Card Factory plc

Good morning, everybody. Welcome to our interim results update for FY23. So this is our first hybrid event. And based on what the production team told me this morning, I have to somehow maintain eye contact in the room, but main eye contact on the camera for all of those that are virtual. So welcome to everybody. So I'm Darcy Wilson-Reimer, the CEO. With me today is Chris Lee, our Chief Financial Officer. And Chris will provide the financial performance update for the first half of FY23. And then I'll provide an update on the delivery of our opening our new future growth strategy and also provide you the outlook for the remainder of the year. Let me begin by saying that one year on from the launch of our new strategy, we're pleased with the progress being made across initiatives that are vital for the growth of our business. We're evolving our customer proposition and transitioning into the customer-centric business that we need to be to move Card Factory forward. And the first half has demonstrated that Card Factory remains a company that is loved both by customers and colleagues. And there's an energy from our colleagues to do the right thing. And that is reflected in our performance. So we're pleased to report a strong performance through the half, which reflects continued good momentum within the business, as well as the reversal of lockdown trends with customers choosing to return to the high street. Combined with continued growth in complimentary categories, this improvement was driven by our leadership in cards and the strong performance of everyday products across cards, gifting, party, and balloons. We saw good growth in life moments, such as weddings and christenings, as well as in cards with celebratory captions, which reflects a return to more normalized lifestyles and social events following the pandemic. This also demonstrates the success of our card strategy to meet customer demand through our strong value proposition and our focus on range optimization, leading to notable improvement in our year-in-year market share. At the prelims, we talked about the work being done to mitigate against inflationary pressures. And I'm pleased to report we have effectively managed these across the cost base. And Chris will talk you through this in more detail later in this presentation. We're seeing the pronounced shift in spend back towards stores, and this supports our continued conviction in the value of our store estate within our customer proposition and as an enabler to our omnichannel ambitions. And to that end, we are about to launch our first click and collect trials, which is an important milestone on our omnichannel journey. As a value retailer with an exceptional value for money offer, we have a strong customer proposition that is performing well within the current economic environment. And as we approach the important Christmas season, we are confident in our preparations. Finally, we've continued to strengthen our balance sheet with a significant reduction in net debt versus three years ago. So to discuss our first half financial performance in more detail, let me hand you over to Chris.

Thanks, Darcy. Morning, everyone. To just give the financial highlights for the half year to FY23. So it's been a good performance in the first half, so like for like sales in stores has been plus 6.1%. We've had effective management inflationary pressures as Darcy touched on, particularly around supplier negotiations, business efficiencies and the hedges that were placed in the business. We've successfully delivered the refinancing to September 25 with £150 million facility, and we've significantly reduced the debt by £74 million over the three-year period, despite a nine-month lockdown period. So, to reiterate, expectations in terms of FY23 remain unchanged. Just moving to the financial summary on the revenue. So revenue year on year was up substantially to £198 million. This was against the prior period, which had a period of 10 weeks of lockdown. However, against pre-pandemic levels, we've still grown sales by £2.4 million to £198 million. EBITDA as well was strong, 43.8 million against 23.6 million in the prior year. We opened a net new stores of six, taking the store portfolio to 1,026 and we opened our first London store. In terms of the PBT, £14.3 million against a loss last year of £6.5 million. And last year, bearing in mind there was £8 million of one-off grants from the government which were not received this year. Net debt at £96 million in line with last year. I'll come on to that's in line with expectations because of £32 million of deferral of payments during the pandemic. But overall, bringing the debt down from three years ago from £170 million. Cash from operating activities, £19.7 million. Again, I'll come on to this later around the deferred cash payments, why that's lower year on year. And then like-for-like from a group perspective, including online, was plus 4.1%. And as we've seen, recovery of the sales back to pre-pandemic levels, minus 3.1 on a three-year basis. Turning to light for light sales, I've touched on some of these on the plus 6.1. Card Factory Online did go back 30%. This was anticipated on the basis we haven't had lockdown periods in this financial year. That is still an 86% growth on pre-pandemic levels in HY20. And overall, Card Factory grew 4.1%. Getting personal was more disappointing behind expectations at minus 36%. But I think the key point in terms of the recovery is around the store transactions and ABV. So we've seen store transaction volumes up 9.4% year on year. And we've seen average basket value tail off slightly by 3.1%. But still a positive delta of 6.3%. And ABV continues to have increased on HY20 by 23%. So the key message here is, in effect, what we're seeing is transactions are recovering faster than what the average basket value is declining. Just moving to the graph on the right, the yellow line is, in effect, the light-for-light sales by month, year-on-year. And the blue line, in effect, is the three-year light-for-light position. So as you can see, the yellow line year on year, like for likes, has been significantly positive. The opening position April 22, where that was negative, that was purely because, as you'll remember, stores reopened in April 21, so there was a halo effect in terms of the comparative in the prior year. And then if we look at the three-year basis, you can see that recovery, as we've seen from June onwards, that basically the stores are into positive, like for like, even though... regardless of the fact that we've still got reduced footfall compared to hy20 pre the pandemic just moving to divisional sales overall group sales grew and in terms of the stores were 82 percent up on the prior year as i mentioned there was 10 weeks of lockdown the prior year but the actual light for light sales of the same periods being open, we were plus 6.1. So we're seeing a strong recovery. And you can see on the stores number and in terms of the bar chart, the yellow and the blue line, that we're back to pre-pandemic levels in overall store sales. I've touched on Card Factory Online, the 86% growth, and we're looking at 1.9 million of growth compared to HY20. And particularly what we've seen is growth in card in both personalised and non-personalised cards, as well as in gifting and party in terms of the online channel. In terms of the partnerships, partnerships have performed strongly. Half a million in terms of sales back in HY20, now to four million. And we're also looking at other opportunities in the UK and internationally. Just looking at the margin bridge, costs of goods and effects of the product margin did improve slightly, 0.6 percentage points. This was down mainly to currency. What we have seen though is we've managed to maintain product margins despite the increase in freight costs and raw materials that we've seen. We've looked at different things in terms of supplier base, container fill and other levels of mitigation. Store wages, as a percentage, reduced over the period. There is a one-off benefit in there of £2.5 million, which is a release of a provision on CGRS. And store property costs, as expected, increased. This is because the prior year we benefited from grants from the government in terms of support for non-essential retailers. While direct expenses fell as a percentage of sales, And operating expenses did increase to £22 million. But again, there was in the prior year some CDRS support in that number. And we have also invested in customer-led insight and brand proposition, digital online as part of the strategy. And one of the key areas in terms of delivering the strategy is the investment in the IT infrastructure. Overall then EBITDA 43.8 million against 23.6 last year. So both in EBITDA margin percentage and in pounds we've seen a significant improvement year on year. Just looking at the three-year net debt bridge, this is excluding lease liabilities. So in HY20, we had net debt of £170 million. This fell by HY22 to £96 million. One thing that should be borne in mind is as part of the protection of the balance sheet during the lockdown periods, we agreed deferrals on VAT and rent. So there was 32 million of deferrals in HY22 that have effectively hit the first half of this year. So even though net debt overall between last year and this year looks to be the same, there is an underlying 32 million cash generation in that period. In addition to that, you can see there's some one-off cash costs of £7.5 million in terms of the debt refinancing, which will be non-reoccurring this year. But you can see in terms of the green bar, the EBITDA, effectively all this debt reduction has come through mainly through cost initiatives we've made and also the general performance of the business. So just looking at free cash flow for the first six months. Operating cash flow obviously has improved off the back of improved profitability. There's three other areas probably to call out around net working capital, movement, capex and lease liabilities. So there's a 35 million swing on net working capital. Seven million, as I've mentioned, to do with deferred VATs. There was £8 million in terms of this one-off grant income in the prior year. And one of the other things we've done, there's probably £11 million in terms of additional stock build. This is where we've took the decision to bring Christmas stock in early, obviously with the disruption in ports, so we're well positioned in terms of trading Christmas. In terms of CapEx, a slight increase, £2.1 million. Again, this is planned. Again, we're protecting the balance sheet in the COVID period. This is now the reinvestment effectively in the strategy. And lease liability payments, this is a normalisation. As I mentioned, £25 million of deferrals were in the prior year. So when looking at the free cash flow, although it's saying it's £22 million negative, you've got to bear in mind that there's £32 million of deferrals in there, plus there's this time indifference on £11 million of additional stock build. So refinancing. The refinancing was successfully completed in April 22. This included the removal of any requirement to raise equity. It's a £150 million facility made up of £100 million RCF and then £30 million of term loan and £20 million of CL bills. We're now in a position that I think the balance sheet allows us to invest, capital invest in terms of driving the strategy. There is a restriction on dividends until the CL bills and term loans are repaid. And the board intends to maintain a perhaps more prudent leverage ratio of 0.5 times to 1.5 times on a pre-IFRS 16 basis. And we'll focus on paying dividends at the appropriate time. At the minute, the earliest the board is considering commencement of dividend payments is January 24, based on the latest management view. so to conclude on the outlook to reiterate expectations for the full year remain unchanged We anticipate that cost headwinds will continue in energy, currency, freight, material costs and wage inflation being the biggest ticket items. Particularly around energy, we're hedged until September 24 and these hedges were put in place before the hike we've seen in the wholesale market. We've got good coverage in terms of currency and FX. In terms of freight, that has been a significant headwind. That is reducing. And we're also, as I mentioned, focusing on container fill. And in terms of material costs, we've got multiple sources that we're exploring and have explored in terms of getting the best prices. And in terms of wage inflation, we've looked at particularly in stores around business efficiencies and where we can use technology to take tasks out of store. So in essence, through a combination of target price increases and efficiency savings, we've protected the cost base of the business. The full impact of the price actions will come through in the second half of the year. So at that juncture, I'll now pass back to Darcy to just discuss the strategy update. Thank you.

Thank you very much, Chris, for the comprehensive update. It's been a year since we launched our opening our new future growth strategy, and I'm pleased to provide an update on the delivery and the progress to date. So if I recap, in summary, our strategy will transition Card Factory from being a store-led retailer into a market-leading omnichannel retailer of cards and gifts. Through this strategy, Card Factory is well positioned to become the UK's number one destination for all customers seeking unrivalled quality, value, choice, convenience and experience. And we're working to transform Card Factory into a leading omnichannel brand in our space to help customers celebrate each and every special occasion. And it's our aim to become a global competitor, putting cards and gifts in the hands of more customers. We continue to deliver on the strategic initiatives, specifically around omnichannel, complementary categories and partnerships, with further milestones achieved since the last update at the full year results in May. So let me start with omnichannel and the delivery of our omnichannel strategy is about to begin with the launch of Click and Collect trial in 84 stores. As we test the approach and understand customer response, we'll be able to ensure the successful rollout of a full omnichannel offer in FY24 and beyond. And we continue with our digital investment, completing the re-platforming of CardFactory.co.uk, which has opened up product and ranging capability across our gifting categories. And as the success of our omnichannel strategy relies on the strength and breadth of our store estate, we continue to focus on the analysis of our first five model stores that we built, and we're pleased with the progress of that initial rollout, and we'll continue to evaluate performance and identify learnings as we extend the model store format. And by trialling two small format trial stores in central London, as well as six new stores in the Republic of Ireland, we continue with our plans to diversify our store estate in under-penetrated markets. Looking ahead, as well as the click and collect rollout and the opening of five more model stores by the end of the year, we continue to invest in our core infrastructure with the second phase of our ERP implementation commencing after the Christmas peak. This will enable the ability to view stock in all areas of the business, but also enable the integration with future partners both in the UK and internationally. Moving on to complementary categories, I'd like to highlight some of the significant complementary category growth successes that we've seen in the first half. Whilst we continue to retain our leadership in cards through our successful card strategy, we are on track to grow our share of the complementary category with its addressable 5 billion UK market opportunity. Starting with balloons and parties, we saw clear evidence that our customers have begun celebrating social events and other occasions, resulting in a strong performance in balloons and party with an increase of 29% like-for-like in party sales. Expansion of our confectionery range to meet a broader set of customer needs saw a sales increase of 98% on a like-for-like basis. We've also launched new ranges in licensed gifts and party wear. And category expansion will continue through the next half, particularly with regards to confectionery, home accessories, toys, as well as flowers and alcohol on cardfactory.co.uk. We remain confident in the potential to attract new partners in the UK and internationally. And to succeed, we need to build the right partnerships. And to that end, we've now completed a thorough analysis of the international opportunity. And by working with global data, we've researched and sized international markets for potential opportunity. And in doing so, we've identified India and the Middle East as additional targets compared to what we previously announced. The team is now developing a pipeline of partners and building out internal capabilities to support delivery in newly identified markets. We've continued to make progress through our ESG strategy on developing and delivering positive change across the business. We'll remain on track with our efforts to reduce waste and to improve sustainability of our product ranges. With 90% of products being free of single-use plastics by the end of FY24, and all new cards and gifts produced for Card Factory are now glitter-free. And by the end of FY24, we expect to have sold through any existing stock containing glitter. Our focus on developing a diverse, inclusive and socially responsible culture in Card Factory continues to be a priority and is supported through our progressive DE&I strategy. And with the support and extensive consultation of all our colleagues, we continue to have a positive impact across communities in the UK and the Republic of Ireland alongside the Card Factory Foundation. Notable progress since the last update in May includes entering into a new partnership with the Woodland Trust to support their work to protect, restore and create native woodland in the UK. Commencing work with a specialist energy consultancy to provide enhanced insight and recommendations to reduce scope one, two and three emissions. And commissioning a review of our ESG structure and strategy to support the creation of a future roadmap. And we received best place to work recognition in the Q2 results and we're a top 10 best place to work employer. And I'm delighted on behalf of our colleagues to have achieved that. So looking ahead, I'd like to start by summarizing our preparations for the Christmas peak. While we continue to benefit from the agility provided by having our own UK-based production facility, we have put in place a number of actions to mitigate any potential supply chain disruption from Far East orders and across the UK ports by bringing forward ordering and delivery of product. Further enhancements have been made to the store stock replenishment, which will increase availability of our products to our customers. And we will also benefit from having cleared through legacy stock created by the pandemic. Finally, recruitment of the 6,000 seasonal colleagues that we need for the Christmas seasons commenced, and we're confident of our ability to meet our staffing requirements for this seasonal peak. So in summary, we've delivered significant milestones in the first half of FY23 as we progress our strategic growth plans, and we are on track to continue with this momentum. We have continued to develop our digital proposition about launching the first phase of our omnichannel strategy. We'll leverage the strength of our storage state to transform Card Factory into an omnichannel business. Our value for money proposition is resonating with customers across an increasing range of products and price points. and the financial strength of the business continues to build, delivering a highly profitable business with strong cash generation and a significant reduction in net debt. We remain comfortable with the expectations for the full year, considering the combination of good trading momentum in everyday product, alongside the inflationary outlook and market uncertainty around consumer behavior through the Christmas season due to the cost of living impact. And whilst we remain mindful of the challenging economic background or very challenging economic background, we believe our value proposition positions us to navigate this well. We remain confident that our customers will want to continue to celebrate life's moments and that value for money is increasingly important to them. The first half demonstrated our ability to effectively manage inflationary headwinds, which, as you've heard from Chris, has been achieved through a combination of management actions and targeted price increases. For the remainder of FY23, we're well covered from a hedging perspective on both energy and US dollar foreign exchange exposures. And we continue to be excited by the growth opportunity for Card Factory. And we remain focused on evolving our customer proposition and transitioning into a customer-centric business that we need to be to move Card Factory forward. So thank you for your time today, whether it's here in the room or online. Chris and I will now be delighted to take your questions. So we're gonna start, we'll start by taking two or three questions in the room and then we'll move to online and basically we'll alternate. If you're in the room, we're going to pass you a mic. The mic's important. Even though this is a small room, it's important for the people that are online to be able to hear.