Portmeirion Group PLC (PMP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Portmeirion Group Full Year Results Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your Investor Meet company dashboard. After the presentation, you'll be redirected to provide the company with feedback. And finally, we'd like to remind you that this presentation is being recorded. We will shortly submit a poll, which we'd be very appreciative if you could respond and then close poll session. I'd like now to hand over to Mike Raybould, the CEO of Portmeirion Group. Thank you, Mike.

Thank you, [ Marc ], and thank you, everybody, for dialing in today to our full year '19 results presentation. This is a useful review. What I intend to do is go through and cover some of the headlines from our results as well as spending a bit of time on certain key areas. I'll spend some time, I think, in particular, on our progress -- the progress we've made with our Korean market as well as updating on our recent acquisitions of Nambé in the U.S., and I'll help frame as big as well Wax Lyrical. I will give an update on how COVID-19 impacts us as a business and the steps we're taking to mitigate that. And I want to spend a bit of time on our strategy, the 3- to 5-year strategy and how I see that driving the business forward. I'm going to go through some of the slides at a fair pace because I want to leave some time to be able to answer any questions that there are at the end. Okay. So to get started, just a very brief overview, again, of our business, our group. Portmeirion is a global homewares group. We have 6 incredible brands that we sell around the world, and those brands together have over 700 years of history, of heritage between them. In fact, our youngest business, our youngest brand is already 40 years old, Wax Lyrical; and indeed, Spode is celebrating its 250th anniversary this year. And I'll talk a little bit more about the marketing product activity we're doing to support that. We sell across 72 markets around the world. And our 3 big markets are the U.K., U.S. and South Korea. The business has a good, strong, consistent track record of growing its top line and bottom line and is a progressive dividend -- has a progressive dividend policy. In terms of how our business model works, our key assets really are our global brands that I've just described that have built up over years and years of incredible design. We have established sales channels around the world. We have 2 U.K. factories with substantial capacity for growth, and we have a strong balance sheet. And so our aim really is to leverage these assets and drive profitable sales growth. And that's through our product pipeline, which I'll talk to a little bit later on, extending our brand, driving further rest of world market development and from time to time, if it's appropriate, M&A activity. So if I turn to our full year 2019 results and the key points from that. Our full year results were in line with revised expectations. Our top line sales increased by just under 4% in the year. Our like-for-like sales were down 5%, and that was due as previously reported to some challenges we faced, short-term challenges we faced with our Korean market, which is our third biggest sales market. I'm going to spend some time later on in the presentation, talking about Korea and the progress we've made in dealing with that. But other areas of our business performed well, and we were very pleased with that, and that included the growth in the U.K. market against tough economic backdrop, growth in our U.S. market and also really strong growth again in our online sales transition in both our core U.K. and U.S. markets. We saw 17% like-for-like growth in online. And now over 30% of our 2 big markets, all of the sales, up -- 30% of the sales are through online channels. And we think there's a substantial opportunity to grow that further, and I'll talk to that when I do strategy. So we made good progress in most parts of our business, but we had headwinds in Korea, and I'll talk to that in a moment. We intended -- as of about 10 days ago, we intended to declare our full year dividend in line with expectations and in line with the prior year, but because of the fast changing uncertainty that faces nearly all businesses with COVID-19, we took the decision to delay that dividend decision for 3 months. In terms of our detailed profit and loss, I'm not going to dwell too much on this because I've given some color already. I've talked about our top line revenue. We still made a healthy profit in terms of operating profit. We had a short-term disruption and reduction in our operating profit margins. This again was really due to the steps we had to take to protect our brands long term in South Korea and the steps we took meant that we had to push a lot of new products through our factories. And in the first year of doing that, we were unable to achieve the efficiencies we would normally get from standard lines. If I turn to our balance sheet, I think the headline here is that we have a strong balance sheet. Our net assets are just over GBP 48 million. Our inventory and receivables increased mostly because of the acquisition of the Nambé business in the U.S. partway through the year, but also the rollout of further SKUs and some new ranges for South Korea. We took on debt in order to finance the acquisition of Nambé and that is what drives our borrowing position. But really the key point I would take from this is that we have a strong balance sheet. We have substantial bank facilities of the balance sheet date around GBP 28 million, and we would draw down around GBP 12 million of those on the balance sheet date. So we have good headroom, and that will become important when I talk to you about how we will find our way through the challenges that our businesses face from COVID-19. Moving on to our sales analysis by markets, our key markets. As I said previously, our 3 big markets -- biggest markets are the U.S., the U.K. and South Korea, which will show year-on-year growth. However, what I have to say is that our rest of world lines or our other 70-odd countries show a reduction. And that's because we chose to reduce the sales of our Botanic Garden range to many of those markets as we sought to get control of parallel shipping, grey shipping that was going on into South Korea. And so really, the South Korea line and the rest of world line need to be seen as one bucket of sales. So some more detail on Korea. This is the challenge that we faced and reported during 2019 on. So I think it would be useful to give a more detailed update. So to recap, the issue that we faced early in 2019 was that we were informed that there was oversupply of Botanic Garden, substantial grey shipping from other markets into Korea. And this is due to the fact that the Botanic Garden range, one of our key ranges, sells at a much higher price in Korea than it does in other markets. Grey shipping, parallel shipping to Korea is not a new problem. It's something that has gone on for 10 or more years. However, in 2019, changes to custom documentation allowed our distributor, our long-term distributor who looks after Korea for us to be able to identify where the grey shipping has come from, the levels of grey shipping. So our concerns were that we needed to let those overstock subside, but also we wanted to protect our brands in Korea long term. And so we took substantial action in 2019. Those actions included pulling back and reducing, being really, really disciplined about the level of Botanic Garden orders and sales that we made to other markets to reduce the grey shipping that was going on to Korea. We also, secondly, created a huge amount of new product development in a very short space of time exclusively for our Korean distributor. So that in this transition period, they had a point of difference and something new and fresh to sell. We also started to diversify our routes to market and the brands and products that we sell within Korea and started establishing relationships direct with retailers in Korea. The impact of all of that was a reduction in our rest of world sales line that impacts our like-for-like sales numbers and also short-term lower margins because of the mix change and the amount of new products at one go going through our factories. We believe that's a short-term impact, and those operating margins should return back to our standard level in the next couple of years. So good progress was made fixing and stabilizing the market, but it did hurt our like-for-like and our P&L in 2019. In terms of how we follow through on that in 2020 and beyond, there's really 2 strands to our strategy. One is discipline, making sure we're far more disciplined in everything we do with Botanic Garden, in particular, how it gets into Korea. We have tightened all of our processes and working relationship with our Korean distributor. We've hired, as of about a month ago, a local Korean national, who will be our eyes and ears in terms of the sales management in Korea. And we will continue to reduce and be disciplined about our Botanic Garden sales to other markets where there's a risk of reshipping. And in addition, the second part is about diversification. It's about establishing new routes to market for other brands and other products into Korea to spread out how we sell. And so we've established a relationship with the Shinsegae Group, one of the biggest retail groups in Korea. And we will be selling the Royal Worcester brand to Shinsegae and are already taking orders from them. We expect that account and route-to-market to grow healthily in the next couple of years. So put together, that action and continued discipline through the next 12 to 18 months, I think, will lead to a position where our Korean sales market is stable and doesn't give us the shocks we had in 2019. I want to turn and deal with a couple of the recent acquisitions and the progress we've made on those acquisitions. And the first is Nambé. Nambé is a premium U.S. homeware brand. We bought the company in July last year for just over $12 million, sourced and financed through debt. At the time of the acquisition, we laid out 2 synergies. One was cost savings from integrating with our existing U.S. business and the footprint we already have; and the second was sales synergies as we took what was a U.S.-only brand and leveraged our international sales infrastructure. So in terms of what we've achieved and the progress as of where we sit today here at the end of quarter 1, the great news is we've delivered the cost synergies. We've integrated our existing U.S. business with the Nambé business: 1 management team, 1 sales and marketing team, 1 person going out to customers in the U.S. So we've delivered those cost savings. And the sales synergies similarly are progressing really, really well. We've launched the Nambé at key international trade fairs, including Ambiente in Frankfurt around 4 weeks ago, and we're getting good interest from distributors and customers around the world. And so we expect to see good growth from the Nambé business in the coming years. We also brought over from Nambé a very strong management team, and that's become apparent to us through the first 3 to 6 months of owning the business. And indeed, the Chief Executive of the Nambé business is now the President of our integrated and combined U.S. operation. So good progress on Nambé. Wax Lyrical as our Home Fragrance division, a huge amount of work went on in 2019 into Wax Lyrical. We had a challenging quarter 4 in the business, which meant that the full year sales didn't deliver the expected double-digit sales growth, but we understand the reasons for that. In particular, that business was exposed most to the U.K. grocery channel through quarter 4 and through the expected Brexit date of October. And the U.K. grocery channel had a very tough trading period. We also chose not to repeat some of the typical and standard end-of-season clearance that we do, particularly in the U.S. and U.K. markets, because of the pricing that we were offered. We decided it wasn't something we wanted to play with. But in terms of what happened underneath the hood, we made great progress. We built a state-of-the-art, new quality labs, which will enable us to develop product much faster and more effectively. We upgraded all of our key home fragrance ranges, ready for launch in quarter 1 of this year. We also developed new ranges. Some of our most successful ceramic licenses like Wrendale and Sophie Conran, very successful ceramic ranges. Plus we've launched and developed -- ready for launch home fragrance ranges for later this year. We've opened up new export distributors, including in China, Taiwan and Greece and now getting orders in the last few weeks from those distributors as well as making progress in the U.S. and in our online and website strategy. So the Wax Lyrical business has -- we've invested strongly in the last 12 months, and we think it's really poised so good growth, strong growth in the next 2 to 3 years. I wanted to turn now and just deal with COVID-19. Clearly, I'm sure there isn't a presentation that's going on anywhere in the world at the moment where this isn't being addressed. So I think it's worth talking about how it affects us and the actions we're already taking. So first thing to say is that clearly, it brings uncertainty into how we operate as a business. However, we have -- as I illustrated earlier, have a strong balance sheet, and we have extensive bank facilities in place and good headroom within those bank facilities. However, we're also taking further action to give further prudent contingency for those -- that headroom. And that includes the decision to delay the dividend, which is worth over GBP 3 million. We're cutting around GBP 1.5 million of proposed CapEx out, and we'll be delaying that until next year. We've also cut back nonessential spend, things that aren't really driving us strategically. And we are going to work with the governments in all the countries we operate in, particularly the U.K. and U.S., and take advantage of the grants and relief that have been and are being announced on a daily basis, including the Job Retention Scheme that was announced on Friday night by the Prime Minister. In other parts of our -- in our operation, the Far East supply chains that we have are already back up and working. Our Wax Lyrical factory in Cumbria have spent the last 10 days converting service production lines to be able to produce the global demand for alcohol, sanitizer -- hand sanitizer. They've done a fantastic job, and we're about to mass produce that and supply local communities, the NHS and other customers. We are expecting short-term disruption to our U.K. and U.S. sales markets mainly because of the enforced closure of retail stores across those 2 countries. However, a good chunk of our sales in those markets are already through online channels. And our data so far shows that the online sales channels are staying strong, remaining strong. And in fact, may grow through this -- and our warehouses are staying open while we do this. And we are engaged in looking after our staff, safe distancing and making sure that we can continue where we can. Our export order book also remains very strong. And then also orders -- we have been reconfirmed in recent days from Korea, in China and other parts. So we know we have a strong order book, and that will be very important going forward. So clearly, sort of uncertain times, and there is going to be some disruption in the next few months in the U.K. and U.S., but we think we're in a good position. We certainly have the bank facilities and the headroom to see us through this, and we think we're going to be in a strong position when markets come back online to grow the business. I wanted to turn to our strategy, our long-term strategy, our 3- to 5-year strategy. We had some organization changes in September last year. Lawrence Bryan, our long-standing Chief Executive, retired. I was appointed as Chief Executive, and that felt like a good opportunity to review our strategy, understand what's worked really well for us in the last 10 years, but also understand what the challenges are going to be in the future. So we did a full strategic review, which was agreed by the Board late last year. And in terms of what that means, in the last few months, I've taken the opportunity to expand our teams and our skill sets in certain areas that I see as being really, really important for the next 2 to 3 years. Firstly, that's product development, our product development teams. We put in some new leadership and some fresh talent. Our product pipeline is an incredibly important part of driving our business. The second area is we brought in new people in marketing. We've done a reset in our marketing teams and made sure we have enough digital talent to drive our online business. We are focusing on our export sales teams. And as I said, we have hired local national Korean, who's going to be our ears and our eyes on the ground in Korea. I've launched focused product development work in certain areas that I think are going to be important. So we are going to focus on developing more giftware, more gift sets. We're going to be developing more product for brands such as Spode and Royal Worcester, where we think there's a big opportunity to grow those brands around the world. And we're also focusing on leveraging the new product categories that we've got into through the acquisitions of Wax Lyrical and Nambé. And that includes glassware and metal and wood, and all come together into collections of homewares for the kitchen and around the home. So the strategies I've laid out for our teams across the world really are focused around 6 key areas, and I thought it we could to share those with you. So first is our brand and our product. We have 6 incredible brands, and so we need to leverage our brands as effective as we can across the infrastructure we have. So leveraging our brands and putting product and design at the heart of everything we do, is the first thing. That's the engine that's going to drive our sales growth. Secondly, we've made great progress, as I said, with our transition to online, but there's a lot further, we believe, we can go. So we are investing in accelerating our online transformation and see big opportunities to deal direct with the consumer and sell around the world. Thirdly, as I said, we're going to continue to act with discipline and diversify how we sell to the Korean market and stabilize that sales market while protecting our brand in the long term. Fourthly, we're going to leverage the recent acquisitions we made, Wax Lyrical and Nambé, and take full advantage of the sales opportunities and the new product categories that those acquisitions get us into. Fifth, although we sell to 72 countries, we have 3 key sales markets, the U.K., U.S. and Korea. We are going to focus on building 2 or 3 further new sales markets. And that's going to include China and the Far East and the Middle East. We're going to continue to sell across all 69, 70 countries, but we're going to focus our teams more effectively on building 2 or 3 new substantial markets. Those five things put together, we believe, will drive our sales engine and drive sales growth across the next 3 to 5 years for the business, and that then leads us with how do we operate more effectively. And so we've already set up in place a number of initiatives in our factories to make ourselves more efficient, automation schemes and more agile and more flexible, and also in our warehouses. And we are also launching -- have launched a procurement program to look at our global spend and how we can procure more effectively. Those initiatives, we believe, will improve our operating margins over the next 2 to 3 years on top of the sales growth. A lot of work is already going on in terms of implementing and executing on that strategy, and I've laid out some of the initiatives that are in process right now on this next slide. I'm not going to go through this in too much detail, but I would highlight that we've done a huge amount of work and we'll be launching a lot of marketing activity and new product lines to celebrate the 250 year of our Spode brand around the world as well as replatforming key websites on -- e-commerce websites through the year and enhancing our digital assets, so the way in which our products appear on everyone's screen around the world and on all the online channels that they're on sale. Product Pipeline, as I've said a couple of times through this presentation, I really believe that our product pipeline is at the heart of our business. It's a key driver of our sales engine. And we've been very successful over many years of extending the life and bringing out new products for some of our heritage ranges that have sold for, in some cases, hundreds of years. We're going to continue to do that, but we're also going to invest more resource and more product development time in all of our brands. And here are just some of the highlights of things that we are working on right now for 2020 and 2021 by brand and they include more giftware. They include more products for our brands like Spode and Royal Worcester, where we think we have a substantial opportunity to grow. Some contemporary ranges for some of our brands as well as ranges that are going to take our Wax Lyrical and Nambé business forwards. So a healthy product pipeline, a fresh and reinvigorated team and an exciting pipeline of product to come. So to try and pull all that together. 2019, we had some challenges in South Korea, and that masked the progress that I think we've made in many other areas. We were pleased with the progress we made in other areas. And I've highlighted those areas for you. We know what we have to do to continue to stabilize our Korean market, and it's about discipline and how we trade with -- particularly on Botanic Garden range and it's about diversifying how we sell in Korea. That aside, we know what our strategy is, and we are putting more focus and more investment behind certain key areas. As I've said, product pipeline and where that's targeted at. Leveraging our brands, particularly in digital and online space to continue our transition to online, and making sure we drive out the benefits from the Wax Lyrical home fragrance business and the Nambé acquisition that we bought last year. Put together, we're excited about our next 3 to 5 years. We think there's some great opportunities to grow the business, and I hope you found that presentation and update useful. So...

Mike?

Yes?

Should I just give you a chance, because you've obviously received quite a few questions from investors today. If I just let you have a couple of moments to just scan through those that, of course, that you're in a position to answer. And then I'll just tell the investors a little bit more about what they can get from Portmeirion Group, from their investment in the company?