Portmeirion Group PLC (PMP) Earnings Call Transcript & Summary

Everyone, welcome to Portmeirion Group's Interim Results Presentation.

Just one second, please, Mike. Go ahead, Alex.

Good afternoon, and welcome to the Portmeirion Group PLC Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Michael Raybould. Good afternoon to you.

Good afternoon, everybody, and welcome to Portmeirion Group's 2023 interim results presentation. You have myself, Chief Executive; and David Sproston, our Group Finance Director. I'd like to start with some headlines, and then I'm going to pass on to Dave, who will talk us through some of our financial summary slides. So in terms of an overview, our sales in the first half were down 3 points year-on-year, albeit against a tough record sales last year and against a backdrop of much tougher consumer markets generally around the world. The challenges we faced was centered really in North America, which for us is the U.S. and Canadian markets, where our sales were 13% down, and that really reflected destocking from major customers against the backdrop of tougher consumer sentiment. Outside of North America, we were pleased with our performance and slow growth in the U.K., our second biggest market, South Korea, the third biggest market and within our Rest of World sales markets, a key part of our long-term growth strategy. The reduction in sales has fed through to reduce profit levels, and I'll let, Dave, later on these slides talk through the key drivers of the changes in profit during the period. Looking forward for a moment to our key second half, we are a second half weighted business, generally with a big and strong Christmas program. We're pleased with our second half shipping so far. We have good and healthy order books for Christmas, which we had for the same period last year in the U.S. We'll continue to maintain tight focus on all of our costs. And as the management team are committed to the targets we put out in the marketplace of growing our operating margin to a medium-term target of 10% and then beyond to around 12.5%. And delighted, we've also maintained our interim dividend for 3.5p. I'm now going to pass you on to David Sproston to talk through some of our key financial slides.

Okay. Thank you, Mike, and good afternoon to everyone on the call. As Mike has just said, we had a 3% sales decline against a record 2022 performance and that was largely contained within North America. Although sales remained 26% ahead pre-COVID levels from 2019. In terms of the drop-through to profitability, we've got a small bridge in here which just demonstrates, I think, that in terms of the U.K., Rest of World and South Korea and our home fragrance division actually increased that contribution to profit in the first half of the year. The reduction was really down to lower sales in North America, but also the impact of peak container rate inflation in terms of inventory although that rate starts to subside as we go through the second half of this year and into 2024. We have maintained our interim dividend at 3.5p. And finally, we have seen an increase in our net debt levels, largely due to higher working capital although we expect to see an improvement by year end to a reduction in net debt over 2022 year-end levels. So moving on to balance sheet. We continue to maintain a strong balance sheet, maintaining significant headroom within our borrowing facilities. And as I said, although we saw an increase in net debt, we do expect to see about 30% reduction from the December '22 year-end by the time we reach December 2023. What is driving that reduction in net debt? We have talked and presented before about reducing inventory as a priority, and we actually had a 5% reduction like-for-like in inventory in the first half of the year. We expect to be able to continue and make further progress in the second half of the year to achieve approximately a 10% reduction in inventory by the end of the year, and that should flow through to a reduction in net debt levels. And finally, on balance sheet, we continue to maintain a small surplus within our pension scheme. In terms of sales by geographical markets, the reduction in sales, as we've highlighted in the table is largely driven by North America, the U.S. and Canadian markets. Elsewhere, our U.K. sales were actually up 2% despite weakened consumer sentiment. South Korea sales were up 7% due to new product ranges and increased distribution in that market. In terms of rest of the world, a key part of our long-term strategy, we had about a 10% growth in ceramic markets driven by China and the Far East. On the final slide on financial sales by brand. We continue to see positive growth in the Spode brand, which increased by 8% over 2022 and is now 68% ahead pre-COVID levels. Portmeirion Botanic Garden and Spode Christmas Tree, our key heritage ranges, have continued to perform well and make up approximately 60% of the group sales. The Nambe brand has been most impacted by North American retailer destocking due to the focus on that marketplace. And then finally, in terms of home fragrance, sales were up 9% year-on-year as we benefit from the AromaWorks acquisition that we made in August 2022, and we expect to see further growth in the second half of this year. Back to you, Mark.

Thank you, Dave. I'm now going to turn to our U.S. market, our largest sales market by revenue. And as we've said so far in this presentation the market where we saw a reduction and destocking in key customers in the first half. So some more background here about what we're seeing going on in the U.S. First of all, I'll start by highlighting the chart in the top right-hand corner of the slide, which shows that on the run up to 2023, we've had a good level of growth coming from this market. We've taken market share in both physical department stores and online. However, what we've seen in the first half of 2023, clearly against the backdrop of tougher consumer sentiment is key customers reducing their stock levels. We collect sales out data, which is a very good approximation to end consumer demand from about 50% to 60% of our U.S. sales market. And that spells out like the end consumer demand has been stronger than our sales in -- which is highlighting that key customers such as Macys and Bloomingdales and indeed, online platforms like Amazon are reducing stock levels across the board. What we are pleased with, as I said, is we've taken market share in recent years within the categories we operate, and we're still securing new incremental sales listings in both physical and online retail. So all those that I've listed here on this slide, in the premium William Sonoma departmental store chain. We have a new Spode range for the first time that's gone it, that has started well. We have repeat orders in our hand for the second half. We have a new contract with Firmdale hotels, premium hotel group in New York and London, for Spode Kit Kemp collaboration. That's also very exciting and a large part of that contract will ship in the second half of this year. Our Spode Conran consumer range is being listed in Macys and Bloomingdales from September of this month. And our key heritage range in the U.S., homeware range Spode Christmas Tree we extended into new additional SKUs and all these SKUs, which are new are going into over 200 Macys stores for the fourth quarter. On the contemporary side, our long-standing successful Sophie Conran range is also going to be in the new relaunch with Macys Bridal program [ weddings] program for next year. So lots of positive things going on that meet the numbers, which, again, reassures us we think that our brand, our products are still in demand by the end consumer and once the markets settle in the U.S. stock levels settle, we should expect to return to historic levels of trends and growth for sales. The next area that I wanted to look at was to talk about our home fragrance division, Wax Lyrical. As I've said in more recent presentations, this was a division that was probably most impacted by the COVID pandemic. Many of its customers we're closed for a lot of that period and footfall traffic has been slow to return. Similarly, it was a product category that didn't move online in the same way that our tableware and giftware ranges did. In terms of an update for the first half of this year, we're pleased to see the benefits of the AromaWorks brand that we acquired late last year, now shown through in this division's performance. Sales were up just under 10%, driven by the acquisition of that AromaWorks brand. And we managed to integrate that brand and all of its products, manufacture them in our own existing factory, Wax Lyrical factory in Cumbria with the same level of head count and resource that we had. So great progress on integration of that brand. The AromaWorks sales have now started to ramp up, and we're getting some momentum, which we expect to grow for the second half of this year and into 2024. In terms of the core existing Wax Lyrical business, again, we're pleased and reassured that we're now starting to see some improvements in sell-through in some of the large customers and stores the brand is present and that includes Dunelm, an online platforms like Amazon. Looking forward for our home fragrance division. We've worked hard on new ranges and new listings. I'm pleased to report we have some significant new volume accounts that are about to come online. There's a picture on this slide on the top right of the new range, Wax Lyrical range, that is going into over 400 ASDA stores from November onwards is being manufactured in our factory right now. We're also hopeful of getting this range extended into other national retailers for 2024. We have a new range on the picture on the bottom of this slide, they will be going to Marks & Spencer's from late this year. When we put this -- these new wins together with the AromaWorks acquisition, we're hopeful that this division will return back to profitability in the second half of this year and hopefully give us a foundation which we can build further on in 2024 and 2025. I want to now turn to our ambition and our forward strategy. We framed in recent presentations, 2 key objectives that we, the management team, are highly focused on; one, is how do we grow our top line sales over the next 5 years? And secondly, how do we get our operating margins back up to around 10% and then beyond in the years to follow? So first, I'm going to deal with the top line sales opportunity. Four key buckets of drivers here that we've identified and a brief update on each of those 4. In terms of geography, and we've successfully continued to grow our Rest of World sales markets, 60 or 70 countries that we have small foot holding, and we're looking to grow and make some significant progress. In the last 6 months, we've seen some nice work going on in Asia including Malaysia and China. We expect that to continue. And as I said, overall, our Rest of World division grew by 10% ceramic sales in the first half. We expect that level of growth to continue, I think, in the second half too. Turning to online, getting our products, our brands in front of more potential customers around the world by developing and getting a presence of more online sales channels. Our own e-commerce websites in the U.S. and U.K. declined year-on-year, pretty much in line with the e-commerce market, but we have seen much improved net profitability levels on our U.K. e-commerce website in particular as we manage costs, improved return on ad spend, et cetera, et cetera. Customer list on our own websites in the U.S. and U.K. continue to grow up 10% year-on-year, and we have good levels of repeat purchase. So these customers are important for long-term business. We've continued to expand ranges online on third-party platforms, and that includes South Korea, our third biggest market, where we're expanding the number of ranges that we have in the second half. [ Trialing ] brands like Nambe, trialing ranges like Spode Christmas Tree, trailing ranges like Portmeirion Sophie Conran. Thirdly, in terms of new product development -- new product launches, we continue to extend our hugely successful heritage ranges. Portmeirion Botanic Garden is launching a new Minimeirion Kids range and that launches in South Korea on the online Coupang platform in the second half of this year. We continue to extend our Spode Kit Kemp range and Spode Blue Italian and Christmas Tree ranges as well. We're also targeting contemporary, more contemporary parts of the market. We have 2 big new ranges already to launch at the back end of this year, beginning of next year, a contemporary stoneware range and a new extension of our Spode Blue Italian range. Finally, we're looking to leverage our full range of brands and products more effectively around the world. In addition to some examples I've given in South Korea and the Rest of the World, we're also working on whether we could launch Botanic Garden into new different categories. And as David said, we're very pleased that Spode brand, which has been a key part of our focus in the last 18 months is growing very, very nicely, plus 80% and more than 60%, I think, on 2019 levels. Turning now to operating margin growth. Operating margins have been impacted as we've shown on the P&L slides in the first half as our volume and sales have fallen particularly in the U.S. But in terms of long-term initiatives that we're working on, firstly, the investments we're making in our factory efficiency in our main Stoke factory. We've continued to see improvements in productivity and efficiency rates. We have 2 new large-scale automation CapEx teams that are being built now for the last 12 months that are ready, and we can implement those in the next couple of months, they will yield further benefits to our P&L for next year. And we've also just completed a really successful trial of a new real-time data system in our Stoke factory. A system that gives us much quicker awareness of downtime allowing us to act and react on a much quicker basis. We're now going to move to a full implementation of that real time data system and expect it to give us, again, a kick in terms of productivity gains and efficiency for next year. The second area that we're working on to drive the improvement in operating margin is to improve the profitability of our home fragrance division. As I said, a few slides ago, we're pleased with the contribution that the AromaWorks acquisition is now making. We're also really pleased to have acquired some new big volume listing into the Wax Lyrical brand. Putting those 2 together, we can see a good possibility that we will return the division to profit in the second half and give ourselves something to build on further for next year. So we're pleased with the progress on that front. Finally, in terms of top line leveraging, growing the top line, leveraging our overheads and factories, clearly, in the first half, we suffered from the reduced sales order flow in North America. We do, however, see that we've made clear market share gains in the U.S. and believe with the new listings that we're getting all the time, but when that market stabilizes where stock levels stabilize, we should expect the U.S. market to return back to previous levels and grow. And in addition to that, our Rest of World sales market has continued to grow this year, plus 10% in the first half. So as a management team, we're committed to our operating margin ambitions, getting back in the medium term to 10% operating margins and then working in the year following that to get up to 12% to 12.5%. I wanted to turn now to energy and also carbon net zero. We're very aware as a business that manufactures business sells and move products around the world of our responsibilities. We've launched in the first half of this year, a major new ambition and document that we call Crafting a Better Future. We have a new energy and sustainability committee in place reporting to me, and we set a very clear target of getting to carbon net zero by 2040. In terms of progress in the last 6 months, we're pleased to have been able to reduce our energy consumption in our key factories by around 6% from series of schemes and capital investments that we've put in and we're working on further projects in terms of our kilns in our Stoke factory and other energy efficiency -- efficient equipment that we can install that will give us further energy reductions in the future. We also have road maps of work underway looking at how we can reduce energy in our warehouses and across all of our offices around the world, the use of sustainable energies. We already use a wind turbine that powers a lot of our home fragrance factory in Cumbria, what else can we do to get more green energy, self-generation of energy. And of course, we're looking at packaging solutions removing single-use plastics and the like as well. So a lot of work going on across our global teams on energy and carbon net zero ambitions, which turns now really to a summary and then I'd be very glad to take questions. So we've had a challenging first half that really was all about order flow driven by destocking from our major customers in the North American market. We do believe that with the market share wins we've been making with the new product listings that we're gaining that when that market stabilizes our sales should also stabilize and rebound back to historic levels. Other parts of our business have performed well, particularly against the climate of tough consumer sentiment. Our Rest of World sales market, a key part of our long-term strategy is growing double digit. In terms of looking forward, we've made a good start to our second half trading. We have good and healthy Christmas program order books and those order books are ahead of last year. As Dave has talked about, we're focused as a group on reducing inventory levels back to historic levels. And we're seeing the cost inflation that's come through recent years, starting to subside. As I've just said, we're very focused the team on the ambition of getting our operating margins up. And we're confident, therefore, about the long-term sales and operating margin prospects for the group. I hope this presentation has been interesting, has been useful and we look forward to taking questions. Thank you very much.

Mike and David thank you very much indeed for your presentation. [Operator Instructions] Mike and David, as you can see, we have received a number of questions from investors. And if I may now hand back to you and kindly ask you to read out the questions and give responses where appropriate to do so, and I will pick up from you at the end.

Thank you very much, and thank you to everybody that submitted questions so far, please do feel free to continue to add questions while we're talking and answering. So the first question is about the destocking in American customers, when do we expect this to finish? That, I'm afraid, is a very difficult question to answer. We have a significant team in place in the U.S., and I spend a lot of time over there as well sitting in front of all the key retailers that we deal with. At the moment, those retailers are cautious about trading to address this year. And therefore, we're in quarter 2. However, we would expect that destocking sort of cannot continue forever. As I've said, in the presentation of sales out, the end consumer demand we're seeing is actually much more healthy. The next question is about how we onboard new customers, physical and online channel customers well? I mean onboarding of new customers takes a number of given formats, clearly there is an account setup. We would connect EDI systems often for a broader float. We will also work on sharing digital assets, digital content for our brands and our products that they can be featured in our online platform. So onboarding takes a number of different -- net different parts. The next question is about AromaWorks. Have we lost any important customers? What's the status, do we still expect turnover to be what we previously stated? So overall, I'm pleased with the progress that we've made with the bolt-on acquisition of AromaWorks although the business had been in administration for a few months, which obviously disrupted customer relationships, I think all the major customers in the U.K., that includes Waitrose, it includes Hand & Body, it includes Boots. We've managed to retain those customers and are still trading with them today. There are some smaller accounts, particularly in the U.S., which we haven't maintained, but I don't think that is going to be detrimental to the long-term acquisition case. So overall, we're happy with the status and now we're looking to leverage our global customer base -- existing global customer base with that brand. Next question is around making versus buying to making ourselves -- manufacturing ourselves versus sourcing, how do we choose? So part of that is about capabilities and part of it is about [ factory at ] cost price and how important a made-in-U.K. product is in certain sales markets in certain ranges. So our Stoke ceramic factory makes earthenware, so nearly all of our earthenware -- all of our earthenware typically we would make in-house. However, as I think the question highlights, we also have products that are sometimes fine bone china or porcelain, and often we don't make those bodies ourselves, and so we would make them into third-party factories. And similarly, occasionally, there are ranges that we would make outside the U.K. where we can hit a lower price point, if that's the most important part. But typically, key markets like a made-in-U.K. product and that for manufacturing in our own factory, if we can, is sensible and good for brand price point. Next question is why a Nambe Royal Worcester, Pimpernel produced externally. And I think that's a very similar question that I've just answered, which is that they all contain materials and processes that we don't actually have the capability to make. Pimpernel is a placemat -- a corkbacked placemat. Nambe has a lot of wood and metals, and therefore, we make those in third-party factories. The next 2 or 3 questions are about inventory, and I think I'll let Dave Sproston answer those. Okay.

So that question is about do we think reducing inventory to the same volume of 2021 is the right level? I think in terms of the inventory reduction, as we showed in the presentation, our aim to get a 10% reduction this year. We still think getting to the 2021 level is the right level. So I think there is further progress to make in 2024 in inventory. What initiatives have been taken? I think that the biggest one is just rebalancing our sort of output and certain buying practices as we've gone through the year. So just reforecasting what we think we're going to sell and then adjusting our inflow of inventory accordingly to be able to deliver the right level of -- by the end of the year. Next question is, can we provide a breakdown of inventory by brands? That is not a figure that we publish externally. So I don't have that breakdown at hand. Is there a part -- next question, is there a part of inventory obsolete or difficult to sell? We're not a fashion-led business. So a lot of our brands have been around for well over 200 years. Certainly, a lot of our patents and ranges have been around for themselves, now 40, 50 years for the Botanic Garden. So there is not an element of inventory that effectively goes out of fashion or gets to the end of its shelf life. So no, we don't have a significant amount of obsolete inventory.

Do you want to take the next question, Dave?

Yes, The answer to balance sheet. Goodwill is because of AromaWorks. The intangibles increased. We have been doing an upgrade to our accounting, sales order process, the ERP system in the United States, which is to enable us to amalgamate all of our businesses, all of our inventory onto the same system. So that has required an investment in software in North America, particularly the U.S., because that is the background to the increase in intangibles.

Thank you, Dave. I'll take the next few. So the next question is, what can Jeremy Wilson add to the Board? So for benefit Jeremy Wilson joined as a Non-Executive Director in recent months. Look, Jeremy comes with a huge amount of experience as an Executive Director of a number of different consumer goods businesses that were present in the U.K. but also had a lot of international business. And therefore, I think he will add to our Board in terms of his international experience, a key part of our true strategies to diversify our sales markets and grow outside, but also give us plenty of experience in terms of the commercials -- good businesses around the world. Next question is what exciting strategic projects or customers are on the role for this year? Well, we've got a lot going on. Hopefully, some of that came across during the main part of this presentation. We have a strong 2-year rolling road map for new product and that covers Portmeirion, Spode, some of our other brands. We're also winning new customers and new listings. I highlighted some of those in terms of -- in South Korea, highlighted some of those in terms of new listings in the U.S. and highlighted some of those in terms of our home fragrance business as well. We also continue to work on capital projects, particularly in our factories where we're automating -- making our factory efficient, future-proofing our factory for generations to come, we hope. Next question is about Capital Markets Day. We held one in 2022 when is the next one? We don't have another one scheduled right now, but it is something we want to going forward. And if there's this particular demand for that, and people want to come and see us, then we'll get one scheduled in the next 12 months. Next question is about operating margin targets. And I think we would have dealt with that on the presentation. Yes, we're still committed to operating margin targets. I think that the consensus, expectations that analysts have in the market have us increasing operating margins nicely next year, getting to 10%. I think in 2025 and growing beyond that in the years. What is the interest rate on borrowing? Dave, I'll let you pick that one up.