Portmeirion Group PLC (PMP) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Portmeirion Group PLC full year 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 received today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to David Sproston, CFO; and Mike Raybould, CEO. Good afternoon to you both.

Thank you. Good afternoon, everybody. Welcome to our Full Year 2021 Investor Roadshow presentation. In terms of our agenda today, we have a presentation that will last between 30 and 40 minutes, and we'd encourage you to post any questions you have on the software, and we'll try and answer as many of those as we can at the end. In terms of the agenda for the presentation itself, I'm going to start off with a brief overview. And then Dave Sproston, our Group Finance Director, will cover some detailed financial slides. I'll then do a recap on our business model and strategy and where we're going. And then we'll spend the bulk of the time of the presentation on reviewing the progress that we've made in the last 12 months and our long-term strategy before we come back, put everything together and look at a forward view as well. So turning to the headlines for 2021. Delighted to report a record sales number for the group, 14% ahead of previous best year the group has ever had. And you can see that chart on the right-hand side of that sales trend. More pleasing, I think, is that, that growth has come across a real breadth of areas. All of our key markets were up in the year and all of our brands grew at the same time. Online channel has continued to be a significant driver of that growth, and we'll deal in some detail with what we're doing with online later on in the presentation. We continue to have a strong balance sheet, cash generative. Dave will pick up the detail on that in the coming slides. And we're very pleased to be reinstating our long-standing dividend for FY 2021. We're now going to turn to some detailed slides on our financial performance, and then I'll come back and look at our business model.

Okay. Thank you, Mike, and good afternoon to everybody on the call. So just to summarize FY '21 financial performance. Strong revenue performance, 21% increase over the prior year. Record sales performance. First time the group has exceeded GBP 100 million of sales, and that was a like-for-like improvement of 19% over 2020. That strong revenue performance has dropped through to headline profit before tax, which at GBP 7.2 million was 12% ahead of our initial market expectations and broadly back in line with the profit performance from 2019 prior to COVID. Strong cash performance. We've maintained a net cash positive position and the strong trading performance and strong cash performance means that we are reinstating our long-standing dividend, which is GBP 0.13 per share, which will be paid subject to shareholder approval at the AGM at the end of May. Okay. Moving on to balance sheet. We continue to maintain a strong balance sheet and net assets increased by 11% to GBP 62 million. Net cash, GBP 0.7 million maintained, and that allowed us to accelerate the capital expenditure investment. So net CapEx was GBP 4.6 million in 2021. And that was about 3x the historic rate that the group has invested. So back to 2019, 2018, we're about 3x that level. And Mike will provide an update on some of the key capital expenditure projects later in the presentation. We continue to maintain a strong facility headroom position. In addition to the GBP 7.6 million of cash on the balance sheet at the end of the year, we also had working capital facilities of GBP 15 million, which were not being utilized at that point in time. On this slide, we've also got a small inventory bridge. We've put this in presentations before, which is just really to break down the 7% increase in inventory year-on-year. And about 2/3 of that increase is really just as a relation to increased cost of product, so increased freight, increased raw material costs. So actually like-for-like, we had a very small 2% increase in inventory levels, which compared to the 21% increase in revenue, demonstrates that we've been able to successfully improve our stock turn over the previous years. Okay, moving on to sales breakdown by geographical market. I think as Mike said, growth really across all of our key markets, the U.K., the U.S. and South Korea, just under 90% of sales for the group, all increased in sales over the previous year. So the U.S. was up 27%, driven by strong drop-ship and online fulfillment, good stock availability in the fourth quarter and new product launches. Underlying U.K. growth was 14% year-on-year. And then South Korea back in growth over 2020. We now believe we're at a robust base that we're going to see sustainable growth in this market going forward. And then in Rest of the World markets, 27% ahead of the prior year, but actually 71% ahead of 2019 prior to COVID. Starting to see the benefit of the acquisition of Portmeirion Canada, the other 50% we bought in August of 2020, and starting to see strong growth in that marketplace. Good growth in Australia and then contained within other balance. We have a new Chinese distribution partner, which was commenced in the second half of last year. We look forward to seeing -- reporting good growth in that marketplace in 2022, going forward. Okay. So I'm now going to hand back to Mike.

Thank you, Dave. I'm going to look now at our brand revenue breakdown. This is a new slide that we haven't put into previous presentations. I think since I took over as Chief Executive a couple of years ago, I've been very keen that we understand that Portmeirion Group is a lot more than just Portmeirion brand that even ranges franchises like Botanic Garden within Portmeirion. We have 6 great brands and I felt for some time that some of the other brands have a huge opportunity for growth. We've spent the last 18 months working as a business from a marketing and brand marketing point of view and really understanding how we can communicate what our brands stand for to the end consumer, particularly in online and digital space. And then we've produced road maps for each of our brands that are going to enable us to grow these brands around the world in the coming years. So I'm really pleased with the early progress that we're reporting today on those brands and their growth. And in particular, I would highlight the far right-hand column on this chart that shows the Y-o-2Y growth, so the growth on pre-COVID levels. And we can see already that brands like Spode plus 33%, Royal Worcester nearly 20% up, and Pimpernel plus 26%, all showing positive reaction to the new work, the new focus, the new brand work that we've done. Other things to note on this slide, Nambe, which was acquired part way through 2019, grew again in the year and reported its best sales for the last 5 years. And that, as Dave said, was helped by increased direct-to-consumer business, better stock availability during key seasonal sales periods. Portmeirion shows as being down 3% on a Y-o-2Y basis, but if we exclude from that Botanic Garden, where we've pulled back and reduced over-shipping that was going on to the Korean market, then the rest of that brand contemporary ranges like Sophie Conran and Sara Miller collaborations, those are up double digit on that metric. So a really positive story on many of these brands. Wax Lyrical, our home fragrance business, was up 5% in the year, but still short of where we were pre-COVID. Wax Lyrical is the business, the brand that's been most impacted by COVID-enforced retail shutdowns. Its sales were very dominated by traditional bricks-and-mortar retail and clearly has been disrupted in the last 12 months. And I'm going to come on to how that business is turning around later on in the presentation. So I'm now going to move to our business model and our strategy and our ambition. So a few words in terms of our key strengths that our strategy is built on. 6 great brands together with over 750 years of combined history. Increasingly, our business is diversified, diversified in terms of geography, sales channels, off-line physical retail and now online and product. We have significant amount of expertise in our business across the world in the categories that we operate in, expertise in design, expertise in manufacturing and sourcing, and significant sales infrastructure as well, particularly in the U.K. and the U.S. We have 2 U.K. factories that supply nearly 50% of everything that we sell. And we have drop-ship warehouse facilities in the U.K. and in the U.S. Moving on to our strategy. Our commercial strategy is really very simple. It's about getting our products, our brands in front of an ever wider customer base, potential customer base. And we're doing that by growing and developing new online channels, so getting in front of more customers. We're doing it by building out international markets. So our 3 core markets of the U.K., U.S. and South Korea account for nearly 90% of our sales, but the remaining 10% is 60 or 70 different countries where we already have small sales footprints. So we want to build those markets to be much bigger in the future. We're leveraging our brands more effectively. What do I mean by that? Well, where we have existing distributors and existing markets, encouraging them to take more of our product, more of our brand portfolio. Where we have websites that already sell and have good customer traction, cross-selling more of our products to those existing online customers. Our operational strategy is really to enable that growth as it comes through. And that means that we're investing and increasing the capabilities and the capacities, the output of our factories and also building additional warehouse fulfillment capabilities, so we can ship more online orders. Online orders for our own website sales, but increasingly also the retailer website sales as well. In terms of ESG, we're very respectful of all the communities that we operate in. We understand that we have a carbon footprint and energy footprint, and we have a long-term strategy to constantly get better, reduce the impact that we have on the environment, and I'm going to talk to this a little bit later -- in a little bit more detail later on. So putting that together, in terms of our ambition, by delivering on this strategy, the commercial strategy, the operational strategy, we're really looking at sustainable top line sales growth, backed by significant improvement in operating margins, thereby converting those sales more effectively into bottom line profit. And you can see there that our short-term target, our immediate target, is to get back to an operating margin of 10% and thereafter each year to try and go up into an increment of at least 1%. Our long-range target is to have an operating margin of 13% or more. We're now going to move to the next section of this presentation, which is a review of our strategic progress. I'm going to turn, first of all, to a summary slide, Slide 15. There is a 1-page scorecard that shows our KPI performance against some of these key strategic goals that I've laid out. In terms of our commercial strategy, reaching more customers, more time, and you can see there in the middle column of this slide that our own website sales grew again in the year by 16%, and on a Y-o-2Y basis are now 81% up, significant progress. Similarly, our customer lists were up 24% and are more than double where we were pre-COVID. That is an important metric for us because we know that customers that come and buy from us on our website once, there's a very good chance they'll come back and buy again in the future. So it's a good predictor of future growth. In terms of new product development, we wanted to see an improved contribution from new products. And I'm pleased to say that in this year, more than 10% of our sales came from new product launches. And that is a better return, a better hit rate than historically we've had in the business. In terms of building out geography and opening up new markets, then year-on-year, our sales were up 27% and on a 2-year basis, 71%. So good, pleasing progress there, too. And in terms of leveraging our brands, as we saw on a slide a few pages ago, early signs that the new work we're doing, the new brand leg work we're doing, is giving a good return. Spode, Pimpernel, Royal Worcester, all showing good signs of growth. Turning now to the operational strategy then. In terms of our factories, 3 key pieces of new automation have gone in and are going live right now. Those automation projects will increase the output that we can get from our Stoke ceramic factory, improve productivity, and reduce cost per unit, which will help drive that operating margin ambition that we have. In our warehouses in the U.K., we've just completed a floor extension that will enable us to ship roughly double the number of parcels direct to the consumer in the second half of this year. And similarly, in the U.S., we have work going on to do the same. In our home fragrance factory in the Lake District, we've just completed an extension that will allow us to produce and sell a new revenue stream, hand and body soaps, and we'll come and talk about that a little bit more in a moment. In terms of procurement, we hedged out our long-term energy contract in the first quarter of 2021 out to the first half of 2024. So in the short term that protects us from the immediate volatility that we're all experiencing in energy costs right now. From an ESG point of view, our carbon emissions per tonne were further reduced this year by 12% on the previous year. So that's a very quick overview of some of our key KPIs on our strategy, and what I'm now going to do is go into some of the key parts of this in a little bit more detail. I'm going to start with developing online sales channels, a really important area that we can reach more potential customers. On the right-hand side, you can see the trends for our own website sales platforms. Those platforms are in the U.K. and in the U.S. Good growth, again, year-on-year and significant growth on a Y-o-2Y basis, and that customer list is growing in line as well. When we talk about online channels, in addition to our own website, we also have pure play e-tailers like Amazon and Wayfair, as well as omnichannel retailers like John Lewis in the U.K. or Macy's in the U.S. And I'm pleased to report that when we look at all those online channels together in those 2 big markets of the U.S. and U.K., 50% or more of our sales now go through an online channel, and that's significantly up from where we were 2 or 3 years ago. Continuing on online, just a few words about the key pillars that we're investing in for our own website sales growth. Starting on the left with user experience. We're investing in our website, improving the user experience. We've already launched brand-new websites in the U.S. market, and later this year, in 2022, we have new websites for the U.K. that will go live. We want to improve the user experience, simplify the journey that the customer makes when they're on our website, and that will improve the conversion level as well. Secondly, we're increasing the pipe in terms of bringing new customers into our websites by looking at paid search, social media, all different routes and channels of acquiring those customers. Once we have those customers, our job then is to maximize the value of that customer through repeat purchases and really getting sticky and engaging with that customer. So later this year, we'll be launching loyalty and VIP programs and clubs for some of our brands as well as working with the new data that we have with that end consumer, segmenting that data effectively and being able to target on e-mail campaigns. And finally, on all online channels, whether it's our website or retailer's websites, we want to stand out better on that digital shelf and that means improving the content, the photography, video content, the story, the reviews, and so on. So in terms of -- if you'd like to move 1 slide on, Dave. In terms of our road map in this online area, I shan't go through the detail on this slide, but really just to get over that, we have a very comprehensive program that we're working through. It touches everything from people and capabilities to the front-end websites, back-end systems, data, how we use data, how we fulfill and how much we can fulfill in terms of customer orders as well. And I think the key point here is to say that although we've made significant progress in the last 1.5 years, we're still really in our infancy, I think, in terms of developing our expertise in this area. We've got another 1.5 years ahead of us. The things to watch out for in the next 12 months, as I said, our new websites coming in the U.K. with better customer experience and hopefully better conversion, as well as the launch of some VIP loyalty clubs and referral schemes. So online, if I sum that up. Good growth again in 2021, even with retail, physical retail reopening. We're partway through our journey in terms of getting in front of more customers and really leveraging our brand values. And in the next 12 to 24 months, there's going to be a considerable number of new projects that come to bear. Moving on to our second key strategic sales driver, which is building that Rest of World geography. So in 2021, our sales in this area were up well 27% on a Y-o-2Y basis, 71%, and that really shows some positive early results from the reset of the team, the sales team that we did just over 18 months ago. We've worked on aligning our RRPs around the world and are now seeing good growth from many countries including Australia, Canada, and Scandinavia. We've also, in the second half of last year, signed a new distribution agreement, all 6 of our brands in China. We're very excited to see that market grow for us in the next 2 or 3 years. We expect, therefore, to see our Rest of the World geography sales markets grow at a faster rate than the average business in the next 2 or 3 years, and some of those target markets are on that slide. Turning to our third key strategic sales driver, which is getting an improved return from new product development and launches. In this area, we launched a number of new ranges of products in the last 12 months. We extended some of our key heritage ranges like Botanic Garden, Spode Christmas Tree. Spode Christmas Tree, in particular, was a big driver of our very successful outperformance in quarter 4. We've also increasingly launched new contemporary ranges, including our collaboration with Sophie Conran, and Spode ranges like Creatures of Curiosity, which are targeted at growing a wider consumer market in areas of the market where we aren't as concentrated in at the moment. In total, in the year, more than 10% of our sales came from these new launches. And as I said, that's an improved contribution versus our historical head rate. Looking forward now, what are we doing? Well, we have a 2-year road map in place for all of our brands for products that we're going to launch. In the next 12 months, you're going to see product launches to celebrate the 50th anniversary of Botanic Garden. We're also extending Botanic Garden, Portmeirion Botanic Garden into home fragrance and hand and body products using our Wax Lyrical factory. We have further Spode Christmas Tree products that come out this Christmas to build on the real success we had in 2021. And then we have contemporary ranges and gifting ranges, including new Sara Miller coming too, so a good product road map for the next 12 months. And as I say, a 2-year rolling road map is part of our processes going forward. Final key strategic sales driver is to leverage our brands more effectively. You can see our 6 brands there on Slide 26. Just to touch, first of all, on Spode. I've talked about Spode a little bit earlier, but you can see on the chart there that really good early signs from the work we've done, the focus on this brand that we've had a breakout year in terms of sales growth. We expect this brand, Spode, to continue to grow. Where did we get the growth formula? It was a combination of new product launches in our heritage ranges and some more contemporary giftware as well. Critically, as we talk to the end consumer more and more on online digital channels, we're seeing a real engagement, social following for this brand to significantly improve KPIs. Next on this section, I want to talk about Wax Lyrical, our home fragrance business, factory based up in the Lake District in the U.K. Sales were up 5% in the year, are still below where we were pre-COVID. Why is that? Well, this business, this brand, has been most impacted by COVID-enforced physical retail shutdowns. Many of its customers are physical bricks-and-mortar retailer, and we're enforced to close through large parts of last year. The good news is that with retail reopened, particularly in the U.K., then sales this year should rebound. We're also leveraging our wider group infrastructure in the U.S. and some of our Rest of World sales teams to really go out and sell and take this brand to new markets. We have new product coming through, in particular, following through with the development of the new extension of the factory that allows us to make the hand and body products. There's a couple of photos there on this slide of some of the new ranges that are being produced right now. And then finally, in terms of leveraging our brands, an update on Nambe. Nambe, a brand that we bought in the second half of 2019 to increase our exposure initially in the U.S. So again, pleased to see a 5-year sales high for the Nambe brand despite all the ongoing disruption from COVID. Good sales in online channels. We're reaching more potential customers, really benefiting being able to reship and replenish and take orders through quarter 4, better stock availability and good new product launches. We expect Nambe to grow in the next couple of years. Again, further extensions within online channels is going to be a big focus, as well as leveraging our U.K. and other markets around the world for new listings. So that is an overview of our key strategic sales drivers. Again, all about getting our products, our brands in front of more potential customers on more occasions. Looking now at our operational strategy, again, this is about our capabilities, our efficiency, driving up our operating margins. I'm going to start, first of all, with our factories. So in our Spode factory, we've invested heavily in the last 12 months in designing and developing with automation specialists new pieces of machinery that will increase our output on every shift, reduce our cost and make us more productive. Three pieces of automation are now in and live, and so we expect to see increased output this year and in future years. Better productivity, lower cost per unit driving that accretive operating margin goal. These pieces of CapEx also reduce the energy consumption that we have in our factories and reduce reliance on manual labor. In our Wax Lyrical factory, we've completed the extension that allows us to make the hand and body products. Those are in production right now, and are going on sale and begin to take orders from a number of markets around the world. In terms of our 2 factories, we have a further 2 years of this road map, with projects that are either underway in design and build or will shortly be underway. And at the end of the 2 years, our factories will have a much higher output, much better productivity and lower cost base. In terms of our warehouses, we've extended our U.K. warehouse specifically to double the capacity we have for picking online orders, so enabling and getting ahead of the growth that we're going to be bringing in on those channels. Similarly, in our U.S. warehouses in Connecticut and New Mexico, we are investing in systems to allow us to be more efficient in how our ERP and warehouse management systems work, so that we can pick and pack and ship all 6 of our brands on 1 single order. And finally, on this section, a really important area which is ESG. We have a strong track record in these areas of making incremental improvements, and 2021 was no exception. New products that we put in, in our factories enabled us to reduce our carbon cost, our carbon emission per tonne by further 12%. We also achieved, for the first time, platinum accreditation on Investors in People in our U.K. businesses. We've worked hard on our environmental sustainability piece with outside consultants in the last 6 months, really understanding not only what our emissions are, but also our suppliers and our suppliers' suppliers that we have a full audit, if you like, of everything that goes on, both in our control and on our suppliers. What we're going to do with this is come up with an ambition that we will launch to the market in the next 6 to 9 months of how we go even further in terms of reducing our impact on the environment and look forward to sharing that in due course. That completes the strategic overview of this presentation, so I'm going to come back and summarize the year. So again, as we said at the start, very pleased with the sales performance despite all of the ongoing disruptions. A record sales year for the group, and that sales growth really was across all of our markets and all of our brands, so strength and depth in that growth. As Dave highlighted, our cash generation, our balance sheet is robust, and we're very pleased to reinstate our long-standing dividend. As we look forward now into 2022 and 2023 in terms of our outlook, we expect the disruption from COVID to continue in supply chains at least in the short term, and I think that would be evidenced by the lockdowns in China that have been announced in the last 7 to 10 days. We have a good track record of very experienced sourcing and operational teams, and we've been used to dealing with these bumps in the road for the last couple of years. So we expect to navigate those existing -- those continued supply chain disruptions as we go through this year. We're also very aware of inflationary pressures. In terms of energy and our business, we're fortunate to have these long-term energy contracts, fixed-price energy contracts in place. So as a business, and our fact is we know we are protected at least for the next couple of years. But we are cognizant and watchful of the impact that energy price rises, fuel price rises, food price rises are going to have on the end consumer. We expect that it's going to take the consumer around the world a little time this year to adjust to all those inflationary pressures. However, with the things that we can control, the areas of strategic growth that I've just talked through, we expect to continue to grow despite that pressure on the consumer in 2022. And in 2023, we'd expect to see the full benefit of the program of work that we've done in the business, both on the sales, commercial side, and operational side, that transformation come through in our P&L. So where does that leave us? This is our final slide, and then we're going to turn over and give you some time to put any questions on the screen. I think we feel like a very different business, I think that's the first thing to say. A very different business to where we were a couple of years ago and with a very different potential. We've added significant strength and depth to our teams in the last 24 months, in online and digital, in particular, as well as resetting all of our international sales teams. And so our focus is really getting our product in front of an ever-wider customer base. And we're doing that through developing these online sales channels, by building out markets, by leveraging our brands more effectively and by launching new products. As we do that, we're building ahead of time capacities, capabilities we need in our operations. And as a result, we're targeting sustainable top line sales growth, combined with improved operating margins. When we do that, it should be transformational to our P&L and to shareholder value. So on behalf of Dave and I, for now, we'd like to thank you for listening and joining our presentation today. I hope it's been useful. I'm now going to pass back to the host and give you a few moments to enter any questions you've got, and then Dave and I will come back and answer as many of the questions as we can. Thank you.

Thank you.

Mike, David, thank you very much for your presentation. [Operator Instructions] But just one moment while Mike and David take a few moments to review those questions mixed already today. 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 dashboard. As you can see, we've received a number of questions prior to and throughout today's presentation. Thank you to all the investors for submitting those. But could I ask you to read out the questions and give responses where it's appropriate to do so, and then I'll pick up where I left at the end.

Right. Thank you. So you can continue to add those questions, but I'm going to start at the top of the list. I'll try and read out a short version of the question just for everybody's benefit who's on the call. So the first question is whether we can include a high-level table of revenue by brand, and hopefully, you've seen that table in the slide show that we've just gone through today. Thank you. The next question is about, again, a simple table of revenue showing direct-to-consumer versus online versus multichannel wholesale and so on. It's difficult to do that at a group level simply because whilst we have that data in markets where we sell direct to the customer, U.K. and U.S., for example, in many of the other 60 or 70 markets that we sell, we sell through distributors, and so they don't necessarily share that data with us. What we do, do and have done, I think, during this presentation and in our wider accounts releases, we talk about the level of sales for direct-to-consumer and how that compares to previous years. The next question is about directors holding shares as equity investment. So directors are incentivized to grow the share price. Our long-term incentive program is clearly targeted on earnings per share growth. Those targets have not been diminished or reduced as a result of what's happened with COVID, that stretching, and so I believe that all of the Exec Board are very focused on growing the share price. The next question is how much will gas and electricity prices impact profit, consumer demand as a result of less disposable income, and how strong is your cash position. So I'll start on this, and then I'll let Dave jump in on the cash piece. So in terms of gas and electricity prices, so the vast majority of our energy consumption is a result of having 2 factories in the U.K. As we've noted in this presentation, we're in a long-term contract for energy that goes out to the first half of 2024. So for the next couple of years, we are currently buying at a price that is much lower than the market rate, and so we are protected. What about the consumer? Absolutely, there is clearly going to be an impact on the consumer in all of the markets that we operate in. We can't or don't have any better forecast than in the focus, I'm sure that you are able to read in the press, but we're watchful for that. I think what we can say is that we expect to mitigate that by some of the strategic sales growth drivers that I just talked through in the presentation. How strong is our cash position? I'm going to let Dave, our Finance Director, answer that.

Yes. Thanks, Mike. So I think as I said when we went through the presentation, we are net cash positive. We've got cash on the balance sheet, and then GBP 15 million of facility -- unutilized facilities at the end of the year. So we've got just under GBP 23 million in terms of cash and facilities. We have a working capital movement, which is about GBP 8 million typically. That's a pretty normal run rate over the last 2 to 3 years, so we've still about GBP 15 million worth of headroom within our facilities.