Portmeirion Group PLC (PMP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Portmeirion Group PLC Interim Results Investor Presentation. [Operator Instructions] I'd also like to remind that this presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Mike Raybould, CEO; and David Sproston, CFO of Portmeirion Group PLC. Good morning.

Good morning. Thank you, Mark, and welcome, everybody. Thank you for joining us this morning for our interim presentation. I think this is the fourth presentation we've done on this platform. It's worked very well so far, and we hope you get the most out of this session. Again, just to repeat what Mark said, please do post any questions you have using the functionality of the platform. And Dave and I will get to as many of those as we can at the end of the formal part of our presentation. Okay. So in terms of what we're going to cover today, if we just look at the agenda slide. I'm going to give a brief overview of our first half and our outlook for the remainder of the year. Dave is going to talk in some detail about our financials for the first half and our sales by market. I'm going to come back and talk about the progress we're making on the key parts of our long-term strategy. I'd then like to talk briefly about the progress we're making on ESG and our sustainability and environmental impact projects. And then we'll come back and really pull it all together, summarize where we are and talk about the forward view. Okay. So in terms of an overview of our first half, really, really pleased with our first half results. Actually, a record first half revenue, just over GBP 43 million, obviously substantially up on 2020. I think the most important statistic here, the biggest takeaway that I would emphasize is the performance against pre-COVID 2019 and we're 7% up like-for-like on 2019. And that really shows the benefit of the long-term strategy that we're working and the increased investment we're putting behind online, in particular, but also other parts of our business. What's driving this performance? Again, at its heart, strong online growth is a key part of our strategy, and I will pick this up later on in the presentation. Good growth again on top of the growth we achieved during the various lockdowns last year, combined with a really substantial improvement in gross margins with that channel as well. Also strong contributions from new product launches, strong contribution from our focus on growing new markets and rest-of-the-world markets outside of our core markets. That means that we have an immediate return to profitability for the half. And Dave will take us through the balance sheet. We have a strong balance sheet, good net cash positive position. And we're also in the process of where we can recommit to hitting our market expectations for the year. Again, strong first half in terms of sales, where we are today with order book and demand is in a good place. We have good demand and order books across all of our key markets. We are aware of and impacted by the well-publicized disruption to supply chain and some of the cost/price inflations that are coming through. This affects us like everybody else in a number of ways in terms of some delays on shipping, global shipping around the world and unloading at ports in terms of labor shortages and short-term price inflation. We've mitigated these effects very well so far in our first half numbers and are focused on continuing to mitigate them in the second half. And we have a lot of people pointed at that part of the business right now. So that's an overview of where we are. We're going to move on to the financial review, and I'm going to hand over to Dave, our Finance Director.

Thank you, Mike, and good morning to everyone on the call. So as Mike has laid out there, I think record H1 revenue, GBP 43.1 million and that was 35% up on 2020 and actually, 24% ahead of pre-COVID levels of 2019. Since the first half of 2019, we've made a couple of acquisitions that we're benefiting from in terms of top line revenue growth. So we acquired the Nambé business in the U.S. in July 2019. And we also bought the other 50% of our longtime joint venture, Portmeirion Canada in August 2020. So we benefit from additional sales of both of those businesses, in '20 -- the first half of 2021. And that did mean though that we were still like-for-like ahead 7% of 2019. So very pleasing to see that we're actually ahead of pre-COVID levels when there is still -- we're still seeing disruption in some of our sales markets, particularly the U.K., where retail was closed for 3.5 months of the first 6 months of the year. And that dropped through, revenue improvement dropped through into improved profitability, so operating margin growth, pre-COVID 1.9%. We've grown that to 4% for the first half of the year. And that meant that the headline profit before tax grew from GBP 0.5 million in 2019 to GBP 1.5 million for 2021. We're continuing to see positive operating cash flows, and that's allowing us to continue and accelerate our investment behind our growth strategy. And we're recommitting to reintroducing the dividend for full year '21. We're not paying an interim dividend, but we expect to be in a position to pay a final dividend, and we'll be updating on that in the first quarter when we announce our full year results the first quarter of 2020. Okay. Moving on to balance sheet. We continue to maintain a strong balance sheet. We're cash positive GBP 9 million at the half year. And in addition to this, we have GBP 15 million of unutilized borrowing facilities. So we had about GBP 24 million worth of headroom to allow us to continue to invest. We've actually spent about GBP 4 million in net CapEx over the last 12 months pre-COVID levels for the group. We're spending about 3x the annual run rate from pre-COVID. So continuing to invest in a number of operational and strategic projects, and we'll update on that in a bit more detail in terms of some of the progress against some of these projects. Stock levels we're continuing to focus on. We've got a small walk in there in terms of laying out the progress that we've made in the last 12 months. And we've actually been able to reduce inventory levels by about 8%, which is worth GBP 2.5 million in cash terms. So very pleased and able to increase the -- and improve our stock turn, and that's something that we're continuing to focus on in terms of leveraging our working capital in a better way. On to sales breakdown by geographical market. And I think the most pleasing thing that we've seen in the first half when we compare to 2020, we're really seeing growth across all of our key markets. So the 3 biggest markets, the U.S., the U.K. and South Korea, growth against prior year in all of those markets. The U.S., 44% up year-on-year. And we're now actually trading like-for-like above pre-COVID levels in FY '19. So really pleasing to see growth in that key market, and that's really driven by new product introduction now that we continue to invest in during this period. And the strength of online sales, both in our own websites in the U.S. but also third-party platforms as well, which have seen significant growth during the COVID period. The U.K. marketplace continues to be resilient. Increase in sales year-on-year and really set against the disruption to physical retail, which was closed for all of the first quarter and up until mid-April. In the Korean marketplace, very disrupted by COVID, certainly through the first quarter of 2020. We're starting to see sales out in this marketplace increasing year-on-year, and our sales into the market have grown over 2020. And we're now at a level where we believe we have a sustainable level where we can continue to see growth in that marketplace. And then finally, in rest of the world as well, we've seen growth over 2020. And actually, I think, more pleasing 40% growth over pre-COVID levels of 2019 in rest-of-world markets. So we're aiming to establish 2 or 3 other key international markets. And we're starting to see benefits of that strategy where progress against Australia and in the Middle East, and then we're benefiting from the full ownership of Portmeirion Canada that we fully acquired in August 2020. Anything you want to add, Mike, to...

Yes. I mean I'll just round that one off, Dave. Thank you for that overview. Again, I think what I'm really pleased with on this slide in terms of our geography, is the fact that we are substantially in growth across so many different markets, across our core markets as well as making a really good -- are getting a really good traction with some of our rest-of-world new markets. And in particular, in South Korea, we've spent a lot of time in the last couple of years stabilizing that market. We've made a lot of progress. Stock overhangs that we maybe had a couple of years ago have gone. The sales out and the demand in that market is now very, very strong for our brands, particularly the Portmeirion brand, which is very, very encouraging. Okay. So that is our overview in terms of financials. I'm now going to move on to the next section, which is an overview of our strategy, long-term strategy and in particular, the progress that we're making. So this is a slide that we put in for the last 2 or 3 presentations. And just as a recap, we have a 6-point strategy that the whole group is focused on. The first 5 are about targeting consistent and accelerated sales growth. And the final sixth one is about improving our operating margins by investing in capacity and efficiency within all of our operations. So briefly, in terms of sales drivers, we're focused on a massive online and digital transformation. We're really getting penetration in online sales channels, including our own websites. Two, unlocking new geography to complement the 3 core markets we have in the U.K., U.S. and South Korea. Three, driving new product launches to really drive sales growth in our markets. And four, developing our brands, underweight brands and leveraging the benefit of new brands that we've brought into the group like Wax Lyrical and Nambé. In terms of operations, as I said, as we grow, we have to develop the capabilities of our operations, our factories and our warehouses to cope with that growth. Those investments are going on now. I'll update that in more detail. Do you want to move the slide forward, Dave? Just in terms of how that strategy then plays out into our numbers, how do we see this playing out in the next few years? Well, those sales drivers that I've just gone through are all pointed at, again, accelerating our top line growth, our top line performance. And very quickly, we want to get back to 2019 pre-COVID levels. Well, we've already done that in the first half of this year. And then going forward in future years, we really want to be driving 10%, 10% plus double-digit sales growth. And then as we leverage that extra volume across our business, across our operational base, we're also looking to drive up operating margins. So the benefit of that sales volume going through our factories, going through our organization, the benefit of our own website sales growing, which are accretive, above average gross margin drives up the margin. And again, as we invest more money in automation projects in our factories, and we're going to come on to that, all of these things are going to drive improvements in our operating margin. We want to get back to 10% as soon as we can in 2022 and then grow beyond that, up to 13% and even beyond in the coming years. A little bit about digital and online. This is the single biggest opportunity that we believe that we have. We're partway through the journey. But I want to talk a little bit about the benefit of deepening our relationship with the end customer. Bear in mind that a couple of years ago, our business really was focused and developed around servicing trade and wholesale and distributors around the world, still an important part of our business. But with the brands we have with over 750 years of combined history, products that already exist and are loved around many, many homes, millions of homes around the world, the benefit for us of deepening that relationship with the end consumer, the customer, is massive. And this is really about telling the story of our brand, the quality of our products more to the end consumer. We want to reduce the friction in all the touch points we have with that end consumer, whether it be when they place an order on our websites or on someone else's websites, how they engage with the brand, how we deliver to that customer, how we follow with aftersales and customer service. So we're building our own customer lists, our consumer lists. We're expanding the reach that we have in terms of new product launches, new markets and targeting new categories like gifting. As we do that, we know already from our own websites that we have a very high percentage of customers that buy from us and then come back, this repeat customer, returning customer KPI is certainly 50% or more. So that means that we can leverage, we build traffic and we build transactions, we can leverage and build and get repeat transactions. All of this is going to feed through to stronger sales and stronger margin growth. So I'm going to talk for a couple of slides about our targets within digital and online and the progress we've made in the last 6-months period. So firstly, in terms of our own websites, and our own websites are only part of our online strategy, but in terms of our own websites, we want to get to 15% to 20% of our total group sales going through our own websites. Those sales are well above average margins, they will take up our group margins. In terms of progress, in the last 6 months, we've added another 15% growth on top of all the growth we made last year when retail was shut. And we've also taken our gross margins up by 900 basis points at the same time through higher average pricing. In the period, our website sales -- our own website sales represented about 12% of the group sales. We're delighted with the performance we've had during this period, hanging on to the gains we made last year, keeping those gains and growing again despite retail, physical retail reopening. The performance improvements we made to our sites in America, in our American market last year, we relaunched all of our websites in October last year has really shone through this year, and we're seeing much improved site performance from our U.S. websites this year, which is great. We've launched a new Canadian website in July of this year. And again, at the end of the half, we launched a new Wax Lyrical U.S. website, too. There's a huge road map of work going on, and we're partway through that, and I'm going to come and talk to some of the key parts of that in a moment. If we move on now to our wider online and digital strategy, so outside of our pure own website sales. Again, our target is to take our U.S. and U.S. markets, which account for roughly 2/3 of the group sales to a level of more than 50% penetration through online channels. And that will be a massive shift from where we were 2 or 3 years ago where we were very, very focused in physical retail. In the period that we're reporting on today, we've now reached 51%. It's the first time we've gone through that 50% barrier. I think there's further gains in these channels to come. So we're delighted with that progress. And again, what we're seeing on retailer websites that we are present on is that we are hanging on to and growing the online channels and getting the benefit of the physical stores reopening as we go through this pandemic, which is fantastic. Customer list, another important part of what we do, our own customer list, our own consumer customer list, as I said, we have a high percentage of customers that buy from us and then come back. And so our focus on growing those lists is important. We've added another 60,000 in 6 months and 120,000 customers over the last 12 months throughout our traffic acquisition strategies. So again, a good performance in terms of online channel penetration. And then finally, in this area, I just want to look at where we are on this journey. I'm not going to go through this road map in a huge amount of detail, but really, just to get over the breadth and how comprehensive the transformation that we are pushing through our business in terms of people, in terms of systems, both front end and back end, in terms of new websites in terms of our warehouses, building additional direct-to-consumer ship capabilities and developing our data systems so that we can better service our new consumers, our direct-to-consumers in the future. As I said, in terms of the last 6 months, we've made progress on this road map. We've launched new websites in Canada, a new website in the U.S. for Wax Lyrical. We are underway with some very big pieces of work in terms of new product information management systems. We've launched and we're working on a significant overhaul for all of our U.K. websites right now, and hopefully, they will be ready to launch in the first quarter of next year. We learned a lot from the work we did relaunching the U.S. websites last year, and we expect to get the same level of performance improvements on the U.K. websites when they go live next year. We're also partway through projects on implementing new eCRM data systems and e-mail campaign systems, so a lot of work going on there. And then on the back end in terms of delivering to the consumer, we have a big project going on right now in our warehouse in Stoke in the U.K. So it's going to more than double the capacity we have to ship direct-to-consumer and drop-ship orders, not only for our own website but for some of the retailer websites where we do the order for them. And we're engaged with our U.S. warehouse and systems to add similar capacity improvements and efficiencies as well in that part of the world. So very comprehensive road map. We're making good progress. We're happy where we are. This has always been about a 3- to 4-year program, and so we're in a good place. So moving on from digital and online to second big area of focus in terms of driving sales, new product launches, new product vitality. My challenge 18 months ago to our teams was I wanted more contribution from new products in more areas where we operate. And I'm really pleased that despite the pandemic, we've managed to launch great new products so far this year. And indeed, that new product has contributed more than 10% of the group sales in the period. Launches have included our new Sophie Conran Portmeirion range that complements a very successful range that we have around the world already with that partnership and there's a photo in the center there. Also new ranges for Spode, Creatures of Curiosity on the left-hand side, has been a big new launch for us and has worked and resonated really well with the end Spode consumer, too. All parts of our business have had successful product launches, and we expect this engine to continue through the second half with some Christmas lines as well as into next year. Moving on to the next area of our strategy, which is about driving and developing new rest-of-world export markets to complement the positions we have in the U.K., U.S. and South Korea. I think the real headline here is having reset the teams and reset the focus kind of 12 to 18 months ago, it's really pleasing to see that in the period we're reporting, we're now 40% up in these rest-of-world markets on where we were pre-COVID, and that's a really good start to generating growth. Where is this coming from? Well, we're pleased with progress in the Middle East, within Europe, Germany and Scandinavia. We've just signed up a new distributor actually in China, so it won't be in these numbers, in the last couple of weeks. We've been working on this for about 6 or 7 months. That distributor will be responsible for taking all of our brands out within the Far East and the Chinese market. As Dave said, in Canada, we acquired, last year, the joint venture distributor that we had in the Canadian market. That market has been locked down in the first half of this year in terms of physical retail but we've launched new websites. We've integrated that into our business very successfully, and we're very confident of getting a very good return on that acquisition in the coming months and years. So moving off export growth into the next area, which is about leveraging some of our new brands, and I'll talk briefly here about Wax Lyrical, our home fragrance business. Again, a made in U.K. brand, factory based up in Cumbria in the North of England. Tough first half in this division in the U.K. It's a U.K.-centric business at the moment and obviously, impacted by the most recent lockdowns we had in January through April. What that meant was that many of our customers were shut and this business has a lower level of online penetration at this stage than our tableware businesses. We've managed to get that online penetration from close to 0 up to about 20%. But that 20%, if you remember, compares to the sort of 51% average we have across the U.K. and U.S. So we have some way to go. The good news is that retail obviously in the U.K. has reopened and as it has reopened, our order books have started to swell again in terms of where we are now in the second half. We're pleased with where our order books are for this business, and they're ahead of where we were last year at this stage. In addition, we've spent the last 9 months investing in a new part of the factory there, a new production process to give us access to a new revenue stream, and that is to make Hand & Body products under the Wax Lyrical brand, hand soaps, hand pump soaps, hand pump lotions and cleansers. There's a couple of pictures there on the third -- on the right-hand side of those new parts of the factory. We had some delays in getting this over the line due to COVID and contractors having to go off and self-isolate due to the pandemic and also delays to getting these very crucial electronic chipboards, chipsets. They're in such short supply around the world at the moment. But we finally completed that end of August. We've now started production in the first half of September and indeed, in the last week or so shipped first orders, which is great to our first U.K. customers. So that's going to give us access in the future to a new and interesting category and potential revenue stream. Okay. So that section in our strategy is about how we're progressing with these key areas of strategic focus from a sales point of view, how do we accelerate our sales and top line growth. I now want to turn to what we're doing within our operations, how we are going to drive that operating margin gain that I talked about earlier. And really, it's about investing in our factories in terms of efficiency, taking our capacity out so we can get more output through as the growth comes in. Again, our target here in our factories is to take 10% cost per unit out by year 3, where in year 2 of that plan, there's a detailed road map here, and I won't go through it line by line. You can look at it off-line. But again, we're making substantial progress. In addition to the initiative that went live during last year at the top of this sheet, we have 3 or 4 programs that have gone live this year or about to go live. Heat release automation adds key capacity within our Stoke factory as well as efficiency in cost of unit savings. Clay lifting automation, the same and gives health and safety benefits. In-line spraying automation, again, gets us more efficient, enables us to put more product down key parts of our factory. That went live at the end of August. And I've already mentioned the Wax Lyrical, Hand & Body extension. These are big pieces of CapEx investment for us. They will have a long-term benefit to the business. It's been tough delivering capital projects in factories because of COVID, again, keeping contractors on site because of the pandemic, but also the shortage in key electronic circuit boards. But we are either there or very close to being there on all these 3 or 4 projects, and they will benefit us back end of this year, but particularly next year. In terms of what this means in terms of financial progress, then I think we're on track end of this year to be at a cost base cost per unit around 5% below where we were when we started. And we're also -- believe we're on track by the end of year 3, end of next year to be 10% down. At the same time, we'd have built a significant amount of extra capacity that will enable us to grow the business. Okay. So that is a quick tour through the progress we've made on the key parts of our strategy, both the sales-facing parts as well as our operating parts. I now want to move on to sustainability and ESG. We have a great track record in this area. Clearly, we're very aware as a manufacturer, as a business that ships product around the world, the impact that we have on the environment and the communities that we both operate in and sell in. As I say, we've had a track record over many years of getting better. And this year is no exception. A number of new initiatives being put in this year, both in terms of reducing plastic packaging within some of our factories; also in terms of recycling and recirculating, improving heat flow within our Stoke factory and the kilns that we have that fire the product. And that's got us to a place in the last couple of months where we are now 10% better in terms of our energy efficiency per tonne and lower carbon emissions per tonne, which was a great improvement. We're going to continue to work and develop in this area. And in fact, we're working right now with a consultancy on auditing all of our supply chains globally in terms of impact on the environment, so not only our suppliers, but our suppliers' suppliers and really following right back to first principles. And once we have that map and that audit, then we can set some challenging ambitions in this area for how we again improve and reduce our impact on the environment while growing the business. Within people, worth saying that we've continued to work safely and really look after our teams, keeping everyone safe during the COVID pandemic. Our factories, our warehouses are operating at full capacity, which is fantastic and in a COVID-safe way. And I'm really delighted in the U.K. that for the first time this month, we've achieved Platinum Investor in People accreditation. I think only 4% of people that are accredited are Platinum, so it's great to be in that small group of people that have reached the highest level. Okay. So that's sustainability and ESG. If you want to move on, Dave, I want to try and pull all of this together and then we'll ask for questions. And Dave and I will try and get to as many questions as we can. I can see that a number of questions have already come through. So thank you for those. So in terms of our first half, again, just to reiterate, we're delighted with the sales number. It is a record for the group for the first half despite ongoing drag from COVID and closures of retail in certain parts, particularly U.K. and as I said, Canada. I think the fact that our like-for-like sales are now comfortably up on 2019, pre-COVID, is really a good indicator of the change and the potential that we are building into our business through those kind of strategic programs that I've just updated on. We're sitting on good and strong order books for the second half, which is great. We are a seasonal business. We do more volume in the second half and produce more profit in the second half in a typical year. We are cognizant of the challenges that I talked about right at the start in terms of supply chain disruption, moving products around the world, inflation in global shipping rates as well as short-term labor shortages and pressure on labor rates. We have dealt with that very well so far. We have built those short-term on costs that we can see into our second half forecast and again, are recommitting to hitting our full year expectations. At the same time as executing on our sales and our profit, obviously, we are making a significant investment in our business for the future. We're investing roughly 3x our historic average run rate in terms of capital projects, both on front end, online digital systems, but particularly in our factories and warehouses to develop capacity and efficiency for future growth. I think that's fantastic. Because of that, again, we're confident of the future. We're confident that we're going to be delivering sustained sales growth and improved operating margins. We've talked about, as we've gone through this presentation, those targets that we're aiming for. We have a strong balance sheet, and we are delighted to commit to resuming dividends for this year as well. So that's our overview. What we're going to do now is I'm going to pass you back to Mark from IMC for a moment and give you a chance to log any questions on the right-hand side of the screen, and then Dave and I will come back and hopefully, ask -- answer as many of those questions as we can get to. Thank you.

[Operator Instructions] We'd like to remind you the recording of the presentation along with a copy of the slides and the published Q&A can be accessed via Investor Dashboard on the Investor Meet Company platform. I'd also like to remind you that your feedback is important to the company. 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. Mike, David, obviously, we have had a number of questions come through from investors today. If I may just hand back to you to click on that Q&A tab and just start at the top and, where appropriate to do so, just read out the question and give your response please.