Portmeirion Group PLC (PMP) Earnings Call Transcript & Summary

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 it received during the meeting itself. However, the company can review all questions submitted today and publish responses, where it's 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, Mike Raybould. Good afternoon to you.

Good afternoon, everybody, and thank you for joining us. This is Portmeirion Group's 2024 interim results presentation. As I said, you have me, Mike Raybould, Chief Executive; and my colleague, Dave Sproston, our Group Finance Director. We're looking forward to talking to you today to run through our latest half year results. And as I've said, there's opportunity at the end if you have a question and we'll get to as many of those questions as we can. I'm going to start straight away with our headlines. There are a number of slides of background on the company, which I won't go through this morning, but if you haven't listened to one of our presentations before, you can find those afterwards when we post this slide deck on our investor website. So starting with an overview for our first half. Sales as we reported in July were down 17%. This is particularly due to one market and a particular issue in South Korea, where we had destocking going on with our key distributors. I'm going to deal and talk about a number of our key markets in detail later on, and that will include the South Korean market. If we exclude that market, we were pleased our sales everywhere else, were up about 5% on a constant currency basis. That included a 5% growth in our U.S. market, our biggest sales market in the group, which also contributed 50 points improvement in gross margin. As a result of that year-on-year sales reduction in South Korea and the impact that it had on our factory utilization in the first half, we reported a loss, and Dave will come and talk to our financials on the next slide. Looking forward, the cost reduction program that we initiated in the first quarter is on track to deliver around 10% at GBP 4 million of benefit of lower overheads across the year. Our order book going into Christmas in our main U.S. and U.K. markets and our Wax Lyrical home fragrance business are ahead of last year, which is encouraging. And so we expect to forecast our profits to currently be in line with consensus market expectations, which is GBP 4.5 million PBT compared to GBP 3 million in the comparative period last year. Our interim dividend expectations for the year are 7.25p against 5.5p last year, and Dave will talk in more detail about that shortly. Similarly, in the last few weeks, we've signed a new long-term bank facility deal, 4 plus 1, 4 years plus 1 with Barclays under RCF for GBP 30 million. Again, Dave will give the detail on that shortly. So that's an overview. I'm now going to hand over to Dave, who's going to review our financial and balance sheet performance. And then I'll come back and talk in more detail about the performance of our key markets and brands and where we're going forward.

Okay. Thank you, Mike. In terms of sales for the first half of the year, sales of GBP 36.6 million, which was a 17% decline from the first half of 2023. And as Mike has indicated, that was really driven by South Korea. Outside of South Korea, constant currency sales were up 5%. The first half results in terms of profitability was a GBP 2 million loss, driven by the drop-through impact of those sales reduction. In terms of interim dividends, it's 1.5p for the interim although that was really due to a rebalancing of first half, second half dividend. So we've maintained our full year dividend guidance or market guidance of 7.25p. In terms of inventory, that continues to be maintained below 2023 levels. And at the half year, net debt was GBP 1.6 million better than the half year 2023. In terms of balance sheet, we signed a new bank facility. So since we last presented to everybody, we have been with Lloyd's as our bankers for probably about 15 years, and we've really taken the time to do a 4-week tender process. In order to simplify our lending structure and have recently signed at the end of August, a new 4 plus 1 year, GBP 30 million revolving credit facility. That gives us significant facility headroom at peak time of year, which largely is at the end of the third quarter going into the start of the fourth quarter due to working capital. However, we are demonstrating our medium-term aim to reduce that debt, and that reduced by 10% over the first half of '24 versus the first half of '23. We had 5% ongoing decrease in inventory as part of our inventory reduction program. And then finally, on balance sheet in terms of pension scheme, we continue to maintain a small surplus in the scheme, and there are no ongoing employee contributions. The final slide on financials. We cover some of these markets in a bit more detail shortly. But in terms of the headlines, the U.S., our largest market, was up 5% in constant currency despite difficult market economics. The U.K. was up 11%, driven by improving Wax Lyrical top line growth around new listing wins in the grocery channel. South Korea was down 61%, although that represents a 10% reduction in the market. The rest is due to destocking in the mass channel. And then finally, in Rest of World markets, slightly behind for the first half, which is down to timing, but we expect to see full year growth in Rest of World markets for the full year -- fourth consecutive year.

Thank you, Dave. So moving on to our brand performance. You'll know if you joined these presentations over the last couple of years that we have a particular focus on growing our Spode brand. And you can see a chart on the bottom left this page, which shows the progress that we've been making in achieving that growth. I'm pleased to say in this 6-month period, our Spode brand is up again. And this is due to a number of factors: Getting more listings within the key markets like the U.S. and the U.K.; launching new products under this brand; and getting further online penetration around the world. Our Portmeirion brand is down year-on-year in the first half, but this is really down to the reduced sales and order flow from our Korean market through our range of Botanic Garden, which makes up a vast majority of sales into the Korean market. Our Nambé brand sales were down in the half, and that was particularly due to the weaker economy in the U.S. where our Nambé brand is particularly dominant and the impact on premium department stores that have seen reduced footfall. And for our own Nambé stores that are in and around the state of New Mexico has been at the lower levels of tourism, which has impacted retail performance across the board. Wax Lyrical, however, our home fragrance business is really growing very nicely. We've seen a much improved performance in this division in the last couple of years, good growth last year. And this year, we're up 31%. Again, the new strategy we have in this business, the new management team is doing an excellent job in winning listings, winning shelf space in the grocery channel with customers like Asda and Tesco. I'm now going to look at some of our markets in more detail. I want to start with the U.S. is our single biggest sales market. Whilst we made good progress since 2019, 2020, growing this market in the last 18 months, clearly, like everywhere in the world, the consumer spending has been under pressure, and that has impacted our brands as with everybody else. We did grow 5% in the first half at constant currency. We did see improvement again in gross margin points, which is an important driver as we look to increase our operating margin over the next few years. As I said, our Nambé brand has been hit the hardest during the consumer recession, particularly because of the status within premium department stores and the decline in tourism footfall in some of the key places where we have stores. We've continued to navigate a lot of challenge in terms of supply chains, moving products from Asian factories into the U.S. continues to be difficult in terms of the longer routes around Africa, disruptions in travel and lead times and the much higher container rates again this year. However, I'm pleased to say that we've managed to get profit in the right place for Christmas, albeit there have been challenges in the last 2 or 3 months. As we look forward, we have strong advanced order books. We typically get order books for Christmas that represent around 2/3 of our key Christmas business and those advance orders are up on last year, which is encouraging. And despite a tough economy and tougher consumer spending levels in the U.S., I'm pleased to see our team still win new business, new listings. And there's a couple of examples I've given here, where we've increased our presence significantly within the premium department store Williams-Sonoma and also taken on a new online accounts like [ The Knot ]. Moving on to South Korea. It's our third biggest market. And as we said at the outset in the summary slide, this was the market where we saw the key challenges in the first half of the year. Our sales year-on-year were down 61%. Our analysis tells us that roughly 10% of that 60% downturn, it's about the market. So again, the general recession within Asia and slowdown in consumer spending as they, like everyone cope with higher interest rates, higher cost of living and so on. The remaining 50% is about overstocks, particularly within the mass channel that are taking time to subside. If you've been to one of our presentations before, you may remember that we service the Korean market through a series of distributors and therefore, there are more players, if you like, more customers in the chain for the end consumer. Those customers and distributors restocked when the markets reopened after COVID and took a significant amount of stock in. And then that butted up into a real downturn in consumer spending about half year, last year. So those -- that restocking has left our customers a lot of stock, which is taking longer to sell through, and that has resulted in slower order flow in first half of the year. What are we doing to stabilize that order flow? Well, from the time we spent out in the market, speaking to our customers in the last couple of months, we're pleased and reassured to see that those levels of stock have reduced quite nicely since January. There's further to go. I think we will need to see where we are at the end of this year, but we've made good progress in the first 6 or 7 months of the year. The second thing we're doing is accelerating some short-term product development to help customers in Korea, giving them something new and fresh to get in front of the consumer. And we're also significantly expanding the number of ranges that we have on the online platform Coupang and that will include this Christmas having our Spode Christmas Tree range up for consumers to shop from. In terms of the more medium term, we're optimistic that this market will bounce back to kind of historic levels of order flow. And you can see on the top right-hand chart, sort of history we have trading in the South Korean market. Why do we think that's the case? Well, firstly, our Botanic Garden range has a high successful and a long-term market position within Korea. Our online platform Coupang, their sales out to the end consumer of our products are actually up year-on-year, up 37%. So that shows there's still demand in the market from the end consumer. And indeed, our rankings in terms of brand search online in platforms like Coupang, have actually grown. And you can see from the pie chart on the right side, the dominant position that we have in terms of consumers searching for our brands, our products within online space. So with that in mind, we expect to see the second half sales in Korea to be back broadly in line with the second half last year. And then hopefully, this market will recover -- start to recover through 2025. Turning now to Wax Lyrical, our home fragrance business. As I said in our headlines, we're really pleased to see the improving performance and the follow-through on the new strategy from this part of our business. The sales in the first half are up my 1/3 and the new ranges that we created around about a year ago that were at a good price point, an aggressive price point that we could target the grocery channel, have been very successful. We've got new listings in Asda this time last year, that product as continued to perform well within Asda stores in the last 12 months, which is still on sale. And it's gone in addition in the last few months into Tesco and into the Waitrose chain of stores as well. So we're making good progress getting new listings with some of these price fighting ranges that we created around about a year ago. In other parts of our home fragrance business, our Christmas lines have been extended, renewed, refreshed, and we're seeing the benefit in terms of improved advanced orders for Christmas this year. That, together with the well-performing grocery range gives us some optimism that the second half growth will continue as well. In long-standing accounts such as Dunelm, we've mixed up the ranges that we have in store and are seeing improved sell-through rates. So all in all, we're pleased with the performance of this division in the last 6 months. We expect to return back to profitability of this division for the year, full year 2024, and I think we have good momentum going forward into 2025. And finally, in this section, I wanted to talk about our rest of world sales markets. We've said for the last couple of years that developing our rest of world sales markets, a key part of our long-term ambition to grow our business. And I put some examples together here on Slide 17, of the work we're doing in Asia and in particular, within Malaysia and the progress we're making. Malaysia, as an example, has developed very quickly in the last couple of years from almost nothing to around about 2 million sales a year. We have 2 new distributor partnerships and those partners are doing great things with our brands, with our products in the Malaysian market. You can see the different routes to market here on this slide on the left-hand side, we now have some Portmeirion-branded stores across Malaysia in the middle. We are listed within Parkson, a key department store chain across Malaysia. And then finally, online sales are a key contributor. Around 40% of the sales in this market are now coming from the TikTok platform. And indeed, our range Botanic Garden is now one of their top-performing lifestyle products on that TikTok platform. Our distributors believe there's further high growth potential in the Malaysian market over the next 3 to 5 years. And our job obviously is to support them to deliver on that ambition. So the Malaysian market, together with the work we've done in the last 2 years with distributors in China and the work we intend to kick off late this year and early next year in Taiwan gives us some confidence that we have a good roadmap for growth within Asia and a good ongoing roadmap for growth within our rest of world sales markets. I'm now going to move on to our forward ambition and strategy to deliver that. We've been very clear in these presentations over the last 2 or 3 events that we see an opportunity to grow our top line over the next 5 years. But equally important, we want to significantly improve our operating margins. Dealing with that top line growth opportunity. First, on Slide 19, we've laid out the key areas that our teams have focused on. The first is the geography, growing those rest of world sales markets. I've given some examples on the last few slides of how we doing with that. But within Asia and our rest of the world sales markets, we have a good track record of growth, and we're going to support that growth going forward. Second driver for top line growth is about online penetration, open up more online markets with a very well-known products and brands that we have. We continue to focus on our own website sales that we've improved the operating margins in the last 6 months on our own website. We're growing our online presence in the rest of world markets, Malaysia, China are 2 good examples. And in South Korea, as I said a few slides ago, we're expanding the range and the availability of our product on platforms such as Coupang. Third driver of growth will be new product. We have had a good pipeline of product that we brought to market in the last 6 or 9 months. 3 examples today to share with you. First of all, our new contemporary tableware range called Minerals as a photo on the left-hand side of this slide, it's new, it's different, and it's fresh at Portmeirion that was exclusively launched in John Lewis in the second quarter of this year was well received, and it's now being rolled out to further retailers up and down the U.K. And in addition, into some of the other countries as well. Secondly, a long-standing and important Spode Christmas Tree range continues to grow. And that comes from new development as well. We have a U.K.-made addition of Spode Christmas Tree. That is fresh and new for this year, and that will be in U.K. retailers like Fortnum & Mason, it will be in the U.S. and it will be in South Korea online. And thirdly, on the new products, the grocery range that I talked to that we developed within the Wax Lyrical business. Again, we're extending that range in terms of fragrance and looking at how we can develop it further for 2025. So geography, online penetration, new products. And then finally, leveraging our extensive brand and range portfolio more effectively against geography in terms of our omni-channel retailers. The other area of our forward strategy is how do we improve our operating margins. We've been quite public in recent presentations and stating that we want to get our operating margins back to 10% as soon as we can. And really, there are 3 key drivers of this, reducing our operating gearing, improving the profitability of our Wax Lyrical division and leveraging our top line. So if I deal with those one at a time in terms of our operating gearing, we've restructured our operating base in the first quarter of this year, taking out roughly 10% or GBP 4 million of operating cost. So this will go a long way to delivering a full year benefit of around 3% to 4% improvement in operating margin. Secondly, I've talked about the progress we're now making with our Wax Lyrical business, we expect it to return to profit during full year 2024 and then hopefully grow further in 2025. Top line leverage is where we've been challenged in the short term. Growing our sales in key markets like the U.S. and Korea has been a challenge with consumer spending. But when those markets normalize, as we would expect at some point, we should expect to see improvement in terms of our utilization of our factories and the ability to leverage all the infrastructure that we have in those markets around the world. I'm going to just pass on to Dave again, who will give an update on ESG, but particularly what we're doing with energy consumption and energy contracts.

Thank you, Mike. So yes, I think we have a sort of headline strategy in terms of energy. We all obviously consume a significant amount of energy as a U.K. manufacturer. What we are doing and is set out of a clear roadmap to reduce our energy consumption actually, in the first half of the year, we successfully reduced by 10% across our U.K. sites, following a full year benefit of about 8% reduction last year. We're continuingly investing in automation and replacing old plants with new, more energy-efficient equipment. And as I said, we have a roadmap in order to continue to generate energy reductions. We have also recently expanded our energy contracts out until the end of Q1 2027. That is a reduced -- we were out to Q1 '25. We have a reduction for the next 12 months to Q1 '26 and then a further reduction for the second year out to Q1 2027.

Thank you, Dave. And so I'm going to summarize now where we've been in the first half and where we're going. Just a reminder, before I do that summary that if you haven't registered question yet, and you want to do so, do you want to fill that in, in the box. Then shortly, we'll come to answer as many of those questions as we can. So in terms of the summary of what we've covered today, clearly, the markets in which we operate in, the consumer environment we operate in has been tougher and stayed tough up longer, and I think any commentators expected. Interest rates have stayed higher for longer and in particular, in the first half, we saw the impact of reduced consumer spending in Asia, particularly in South Korea, really impacting our order flow in that market. However, elsewhere, we see really good progress up and down our business. Our sales outside of that South Korean market are up 5%. The U.S., our biggest market, started growing again and has improved margins. In Wax Lyrical, our home fragrance business, we continue to see good growth coming from the new strategy in grocery. As Dave said, we've reduced our inventory again, we reduced our net debt again. We've been proactive in terms of engineering a leaner cost base and that will deliver significant benefit in terms of overhead savings this year. And we've signed a new 4-year bank facility with an RCF at competitive rates. So a lot of work has gone on. As we look forward in terms of outlook, we're encouraged by the Christmas order books that we have, the advanced orders we take for Christmas in the U.S., in the U.K. and also in Wax Lyrical home fragrance business. With the work we're doing in Korea, we expect the second half performance in that market to be back broadly in line with 2023 prior year. And so our market expectations for full year 2024 remain at GBP 4.5 million versus GBP 3 million PBT last year. As a management team, we're excited about our medium- and long-term prospects for growing those operating margins and growing the top line again. That's us. We thank you for dialing in today. I hope that's been a useful run-through and we look forward to answering any questions that you have.

[Operator Instructions] Mike, David, as you can see, we have received a number of pre-submitted and live questions for today's presentation. If I may now hand back to you and kindly ask you to read out the questions where appropriate to do so. I'll pick up from you both at the end.

Thank you very much. Okay. Thanks for your questions. We have a lot of questions, and we're going to try and pick up as many of those as we can. Some will overlap, and we'll try to make sure we only answer one. So the first question is around revenue stream and stock building in certain markets. How do we work with customers? So order flow is smoother and less stop start. I think where we find that difficult is where we don't have our own sales infrastructure within a market. So within the U.S. and U.K., we have substantial sales and marketing teams and we're very close to end customers and retailers. In markets like South Korea, where we work through distributors, they're experts in their market, that means it's one step removed. I think what we can do is try and get better management information on stock levels in the market. Indeed, that's what we've been working in the last 3 months in Korea. The next question is around how do we get growth or better growth there within the Portmeirion brand and Nambé and what are the solutions for that? Well, to a degree, all of our brands have been impacted by the much tougher macroeconomic environment and the reduced consumer spending. Our products are at a certain place in the market, which is mid- to premium-mid and those parts of the market, there's no doubt, have been impacted. That said, the way that we can win in tough markets is to take on new listings, new accounts. I gave some examples of the work that we're doing on that front in the U.S. to get in front of more consumers through online and by launching fresh and new products that gets customers and consumers excited and tied into our brands. Dave, the question is which costs have been impacted by restructuring. So do you want to pick?