Portmeirion Group PLC (PMP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Portmeirion Group plc 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, and these will be available via your Investor Meet company dashboard. Before we begin, I would like to submit the following poll. And as usual, if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Mike Raybould. Good mornings, sir.

Good morning, everybody, and thank you, Jake. You have myself, Mike Raybould, Chief Executive; and also Dave Sproston, our Group Finance Director. We're going to cover a few things this morning. I'm going to talk to you a little bit about our company, who we are and what makes us special. We'll then move into a section where we review how we performed in full year 2022. And then we'll move on to our ambition looking forward and group strategy before covering sustainability in a summary. And then as we just said, there's an opportunity for questions at the end. Okay. So in terms of who we are, Portmeirion Group is a collection of 6 consumer homeware brands with a huge amount of history and heritage. We're globally distributed. At last count, we were selling to around 80 markets around the world. We have 2 U.K. factories and also an extensive sourcing operation. We sell tableware, home frames products, giftware and Hand & Body. Our key geographies and key markets are the U.S., U.K. and South Korea and then footprints across a number of other markets. Turning to our brands on Slide 5. You can see our 6 main brands. These brands are incredibly well established in their markets. Our youngest brand is 1980. And then we have brands that go all the way back to 1770 and 1751, so well-known and well-established and well-respected brands in their markets. In terms of our group's investment case, what we think makes Portmeirion Group special. Well, first of all, it starts with those well-known well-established brands, which are sold globally around the world. During COVID, we've established a lot of new and different markets. We're now at a place where 75% of our sales are outside of our core home U.K. market, and we have a significant exposure in the U.S. with 40% of our sales coming in the U.S. We have heritage and contemporary ranges. Heritage ranges provide significant and important revenue underpin and give good visibility of future revenue. Two of our heritage ranges alone, Portmeirion Botanic Garden and Spode Christmas Tree account for 40% of the group's sales. Botanic Garden is 50 years old and Spode Christmas Tree is around 90 years old. So both of those 2 give good sustainable long-term revenue and reliability. We see a significant opportunity over the next 3 to 5 years to not only increase our top line sales, and I'm going to talk through our forward strategy for doing that later in the presentation. But also we see a substantial margin improvement opportunity, which, together with the sales growth, will help transform the profitability of the business. So our vision is to deliver on that opportunity, both long-term revenue and the operating margin target growth. And we're going to do that by leveraging the brands that I've just gone through with you across that global geography and through all the different routes to market that we have. I thought it would be interesting to share with you some of our key retail customers around the world. I think this slide really demonstrates the breadth and strength of customer base that we have across the U.K., U.S., South Korea and then some of the smaller markets that we're in the process of developing further. And in particular, now highlight that customers like John Lewis, Dunelm in the U.K., Macy's, Bloomingdale's in the U.S. are increasingly omnichannel, physical retail and their own retail.com platforms. We've very successfully moved from being physical retail to being omnichannel and having a huge online exposure as well. In Korea, Shinsegae and Lotte are premium physical retail stores that also have their own dot-com platforms and Coupang is a significant pure-play online platform in Korea. That concludes the first section, which is a bit about the company and our business model. We're now going to talk to the year -- full year 2022. I'm going to start off with an overview and then Dave Sproston will take over and talk through some of the details. So in summary, we're very pleased to better recall another year of growth, 5% sales growth, and that's against a tough comp. 2022 in itself was a record sales year for the growth. And clearly, 2022 had tougher economic conditions as well for the consumer. We've really started to benefit from 2 things that we've been working on over the last 2 or 3 years. Firstly, the work we've done to increase our sales market, geographical diversification. And secondly, the work we've done to increase our presence on online sales platforms around the world. Both of those have helped mitigate the tougher economic conditions. So sales up 5 points, profit up 11 points, which means that we have a gain in operating margins, a 60 basis point gain in operating margins to 7.8%. And this is key and important because it's part of our long-term strategy to get operating margins to around 12.5%, which actually is in line with historic levels in 2015 to 2018. Looking forward for a moment, it's very early days in terms of 2023. We're a couple of months in, but I'm pleased to report that trading has started well, and it is in line with forecast so far this year, and we have good and healthy order books across our key markets. We're excited about the strong pipeline of new product launches that we have lined up for the next year to 18 months. And that, together with the momentum and work that we're doing to expand some of our rest of world geography, we think should mitigate any short-term market and consumer conditions. I'm now going to hand over to Dave who'll look at some of the slides on full year '22 in more detail.

Thank you, Mike, and good morning to everybody on the call. So I'm just going to take you through the core financial metrics from the 2022 financial year. In terms of revenue, as Mike has just said, we saw 5% year-on-year revenue growth. And we think that demonstrates the strong repeat nature of a lot of our revenues, and that now leaves us 19% ahead of pre-COVID levels. We were able to increase operating profit margins by 60 basis points to 7.8%, and that improvement meant that there was a strong drop-through of that revenue increase with headline profit before tax increasing by 11% to GBP 8 million. And because of that improved trading performance and ongoing confidence, we increased our dividend by 19%. And then finally, we saw a net debt increase due to cost inflation and foreign exchange retranslation and particularly in higher inventory levels. So moving on to balance sheet. We continue to maintain a strong balance sheet and net assets increased by 8% over the prior year. We did see an increase in net debt due to inventory, but we continue to maintain significant headroom within our borrowing facilities. And then in terms of inventory, the year-on-year increase was largely driven by retranslation of sterling to dollar, increased container freight rates and an increase in underlying labor material cost prices. So about 2/3 was covered by those items. And then we had a like-for-like increase of about 1/3 in volume terms, although we are targeting normalizing that inventory back to 2021 volume terms by the end of 2023. Moving on to sales by geographical market. The U.S. is our biggest market, 40% of sales, a 3% year-on-year increase, and we saw a particularly strong Christmas trading period. The U.K. was negatively impacted by weak consumer sentiment due to cost of living pressures and decreased by 14% over the prior year. Our third largest market, South Korea. We continue to expand the number of ranges that we sell into that marketplace and open new online distribution routes. And then in other markets, we saw further growth in Canada. We bought our long-standing joint venture, the other half of our joint venture in 2020 and continue to see positive momentum in that marketplace. And then in other markets, we had strong performance in China in the Far East, albeit from a small base, 100% increase year-on-year. And then in Europe, Russia and Eastern Europe was negatively impacted by the Ukraine war, and that meant that we saw a decrease in that market. But actually, excluding that region, Rest of World markets were up 6% over the prior year, and that meant that we were 81% ahead of pre-COVID levels in 2019. And finally, on sales by brand. Our Spode brand continues to see positive momentum, 4% increase in sales over the prior year. Now 39% ahead of pre-COVID levels and strong sell through of seasonal products. And we have an exciting new collaboration with the British interior designer, Kit Kemp, which launches next month. In the Nambé brand, another strong performance, 13% up year-on-year, and it's now 17% ahead of its pre-acquisition base in U.S. dollar terms, and we see further opportunities to grow this brand in the U.S. and around the world. And Mike will cover this a little bit with a bit of a deeper dive in terms of the home fragrance category, but for the Wax Lyrical brand, we saw a 7% reduction. Home Fragrance category was particularly impacted. It's mainly a U.K.-centric brand, but we actually acquired the AromaWorks brand out of administration in August last year, and that gives us the opportunity to add additional scale to our Home Fragrance category, particularly in our manufacturing plant. Now I'm going to hand back to Mike for the strategy update.

Thank you, Dave. So the next section is going to cover our ambition and forward strategy, I'm going to talk to 2 particular areas: firstly, the significant opportunity that we see for top line sales growth over the next 5 years and then how we intend to drive up our operating margins. Starting with the sales growth strategy. I've laid out here the 4 key drivers that we see for our sales growth in the medium term. Firstly, geography. We're expecting to continue to grow our Rest of World sales markets over the next few years. We're doing a number of different things here. Firstly, developing new markets in Asia, such as China and Malaysia, but also we expect to leverage our full portfolio of products, ranges and brands across some of the other territories that we already have small footholds in. And that will include countries like Australia, Canada, Scandinavia and Germany. So geography, increasing our geographical diversification is the first key driver. The second bucket is all about online, further developing our online sales channels, reaching more potential customers multiple times. This will cover not only our own websites in the U.K. and the U.S. and building that long-term direct-to-consumer relationship with the end consumer, but also working and continuing to work with our retail customers our omnichannel models as well. Thirdly, new product launches. We have a great pipeline of new products lined up for the next couple of years. And really, we focus our product development and new product launches in 2 particular areas. Firstly, how do we extend our successful heritage ranges, ranges like Portmeirion Botanic Garden and Spode Christmas Tree? How do we take them into new places? How do we extend the ranges as they are into new markets? Secondly, our product development is focused on taking market share in the more contemporary and giftware parts of the market. Together, we expect those 2 parts of new product launches to help us grow in the next 3 years. The fourth area and driver of growth is about all leveraging our portfolio of products, ranges and brands more effectively. This will include cross-selling within our e-commerce platform to cross-selling products, driving up basket sized average purchase price. It would include leveraging more of our ranges, more of our products across our existing customers. If we have a customer or a distributor that's taking a one brand or one range, how do we get them to take more of our portfolio of products? So all 4 of these drivers are about bringing more customers into our brands. If I turn to look at the progress we've made in the last 12 months on some of these key buckets of growth. Then on Slide 17, I've put some charts down. First chart, I'd like to talk to is the top left chart, which shows the progress that we're making on Rest of World sales markets. We've got a really good trajectory of growth. It's a small part of our business at the moment, accounting for around about 10%, but we expect that trajectory of growth to continue, both through new markets like China and Malaysia, but also from further establishing and working with existing distributors in some of the other countries that we operate in around the world. So that's Rest of World sales. On the top right-hand side, you can see the ongoing progress we're making with online sales channel penetration in our U.S. and U.K. markets. We started on this journey back in 2019, pre-COVID with around 30% of our sales in these markets going through online channels, whether that be retailer, online channels or our own websites. We've now reached 51% in 2022. And critically, I would highlight that as physical retail reopened in the last year, in the last 12 months, we managed to retain that growth, that online growth that we've had despite that physical retail reopening. On the bottom of this slide, you can see both our Nambé sales and Spode sales 2 of our brands. And again, the increasing footprint we're getting from both of those brands. We think those 2 brands in particular, will continue to drive us -- to drive growth and drive the group's growth in the next 3 to 5 years. Spode has been highlighted as an area of focus, and we have a lot of new product launches coming in as well as the very well performing Spode Christmas Tree range that already exists. And Nambé we expect to continue to grow both in the U.S. but also to get traction in new markets outside the U.S. as well. So that is our sales forward strategy and the areas that we're focused on as a management team. Turning now to the significant operating margin growth opportunity. We've set a medium-term target by which we mean 2024 of getting to 10% and a longer-term target of getting back to historical highs of around 12.5%. 5.5% would be a roughly 60% uplift on where we are today. Again, a number of areas that we're focused on here. First area is getting productivity gains in our ceramic factory through the automation capital projects that we've been putting in the last couple of years. We're just over halfway through a 4-year accelerated program of investment, making good progress. And across the 4 years, this area could generate around about 1.5% improvement in the group's operating margins. The second key driver is about leveraging the fixed cost base, the OpEx cost base that we have as we grow our top line. We're going to utilize the capacity and spare capacity that we have in our 2 U.K. factories, leverage the operating cost we already have around the world in terms of warehouses and sales teams more effectively. Again, this area over the next 3 to 5 years could be worth 1.5% to 2% of operating margin accretion. Thirdly and finally, in this area, we're looking to improve the profitability of our home fragrance division, the Wax Lyrical company. This part of our business has been most impacted by the disruption from COVID, very U.K. centric and very physical retail centric. A lot of its customer base was forced to close during COVID, and it's taken some time to come back to life. And also home fragrance is a product category that typically is either impulse in terms of nature of purchase and/or people want to smell it before purchasing it, so it hasn't translated to online in the way that our other parts of our business have. That said, we're targeting new areas of business and looking to leverage our existing ranges more effectively across our global sales teams around the world. Furthermore, in the second part of 2022, we acquired a brand called AromaWorks London out of administration. I'll talk a little bit more about that acquisition shortly. But those orders and sales now will be part of this division and should add GBP 3 million to maybe GBP 4 million to the top line of this business in 2023. This part of our operating margin strategy should add a further 1.5% over the next 5 years. Again, in terms of progress on our operating margin growth strategy on Slide 19, on the top chart, you can see in the last couple of years that we've delivered increases in operating margin, and we expect that to continue through 2024 and 2025. As I said, our historical levels peaked at around 12.5%, and we believe we can get back there in the long term. In terms of our home fragrance division, we did improve profitability in 2022 by around GBP 0.5 million, but clearly, there's still a lot of work still to do in that part of our business. On Slide 20, I want to talk a little bit more about the bolt-on acquisition of AromaWorks London. In August last year, we bought the brand and certain limited assets from the administrators. The brand itself is in the health and well-being space, using 100% natural ingredients, natural essential oils. The product includes home fragrance, so candles and reed diffusers, bath and body products like soaps and also small amount of skin care. The rationale for the acquisition really was to provide a bolt-on and add scale to our existing U.K. factory. I'm pleased to say the integration plan, the acquisition plan is on track. The AromaWorks factory was closed in December last year. All production now has been absorbed into our existing Wax Lyrical factory with no extra head count. We're targeting around GBP 3 million to GBP 4 million in the first year of sales, and this will add 25% to 30% to the revenues of our Home Fragrance division, Wax Lyrical. So with minimal on cost, being able to absorb that business, we expect this to help improve the profitability of our division starting in 2023. Although the brand and its business was disrupted as it was going through the painful process of administration and there were some shortages and disruptions to supplying customers, I'm pleased that our commercial teams have managed to retain all of the major customers that the brand have and they include Waitrose, Holland & Barrett and some small online presence in Macy's in the U.S. and Space NK. So overall, this acquisition is a small bolt-on, represents a good opportunity to leverage a new customer base and also provides some extra scale with [ nurture ] headcount going through our factory. I'm going to turn next to give an update on ESG and in particular, our credentials around sustainability. We have and have had a good track record on all these areas for many, many years. We've continued in the last 12 months to look for and invest in projects in our factories that reduce energy consumption, reduce our carbon emissions. We continue to have 0 waste to landfill in our Stoke factory. We continue to use a wind turbine to power over 50% of the energy for our home frames factory. And a key KPI for the group is our carbon emissions per tonne of salable product. And in our Stoke factory, I'm pleased to report a further 10% reduction in our carbon emissions per tonne in 2022, and that is now a 20% reduction over 2 years. Importantly, in the next couple of months, we're going to be launching a new exciting ambition document in terms of our role and just for sustainability. We're going to launch a pathway to get to carbon Net Zero. Our business is excited about it. Our management team is excited about it, and we are going to be sharing that with the wider world in the next couple of months. Similarly, in terms of our people and our communities continue to be committed to working with all of our people around the world, the communities that they operate in and supporting them in every way that we can. We hold investor in people platinum accreditation in the U.K. and similar schemes in the U.S. as well. I'd like to call that we've covered so far together in terms of a summary for 2022. We saw sales growth and profit growth despite much tougher macroeconomic conditions. Our operating margins grew by 60 basis points, and we're able to cover off the very significant input cost inflation through pricing and other improvements in productivity. Key part of our long-term strategy is to take that operating margin up to 10% and then hopefully 12.5% in the long term. In the last 12 months, we've continued to benefit from the work that we've done in recent years to do 2 things: firstly, to diversify our sales market geography and that includes now having 75% of sales outside the U.K. and secondly, to make significant gains in terms of online channel penetration being available on more online platforms around the world. We see an opportunity to grow the top line and our operating margins, and this will be transformational to our profitability. In terms of looking forward, we've got a strong pipeline of new product launches. And that, together with the momentum that we see in our Rest of World sales geography, we think, should help to mitigate short-term market conditions and pressure on the consumer. Our 2023 trading, we're pleased to say it started in line with forecasts, and we have good and healthy order books for our key markets around the world. And so as a management team, we're confident about the short, medium and long-term prospects for the group. We have a clear ambition and we're looking forward to delivering on the opportunity therein. Thank you very much for listening. I hope that's been useful. We're now at a stage where I'm going to hand back to Jake and he's going to ask you to register any questions you've got, and we'll cover those off.

Perfect. Mike, David, thank you very much indeed for your presentation this morning. [Operator Instructions] But just while the team take a few moments to review those questions that were submitted already, I would 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 your investor dashboard. David, Mike, we did receive a number of pre-submitted questions ahead of today's event. And as you can see in the Q&A tab, we've also received a number of questions throughout your presentation today as well. So firstly, thank you to all of those on the call for taking the time to submit their questions. And Mike, David, if I could just hand back to you to respond to those questions where it's appropriate to do so, and then I'll pick up from you at the end. Thank you.

Thank you very much. So we'll cover off as many of these questions as we can. There were some pre-submitted ones but please feel free to add further questions as we talk through. I'm going to start with South Korea, a question about South Korea. Do we see future growth? I think we do see future growth in the long term. I think we shouldn't expect growth in 2023 in the way that we had it in 2022. The growth in 2022 came from both new ranges that we introduced, which we need to give time to settle down and hope to get traction, but also expanding our online sales. However, in the long term, in Korea, we are looking at specialized local product development, local market product development for our Botanic Garden brand as well as how we establish a more contemporary ranges. The next question is about operating margins and what our target is, have we changed it. No, our operating margin target remains around 12.5% in the long term. Obviously, we refine that year-to-year, but 12.5% is where we're targeting. The next question is around the roughly GBP 1 million of restructuring costs and what was it spent on? So Dave, I'll let you pick that one up.

Thanks, Mike. Yes, we have moved to effectively a global sort of more global structure. So there's been an alignment of sales and product development and marketing. That -- so why is it not normal course of business, it's nonrecurring in nature. So that was a one-off nature that we've undertaken that restructuring.

Thank you, David. Do you want to take the next couple of questions as well on pension contribution and...

Yes. So expected cash contribution in -- for the pension, we expect it to continue at 900,000 in terms of the sort of derisking of the scheme, you would move some of your -- how would you derisk it? you would move some of your assets to be more matching to the liabilities. So at the moment, there's a broadly 50-50 split of equities and bonds and liability-driven investments. You would rebalance that more to reduce your equities and move more into bonds so that there's a natural alignment. In terms of why we're still contributing when we're an accounting surplus, unfortunately, the actuarial world would assess the pension with a more cautious set of assumptions to the accounting one. Therefore, the contributions are set on a different basis than what we disclose in the accounts. And then in terms of the next question, which is level of bank debt, do we feel as comfortable. I think the challenge that we have around bank debt is we do have a working capital swing. So we don't have a sort of even bank debt level. We do have a build in working capital in the third quarter. So we always need to make sure we maintain an adequate amount of headroom as we go through the year. We always attempt to demonstrate that we've got at least GBP 10 million within our Boeing facilities. And at the end of the year, we had GBP 17.4 million. So we believe we've got more than adequate headroom to ensure that we retain -- sort of maintain that buffer level should any shock such as the COVID one arise.

Thank you, Dave. The next question was around energy prices. If we bought energy at a current spot level instead of being hedged on long-term contracts, what the impact on operating margin be? I guess, it would be around 1.5%. That said, historically, we've always had long-term contracts in place as part of our strategy. It would be very rare for us to buy at spot level. The next question is around the synergies that were achieved from the AromaWorks acquisition. Was the factory sold? Well no the factory wasn't sold. We entered -- when we bought the brand from administration, we entered into a license to operate within that factory for a few months while we figured out how to lift and shift and understand more about the products. So that factory has closed and everything now has been made from this year in the Wax Lyrical factory. In terms of synergies, well there are 2 synergies. The first synergy is the opportunity to bring that product to make it in our existing factory with no extra infrastructure or resource. And the second synergy is across commercial customers. So an AromaWorks customer comes to visit us, and we will try and sell Wax Lyrical product and Wax Lyrical customer we'll now try and sell our AromaWorks products. Next question is around whether we will consider doing share buybacks. I think the answer at the moment is that we could see a good use of cash within our business, in particular, in investing in our factories for the future. So not at the present time. Next question is, how many years will our new automation equipment last until they need to be replaced. Well, that really would depend upon the piece of equipment. It's quite common in our industry to have machines that can work for 20 or 30 years. In fact, we still have machines working in our factory that were bought 20 or 30 years ago. The new equipment we bought is top end automation and should certainly have a life of 10 to 20 years, I would have thought. Dave, a question for you around interest rates and the interest rate, what interest rate is paid on borrowing?