Chapel Down Group Plc (CDGP) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Chapel Down Group Plc Interim Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, James Pennefather. Good Afternoon.

Great. Thank you, Alex, and a warm welcome to all our shareholders who are joining this call to hear about Chapel Down's interim results for the first half of the financial year 2026. I'm James Pennefather, and I'm joined by Louan Mouton, our CFO, and we're representing the leadership team of the business today and our amazing 87 colleagues to take you through a reminder of our strategic objectives and value creation plan and the progress that we are making against them. Louan and I are joining you from our offices in London, but the real action is happening in Kent, where we are midway through our harvest, which is keeping 20 people busy in our winery and over 120 in our vineyards. This lovely Indian summer weather is certainly helping with the logistics of the harvest, and we will be providing a full update on the harvest next month. We expect today's presentation to take 30 minutes, after which there will be a chance for questions. Please type in any questions, and we will get through all of them. Chapel Down has a clear mission to change the way the world thinks about English wine. Our first wines were planted in Tenterden 49 years ago. We've refocused our strategy in recent years to be focused on sparkling wine as our core focus and are leading the creation of this profitable new category. We would describe our fresh approach as having the same quality credentials as champagne, but a more approachable positioning. This leads to our ambition to achieve an equivalent 1% share of the global champagne market by 2035. We have the vineyards and the winery in place to achieve this exciting ambition. I'm going to hand over to Louan now to take us through the key headlines from today's results announcement.

Good afternoon, everyone. Turning to our performance in the first half of '26. I'm pleased to report another strong set of results. We delivered net sales revenue growth of 19% to GBP 9.4 million, representing our seventh consecutive quarter of growth with wine sales increasing by 18%. Importantly, this growth continues to be driven by our strategic focus on premium Traditional Method Sparkling wines, which now account for 74% of total wine sales revenue, up from 70% a year ago. This premiumization continues to translate into improved profitability with gross profit increasing by 28% to GBP 4.7 million and gross margin improving by 3.5 percentage points. We also saw significant improvement in operating cash flow and continue to invest in maturing wine stocks, which underpins our future growth ambitions.

Thank you, Louan. I'm going to turn now to the category opportunity for English Sparkling Wine. And I'm going to show you 8 charts, which show why we remain so optimistic about this category. We've often talked about how English Sparkling Wine currently only represents 4% of the annual consumption of the 200 million bottles of sparkling wine consumed each year in the U.K. But underlying this, we continue to see clear structural tailwinds, which underpin our confidence in sustained growth potential. The first of these, top left, is the generational shift into English Sparkling Wine by Millennials, who now represent 57% of English Sparkling Wine drinkers, which bodes well for the future growth of the category. The second is that we are creating a subcategory that is distinct from champagne. Champagne has spent 300 years successfully establishing itself as the drink of choice for formal celebration occasions, as seen here in red, whereas Chapel Down, seen here in blue, has created a new accretive consumption space on less formal celebration occasions such as summer drinking occasions, festivals and live music events. English Sparkling Wine has given consumers positive reasons to trade up into these new occasions. Turning to the third chart here, bottom left, you can see that the English Sparkling Wine category remains a growing category with value sales up 14% over the past 12 months. And lastly, we still believe that there is further room for sparkling wines to grow in U.K. because penetration is still low amongst U.K. adults at only 47% compared with 78% in France. As quality credentials continue to grow, as shown here by the 50% figure, we believe that this penetration will also continue to grow. Within the category, Chapel Down continues to reinforce its leadership position. Research shows that brand awareness is the #1 driver for purchase in high-value sparkling wine categories. The role high-value sparkling wine plays in consumers' lives is to make occasions more memorable when celebrating with friends or family and choosing a recognized brand certainly helps achieve that. Chapel Down has established itself as the clear brand leader in the U.K. with 46% brand awareness, albeit still with headroom for growth against the leading champagne brand, Moët and has won 2 percentage points of market share in the Off-Trade channel over the past year. Bottom right now, basket switching data from a top 3 retailer in the U.K. shows that 88% of shoppers switching into Chapel Down from another sparkling wine are trading up from lower value categories of sparkling wine, which shows how Chapel Down is successfully helping to premiumize the whole category. In summary, the Board remains optimistic in the future growth potential for Chapel Down within the growing English Sparkling Wine category. I'm now going to provide a progress update in terms of how we are doing against our 3 strategic priorities. Firstly, a reminder of what these 3 priorities are. The first of these is that we have built a really strong brand and we'll continue to enhance it, remembering that there is no value attached to it at the moment on our balance sheet. The second area is to leverage our position as brand leader in an emerging category for commercial benefit, both in the U.K. and internationally. The third, disciplined capital management reflects that the Board is keen that we leverage our own resources as we expand over the medium term. These, in turn, generate 5 priority value creation initiatives, the first 4 of which relate to the commercial side of our business, building the brand, single vineyards, expanding our U.K. market footprint and international expansion. Starting with the brand, I'm proud of the progress that we have made so far during 2026. We continue to strengthen the brand by engaging with consumers in memorable ways and introducing our wines to more people. We have strengthened our partnerships with iconic British associations such as Royal Ascot, where sales increased 45% compared with the previous year, as well as signing 2 new partnerships with the Jockey Club and the Royal Philharmonic Orchestra. In London, we ran a pop-up bar during English Wine Week in Covent Garden and continued our program of experiential sampling at Pub in the Park and Big Feastival. We get 50,000 visitors each year to our Brand Home in Tenterden and have upgraded our tourism experience there with the new Hythe tasting room. We're now the leading site on Tripadvisor for U.K. wine tourism and won the WineGB Trophy for Best Cellar Door alongside 13 gold medals of quality in that and other international competitions this year. To help attract more Millennials and Gen Z to our Brand Home in Tenterden, we ran our first Magnum Festival earlier this year, in fact, earlier this month, which was a sunny weekend of live music and great food and wines attended by over 600 guests. Transport from the local station and back was provided by us, and this helped us attract more people from a much wider area. We were very pleased with how our inaugural festival went, and we'll continue to work on how we can use this model to run more of them in a way that remains consistent with the peaceful ambience of the village in which our Brand Home is situated. Sharp-eyed shareholders will already have noticed some changes to our brand livery on our stills and carbonated wines, which have injected more personality. And I would encourage you to track down a bottle of our A Touch of Sparkle Bacchus limited edition, which is currently available in our retail shop or on our website. The impact of this increased marketing investment has reinforced our brand leadership position. Compared with the same period last year, we remain at 46% brand awareness and have increased our affinity score. However, we have seen a slight drop-off in penetration, which appears to be from regions outside the Southeast. If we look at 2 of our core focus areas, London and affluent Millennials, you can see continued growth in awareness. And clearly, we want to replicate this growth in all regions of the U.K. Turning now to our premiumization strategy. I am delighted that in Q4, we will be launching the Chapel Down single vineyard series, starting with our much-loved Kit's Coty, which will soon be available in a gift box and with a new variant alongside the Blanc de Blancs and Coeur de Cuvée. You will need to wait until next month before this variant is revealed to the world. The proposition of our single vineyard series is to reveal the intense truth of micro terroir in Kent North Downs. And you will see the visual idea here of the single vineyard highlighted in gold on a map design. Shareholders should feel confident in the quality credentials of what Josh and his team are achieving at Kit's Coty, with an unprecedented 6 gold medals won this year across 6 different prestigious competitions. Excitingly, once we've established Kit's Coty as our first in the single vineyard series, we then have 2 further single vineyards, Boxley Abbey and Buckwell, to explore. Investing in building these luxury sub-brands will build a premium halo for Chapel Down and help deliver further growth in our Traditional Method Sparkling focus and average selling price. We are proud of the progress our small commercial team has made in the U.K. under the leadership of Tom Hepworth-Bond, both in terms of distribution wins and in-outlet activations. We have successfully activated across major retailers with a Here's to Summertime campaign, the On-Trade version of which was more gastronomy led under the banner of Taste of England. We've won new listings across both channels, including some prestigious accounts such as the Gordon Ramsay Group and Hand Picked Hotels in the On-Trade, including 16% growth of by-the-glass listings and grew our direct-to-consumer e-commerce channel by 12% in the half. We still see a significant footprint for growth in the U.K. market. Internationally, we have made significant progress in building a scalable platform for future growth. Revenue in this channel increased by 66% to GBP 0.8 million, driven primarily by continued momentum in the United States with our importer Jackson Family Wines. Distribution in the U.S. expanded from 11 states a year ago to 31 states during the period, and Chapel Down secured a significant listing in 250 Whole Foods stores. You can see a photo here of some of the Jackson Family team who visited the U.K. to learn more about Chapel Down at the start of the summer. In addition, we continue to see good progress in Norway as well as in the travel retail channel, including a new by-the-glass listing in Cunard's fleet of 4 ships, and we've also launched in Portugal, Mexico and West Canada. In terms of disciplined capital management, we are clear that we have the vineyard acreage, winery and ERP systems we need for this next phase of growth. Boxley Abbey is now in full production and Buckwell is on track to be fully productive for the 2027 harvest. We do not intend to plant any new vineyards in the medium term. To improve quality credentials from our existing vineyards, Tenterden is now focused as our center of excellence for Traditional Method Sparkling wines. We have installed some additional tanks at the winery this year to enable us to hold back more reserve wines for future blending into non-vintage wines, which will help Josh and team deliver year-on-year consistency of our house style. Further CapEx was spent on enhancing our tourism offer at Tenterden with the construction of the Hythe tasting room. We're extremely pleased with this development and would encourage all our shareholders to come and visit it when you have a chance. Before I hand over to Louan, I want to remind shareholders of the KPIs that we have set against our 3 strategic priorities. Of the 6 KPIs, we have made good progress in this half on 3 of them, with 2 flat, which are brand awareness and net debt to EBITDA and the sixth share of champagne, only measurable once a year, so we will not be able to update this for 6 months. And I'd like to thank the whole Chapel Down team for all the work they have done to drive this level of progress for our business.

Thanks, James. Turning now to our financial results. The first thing to highlight is that the growth we delivered in the first half was broad-based across the business. Net sales revenue increased by 19% to GBP 9.4 million with growth achieved in every major channel. Off-Trade and On-Trade both grew 18%, while international was our fastest-growing channel, up 66%, reflecting the momentum we are seeing in the United States. E-commerce also continued to perform well, growing 12% and bringing more than 3,800 new customers into the Chapel Down brand. Alongside this growth, we continue to see good execution of our strategy to drive premiumization. Traditional Method Sparkling revenue increased by 26% and now represents 74% of total wine sales, up from 70% last year. This is important because it demonstrates consumers increasingly choosing our premium sparkling wines and reinforces the strategic focus we have placed on Traditional Method Sparkling over the last few years. Overall, we are growing across the channels, expanding distribution, increasing market share and improving our sales mix, which provides a strong foundation for future profitability. Benefits of that premiumization can be seen clearly in our gross margin performance. Gross margin increased by 3.5 percentage points to 49.6%, which is one of the most encouraging aspects of these results. The improvement was driven primarily by 2 factors. Firstly, the increased mix of Traditional Method Sparkling wines, which carry higher margins than our other wine expressions. And secondly, we benefited from the lower production costs associated with sparkling wines due to the exceptional 2023 harvest. These gains were partially offset by a higher weighting of Off-Trade sales, some lower-margin non-core bulk wine sales and marginal increased transportation costs as a result of fuel price increases. The investments we have made in the Chapel Down brand and in growing demand for premium sparkling wine are now delivering tangible margin benefits. Those margin gains translated into strong improvement in profitability. Gross profit increased by 28% to GBP 4.7 million, ahead of revenue growth as the benefits of premiumization and margin expansion materialized. We continue to invest behind our long-term growth strategy, consistent with the Board's previous communicated intention to increase brand investment during 2026. Marketing investment increased to GBP 1.4 million, representing 15% of net sales revenue as we strengthened brand awareness, activated new partnerships and supported further distribution expansion. These investments reinforce our brand leadership position and provide the platform for sustained profitable growth. While overheads increased as we annualize prior year investments and absorbed inflationary costs, revenue growth and gross profit growth grew more than -- sorry, more than offset these increases. As a result, underlying operating performance improved meaningfully compared to the prior year. This translated into a 27% increase in adjusted EBITDA to GBP 1.3 million. Adjusted EBITDA is an important measure for the Board as it provides a clearer view of the underlying trading performance of the business by excluding non-cash and non-trading items, including the fair value adjustment to biological projects. Based on current harvest expectations, we expect the fair value adjustment this year to be immaterial. I believe this is a particularly encouraging set of results because it demonstrates the operating leverage within the business. We have been able to increase investment behind the Chapel Down brand in line with our long-term growth strategy while still delivering strong growth and profitability. Turning finally to the balance sheet and cash flow. I firstly want to remind everyone that our net asset value represents reported book values according to IFRS accounting standards, which for some of our tangible assets are cost minus accumulated depreciation. The Board believes the market value of some of our assets to be significantly higher than the reported book value. One of the most pleasing aspects of the first half was the improvement in cash generation. Operating cash flow was positive at GBP 600,000 compared to an outflow in the prior year, reflecting both stronger underlying profitability and favorable working capital timing during the period. As expected, we continue to invest in the areas which underpin our future growth. Inventory is a strategic asset for Chapel Down and stock levels increased by GBP 3.8 million as we bottled the 2025 harvest and continue to build maturing sparkling wine reserves for future demand. Net debt increased to GBP 14 million, which was in line with our expectations and capital allocation approach. Importantly, this reflects investment in maturing stocks and our asset base rather than operating losses. Encouragingly, compared with the prior year, we used around GBP 600,000 less debt, reflecting the improving cash profile of the business. We should, however, remember that with additional acres becoming productive this year and next year at Boxley Abbey and Buckwell vineyards, we will likely see an increase in working capital requirements over the medium term as we invest into maturing stocks. To support this future growth, we also increased our revolving credit facility from GBP 20 million to GBP 25 million during the first half, while retaining access to a further GBP 5 million accordion facility. This provides substantial liquidity and flexibility as we continue to execute our growth strategy. Overall, our balance sheet remains underpinned by a substantial asset base, growing inventory of maturing wines and a disciplined approach to capital allocation, leaving us well positioned for the next stage of growth. And with that, I'll hand back to James to talk about our outlook for the remainder of '26.

Thank you, Louan. And it's now time to finish with our 2026 full year outlook. Our trading performance, there's been continued growth momentum into Q3. In addition, continued premiumization into TMS and activation plans in place for Q4, including strong distribution gains already confirmed, mean the Board now expects stronger gross profits for the full year 2026. The Board expects this to translate into a material improvement in adjusted EBITDA, excluding fair value adjustments to biological produce of at least 10% compared to market expectations. Net debt, it is anticipated that trading performance and more effective inventory planning of our maturing sparkling wines should reduce working capital requirements this year, alongside less capital expenditure than originally planned for. The Board, therefore, expects net debt to be lower at 31st of December 2026 compared to market expectations. And then lastly, on the harvest. With over 50% of the harvest now completed, the Board believes the 2026 vintage will be of high quality and with a yield tonnes per acre of about 10% lower than the 5-year average. The non-cash uplift from the fair value adjustment to biological produce is therefore likely to be immaterial. A further update on the harvest will be given once final yields are confirmed.

So that is the end of our presentation. We are now going to invite everyone to input any questions that they might have, some of which have been arriving. And what we -- how we're going to do this is I will read them out and then either Louan or I will answer them. So the first is, oh, this one looks like it's probably more a question for you as shareholders, but it is, what impact will these latest results have on the share price? So Louan, can you answer?

Yes, sure. So a reoccurring question. I'll probably tackle this one first. There might be a few more of these. Unfortunately, as an AIM listed company, we're not able to comment on the movements in share price. What we can say is we're delighted, obviously, with the great set of results for H1, and we'll continue to deliver on our progress for the remainder of the year.

Okay. Second question is, what is the status of the new off-site winemaking facility with reference to planning applications, et cetera? This question, I think, is a little bit old because we have already announced that we won't be pursuing an additional winemaking facility. The original plans were to do that at Canterbury. And actually, we have the capacity on site in Tenterden to be a center of excellence for Traditional Method Sparkling wines. So those expansion plans are no longer on the table. Third question, are there any plans to develop the Tenterden site for overnight accommodation? This would be extremely popular in the area and encourage visitors from further afield to attend. The answer to that is no, we have quite a constrained site at the moment. And we -- and our core strategic focus is on building our traditional sparkling wine brand. And when we had the Magnum Festival 2 weekends ago, actually a number of people there were staying overnight in the local area, either in Tenterden or down in Rye. And we think this is really good for the local economy. So no plans to move into overnight accommodation of our own. Is a long-term growth strategy focused on higher acreage and volumes or stabilizing the amount of acreage and focusing on performance of the existing vineyard portfolio. As I think I mentioned a few slides a few slides ago, the I didn't -- can I just ask Alex if anyone is moving the questions, just to leave them on the screen, please, so that I can answer them, triage them more efficiently. The question here is around, are we going to plant any more acreage? The answer to that is we have everything we need for the medium term. So we're not looking to plant any more. We've now planted 1,000 acres of vineyards. That allows us to reach an equivalent 1% share of the global champagne market by 2035. Last year, we sold 0.4% equivalent of the global champagne market. So as you can see from the vineyards that we've now planted, we still have a long path to growth or road map to growth ahead of us with sustained double-digit growth every year into the early 2030s. Shareholder new vintage launch events haven't happened this year, which has been disappointing. Will these be picked up again? Actually, I think what we've done this year is we've merged our new vintage launches into other events. So when we launched the Hythe earlier this year, that wonderful new tasting room to shareholders, that was the night on which we launched English Rose. Likewise, when we did the shareholder event up in London at Covent Garden, I think we had 3 of our new wines available to taste there. And then watch this space for the Kit's Coty new variant launch coming next month as well. So we are ensuring that shareholders get an early look in at any new vintage expressions that are coming. Sixth question. What is the company's plan to capitalize on the growth in wine tourism in the U.K.? Is Chapel Down on the radar for international tour organizers? We certainly see our wine tourism as a key part of what makes Chapel Down special, the 50,000 visitors that we have every year, a number of them go away as strong advocates for the brand, many of them long -- lifelong customers as well. So it's key for the 2 investments we've done this year that are new are the building of the Hythe, but also the Magnum Festival. So this absolutely remains a priority for us. Okay. I think we've got a question here, which looks like Louan can answer it, which is, what is the current status of wine stocks looking on a year-on-year basis over the last 5 years?

Thanks, James. Yes. So we don't -- I recognize we don't publicly disclose our actual stock holding for our different wine expressions. But commercially sensitive. But what I would say, though, is we are targeting a norm of 3 to 4 years worth of TMS stockholding, so Traditional Method Sparkling, which is our maturing wines, of course. And that underpins, of course, future demand and also protects us a bit against year-on-year volatility in the yield of the harvest. And then for still wines and carbonated wines, that's usually between 1 and 2 years of stockholding. And I can say that at H1, we were within those norms. I would say though, linking back to my earlier point on the -- when I spoke about the balance sheet, we might expect a small uplift in that over the next few years as, of course, Boxley Abbey and Buckwell vineyards become fully productive, which delivers additional acreage for us.