Portmeirion Group PLC (PMP) Earnings Call Transcript & Summary

Good afternoon, and welcome to Portmeirion Group plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question 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'd like to submit the following poll. I'd now like to hand you over to Mike Raybould, the CEO. Good afternoon, sir.

Thank you, Lily. Good afternoon, everybody, and thank you for joining us this afternoon. This is Portmeirion Group's Half 1 Interim Results Presentation. I'm going to start with a brief overview, and I'm going to hand on to my colleague, Jon, our CFO, who will talk about our financial results before I come back and do a more in-depth review of our key sales markets and then review on the progress against our strategic and transformation plan. So as an overview, our group sales for the 6-month period grew at just under 3% at constant currency. However, the top line number was significantly impacted by our largest sales market, the U.S. due to the tariff disruption that started in April. Excluding that U.S. market, our overall group sales were up nearly 11% at constant currency, pleasing results. As a result of the impact of tariffs on our U.S. market, our loss for the first half, traditionally quiet half of the year increased from GBP 2 million to GBP 2.8 million, again, driven by that U.S. market. I'll talk much more in our market review about the tariff situation and our strong response plan and where we are now later in the presentation, but in short, the tariffs were very disruptive to our market, both getting our stock into the market and our customer buying and order pattern. However, we had a very strong and fast plan. I think we now find ourselves in as good a place as we could hope to be. Elsewhere, we saw good growth in the first half, and our Wax Lyrical business has continued to improve and turn around with growth in the top line and a significant improvement in profitability in the first half. We continue to control our overheads very carefully with growth just 3% despite a lot of inflation, government taxation increases and the planned investment in sales and marketing heads and a rebuild of finance team. We're very early stages of the transformation plan that we launched back at the end of March. I'll update on the progress we've made during this presentation. And then finally, we've revised our RCF facility to support the impact that the U.S. tariffs has on our [ site ] seasonal cash flow, and Jon will talk about that as we go through the presentation. So that concludes our overview. I'll now hand on to Jon, who will do a financial review.

Thanks, Mike, and good afternoon, everybody. Looking at the financials, as Mike has already mentioned, half 1 sales were up by just over 1% on a constant currency basis, just under 3%. When you strip out the U.S. situation and the performance in that market, actually, the sales of the group were very pleasing, 11% higher on a constant currency basis compared to the first half of 2024. As Mike said, the tariff disruption severely impacted H1 sales and that was the single reason for the greater loss in the period, widening from GBP 2 million to GBP 2.8 million, which was all about the U.S. profitability being lower and its impact on net debt and therefore, increased interest charge. Within the results, though, Wax Lyrical momentum has continued. We're very happy with the results. It was up 15% on profitability, which was all driven by sales and improved margin and returned to profitability in the first half of the year for the first time some time. And overhead costs were in line with our internal plans. We feel we've kept them under control, reflecting, as Mike said, investment in our internal capabilities, but also dealing with higher tax from the early part of the year and also general inflationary pressures. As a result of all that, net debt increased by just over 10% by GBP 1.4 million to GBP 14.8 million, again, driven by that profitability within the U.S. and us taking some higher stock, which I'll come to later on into the U.S. market for the U.S. -- for the Christmas trading period earlier than previously. And where we have been able to pull levers on cash flow, free cash flow, in particular, we've done so. And while still an outflow of GBP 2.8 million, there was a 46% improvements on free cash flow between this period and the same period last year as we've tightened up and improved our collections from customers. And we're very happy with that result, and we intend to sustain that. And as we said back in March, we continue to prioritize net debt such that we reduce interest and reinvest in the business, and therefore, no dividend is proposed for the half year. Moving to the balance sheet. Net assets reduced by 3% to GBP 51 million. The inventory increase is due primarily to cost inflation and operational timing differences, which I will come to in the next slide. Net debt, as I said, has increased by GBP 1.4 million as a result of the higher loss and the U.S. tariff uncertainty impacting performance and stock levels. Free cash flow has improved. And as Mike has already mentioned, we have revised our RCF facility with our primary lender Barclays, recognizing the impact of tariffs and the like and allowing us to continue to support our transformation plan whilst reflecting what is a highly seasonable working capital profile. The legacy pension scheme remains on a small surplus. Inventory is at GBP 43 million. It's about GBP 3 million higher than at the end of close of H1 last year. And I guess I would break those down into three sections. Cost inflation at the top of the table of about GBP 1.7 million. That will persist. That's increased fuel charges, general inflationary pressure on materials and the like. But the following three of Wax Lyrical and the earlier Christmas and stock for the U.S. with the tariffs that come with that are about GBP 2.4 million. And they're all operational timing differences. We've built stock in Wax Lyrical because of the momentum and the sales performance, and we expect that to reverse from the end of the year. We have taken our product into the U.S. market earlier as a result of experience last year, which has been positively received. And that's along with the tariff attached to about GBP 1.3 million. As we said back in March, it is our intention to reduce stock by GBP 6 million over the two financial years. And we've made a start on that by GBP 1 million in the first half. We would have liked it to be more, but the uncertainty and the impact of the U.S. tariffs on a macro global environment has slowed some of our progress down there. However, we expect up to a further GBP 2 million reduction on excess stock from the end of the year alongside the remainder being achieved in 2026. Just looking at the shape of the business by market. As you can see, U.K. was up by just over 2%, driven by Wax Lyrical. South Korea has made a very promising start to the year with a sizable increase of just under 30% or over 30% on a constant currency basis. And international overall was up by 11%. However, as you can see at the top of the table, the story in the first half was all about North America with the uncertainty and the impact on trade from the tariff situation, which continues, and that was down 12% -- just under 12% for the first half. We are pleased with the way that Wax Lyrical is working and also the other international markets, which is a key part of our growth engine as when we launched our transformation plan back in March. Looking at it from a brand perspective, it's hard to ignore the impact of the U.S. The Portmeirion brand benefited from the improved performance in Korea, key driver there being 8% up. And whilst Spode, one of our key brands was down by 13% on a global basis, if you take the U.S. performance out of that, it actually continued its trend of growth and was up nearly 8% in the first half. Wax Lyrical as I mentioned, it's momentum continues with ongoing growth through new listings. And Nambe, which is a higher-priced brand and very much U.S. focused, we're pleased to see it stayed steady through the year. Royal Worcester and Pimpernel were more affected by the U.K. and the U.S. market conditions and limited supply issues. I think it's the end of that, I'll hand you back to Mike for a deeper dive on the markets.

Thank you very much, Jon. So I'm now going to do a more detailed review of some of our key sales markets around the world. I really want to spend some time first on the U.S. So let me get the slide on, that's correct. U.S. is our largest market and significantly our largest profit contributor within the group. Jon has shown us in the tables. This was the market that didn't grow, that sales were down a little over 10% in the first half. So what has happened to our market in the U.S. If we take ourselves back to the beginning of April this year, there were a series of announcements of ever higher incremental tariffs imposed on importing products or kind of products, any kind of products into the United States, whether it was coming from Asia, China, Europe or even the U.K. Those peaked around 150% to 200% incremental. Put it in context, historic tariffs have been somewhere between 5% and 15% bringing products into the U.S. What that meant in the second quarter was an immediate disruption. What we saw was, firstly, disruption to our ability to get product into the U.S., to bring in at that time and have to pay 150% extra tariff would be absolutely penal from a cash point of view. Secondly, we saw our customers, the large retailer groups across the United States that we deal with cancel or pause orders, not just on our business but on most businesses that were importing product to the United States as they themselves took stock of the situation, what was going to happen and waited for the next step. So disruption to supply chain bringing stock in because of the cash cost of the extra tariff disruption and canceled orders. That included our customer base canceling pretty much all of the advanced Christmas orders that they already placed for this Christmas back in February and March. What we did was to cancel and pause production orders around the world that were expected to be routed in the U.S. We rerouted boats, container boats into Canada, for example, and we booked bonded warehouse space, all to make sure that we didn't have anything land in that very hot period of kind of April through mid-June, where there’s very penal extra tariffs. As a result of the past action that we took, we were able to avoid paying any of the very high tariffs of 150% plus. We decided to accelerate the transition, the onshoring of some of the Asian production for the U.S. into our U.K. factory, still contract, particularly our famous Spode Christmas Tree range. We decided to accelerate that onshoring and have made a huge amount of that product this year over the summer in our Spode factory. We then canceled a chunk of our historic Asia and Chinese made production business and it was no longer viable, where the tariffs were. The tariffs have eased out and stabilized now in the third quarter around 30% incremental for China, 10% incremental for the U.K., I think 15% incremental for Europe. So still disrupted. So what did we do -- what have we done to cover that final tariff position? We've put our prices up. We put our prices up to cover that extra tariff. We secured those agreements with our U.S. customers. And we've repriced some of our ranges to take into account the fact that we're now manufacturing them in the U.K. That will require a margin investment in the short term because the cost of manufacturing in the U.K. is still much higher, but we think that is worthwhile. It will pay back. It's good for our brands and will lead to a more positive position in the medium and long term for our brands in those ranges in the U.S. in the future. The critical point is that right now, our stock is in the market for Christmas in the seasonal period, key trading period. It's on time despite all that disruption and it's in the market actually earlier than we managed to achieve last year. So that is a really good result. And in terms of what that means looking forward now for the rest of this year, obviously, we remain extremely cautious. We remain cautious about how the U.S. consumer will react to higher prices, not just our high prices, but generally higher prices from product being imported into the U.S. I was in the U.S. just two weeks ago and met with all of our major retailer customers, the Macy's and Bloomingdale's and Amazon. I was reassured in those meetings that they are generally cautiously optimistic themselves about Christmas spending in the U.S., but we are going to have to wait and see how the consumer reacts to higher prices. We're also cautious because we don't know if there are more tariff announcements to come, further changes. It's been a volatile situation. I think we've dealt with it very, very well. It's an important market. We have strong market positions with the ranges that we have, and we still see this as an important and critical growth opportunity going forward. Outside of the tariff situation in the U.S., just a few other points to make. Firstly, our independent channel and by independence, I mean the thousands and thousands of small one-off shops, individual shops often family-owned shops that exist up and down the country. We have renewed our focus on that channel, put a new packages supported for them that encourage them to buy our products and take more ranges from us, give them more exclusive products. That channel actually has responded by growing 16% year-on-year, and we're hoping that, that will continue through the second half. We've also have our U.S. team start to focus on South America as a new market to develop. Very early days, but we hope that over the next couple of years, we can build a good presence in physical retail and online within the South American market. Turning to our next market to review in the U.K. Total sales, as Jon reported earlier, were up 2%. That was really driven by our home fragrance business, Wax Lyrical, which has had a strong performance. Our tableware sales were down on a like-for-like basis, excluding some canceled business, they were down about 2%. Market in the U.K. is still soft. Our e-commerce business has had a good run from sort of February onwards through to June, and we're confident that, that will continue. We've done a lot of work in the last couple of months on a reset in our U.K. sales team, bringing in some additional sales hires. And we think that, that, together with some new products and product innovation will help us return to some modest growth in the U.K. in the second half and going forward. Our orders for Christmas, advance orders for Christmas have been up on last year. The third market that I want to talk to this afternoon is South Korea. For a long time, it's been a very important and significant market for our brands, particularly our Portmeirion brand, particularly our Botanic Garden range within the Portmeirion brand. We're encouraged by the sales rebound of around 31% from what was a very low number in '24. It feels like we have seen the bottom in this market, and I'm pleased that the work that we put in, the new teams that we have in place, [indiscernible] the market are seeing the rewards from the work they put in. We have been supporting our customers through this year to help reduce the overstocks, the overstocks being the issue that impacted our sales last year. We've also brought to market and accelerated bringing to market some fresh new product again to give something new and different and a reason to buy for our distributor customers and ultimately people in the shops over there. I was there about 4 or 5 weeks ago. I think that the market over there, generally, the market conditions are still very challenging. The political turmoil that was earlier in the year clearly disrupted consumer and economic confidence that came through very loud and clear. And so we remain cautious on this market going forward. We're pleased that we have reached the bottom on the way back up, but we need to be patient about how long this recovery in this market will take. There are still high stock levels that I would like to see. And because the market is generally soft, the economic condition is soft. It is going to take some time for those overstocks to clear. It's important that they do for us to get back to more normalized ordering patterns and not to have up and down in sales performance. So I think that's going to take another 18 to 24 months. In the meantime, we'll continue to innovate on product. We've been exploring new categories. We've actually just launched a new cookware range for the first time, a new category, and that will start to ship, we hope late in quarter 4, sort of November time onwards. And we hope that, that is a success in the market. In the long term, we believe our position in Korea is unharmed. Our market share is still there. We believe the market will recover as those overstocks go, then we think we should get back to more historic levels of business in this market. And then my final market today that I want to review is our home fragrance division. It's quite clear because as Jon said, again, a very pleasing performance. They had a good, really good result last year, continued growth in the first half of this year, plus 15%, combined with a dropping through to improve profitability, the new listings, space wins within the grocery channel continue to perform well. We've put in a small but effective new factory CapEx that extends one of the key fill lines for the candles, adds capacity so we have room for future growth and can satisfy customer growth going forward. A lot of good progress. The team now looking forward, are focused on a new product road map that will help consolidate the grocery account wins and hopefully enable us to take even more share of that space going forward. Those factory efficiencies, again, should continue to kick in as well as the team focusing on a more efficient working capital and stock position. So a good period for Wax Lyrical. So that concludes the market review. The next session is our strategy. I want to start by doing a recap really of a slide that we put in at the end of March, when we did our last announcement. We set out very clearly a 5-point short-term plan that we believe was going to be effective in [indiscernible] our business or transforming our business over the next 24 months, our priorities, if you like. In brief, that led with the fact that we wanted to return to growth in our established markets, U.S., U.K., Korea as soon as we could. Secondly, the importance of building a stronger fortress style balance sheet. Thirdly, it was important to invest much more behind our premium brands, the Spode and Portmeirion, and so on as soon as we're able to afford to do so. Point four, explore and develop includes things like the massive opportunity to develop our brands in new markets and international markets as well as doing more with product innovation and our extensive design archives. And five finally, excellence everywhere about making all those incremental improvements across all parts of our business that over time give us momentum and change. So, I want to update on our progress against those objectives. In terms of number 1, return to growth in our established markets. As you would have heard through this presentation so far, we've made good progress in some of those markets, including South Korea. U.S., however, has been more challenging. I'm not going to repeat the things that we've said so far. But aside from the tariff situation, we're pleased that we're in stock earlier. That was important in the U.S. We're pleased that we have some growth in our independent channel. And we're doing test and learn some exploring in the U.S. by opening up some pop-up stores. In the last couple of months, we've opened a pop-up store in Dallas for our Nambe brand, where we had a very strong e-commerce kind of hit rate and also in New Jersey for our Spode. So that's interesting. South Korea, I've really covered and I won't repeat now. And U.K., as I said, we're confident that we will continue to develop our website and our website sales. We have some platform synergies projects that are on track to go live in quarter 1, 2026. We're seeing some growth on the U.K. website, and we're going to be launching some new and exciting parts of those websites in the next 6 to 9 months. And as I say, generally, our Christmas seasonal ranges, which are very strong and have good market share positions, the advanced order books that we have outside of the U.S. have been strong and up on previous years. The second point of this 5-point plan was that strengthening of our balance sheet. Again, Jon really has covered this. We have seen a small increase in net debt. We are committed to reducing net debt as soon as we can and ultimately [eliminate], the benefit of that is it releases the cost of servicing interest that we can then reinvest back in the business behind sales and marketing. Part of that will be getting inventory down. Jon has already laid out the action we're taking, and that's top of our mind through the rest of this year. I want to spend a little bit more time on number 3, investing more behind our premium brands. We've been busy since we launched this idea in our business, up and down our business. You'll see on this slide our new refreshed Spode logo, which is launched and rolling out right now across all of the major brand touch points. The new logo includes its birth place England as well as its birth date 1770 and where we have room, a nice depiction of the original Spode works, dates going back those hundreds of years. So we're really pleased with that refresh of Spode logo. We have improved the packaging experience that we give to the customers that order off our website, Spode website. So there's a picture again on the slide where you can see that if you order now on Spode, in the U.K. and we'll roll it out to the U.S. shortly, you get a really nice experience in terms of box with branded tape, branded tissue paper, stickers, lovely insert card to tell the story of the brand. And again, it's about reinforcing the purchase decision and what the brand stands for, and I'm sure will lead to repeat purchases. We also have already started to increase ramp up, our spending behind other parts of our marketing budget, social media, influencer engagement, particularly digital assets. So many of our products are sold now off online platforms in the U.S. and the U.K., roughly 50% of all sales are off somebody's online platform. So those digital assets, pictures, the videography are increasingly important. We've done some major refreshes in the last couple of months, and that includes some of the key Christmas ranges that will go live in the next few weeks. A few words about progress on our reshoring, maybe sort of bringing product back, where we can to make in our own factory in Stoke-on-Trent. As I said on the U.S. market review, we took the opportunity that the disruption from the many, many tariff announcements that went up and down of those 2 or 3 months to make the decision to really reaccelerate the onshoring of the product that was being made, the Spode product that was being made in China for the U.S., bring that back to the Stoke-on-Trent factory. There's a graph on this slide that you can see at the bottom that shows the journey we've been on from 2023, where none of Spode Christmas Tree range is made here. Last year, we made some 200,000 pieces. This year over the summer, we've made a few 600,000 pieces of that range. Again, that wasn't made at all just 2 years ago. That has been a great experience for our factory. It's been slightly chaotic times. I've seen products all over the place in the corridors. It's been a great challenge to the factory. I think this is important to the Spode brand. I think it's important that the product ends up in the U.S. market. There is clearly a margin investment that we make in the short term, but we think that it will pay back and it's been great to see the factory busy over the summer. We have also taken that Spode logo, new brand logo and launched a new Spode backstamp. The backstamp is our seal of approval, our seal of authenticity that goes in the bottom of all of our products. And you can see an example of that new backstamp on the bottom of this slide that talks about not only the birthday and the birthplace, but critically now we're not just made in England, we're made in Stoke-on-Trent, England and that means a huge amount to our workforce and the communities that come from the people that work every day and have worked for many, many, many years in our factory here in Stoke-on-Trent, knowing that, that is going around the world, recognizing where it's been made. So lots of progress there. Point 4 of our plan was about exploring and development. This covered a number of different areas. It covered growing those international markets. We're pleased the sales in those markets are up 11%. More work to do, and we expect that growth to continue, but we're excited about the opportunities that Malaysia, other parts of Asia, parts of Europe, Australia, China all present for our brands and our heritage ranges. Part of explore and development is also about design, about products innovation, about leveraging the extensive design archives we have, the Spode going back hundreds of years indeed for Royal Worcester as well. So we've created just in the last month or so, a new role, a new hire, a new Product Strategy Director has joined us with extensive experience in the industry and outside the industry, bringing lots of fresh ideas and energy into the business. That's really exciting. We also set up Sprint teams. Sprint teams being a way of bringing people together in a room from different parts of the business that perhaps don't get to sit in a room together normally, trying to find ways to get them to collaborate and work much faster. The Sprint teams have looked at a number of things, including how do we speed up our product development cycle. And as an example, on the right-hand side, the Sprint team has taken an idea for an extension to our key Spode range, Spode Green Italian range, and they've done the ideation through to production in about 3 months, which compares to a roughly average 12-month normal cycle. So significant shortening of the cycle, again, using Sprint teams, different methods of working. That's exciting. We've taken a significant number of orders around the world for this new range already. Okay. Point 5 is progress on our excellence everywhere. Again, our business starts with our people and so in the last few months, again, we've made a number of changes. As I said in the last slide, a new Product Strategy role, that's very important. We've also done an internal promotion to a new role, COO role [indiscernible] has been with the business for a long time, but going to help Jon and I to particularly speed up our execution across the business on this plan. We've made in the last 2 months new hires in our U.K. sales team in growing our international sales team to drive that international sales growth as well as some strengthening of our -- [apparently back of the stage]. We've designed and launched a new packaging for our Spode products, new gift boxes as an example on the page there, and that is in the process of rolling out across our different markets. And as I said, the Sprint teams that we've introduced started with new products, but now we put Sprint teams in the last few weeks into other parts of the business, including our factories. So that's an exciting way of generating incremental improvement week on week. Okay. That concludes the section on our strategy and in particular, the updates on our progress against that plan, that 5-point plan that we launched back at the end of March. We're approaching the end of the full part of our presentation. I have two more slides, and then we will come to questions, but in terms of outlook, first of all, and then I'll do a summary. I think that despite the disruption that we've had in our biggest market, the U.S. from tariffs, we are happy and pleased that we have got our key seasonal ranges in place in market, in retailers' warehouses onto their platforms online earlier than last year, on time. That has been fed back to me in the different markets I've been to in the last 4 to 6 weeks. That is a positive thing. And it's great to sit in front of customers and say, look, it's really good that we've got stock a year earlier and you're going to benefit from that. We are, however, cautious. We remain cautious about the uncertainty in the U.S. market. The impact of tariffs and price rises generally on the consumer is really an unknown and how the consumer will react. We have seen a more stable pattern of buying, I think, in the last 2 or 3 months, but really, we need to see how the consumer spends over Christmas in the U.S. That will be important. Outside the U.S., we expect to see some modest growth in the second half because of the things that we've talked about as we've gone through this presentation. We're clear on our priorities, Jon and I in terms of our transformation plan, including that strengthening of our balance sheet. We continue to see significant global potential for the brands that we have and that we love, we love to work with every day. And our job is to put together pieces in the right place in order to get that potential out and that top line growth as soon as we can. And therefore, in summary, I conclude by saying that our half 1 result outside the U.S., we were pleased with the top line growth of 11%, that was a pleasing performance. We're also pleased with the progress that we're making on the transformation plan. It will take time to feed into the numbers, but okay with the progress. The U.S. tariff situation was very disruptive to our business. You can see that in our numbers. But I think the team has done an excellent job reacting to it. We're pleased with the progress made on our transformation plan, and we continue to look at our organizational structure and our people and hire people that improve our business and so that we can work on what we do every day going forward. So we're excited by what we have ahead of us. We're excited about the potential that we have in our brands. And we thank you for joining us today for this presentation. That concludes the formal part of our presentation. And we'll now hand back to Lily, who will talk to the questions that we have received.

Mike, Jonathan, thank you very much for your presentation this afternoon. [Operator Instructions] I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A can be accessed by your investor dashboard. As you can see, we have received a number of questions throughout today's presentation. If I could please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

We’re just navigating to the questions, one moment. Okay. We're just -- just bear with us one moment while we try and get some of the questions on the screens so that we can see them. Okay. Well, I'll just make a start, and then we'll try and bring up the ones that come in during the presentation. So look, I appreciate all the questions that come in. There's a ton of questions here and some of the pre-submitted ones with some duplication. So please forgive me if we don't answer every question, but that'll be simply be that there was duplication or they were very close to other questions that have been posted. Let me start off with the one, do we think -- when do we think U.S. market will recover, was the question. So we've seen some stabilization already in quarter 3, which is good. I was in the U.S. a couple of weeks ago and met with the major retail groups. They were cautiously optimistic about general consumer seasonal spending that was encouraging. However, really, we need to see how the consumer reacts over Christmas. So that's what we know today. Question 2 is a question about inventory and net debt, I'll leave that to Jon, you to answer.

We're highly -- a very strong working capital profile peaking about this time of the year and that goes hand in hand with net debt, obviously. Difficult to say where we'll be at the year-end, as Mike has said, it very much depends on trading, but we continue to focus on reduction of inventory. As I said earlier in the slides, we're targeting up to another GBP 2 million of excess inventory by the end of the year, and then trading will deal with the rest.

And question 3, Jon, I think, is also for you, about the interest rates on our borrowing.