Portmeirion Group PLC (PMP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Portmeirion Group interim results investor 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. I'd like to remind you that this presentation is also being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand over to Mike Raybould, CEO of Portmeirion Group. Good afternoon, Mike.

Good afternoon, everybody. Thank you for joining Portmeirion Group's interim results presentation for 2020. I'm going to do a few things this afternoon. I'm going to talk about our half 1 results in a little bit of detail, move on to our strategy, and in particular, talk to you about the progress we've made on our strategy in the last 6 months or so and since our recent fundraise, and then just spend a little bit of time on outlook and then pull everything together. As Mark said, I'd be delighted to answer any questions if you have and you want to post those during this, and I'll pick them up at the end. Okay. Let's make a start. So I think the first thing to say is, clearly, it's been a challenging period, a difficult backdrop for us, like many companies for roughly half of the period that we're reporting on today. We've had retail shutdowns around the world. That has led to our numbers being down 8% like-for-like, 20% down -- sorry, 20% down like-for-like, 8% including an acquisition, whereas you think that our brands have shown a great deal of resilience during the first half against that backdrop, which I think is really encouraging for the future. And also, we're pleased to see a good and continuing trend of improving sales in our key markets. It kind of started mid-June and as retail started to reawaken, it has continued through to the current day. I think that's also positive. So our numbers overall show us having gone backwards, like-for-like, and a small profit last year becomes a small loss this year. That's not a result that we take lightly or are comfortable with. Clearly, we want to do as much as we can to fix that. But I think underneath those headline numbers, there's actually some real positives. And I hope some of those come through as we go through the presentation this afternoon. In particular, we've seen substantial growth in our online sales, both from our own website and indeed from retailer websites. And that's a core part of our strategy going forward. So I think we're really doubling down our investment on. So I think that's fantastic. We've also sped up our decision-making. I think our capabilities as a business have improved. Our factories are back open and running and have shown great agility through this last 6 months, both in terms of reopening in a safe way, but also being able to change and repurpose parts of our factory production lines to make hand sanitizer. We did a successful fundraise in June. We've brought in over GBP 11 million of new equity. And that was on the basis of the fact we really wanted to be able to invest behind and accelerate the progress that we're making on new strategy. I'll talk you through that in more detail as we go through. We have a good strong balance sheet, which we've maintained through this period. Our cash is net positive. Significant headroom as well. As I've said earlier, we've seen an improving trend in sales since June, and that's continued through the current data. 2 U.K. factories that we own make roughly 50% of everything that we sell in a particular year around the world. Those 2 factories are now at or really close to the output levels they were pre-COVID. So we expect to return to profitability in the second half, which is great and return to be able to make dividend payments in financial year 2021. So moving on now to our numbers overview of half 1. As I said, revenue was down 8.3% or like-for-like 20%. A small profit last year becomes a small loss. That loss was in line with the expectations we had by the end of the second half. No surprises came through that. We've reduced our net debt significantly by a couple of million even before the equity raise proceeds. In terms of our balance sheet, we have a strong balance sheet with good headroom. On top of the GBP 13 million of cash, we also have significant headroom in our facilities. And I think together with the cash, we have GBP 27 million, GBP 28 million of facility headroom at the half year. So enough to see us through all kinds of twists and turns, I think, in the coming years. We actually had a cash inflow of GBP 2 million prior to the equity raise, and that was due to quick and strong action that we took to preserve cash and cut our costs as the country and much of the world entered the lockdowns due to COVID. We have a small pension scheme deficit movement in the period, minus GBP 2 million. And that really is simply due to the change in actuarial assumptions -- forward assumptions that have been made at discount rates rather than anything material in terms of change of valuation of the scheme in itself. Our inventory has increased by just over 1/4 in the period, and there's a walk there on the right-hand side, which I hope you can see, which talks you through the key drivers of that. In particular, it's been the acquisition of Nambé, which wasn't in our numbers this time last year, just over GBP 4 million. And then, in addition to that, we have some stocks in our Wax Lyrical business as we extended into the hand sanitizer production. And then new lines that we had manufactured and designed, ready to launch in spring/summer that were delayed from being -- going on the market due to the retail lockdowns around the world. Stock and inventory levels remain a key part of our focus going forward. We expect to make progress from reducing year-on-year stock levels as we go through the remainder of this year and then reduce further in the 12 months next year. Moving on to our sales by market. There's a table here that shows where our key markets, and our 3 big markets are the U.K., U.S. and South Korea. You can see our year-on-year performance. Unfortunately, it's one of those years where there isn't so much to be read into the like-for-like numbers. All the markets have been disrupted significantly due to retail shutdowns and COVID. We've been pleased with the resilience, as I said earlier, that our brands have shown and we're expecting all of those markets to pick up and grow as we go into next year. The U.S. numbers benefit from the acquisition of Nambé. Korea, which has been a key market for us for many years. A few points on Korea. Firstly, Korea was one of the first countries to enter into a lockdown as early as January. I think at the start of this year, retailers and department stores in Korea significantly disrupted through the first half. So those numbers we're showing, minus 46%, are no surprise. What is important and far more encouraging is that the sales out data that our distributor sends us, what they're selling out of their stock to the end consumer, have really turned around. Within the last 2 or 3 months, we're seeing year-on-year gains in the level of sell-out that they're making. So that's very positive. Similarly, we created a lot of new product in the second half 2019 to deal with and help deal with the disruption we had in Korea from grey shipping. And again, the positive news is those new product lines have started to sell well in Korea, and we're looking to pick up repeat orders for those. The issue we have had in Korea, and in particular, 2019, was overstocks in what we call the mid-market due to high levels of grey ship or parallel shipping from other markets into Korea. We've tackled that by being far more disciplined in how we sell Botanic Garden around the world and ensuring that product is not being grey-shipped in too-high volumes. And again, the positive feedback that we're getting is those overstocks that were there last year are now gone in that mid-market. And that, again, is good for the future. I'm now going to move on to a section of the presentation where I'll deal with our strategy -- our long-term strategy, and in particular, the progress that we've made in recent months. Our strategy is built around 6 key building blocks. And those building blocks are in place against twin objectives. The twin objectives are to deliver consistent sales growth -- top line sales growth, and to also increase our operating margins year-on-year. So we translate that sales and the sales growth will -- consistently and better into profit. At the heart of the strategy, it's about leveraging far harder the key brands we've got, these strong 6 brands that we sell around the world and also making our products and our product development work harder and more commercially successful. We have a huge piece of transformation to do in terms of becoming more digitally savvy and online, big opportunity around the world for us to increase the amount of online sales we do with the brands and the brand recognition that we have. The third area is about being focused on South Korea, preventing the feast and famine that we've had in recent years by being more disciplined, diversifying what we sell and who we sell it to in that market. The fourth part of our strategy is leveraging recent acquisitions, both Wax Lyrical, our home fragrance business, and Nambé, a business we bought last year, leveraging those businesses and getting the return on acquisition. Finally, in terms of growing our sales, we're going to be far more targeted about growing sustainable new markets -- export markets around the world. We have 3 big markets today in the U.K., U.S. and Korea, and we want to create another 3 or 4 big markets in the next 2 or 3 years. From an operating point of view, the sixth part of our strategy, is about getting more efficient in everything we do, improving our capabilities, drawing and procurement expertise so that we can deliver operating margin point gains. Against that strategy, those 6 key building blocks, is a time line here of progress we've made, and then I'm going to go into some more detail on some of those areas. That strategy was put together in quarter 4 of last year. We had new management -- management changes and we put that strategy together. As we came into the first half of this year, clearly, COVID hit the world, and our first priority really was how we responded to COVID. And as I've said earlier, we had strong cash management, we took quick action to control costs, get our cash burn down and actually had a cash inflow in the first half. We were able to reopen our key ceramic factory in Stoke-on-Trent in a safe way very quickly. I think we're the first people in the industry to be open safely at the beginning of May. And we repurposed our home fragrance factory to make hand sanitizer with a 2- or 3-week turnaround from the idea to be able to execute on that. Our online sales grew significantly, and we increased our investment in that area as well. We then moved forward to June. We did a successful fundraise, bringing over GBP 11 million, and that fundraise was targeted at 4 key areas: Driving online growth gains, getting more efficient-enough factories, extending our home fragrance factory so that we can make hand and body care soaps and lotions in the future, and purchasing a long-term joint venture in Canada and really being able to revitalize that sales market. We move forward to today and the progress we've made. Well, we have purchased and completed the purchase of the joint venture in Canada. We started to build for some of our new factory efficiency programs as well as starting to build the extension to our Wax Lyrical factory. We simplified our Board and key teams and people structure in the U.K. that will give us much more laser focus from a sales point of view and cost synergies. We've continued to invest in people, systems and warehouse capability for our online program. I want to move now and talk about the online opportunity in more detail. We set ourselves the objective of growing our own website sales to be at least 15% of our group in the next 2 to 3 years. And at the same time, all of our channel online sales to being at least 50% of our business. In the first half of 2020, we've made considerable progress against that. Our own website sales grew over 90% and now represented 15% in the first half. We've also had good growth in our retailer websites as well. We're not saying that we fixed this area, and clearly, we've benefited from the change in consumer demand and how consumers are ordering through the COVID retail shutdown. But this is a clear example of just what is possible when we complete this program of investing in digital and online. Another key metric that we check in on is our customer database, our e-mail list. That grew 31% since the end of last year and the 6 months. We've now got over 220,000 e-mail customers that we can target and follow-up. We find that once people order from us once, we get a very high proportion of reordering. And so growing that customer database is key to delivering growth in sales going forward. We're working on a number of different programs to boost customer acquisitions to our own websites, including increasing resource and investment behind paid search, social media. We've also just filmed a television advert for our U.S. market that will go live in October and that's for one of our heritage ranges, Botanic Garden. This is a direct-to-consumer advert and it will advertise a set of Botanic Garden only be bought direct from our own website in the U.S., and we're excited to see how that plays out and whether it's a model that works that we can do further within other markets going forward. We also need to make our product look far better in all online space. We've developed new platforms this year, completely new websites, updated websites. We've currently launched 4 new platforms. And indeed, this week, we are relaunching on a new platform, all of our U.S. websites for Nambé, Portmeirion, Royal Worcester, Spode and Pimpernel. We've also doubled the amount of photography resource we have and we're reshooting all of our key ranges, and that should be complete by the end of this year. And we're halfway through the build and rollout of a new digital asset management system as well, and that system will enable us to push the new content out to all of our retailer websites. And that should again be live by the end of this year. We've added people to this area to increase our pipe and the speed in which we can execute. And we have 4 further new hires joining in October, including an experienced e-commerce transformation director. The other part of this program online investment is building increased capacity in our warehouses to deliver drop ship online orders. We continue to invest in our U.K. and U.S. websites, and we'll continue through next year to do that. We've also just integrated our systems with John Lewis in the U.K. so that we can accept and fulfill their website orders through our own website. The benefit of this is it will help us increase the amount of range stock that we have in John Lewis without the need to hold the inventory. So good progress in all things to do with online. The next I'll update on in detail is our Wax Lyrical, our home fragrance business, the biggest candle manufacturer in the U.K. A good period despite shutdown of retailers for this business. We grew up to 2% despite all the disruption that was aided by the agile change we made to be able to making hand sanitizer, and we produced over 1 million bottles of hand sanitizer in the second quarter, some of which sold through and some of which is going to be in quarter 3 sales. To double this business, which is our ambition, we have to do a number of things. We have to increase the penetration in our core market in the U.K., and that's partly about new products and partly about new listings. Although shutdown during the first half, the retail channels in the U.K. have reawakened and we're seeing good order flow in quarter 3, and we're optimistic about quarter 4 of this business. The new ranges that we've developed are now selling through, which is good, and we've got new ranges ready to go in 2021. On the international front, we want to get traction in new international markets. And I'm pleased to say we've opened up new distributors in countries like China, Taiwan and Germany as well as appointing additional representation in other markets, including the U.S. And then finally, investing in range extensions and new lines for hand and body soaps and lotions and sanitizer. We're on track in terms of our build program for our commercial launch and also our factory being ready. And we hope to be launching this new range of this new product in the spring of next year. Canada has been a long-time market for us. And for many decades, we've shared a 50-50 joint venture with another company for how we operated in Canada. In August, we bought that joint venture out and we now own this company 100%. We've paid CAD 1 million, which is roundabout GBP 0.6 million. We think there's a great opportunity to grow this market given the sort of 33 million, 35 million population. It's been a long-term market for us. Our product, we know, resonates in this market. So we're in the process now of integrating the team there based in Toronto into our existing New Jersey operation. And already, the team are reporting back to me that there are some quick wins they can go out in terms of online sales channels opening and more focus in that area. So we're excited about this. I think it's a market that should grow well for us in the next couple of years. And finally, in terms of strategic updates or detailed strategic updates, I wanted to talk about manufacturing efficiency. We set an objective over the next 3 years of reducing our cost per unit of manufacturing by at least 10%, and that will feed into our target of getting our operating margins up each year. We've been working with an automation specialist, a third-party automation specialist in the U.K. for 4 or 5 months, and we're very close to having a 3-year road map for both of our U.K. factories. We've also moved on and started getting on with some of the low-hanging fruit. And I can give an example here of 3 of the investments we've made in the last 2 or 3 months that can start to transform the efficiency of our manufacturing. On the left-hand side is an example of how we've been operating in the past. The top line is a 20-year-old machine that we've used for applying the detail of the image to much of our product. On the right-hand side is a new custom-built machine that will be ready by April next year. It's being built right now in Manchester. When this is live, it will give us double the output in any shift for 1/3 of the labor and less energy. So this will be a transformational piece of equipment for us. And similarly, further down the page, getting examples on the left-hand side of processes that have been very labor-intensive to date and machines that we put in the last 4 to 6 weeks that are automating that. So an automated mug machine that went live. It gives us 4x the output for every 8-hour shift. And a litho -- kind of decal litho cutting machine that we implemented last month. Again, massively improves the output and has less labor cost. This, I think, is just the start of what we're going to be able to deliver in the next 3 years, and all of this will feed through into our target of increasing operating margins. So that's the end of our strategy section. We think we've made good progress in our strategy despite the disruption of COVID, remote working and everything else. We're also in a good place with regard to product, product development. Our new product pipeline is on track despite the challenges of remote working and not being able to get to all the factories outside of the U.K. We've got key launches lined up for next year, both for spring/summer and for autumn/winter, and in particular, one of our most successful contemporary ranges for the last 10 years, Sophie Conran, we have a completely new launch ready to go in April, and that will be a global launch. So I want to move now on to outlook -- forward outlook. As I said at the outset, we're pleased to see a continuation of the improving sales trend that we saw in June, and that has continued through quarter 3. We continue to see good online sales growth year-over-year, even with retail reopened. And our 2 factories in Stoke and up in the Lake District are running at or really close to the key pre-COVID output levels that we had. So we expect to return and become profitable again in the second half and to be marginally profitable for the full year. We are cognizant that we have a key trading period ahead of us in the next 3 months. There's always a key trading period around the run-up to Christmas. And obviously, there are still COVID uncertainties that exist, not least in the U.K. However, in the absence of a total retail shutdown again, we're confident that we are going to have a good and continued trading period in the run-up to the end of the year. As we move forward to next year, 2021, we broadly expect to return to trading levels of 2019. We expect some of the benefits of the new programs and new initiatives we're working on to drive our sales forward, but we still are cautious and expect there will be an overhang -- a hangover from COVID. And so putting those 2 together, we think we're going to be back to 2019 levels in 2021. And then moving forward to 2022 and 2023, we then think we get the full benefit of investments we're making, both in double-digit sales growth, we hope, and improved operating margins as well. In terms of dividends, we understand that dividend payouts have been important to our shareholders over the years, and we're not proposing to pay an interim dividend for FY '20 or for full year '21. We want to continue to see the improvement in trading. We want to get through our key seasonal Christmas trading period before we make firm commitments on dividends. However, with the trends that we see right now, we expect to be able to resume payments for FY '21. Our first priority through this period is going to be making sure we invest the right amount back in the business to drive our strategy. And then, we'll be able to pay dividends out with what's left and ensure they are sustainable and well covered in terms of dividend cover, too. So if I try and pull this together and then I'm going to ask for questions. So we think we had a very resilient performance in the first half against a very tough and challenging backdrop of retail closures around the world. We think our brands have performed with great resilience, and we think that's really encouraging for the future. In particular, we've seen very, very strong online growth. That's a key part of our strategy, an area which we're still investing in. So that's great to see and gives us great confidence for the future. Our balance sheet is robust. We have a huge amount of headroom for whatever the world throws at us. The fundraise that we did was successful in June is about backing and accelerating our investment in that strategy. We've seen an improving sales trend from sort of the middle of June onwards, and that's continued through quarter 3. And we've continued to invest in our business throughout this period. And that investment, we believe, will drive a much stronger performance in our business once the fog of COVID has cleared. So that's the formal part of this presentation. Thank you for bearing with me. I hope it's been useful and given you added color and flavor in terms of what we've been doing and what the future holds for Portmeirion. We're excited with the opportunities that we see ahead of us, we're excited that we'll be able to continue to invest behind the key parts of our strategy, and we've got a strong balance sheet that we think supports that. So now we're going to take over and move on to questions.

That's great, Mike. Thank you very, very much indeed. [Operator Instructions] But just one might take a few moments and ahead of going into the Q&A, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via our Investor Meet Company dashboard. I'd also like to remind you that your feedback is important to the company. And immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order that the company can better understand your views and expectations, and would very much encourage you to do so. Mike, obviously, investors do have functionality where they can presubmit questions and we have a number, just if I could start off by throwing these at you. And then, obviously, questions are in the live Q&A and as they continue to come in, I'll hand over to you in a moment for those. So the first question we have is, what about absolute pound and percentage of sales are now made online through the company's controlled website; and two, online through third-party internal estimates? How do margins on company websites compare with margins of the traditional retail sale?

Okay. Thank you. It's a good question. So in the first half, which is our smallest half in terms of half 1 and half 2, sales from our own websites were around 15% of the total. So out of about GBP 32 million, that will be between GBP 4.5 million and GBP 5 million that were sold through our own website. In terms of the margins that we make, when we sell product through our own websites, our average margins are higher, roughly 10% higher than we would make by selling through wholesale or trade channels. There's a slightly higher cost of fulfillment in our warehouses from that in terms of picking a single product and sending that out to a consumer rather than sending a full container to a big retail warehouse. But even after that extra cost at warehouse, we're still accretive in terms of margins. And I think the final part of that question was about retailer website sales. I don't have an exact number for the first half in front of me, but we saw strong growth from our retailer websites. And in total, retailer websites and our own websites, they account for about 42% of our sales in the U.K. and the U.S., the 2 big markets. The U.K. and U.S. is roughly 2/3 of our sales. So all that 2/3, about 42% of that went through online. And that's a considerable step forward from where we were a year or 2 ago.

Thank you very much. There's a question around, I guess, how the company presents numbers within its results statements. And the question reads, in its result statements, why does the company not publish simple tables this half, this half last year, the full year of its performance and its key strategies? It's very wordy, difficult to interpret. And there's a little bit more to the question, but I guess, in essence, about how can investors better understand the information.

Okay. Well, look, I'm sorry that the statements didn't give the information that you expect or you wanted to see or in the format that you wanted to see. I hope that this presentation today and the tables within it have helped clear that up. We always come back and take -- and reflect on feedback we get and we'll reflect on that for next time. We do work with advisers for a considerable amount of time in terms of what we release and how we release it, but we'll take that feedback on board. Thank you.

Mike, that's great. And of course, they do have the ability to put that in the feedback post the meeting as well. The final question that was presubmitted. Is the Board confident that sales of over 1 million in hand sanitizer line will deliver long-term sustainable returns? Many, many companies have launched hand sanitizers and built CapEx for it. COVID is likely to be controlled within 1 to 2 years. Is Wax Lyrical a good brand for germ-killer romantically scented candles?