantly evolving our approach, but very much within this strategic framework. One such area has been the expansion of our sales development program from public sector to include corporate sales and sales specialists. And with a full year now under our belt, it's clear that this has brought benefits of both performance and retention to our entry-level salespeople. There's lots of complexity in IT infrastructure, a lot of choice, and the pace of change is relentless. and we provide expertise and skills and market insights every time we speak to a customer, and we have the support and partnership of our vendors to help us provide a solution for those customers. We operate in a fragmented market, and we believe as market leader, we still only have around 4% of the available market by sales and around 20% by customer number. That means on average we have around 20% share of wallet of our customers, and our aim is to keep driving that figure up by building trust and loyalty over time to become typically the leading partner for our smaller customers and one of two leading partners for our larger customers. The market is growing and we can see a clear opportunity for incremental growth as we build that share of wallet, add new customers and over time expand our addressable market. And we're starting from a great position as we know that every single one of our existing and potential customers are consuming some or all of what we sell. Our customers have IT infrastructure needs from the workspace to the data center, and every day we're aiming to expose our existing customers and new customers to the compelling propositions we have to offer. We've said it before, IT infrastructure solutions have become fundamental to the success of business and public sector entities. Investing in technology has been part of the fabric for companies to operate and stay ahead of the pack. The world is becoming ever more connected, and the demand for digital infrastructure will only grow. It's clear that our industry has a very bright future and we continue to be very excited by the opportunity the market offers. Turning to people and culture, we love awards that recognise us for areas relating to our people and how we work together. So it's very rewarding to receive UK recognition by Great Places to Work as the third best workplaces for wellbeing and the number one best place to work in the tech super large category. We were also recognised by Glassdoor as the number two best work-life balance company in the UK. And we were ranked 31st in Glassdoor's best places to work in the UK, notably the only reseller in the top 50. We feel that we've been recruiting more than most during the pandemic and we've been able to add resources across all areas of the business. And I spoke earlier about the actions we have taken and are taking to address what is a challenging market for talent. I think this new era of hybrid working is bedding in well. We have people back in the office in greater numbers, and face-to-face meetings with customer suppliers and service partners have resumed in numbers, which is very healthy. It's important, I think, for our younger tenure employees in particular to embrace the office environment, to learn our business from others, see our culture in action, and build relationships, as well as receive the recognition and have fun and make friendships all critical parts of our culture. We continue to learn as we go along in terms of what works and what doesn't, and what we do know is that in whatever mode we are working, delivering a great internal and external customer experience and continuing to be a great place to work are key priorities. Our people are enjoying being back together in the office and team nights out, lunches of the quarter are back, and our half-year and full-year incentive trips are all planned in too. We have a lot to look forward to later in the year with kickoff in September, This will be noting that this will be the first time for three years that we'll get the entire company together in one location for what we think will be a kickoff to remember. From an ease of doing business perspective, our financial systems and data upgrade project is progressing well and will be implemented later this year. And thanks to everybody in the team who have worked so hard to get us to this point. And we have a comprehensive roadmap of further investment and development in areas such as IT service management, CRM, and ECAT, our e-business portal. Our most recent customer engagement feedback was very positive and we look forward to updating that feedback again in May this year. And from expanding our addressable market perspective, we will consolidate and over time expand our multinational entity network to support our UK and Irish customers with their overseas needs. Any expansion is purely customer-led and our goal is simply to add value and capabilities whilst making the supply chain much slicker for our customers. These entities that we've already established facilitate local billing in local currency with local sales taxes and are supported by local relationships with vendors and distributors so that we can procure and deliver in country and at the same time be commercially competitive too. Much of the processes and administration are run from the UK for both Global and EMEA projects and this is supplemented with a person on the ground in Singapore to manage the business in Asia-Pac and an office now in Arlington in the US where we're building a small team comprising both sales and operational staff to take care of the Americas. Client devices moved very much into the spotlight when the pandemic broke, and we promised to set ourselves up to be more active and ambitious in this space by building the right processes, the right commercials, and install the supply chain management to support our customers. We have done this and are now in a much better position to manage significant deals across a large number of locations And we're adding value by imaging, holding buffer stock, offering financing solutions or consumption options, delivering devices to new starts and replacing them too, and managing the environmental implications of refurbishment and responsible disposal too. And diversity and inclusion, moving to diversity and inclusion, which is embraced by everyone at Softcat and is now firmly embedded in everything we do. Our diversity focus is led by has led to a steady increase in our gender composition, where women now make up 33% of the workforce, compared to only 29% four years ago. It is slow but steady progress, and I remain committed to further diversifying our workforce, particularly in our leadership teams, which is one of a number of moves that I think will help accelerate progress. We've also added community as a fifth company value, which reflects on our belief in the power of people and encouraging collaboration. And I'm pleased that plans are in place to get our industry-celebrated charity Borg and associated fundraising back on the calendar for later this year. Added to that, the Empowering Disability and Neurodiversity Network that we added last year is making good progress in its work on education awareness and its support for employees who have a disability. Our staff remain very active and supportive in all areas. We've over 1,000 soft cap people who have now been through or are registered for our allyship program and we now have a total of 850 people that are members of our seven network groups. We feel passionately about sustainability, and it's imperative that we all demonstrate leadership in this area and take action now to make our planet a safer, cleaner place. There's no time to waste, and some of you may be aware that today is World Water Day. We talk a lot about energy and emissions, but as the climate changes, groundwater will become more and more critical and we need to work together to sustainably manage this precious resource too. Groundwater may be out of sight, but it must not be out of mind. With that, I'd like to now hand over to Graham Charlton, our CFO, and Graham will add some more colour to the numbers and provide an update to our sustainability priorities.

Thank you, Graham, and morning, everyone. If we can turn first to the summary income statement, please, and the headlines of which have already been highlighted by Graham, but we'll work through some more of the detail now as well. And firstly, it's worth reiterating, and we've always been very clear about this, that we regard gross profit as our primary measure of income, and that very much continues to be the case. After that, gross invoiced income is the best way to understand the trading performance that we have with our customers and the margin that we're achieving on those transactions. Gross income also gives an accurate reflection of our working capital situation related to that trading as well. So in the period we saw 11.7% growth in gross profit and gross invoiced income was up by 33%. So the GP margin achieved from that gross income reduced from 15.4% to 13%. And that drop in margin doesn't concern us at all. We're delighted with the GP growth of 11.7%. The reason for the drop in the margin is that we made excellent further progress with a major mid-market customer, And the nature of that work with that customer in the current period was very large value hardware fulfillment work, which means that the percentage margin on that business is amongst the very lowest in our portfolio as well. It's still great business for us, but the size of those transactions in gross income and revenue terms is very significant, and so it affects our overall margin. On the other hand, in the prior period, we had some large high margin projects for other customers, And so the combined effect of those things creates the large drop in GP margin that you can see on the slide there. Coming to revenue next, and it's been a feature of our numbers for the past few reporting cycles that revenue growth has actually lagged gross income growth. And that's been due to the shift in mix of our gross income towards cloud and security software. And those things are netted down under IFRS 15 for the revenue disclosure. That trend is reversed in the current period by a shift in mix back towards hardware, mainly driven by the very large value of work with the major customer I just mentioned. And so for the most recent six months, revenue is up by 33.6%, just slightly ahead of the 33.0% growth in gross invoice income. But of course, and as I said, the main numbers on this chart from our internal perspective are the growth rates for both gross profit, but also operating profit as well. Gross profit growth was ahead of the expectations that we had for ourselves as we entered this year. And that's down to two things. We did make good progress with a major customer, but we had very strong trading with the rest of our customer base as well. And that was the bigger effect where we were able to capitalize on the high demand from new and existing customers. Graham's already described some of the characteristics of that demand and how we've been able to grow our share of the opportunity. But once again, it is the broad-based nature of that success that pleases us most. And we were able to post double-digit expansion in gross income in all customer and technology segments as well. And this despite the headwind of component shortages. But coming down now to operating profit performance, that was up 12.4%, slightly ahead of the GP growth. We've continued to invest for the future, as Graham mentioned. An average headcount was up by 10% in the period, which was the main driver of the 11.2% rise in costs. The return of travel and events costs has been slower than we anticipated at the start of the year due mainly to the impact of the Omicron COVID variant. And this has pushed back the full resumption of our normal operating pattern. But as of the 1st of Feb, we are back into our hybrid working policy And we expect those business costs to ramp during the second half. For example, we have three half-year incentive trips scheduled for May. And this will be the first time we've been able to run those trips for more than two years since the start of the pandemic. And we're delighted about that. But some savings in half one, and so not as aggressive a cost rebound as we expected so far. And that, combined with the strong GDP growth against really tough comparatives, gives us that 12.4% increase in operating profit, ahead, as we said, of where we expected to be at this stage, and especially given that we did grow operating profit by more than 40% in the first half of FY21. But if we turn over the slide, we can now take a quick look at the productivity of the sales teams in this latest period. This is a familiar chart with a familiar pattern now showing the gross profit the company's generating plotted against the cumulative experience of our salespeople. And as is very clearly visible, aided hopefully by the lines of best fit that we've dotted in there, the gains in productivity that we really started to evidence back in FY18 as we expanded the average resources available to the average salesperson within Softcat, those productivity gains have continued into this latest set of figures. And we think that with a share of wallet with the average customer, still just in the region of 20%, we think there's a lot of potential for further progression here for many years to come as well. And if we turn over the slide again, you can see this same trend, but from a customer perspective. And this chart shows the progression in the customer base, which is the bars, and the growth in gross profit per customer, which is the line. Our strong progress in GP per customer began back in FY18, as you saw on the previous slide, and that's continued unabated, except for a slight kink that you can see there at the beginning of the pandemic. What we also saw in the initial stages of the pandemic was a more difficult environment for winning new customers. The customer base is a measure that we report here, which requires an organization to trade with us in two consecutive phases. rolling 12-month periods. So in order to be counted in that KPI, the business has to trade in consecutive 12-month periods. And for this reason, that difficult new business environment at the start of the pandemic is actually impacting the growth in the customer base KPI as we're reporting in this current period. What we've actually seen in the most recent 12 months is an improvement in the rate of new customer wins. And so we expected that to be reflected in the customer base during our next financial year. If we can move on to the next slide, please, we'll take a quick look then at cash generation. And there's no great news to update on here, really. We're once again reporting healthy cash conversion of profit growth into cash. The conversion rate in the period was 85%, very much in the window of historic performance and expectations. and there's been no change to our underlying business model. CapEx is slightly lower this year than it was in the prior period due to the completion last year of some major office works. The network and capital movement, which is mainly trade payables and receivables, is consistent with the growth that we're seeing in gross invoiced income as well broadly. So the closing cash balance slightly ahead of prior period despite the very large cash outflows from the final and special dividends, which we announced in October and paid in December 21. And speaking of dividends, if we turn the page again, please, I can confirm the details of the interim dividend that we're announcing today. The interim payment of 7.3 pence per share is up 14.1% on the comparative, and that will be paid on the 13th of May. The shares will trade ex-dividend on the 7th of April. And turning the slide again, please, before I hand back to Graham, I will, as he mentioned, just provide a quick update on our carbon sustainability action plan. We communicated at our last set of results the structure and targets that we put in place to help us form our roadmap towards net zero. That's reiterated here, where at the top you can see those three headline targets, and an indication of our progress against them. So neutralising our Scope 1 and 2 emissions from a mixture of reducing emissions but also offsetting has been achieved, and we're well on the way now to having all of our UK and Irish offices moved across to renewable energy sources. That means that we're now able to target a net neutral position without offsetting for our own Scope 1 and 2 emissions by the end of 2024. And we have a very clear and achievable set of actions to get us there as well. On the big goal of net zero, including scope three emissions across the supply chain, we're very honest in the grading here. We have serious intent and are very passionate and motivated to make progress. But we've done our homework and are fully aware of the size of that task as well. And that's where the three areas of action come into play. Achieving net zero will require us to pay attention to our own operations, but also to those of our supply chain too. as the solutions being designed and manufactured by our vendor partners and how they're understood and selected by our customers is very important. You can see some of the initiatives that we're pursuing there under each heading. But if we turn over again to my final slide, I can highlight a few areas of current focus. And firstly, in the top left there, you can see that we're embedding an approach to sustainability in our board and executive level management structures. We have a formal subcommittee of the board now, which meets on a six-monthly basis to review and drive our progress towards net zero. And we have a steering group that will work across all areas of business to define and drive the detailed action planning that will move us forward. In the top right, you can see that we've submitted our carbon reduction plan to the Science Based Targets Initiative, and we're waiting now to get their feedback, input, and help on that. And finally, in the bottom rows, you can see that we're committed to transparent reporting on how we're doing against all of this. We're working towards full compliance with the requirements of TCFD. And in our recent submission to CDP, we rated more highly than our top 10 peers in the bar space. So we think we've made a good start. We're very conscious. It is just a start as well. But rest assured, we have a deep commitment to making progress and transparently sharing the steps that we're taking. We've set ourselves the goal of not only managing our own scope one, two, and three targets, but hopefully contributing and collaborating towards an industry-wide movement in this regard as well. So we'll keep you updated as we go. That's it for me from now. I'll pass you back to Graham Watt to close us up.