Portmeirion Group (LSE:PMP) — FY Results

0:01 Good afternoon, and welcome to the PORTMEIRION PLC Full Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question or receives during the meeting itself. However, the company can 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

0:32 would now like to hand you over to CEO, Mike Raybold. Good morning good afternoon to you. Thank you. Good afternoon, everybody. We're delighted to have this opportunity this afternoon to present our update on our business, and thank you for joining us. In terms of what we're gonna cover this afternoon, you have myself, chief executive, and Dave Sproston, our group finance director. I'm gonna talk firstly and give a brief overview recap of our business in terms of our business model. We're then gonna spend the majority of the presentation doing a review of our 2023 results, which will include a deep dive into financials, some of our key markets, and or divisions. And then thirdly, we will move on to our forward ambition for growth and improving operating margins and profitability.

1:24 As Alex said, we would welcome questions. I know there's been some questions that have been logged already, and we look forward to picking up any questions at the at the end. Okay. So moving into our first section.

1:44 A few slides as a recap, in terms of our company, what we do, and how we go about things. So our group is built around six consumer homeware brands. We have a huge amount of collective history or heritage over seven hundred and fifty years of history across those six brands, and we sell very widely. We're very geographically diversified in terms of how we sell across the world to over 80 markets. You can see a list of our key consumer good brands on slide four. And, again, our long track record, our youngest brand, 1980, is still at 40 years old, and we go back to the seventeen fifties and seventeen seventies. And what that means is that our brands and our products are well known by our customers and our retail customers across the world and indeed by our consumer base.

2:40 What makes our business well, in our view, it centers on those six very well known brands which have been around for a long time, well loved by consumers around the world. We have two UK factories that manufacture around 40% of everything we sell. We sell across multiple channels, physical retail, omnichannel, and and online. We sell around the world to over 80 countries, and we see a significant opportunity in the long term to improve our sales, our top line, grow our business, as well as improve the operating margins as well. We have a strong balance sheet. We generate cash, and Dave will come talk about that in more detail as we go through today's presentation.

3:27 Our vision and our ambition really focuses on these three things, that opportunity that we see for long term revenue growth. How we do that is by leveraging these brands that we have collected into the group across that global geography, across all those different routes to market, and we have a very clear medium term target of getting operating margins up to at least 10%.

3:55 I thought it'd be worth looking at our longer term sort of fifteen year track record, and you can see on this slide, top of the chart is revenue, bottom is pretax profit, a very clear and consistent track record of sales growth, And even the toughest of macro conditions and even in in a year where COVID hits and shuts down our customer base, we've managed to always stay profitable business. Our opportunity and our strategy is focused on returning the company to those historic levels of operating margins and seeing that improvement in profitability. We're very proud of our customer list. We sell to some of the very best retailers around the world, and you can see many of them listed on this page on slide eight.

4:46 Physical retailers, omnichannel retailers, and pure play online retailers all covered across our key markets, The US, UK, and Korea, as well as many of the, other markets that we are investing in and developing.

5:05 So I'm now gonna move to the second section of this presentation, which is a review and deep dive into our full year 2023 results. I'm gonna give some headlines, and then I'm gonna hand over to Dave, our group finance director, who will take you through some of the financials. So to start off in terms of an overview, our sales and underlying profit of the year came in in line with our revised market expectations, albeit with below prior year levels. And that in particular was down to much tougher macro conditions and elements of destocking in key markets. In particular, we saw the challenges in The US, which is our biggest sales market, right up 40% of the business, and in Asia, which can which is our third biggest sales market. Conditions macro conditions in those markets were particularly difficult.

6:00 However, we were pleased that we made some really great progress on a lot of the areas that we can control

6:06 in the last twelve months. We'll talk about many of these as we go through the presentation, but they include, again, strong growth in our rest of world sales markets, a key part of our long term strategy, a significant rebound and improvement in the sales levels in our wax lyrical division, an improvement of gross margin of about a 130 basis points in our largest sales market, The US, much improved free cash flow, reductions in inventory, reductions in net debt. Dave will talk to those in more detail. And then work we've done the last three or four months to engineer a significantly leaner, tighter cost base, which means that going forward, we should have roughly 10% lower costs in our business. In the short term, the board has decided to reduce dividends for FY 2023, and that's all about prioritizing further debt reduction and further, interest cost reduction.

7:02 Looking forward in terms of outlook for the next twelve months, we expect to return to modest growth in key markets, The US, UK. We expect to continue to grow in our rest of world markets. We expect our wax local business to grow. However, we are cautious and do expect to see lower sales in South Korea, particularly in the first half of twenty twenty four. And throughout everything that we do and everything that we talk about today, our underlying focus is on improving our operating margins through 2024, '25, and '26, and we'll touch on that in much more detail later in the presentation. So that's a few headlines. I'm now gonna let pass on to to Dave, our finance director, and he'll take you through some financials.

7:53 Thank you, Mike, and good afternoon to everyone on the call. So just moving through the financial slides. In terms of revenue performance, 7% sales reduction over the prior year. And as Mike has highlighted, that was largely due to to destocking and macro conditions in The US and South Korea. Although sales remain 11% ahead pre COVID levels in 2019, It was that sales reduction, which really led to a reduction in in operating profit margin and a drop through with a resultant decrease in headline profit for taxation. Focused on reducing inventory levels, and that allowed us to reduce our net debt by about 20% from 10,100,000 to 7,900,000.

8:42 In terms of prioritization of of debt reduction, and reducing interest costs, we've reduced our dividend payment, in the short term.

8:55 K. Moving on to balance sheet. We continue to maintain a strong balance sheet. Increased focus on free cash flow. We actually had a free cash inflow of 4,400,000 against an outflow of 8,700,000 in the prior year, so much improved performance. And that allowed us to reduce our reduce our net debt levels, and we expect a further positive free cash inflow in 2024 and a and a further reduction to net debt levels. Key driver in this was inventory reduction, 41,100,000 in the prior year, and we reduced that by 13% to 36,000,000. Continue to maintain control within our pension scheme. We have a small surplus at the end of the year.

9:43 We did have a technical noncash goodwill impairment on our home fragrance division. Mike will do a deeper dive into the performance of that division, but the key driver of that being being an increase in the discount rate that was applied to future cash flows and also a a slower sales rebound beyond the COVID pandemic. And we continue to maintain significant headroom within our borrowing facilities.

10:14 Moving on to sales by key market. North America, both The US and Canada were impacted by retailer destocking and difficult macroeconomic conditions. Although we did see Sorry, David. Just to jump in. You have just frozen here. So what I'll do is I'll just refresh your browser and pull you in. Sorry about that.

10:46 If I may just request control, Mike. Thank you very much. K, guys. You're back in the you're back in the room. Thank you. Go ahead, please. Okay. So so so just to recap sales by market, I think we we talked about North America, and we did have a good sell through of our Christmas ranges, particularly in the second half of the year and still believe that we're continuing to improve market share despite difficult macro conditions. In The UK market, sales were up 9%, so resilient performance in in that market.

11:32 In South Korea, sales were down after a particularly strong year in 2022, difficult conditions, particularly in premium department stores. And then in in rest of world market sales were up 16%, which is a key part of our long term strategy for growth. And then final slide on financials and sales by brand. Difficult sort of North America, particularly Asia market conditions had most impact on PORTMEIRION and NARBEY brand sales. Particularly pleasing, though, we have a chart on the left hand side of this slide in terms of SPOWED, which, despite a sales decrease in other brands, continued to grow and is now 42% ahead of pre COVID 2019 levels.

12:28 And as Mike will cover in a bit more detail, our home fragrance division returned to growth. Sales were up 24%, we continue to to to see an improved performance in that division. Just gonna hand back to Mike. Thank you, Dave. I'm now going to do a deeper dive into our US market, which is our biggest market by sales value. It accounts for nearly 40% of the group's sales. So starting on slide 14, you can see on the chart on the right hand side that we recovered very well and fast from COVID in 2021 and 2022, good levels of sales and growth. But against that, in 2023, we lost around 13%. Why was that? Well, clearly, spending was in a much tougher place, and that was compounded by key customers, key retailers wanting to destock across the board in order to reduce their own stock levels because of the high cost of holding stock and higher interest rates.

13:29 In particular, our Nambay brand, which is highly concentrated in The US, was most impacted, and that was, again, the impact of a lower footfall in premium department stores, lower spending power, but also a decline in tourist footfall in southern states, including New Mexico where we have our own Nambe physical retail stores. What we can clearly see is this is about the market. We have not lost any market share. Indeed, particularly around our Christmas programs, we've continued to take market share, and that gives us some reassurance that as consumer spending normalizes, then our sales in this market should improve. Similarly, Christmas season in quarter four, we saw a very good sell through in 2023, and that reassures us as as well for this year.

14:22 We've continued to focus on gross margin. Although sales were off 13%, we were pleased to see gross margins advance by a 130 basis points. In terms of things that we can do to help mitigate and still win business even the toughest of market conditions, I'll just add a few things here. But just to give you a flavor, we managed to take new listings and new business and new customers, and that includes a new Spode range. It's gone into the Williams Sonoma premium department store chain, and that should grow further this year in 2024. We've rolled out our Spode kid camp range into the restaurants of the Ferndale Hotel Group. We're now into four hotels, I think, across New York and London, and we hope that that might extend further in the coming years.

15:12 And those ranges are also on stay on sale in in retail formats such as Macy's and Bloomingdale's. Our ever popular Spoke Christmas tree range, again, we've increased further listings and and and range space, and that's been aided by successful new product development. So putting all that together, what do we see for The US market in terms of outlook?

15:39 We're expecting this market to return to modest levels of growth, I think, in 2024 and similar further improvements in gross margin points, particularly as inflationary pressures subside. We remain cautious about the premium department stores and in particularly our non bay brands, both in department stores and and direct to consumer, and that's partly about market and partly about an ongoing reduction in tourist footfall in and around New Mexico. We are reassured by bookings and advance orders that we're taking for this coming Christmas. This is a significant part of the profitability of our US division. We had a good Christmas last year, and I'm pleased to report that at the moment, our order book for Christmas is up significantly on on last year.

16:33 I'm next gonna move to Asia, in particular, South Korea market. It's our third biggest market in the group, and it accounts for something like 15 to 20% of the group's sales. So, again, you can see on the top right a longer term sales chart, slightly up and down, but we had two good years and rebound out of COVID in 2021 and 2022. Very strong sales in 2022, but sales fell back in 2023. And, again, a similar message to The US, which was a significant slowdown in consumer spending, again, compounded by, the fact that we sell through distributors, and those distributors have a certain amount of stock they bought for us. It takes longer for that stock that's in the channel to sell through before they can reorder, from us, from PORTMEIRI.

17:23 PORTMEIRION Botanic Garden is really our strong play in South Korea, and it remains one of the top two and leading brands by market share and online search within the Korean market. So we're confident that, again, some stage in the future Apologies, Mike. Sorry. Sorry to jump in again. You have just frozen. So what I will do is I'll just bring your camera down for the rest of the presentation. That's okay. So Thank you.

18:17 We do expect those tough conditions to continue, particularly for the first half of twenty twenty four. So we expect lower sales in the first half, albeit against a very tough comp in the first half of twenty twenty three. When we speak to retailers in the market, a key big retailers group, they are, again, cautiously optimistic that in the second half, conditions should start to improve. In terms of what we can do while markets are tough, we're focused on taking new ranges and other brands into the market and looking to introduce those. And that includes what we're doing with the bespoke Christmas tree range, with the non vape brand, a new stoneware range that we've just developed and launched, as well as looking at new categories.

19:06 I'm next gonna turn to our home fragrance division, our business wax lyrical. As you may recall from previous presentations, this is a business that suffered, and was hit hardest by COVID. A lot of its customer base was was pushed, was shut for a long period, and it's taken longer for it to recover post post COVID than other parts of our business. So I'm delighted and pleased to see a very strong rebound performance in 2023. Sales grew 24% year over year. Two real reasons for this. Firstly, full year impact of the AromaWorks acquisition that we did partway through the previous year. But more importantly, we've developed a new set of price fighter ranges to target the grocery channel, and that was successful and went into Asta for the first time in second half of of twenty twenty three.

20:05 The integration of our our RemoteWeb's acquisition has been successful and completed, and now all of the production for that brand and its ranges are being done in our existing wax lyrical facility up in Cumbria with no additional resource or cost. As a result of both those factors, our profitability improved during 2023. Looking forward now into 2024 for wax lyrical, we expect with these new ranges that we've created and the interest that

20:35 they're getting, particularly in the grocery channel for further growth, 15 to 20% top rate of growth in this division, and that will include a full year impact to the listings in as well as the range going into, we believe, Tesco in the second half. In addition to that, the team have worked on improving our Christmas gifting proposition. We have new products and new formats all ready to go for 2024. All those things together, we would expect in 2024 to deliver substantial improvement in the profitability of this division driven by that forecast sales growth. And the factories are now running clearly at a much more highly utilized level.

21:24 As Dave mentioned, from a financial point of view, an accounting point of view, it was a one off non cash impairment against the brand, and that really was a result of the fact that it's taking this category of our products longer to recover post COVID and a much higher discount rate being applied to future cash flows. So that completes our second section, which was a review of our financials, our performance, and some of the key divisions and markets. I'm now gonna turn to our ambition and forward strategy.

22:06 As a recap, we're really focused as a management team on two particular things. One, how do we grow over the medium and long term of top line sales? Secondly, how do we radically improve, and divert deliver consistent operating margin growth? So taking the first of those, the top line growth opportunity. And over the next five years, what are we focused on? Four key things laid out on slide 18. One is all about geography, leveraging geography, growing new markets, what we call rest of world sales markets. We were successful last year. Indeed, the last two or three years, we've grown, consistently our rest of world sales, and we hope that will continue, and are focused on that. Secondly, online.

22:52 We've made great progress in the last two or three years about deepening our exposure in online channels, not only our own websites, but also online platforms that retailers have, whether that be at johnlewis.com or amazes.com or a retailer website in South Korea. So we've made great progress. Our customer list continue to grow, and we expect our online sales over the next five years to continue to grow. In the short term last year, our own ecommerce sales declined much as the market did as physical retail reawakened. But in terms of long term trends, we've got good growth, and we expect over the next three to five years to see wider online penetration. Third key area for growth is about using new products to either extend our very successful, well known heritage ranges or to develop and grow market share in more contemporary giftware part of the market. And I've got a couple of slides coming up where I'll talk about some examples of what we're doing in the next twelve months.

23:58 And finally, on this page, in terms of growing top line, leveraging those six brands, the ranges that we have really across, a, the geography, the different channels, and working on how we can make the most of things like PORTMEIRION Botanic Gardens, Spoke Christmas Tree

24:28 we were very clear, I think, in in in recent sort of communications that we see our medium term target to get operating margins back to 10% and long term to to around twelve, twelve and a half percent. And I'll talk a little bit more in a moment about how we intend to do that. Let me just go back, though, to the new product engine

24:50 as a key driver of growth, and I've given some examples here in terms of our heritage ranges. How do we leverage these heritage ranges that are really well known across key retail groups across the consumer base? How do we leverage that for further top line growth in the next three to five

25:07 years? So Botanic Garden, first of all, is fifty, fifty plus years old now. It's one of the most famous and long standing ranges in the tableware category. So in terms of working that harder, in the first half of this year, 2024, we're pleased to launch a new range under botanic garden called Meadows. There's a picture of it in the top right and creates and uses lots of different colors in terms of the border and the patterns.

25:36 We're also expecting to take botanic garden into new categories, starting with bedding, and, hopefully, that will launch and start shipping to customers in the third quarter. So that's Botanic Garden. So Christmas Tree is the next biggest heritage range we have. Originally launched way back in 1938, very well known in The US and is often seen as being the leading, what they call, holiday tableware range. That's kind of the period from Thanksgiving through Christmas in The US market. Again, I'm pleased to say that we've now had three successive years of growth, the Spade Christmas tree. We've got further extensions to that range coming for The US market in 2024 as well as us focusing on how do we establish Spade Christmas tree more successfully outside of The US, in The UK, in South Korea, and in Europe. And that will be aided by new UK made special edition, that will launch in the coming months.

26:41 Thirdly, Spode Blue Italian. Again, over a couple of hundred years of of heritage here, we're launching a new contemporary range called There's a picture on the right hand side that can either be mixed and matched with the original traditional range or can be bought as a stand alone.

26:59 So Botanic Garden, Spode Christmas Tree, Spode Blue Italian, three key heritage ranges that we're looking to push, and grow around the world. And further forward, in terms of 2025 and '26, we'll continue to look at and explore other category, excuse me, opportunities for these heritage ranges. Similarly, moving on to how do we take market share, more market share in the contemporary tableware and giftware markets. Again, three examples of things that are happening right now. Firstly,

27:47 over the second quarter and third quarter this year, it will roll out to other customers, and we'll also, start going into the Korean market. So we're excited about that modern, on trend, minerals stoneware range. In the middle on this page, the Spok Camp collaboration, this is the range we started last year. It's gone into the hotels and the restaurants, but it's also a consumer range on sale, and we're gonna further widen the appeal, the product range, and and hopefully the listings for that particular range. And then finally, on this slide, under our home frames business, Wax Lyrica, as I said, we've created a new real price fighter range that can attack the very high footfall that is in gross the grocery channel for home frames. We were successful in getting listings in our store in the second half of last year. The product sold through well.

28:45 We now have good forecast from that customer and interest and forecast from other retailers like Tesco and, I think, Boots for further rollout this year. We're adding fragrances, new fragrances to the range, again, to keep it exciting and also to focus on Halloween and Christmas kind of style and and fragrances. So three examples of things we're doing within within the contemporary part of our market. Okay. So sales growth is something we're focused on. But, actually, you know, the most important thing we see over the next couple of years, we're focused on as management team, is how do we grow and get our operating models back to kinda historic levels and indeed even beyond. And so we've set up very clearly a target of 10% in the medium term, and we've laid out on this slide, slide twenty twenty on slide 22, three

29:42 key things that are gonna influence our ability to reach that goal in the next one to two years. The first is reducing our operating gearing levels. So reducing our cost base. I've talked about the work we've done in terms of getting to a leaner operating model. We think that's worth about £4,000,000 or 10 percent of our overhead cost. That can contribute up to 4% in terms of improvements in the group's operating margin in the next twelve to twenty four months. Secondly, improving the profitability in our home frames business, Wax Lyrical. That is a business, that struggled as it came out of COVID because a lot of its customers were were adversely impacted. It's recovered nicely in 2023. I've talked about our plans for 2024.

30:29 As we continue to grow that top line, as we continue to leverage the factory capacity that we have in that business, that we think can contribute one to even 2% of group operating margin improvement. And then finally, top line leverage. As consumer markets stabilize, normalize, macro conditions improve, our US sales recover, and we grow other parts of our business, the ability to then leverage our fixed cost, our infrastructure, our sales teams, our warehouses around the world, our factories that have spare capacity. Our ability to leverage that, again, we think is worth up to 2% of operating margin, incremental growth. And so if you wrap that together, and there's a chart at the bottom of this slide, you can see our kind of, road map in terms of ambition for operating margin for the next three years. It's gonna go 7%, 8%, 10%.

31:29 Okay. So that covers our forward ambition and our strategy both in terms of top line sales growth and then operating margin improvement. I do wanna turn to sustainability energy and carbon. I was excited, you know, as a business when we launched last year, our ambition, our carbon net zero ambition by 2040. We launched internally and externally crafting a better future paper, which is about all things that we can do recognizing our responsibilities in terms of our impact of carbon on the on the environment and sustainability. We have new processes and meetings and committees in place across our global group. We were successful last year in reducing our energy usage by around 8%, and that was impacted by investments into our factories and more energy efficient automation through work we're doing in efficiency of our kilns, and, by looking at every bit of energy across the group. We expect that kind of reduction to be something that we would have the ambition to continue to reduce in the next two or three years. So a lot of work continuing to go on in the business, reducing energy usage, looking at sustainable energy, and also different packaging solutions and logistics solutions that reduce the carbon footprint that we have.

32:55 So putting all of that together, and I know we've moved quite quickly in terms of a summary. This is the final slide we have, and then we'll be very happy to move to the q and a part of the session. So, you know, in summary, 2023, clearly much tougher consumer markets, and particularly in The US, our biggest market, and Asia, we saw tough tough conditions. But in terms of what things we can control, we think we've made some really good progress. We're pretty pleased to see our wax local division improve on sales and profit front. We're pleased to see our rest of world markets continue to grow. Gross margins were up in The US. As Dave said, a much improved generation of free cash flow, inventory down, net debt down. We expect more of that to come in the next twelve months. And we've worked very hard to get to a leaner cost base that will impact our profit generation going forward.

33:51 In terms of our outlook and what we see in the market, again, we remain cautious about the state of of macroeconomic conditions. We expect modest growth, I think, in The US and UK this year with improved levels of gross margin. Sales and profit should continue to grow in wax lyrical and and in our rest of world sales markets. In Asia and particularly South Korea, we think that market conditions are gonna remain challenging and tough. Therefore, we would expect sales to be down particularly in the first half of the year. Further free cash flow, further inventory reduction, further net reduction is is what we are focused on, and as I said, a number of times, lower cost base going forward. So, you know, we're excited by the ambition and the opportunity that we see to improve profitability.

34:46 We're encouraged by our Christmas order books, which is a key part of our trading, key part of our profitability for the fourth quarter, and, we're looking forward to getting on with 2024. So hope that has been useful, and thank you. I think we're gonna give a little bit of time now to do q and a. That's great, Mike. David, thank you very much indeed for your presentation. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the top right corner of your screen. While the company take a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q and A can be accessed via investor dashboard.

35:32 Mike, David, as you can see, we have received a number of questions throughout today's presentation as well as presubmitted questions. And if I may now hand back to you and kindly ask you to read out the questions, give responses where appropriate to do so, and I'll pick up from you at the end. Thank you. Thank you very much, Alex. Right. I'm gonna start with the presubmitted questions. There were a number of questions, quite a lot of questions. So what I will do is I'll try and deal with rather than reading out every question word by word, I'll try and deal with the questions in groups, similar groups. And the first set of questions are really about sales market, sales growth, and market share. Questions centered around, can we give detail on the challenges in The US and South Korea? How long is it gonna take to resolve?

36:22 So as I think we've explained through this presentation, consumer sentiment, consumer spending power is impacted by high inflation, high interest rates, and that was compounded by retailers wanting to to kinda destock, reduce their own stock holdings. What is the time frame for that to improve? I I think that, you know, what we hear from our retail customers is that is is they are cautious again for this year. Markets are still tough. We will continue to focus on we can control. You know, talked about some of the new product, talked about some things we can do to mitigate, but we're cautious about the the the markets going forward. Premium department stores. There was a question about premium department stores in South Korea.

37:09 What happened in 2023? Well, you know, Korea, like The UK and US, have to deal with with inflation interest rate hikes, but also the devaluation of the the local currency, the won, all, you know, exacerbated the the inflationary pressures on the consumer, and that particularly impacted the premium department store channel segment within South Korea. As I said, you know, we're happy that our brands, our ranges still retain their love that people have for them and their market share, and we're gonna have to wait for kind of conditions in that market to to improve. Similarly, on this track, there was a question around some of our competitors. Was mentioned and whether they had grown in Asia and how they meant to do that. Well, I I can see can see, the question there. Their division of Vita, I think it is, that covers tableware and glassware, was was broadly flat, I think, but was aided by a significant acquisition they made during the year. With George Jensen brand. I think as they state somewhere in their results, if you exclude that, their like for like sales were down overall and and certainly down in Asia.

38:24 There's a question again about PORTMEIRION Botanic Gardens, both Christmas tree, the importance of those to the total group sale. What are we doing to innovate, expand, and broaden the market segments? So I have talked about some of that on the way through. We are focused on maintaining and indeed trying to grow botanic garden, whether that be, new ranges like Meadows or whether it'd be looking at other categories. And similarly, we spoke Christmas tree. We still think this is growing. It's growing for three years. We think it's got a lot of headroom ahead of it, and we're innovating in that range as well. PORTMEIRION brand. Is there any plans to grow the PORTMEIRION brand? That's the next question. PORTMEIRION sales were down. You can see that in the table in 2023, and that was largely impacted by the reversal in the South Korean market.

39:19 But we have well developed plans for PORTMEIRION, and that includes what we're doing with heritage rates like Botanic Garden and the contemporary new product like minerals that I've talked about as well. What is the potential of direct to consumer sales in a total sense? It's about 20%, and that covers our own ecommerce and own physical stores. Then a series of questions around gross margins. I'll deal with those next. Question about pressures recent pressures on profit margins generally, global trade environment, and what are we doing to mitigate? How does that impact sourcing, And what is our long term view in terms of sustainability for sourcing? So, fortunately, a lot of the cost pressures, inflationary cost pressures, particularly container freight, shipping container freight, have subsided.

40:22 Container freight rates went up from sort of $3,000. It contains a 20,000. They've come back down to 3 or 4,000. So that's good news, and they seem pretty stable. In terms of boats that are moving through the Red Sea, clearly, there's there's some well publicized two or three week delays as people avoid the Houthi rebels and stuff, but that's not having too too too big an impact on our business right now. Energy prices is the other big thing that was inflationary. Dave, our finance director, had a very good long term hedging strategy in place that protected us from a lot of the kind of peak inflation that came through in energy. He's just increased or put in further hedges for the next twelve months through to, I think, March 25 to To to the end of March twenty five, and then we're we're currently looking at extending extending the energy policy. But prices in terms of energy are coming down in the in the sort of more medium term.

41:18 So I I I think some of those some of those energy costs approved transitory as we've gone through gone through that period. Thank you. And then the final part of a question on the on the gross margins were and sourcing with regard to China. How much sourcing do we do in China? It's about about 30% of our sales currently come from China. However, China, in terms of a cost base, is not where the inflation is. As you probably know, there's significant factory excess capacity across a lot of streams of production in China. And so, actually, that's good in terms of inflationary cost pressures because it's very hard for them to put price rises through when they've got excess capacity. We are aware of the green energy, the sustainability thing that comes from from shipping product from China into The US, for example. When we look at new products, for example, we're very aware of where we make them. The new minerals range that I talked about earlier is made in Portugal, so closer to market, and we'll continue to evaluate that.

42:20 The next set of questions was around Wax Lyrical and the accounting impairment, so let me deal with those. The thrust of some of those were around if that division has started growing again and improving, why why is there an accounting impairment on the brand? And that really is about the fact that the discount rate that we were required to use, I think, 17 and a half percent that a couple of years ago was 5% means that you discount forward cash flows back more aggressively, and therefore, it's that that was what led to the impairment. We do think that wax lyrical will continue to improve, but it's prudent and cautious to put the the impairment through in 2023.

43:11 Some questions around balance sheet and net debt. What is the interest rate on the borrowing, and when do we expect to cut that? So, Dave, that's certainly one for you. Yeah. The the average interest rate is is about 8%. I think as we talked about through the presentation, our priority is to to reduce our net debt levels and and and therefore our our interest our interest cost. And the aim in the medium term is to to get to a point where where we are not we were not borrowing, certainly not in the sort of the the year end position. So, you know, probably probably two to three years, we're looking in a position where we can we can eliminate net net debt as much as possible and and, therefore, reduce the interest cost. Thank you.

43:56 I mean, next question, where where where do you see inventory in net debt levels? I mean, as I've just said, commit committed to to reducing net debt. We're at 8,000,000. The the aim is certainly to to to reduce that by another sort of twenty twenty to 30% this year. Inventory levels, we are targeting sort of high single digit reduction, not like 10%, but some something in the sort of sort of seven to 8% reduction in in inventory levels this year. Thank you, Dave. Next series of questions were a little bit about our shareholder base current valuations versus historic levels. Is the company cheap? Is there a takeover risk? So let me deal with some of that. I'm not aware of any any any take any any takeover interest. Yes. The value is of the company market value is below historic levels. We're aware of that, and we're focused on improving profitability levels, and, hopefully, that will read through at some point into valuation and share price.

44:59 In terms of long term shareholders or shareholders that have increased their stake recently, in terms of what strategy or rationale they have, I I think or believe and hope that they see PORTMEIRION as a good long term value play, but, clearly, that that decision making is theirs. There's a question around AI. Does it affect the PORTMEIRION business? I don't think AI has significant impact on us right now. Probably the place that it is and and and will impact the most in the next two or three years is around online sales, online review generation, and how that is communicates the the quality of your products and how, you know, customer satisfaction. You know, I think good news is that we have a very happy customer base. Our products are loved. We have almost zero returns on our website, so I think, you know, AI will only help us. Ultimately, AI, I think, will, you know, lead to opportunities to improve efficiency in in kind of offices and transactional processing.

45:59 We'll have to see, when that when that kind of comes through. Next series of questions were around the board of the company, remuneration shareholders sorry, shareholdings and strategy. I think that the director's remuneration levels and policy is a very clear and lengthy section in the annual accounts, which explains all of that, and it includes shareholdings of any of the directors. Yes. Directors are encouraged to hold shares, but there are no fixed rules that say you have to buy or sell shares to a certain level at a certain time. And therefore, you know, it's up to the individuals and their personal financial situations in terms of adding to their shareholders.

46:50 Next questions were around forward outlook and strategy and then returns. So sales and profit were down and disappointing in 2023 was the first question. And then there's a question around what part is played by acquisitions and the cost of financing acquisitions with higher interest costs. So I think, you know, look, there's there's no there's no hiding from the fact that we as a management team were disappointed with the 2023 sales and profit levels. And particularly, you know, we had to operate in much tougher sales markets, much tougher consumer macro macroeconomic conditions, and that's particularly prevalent in The US and in Asia and South Korea, we are very focused on what we can control.

47:47 And I think we've tried to, throughout this presentation, highlight some of the work that we're doing and the progress we're making, you know, whether it be in advancing our our brand awareness in rest of world markets, turning around a a division that was hit hard by COVID, improving net debt inventory, improving free cash flow, etcetera. We'll continue to focus on those things. And, ultimately, sales markets will do what sales markets do, and macro conditions will stabilize. And, hopefully, the value of of what we've done will be more apparent. Yes. Acquisitions such as the Namba acquisition in 2019 were financed by debt. And, yes, the cost of that debt in terms of interest cost is now much higher than perhaps anyone would have anticipated at the time. But as Dave said, we have a clear plan to continue to reduce net debt, and that in turn will reduce the cost of of of borrowing as well.

48:44 Three or four questions on our focus on operating margins, how we're gonna do it, impact of recent investments in things like our US ERP system and warehouse programs. So an update in all of this. You know, we've been very clear, and today's presentation is similarly clear that operating margins are at the heart of everything we do. Getting operating margins up, clear focus for the business, medium term objective 10%. And I think on the slide that we had, two, three slides before the end of the presentation, there was a chart that showed kind of a seven, eight, ten percent three year program of ambition for operating margins.

49:33 Overhead costs reduction of around 10% of 4,000,000. Where does it come from? Tell us more. Look. This is about simplifying where we can, reducing management layers, where we can, globalizing teams where we can, getting lean in all parts of our organization. It impacts headcount, yes, but also general spending, and that that process has been has been has been completed. The investments that we made in in our ERP systems and WMS systems, warehouse systems in The US, those projects are complete. And indeed, the benefits from having a unified ERP, unified WMS, those benefits, those cost benefits are in the 10% cost savings that I've articulated in in the presentation.

50:23 Right. There's some further questions that have come through, which I'll now deal with, as quickly as I can. There's a question around, EBITDA versus PBT. I think we report PBT underlying PBT and EBITDA, and I think that's pretty standard across, similar companies. Question on the pension scheme. Is the pension scheme a 100% interest rate and inflation hedge? That's the do wanna talk about the pension fund and No. No. We we we we we are I think because of the the position that we're we're we're in certainly in the accounts with a small surplus, we are increasing our hedging percentage. We're not a 100%, but certainly we're looking to move to to more matched assets. So we're not we're not gonna move to a 100%, but certainly we are increasing the we're increasing the the the percentage to be able to sort of lock into the lock into the the the matched the the the matched movement given the the the positive signs that we've seen in the scheme in recent years.

51:34 Thank you. Next question is around, can I comment on competitors, particularly in Stoke? How do they compare to you? So pottery industry and Stoke on trend, those people in that are in the retail space, consumer space like us, you know, I think very, very, very consistent feedback when I meet people in those companies about the fact that, yes, markets are tough. And in the wider world, because, you know, look, any 40% of our sales are in The UK. You know, when I meet with executives, sales teams in The US, in South Korea, the message is very, very consistent that markets are very tough. And, you know, what we're focused on is making sure we retain or grow market shares in tough markets because markets will will stabilize and normalize at some point.

52:26 Does it then a question about pension recovery payments in half two, perhaps the first time in many years. Was this one off to conserve cash? So do we make are we making any further this is a heritage this is a legacy pension fund. Yeah. So so that that that wasn't a it wasn't a one off. We're we're in the process of of finalizing the a triennial valuation, which was to April 2023. So certainly in the in the medium term, we don't expect there to be any any ongoing contributions to the scheme because of the the improvement that we've seen. Okay. Thank you. There's a question around websites, our own websites, I think, and the consistency of some of our products in different websites. I guess this refers to a US website, a UK website, and maybe other countries' websites. So although we sell core ranges across many countries, some countries have specific ranges that might work for that consumer, but but aren't work or or don't wanna work or are relevant to another market. And there's also a sizing thing, particularly between The US and The UK. The US standard size for things like a mug, a cup, whatever, tend to be larger than The UK.

53:44 So there is sometimes an inconsistency in the products, but it's normally targeted at the consumer in those markets. There's a question around banking facilities. So, yes, we'll continue to review banking facilities. We have facility in place that that covers us for the next kind of twelve months or so. You've reported restructuring costs consistently. What level of restructuring costs in the current year and what are the redundancy costs? So, look, they're not gonna share redundancy costs, but in terms of exceptional costs, there'll be a, you know, a limited amount of, I think, exceptional costs in 2024 that relate to redundancy. We are aware of accepting costs. We only do it when we need to do it, and I think the payback is normally very, very quick.

54:41 Have we seen the end of US retail destocking and orders starting to recover? Which brands are most impacted. So my my belief from speaking to our US team and when I'm in The US doing trade shows is that destocking, you know, is largely being done, and therefore, we shouldn't have that that headwind in 2024. And as I said in the presentation, you know, our key trading period is the second half. In particular, some of our Christmas programs are very strong, and our advanced order books are nicely up on last year, which which is encouraging. All brands. Instead of which brands were most impacted, you know, everyone I speak to and other brands in The US has similarly felt the pressure of the tough tough consumer conditions.

55:40 Another question about bank financing, 4,000,000 of cost cutting. I've dealt with that. A lot of the highlights improvement in cash flow seems to be working capital changes to what extent you think Yeah. I think I think we've I think I think the work yeah. The key working capital improvement was was inventory. I think as I said earlier, the the we're we're committed to continuing continuing to see a reduction in inventory, so I I don't think there's an unwind. So, you know, we're very focused on on generating further improvements in in working capital and generating free cash flow. Great. Question about the geographical source of our products. So around 40% of our products are made in our own factories in The UK. The other 60% is sourced probably 30% of the group sales come from Asia, and then we have some in Europe.

56:39 So we're pretty pretty diversified, and it's not too much concentration. There's probably 20 different source factories that our product comes from. A question about institutional investors, their interest generally in small cap stocks. That's a tough one for me to answer. I know we have a lot of institutional investors and a lot of retail investors. We value them both, and that's why we do things like the investor media company today. UK website, different between PORTMEI and SPOAD. So, yeah, we we have a particular customer for SPOAD both in The US and UK. We have separate websites.

57:25 We're very interested in building customer loyalty and customer lists separately for Spode. Spode has a real following for some of the heritage ranges and I think has grown three or four years on the runs, which I think gives some indication of the focus we put on it and where we think we can go go with it too. How do we attract younger consumers? Well, I think two things spring to mind. Firstly, online advertising.

58:11 Influencers are very popular, obviously, with the young demographic in terms of content they post on YouTube. And so we work and increasingly will work with more influencers that do fun material and content and get it out to kind of, different demographics. Okay. So that's, all the questions that I can see. Look. Just generally, I think we're we're very very glad to get all the questions, but there are around 50 questions. So I think we've tried to deal with all the questions that we can, and I hope that has been that's been useful. That's great, Mike. David, you have addressed all those questions, so thank you very much. But before redirecting investors to provide you with their feedback, which one is particularly important to the company, Mike, could I please ask you for a few closing comments?

59:01 Of course. Thank you. Well, look. Firstly, everybody, thank you for joining us. We're very pleased to have this opportunity on IMC to do this. It's a great platform. I hope the content has been useful. I hope you understand more about the business, not only last year, but where we're going than when we started. But we do welcome your feedback, and then we can improve and and build that into to next time. And with that, we look forward to seeing as many of you as we can next time we do this. Thank you very much. Thank you. Perfect. Mike, David, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide you feedback in order that the board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company.

59:51 On behalf of the management team of PORTMEIRION GROUP PLC, we would like to thank you for attending today's presentation, and good afternoon to you all.