Dr. Martens plc

Good morning, everyone, and thank you for joining our first half results call for FY24, both here and also on the webcast and on the call. I'm joined today by John, our chief financial officer, and also from Dr. Martens by Paul Mason, our chairman, Emily Reichwald, our company secretary, and also Bethany Barnes, our head of investor relations. You will also have seen recently that we continue to invest in the senior leadership team here at Dr. Martin's. Giles Wilson will be joining us as CFO in the new year. And E.J. Wakode, who has spent three years on the board at Dr. Martin's, will be joining us as our first ever chief brand officer. I'm really excited about these new appointments and what these two individuals are going to bring to Dr. Martin's in the future. Our agenda for today, I'm going to walk us through some key messages, then John is going to give us a short financial review, and then I'll come back and walk us through the business review from the first half of this year. Overall, our first half performance was broadly in line with market expectations on revenue and slightly better on profit. In the first half, we focused on controlling the controllables and making progress against our strategy. I'll talk to this later in the business review, but some headlines. We delivered significant supply chain savings. We opened 25 new stores. We launched Omnichannel in the UK. We transformed our North American supply chain. We started major projects like our supply and demand planning system and the customer data platform. And most excitingly for me personally, we launched major product innovation with 14xx. In half one, we saw good performance in EMEA and Asia in line with our expectations. We are pleased with the progress we are making in these two regions. In the USA, the consumer environment has become more challenging for us and also for our competitors. We fixed all of the supply chain issues in LA by April. The boots market is significantly down in the United States year on year. We are clear that we have to reignite boots in the USA market, and we are taking significant action to meet the consumer headwinds there. The USA is our number one priority, And I'm going to talk to the clear actions we are taking in that market in more detail later. In the first half, we've continued to deliver on our DOC strategy. I'm going to go through this in a business review by the headlines. On D, direct to consumer, our DTC business was up 11% in constant currency with mix up 7 points to 50% in the first half. O, we drove operational excellence in both the savings and major transformation projects that we delivered in the supply chain. On C, consumer connection. We launched our Made Strong campaign, our new brand platform. This is all about building awareness and driving consumer purchase globally. And on S, we continued to elevate our wholesale account base. Turning to current trading beyond the half. To date, trading in the second half has been mixed. However, in both EMEA and APAC, we have seen improved trading in recent weeks. We expect trading for the remainder of the year in these two regions to be broadly in line with our previous expectations. In the USA, the consumer environment has become more challenging in recent months. Although we've seen some encouraging signs in very recent trading in the U.S., including over the Black Friday weekend, we expect that it will take longer to see a material improvement in USA performance. The most challenging part within our USA business is wholesale, with caution amongst our key customers, resulting in a weaker order book than we've seen in prior years. Wholesale customers have low in-market inventory right now of our product, and therefore we can expect them to reorder. However, the timing and level of these reorders is somewhat unpredictable. There's still a large part of the financial year ahead of us, including our peak. However, given the consumer backdrop in the USA, we expect that full-year revenue will decline by high single-digit percentage year-on-year on a constant currency basis. Assuming this revenue outturn, we expect FY24 EBITDA and PBT to be moderately below the bottom end of consensus range. I'm now going to hand over to John, who's going to walk us through the financial review.

Wrong way. Thank you, Kenny, and good morning, everybody. In the half year to the 30th of September, we had revenue of £396 million, EBITDA of £78 million, and profit before tax of £26 million. All were lower than prior year half, and mainly due to lower volume, with pairs sold declining by 9% to 5.7 million pairs. The volume decline was all wholesale related. In D2C, we grew volumes by 12%. The wholesale decline was due to four main factors. Three were planned strategic shifts and one was market. And I'll return to these on my next slide. Gross margin expanded by 2.8 percentage points to 64.4%, driven by very strong progress on supply chain savings, and also targeted OPEX efficiencies, funding some of our key investments, with the timing of the Autumn-Winter 23 brand marketing launch shifting from September to October. EBITDA declined by 13% to £78 million, with the EBITDA margin declined better than expected at minus 1.6 percentage points, again due to very strong supply chain savings. We grew revenue in our own DTC channels by 11% constant currency, 9% actual currency to £196 million, to now represent half of our revenue mix. E-commerce grew by 5% constant currency and was led by good growth in EMEA, which grew 19%, and Asia-Pacific, which grew by 18%. These strong performances were offset by America, which declined by 10% constant currency. All regions improved conversion in the half with traffic growth in EMEA and Asia-Pacific, but traffic decline in America. Retail grew by 17% content currency. In aggregate, growth was led by new maturing stores across all geographies. We saw continued footfall recovery in EMEA and Asia-Pacific, but a footfall decline in America, resulting in like-for-like growth in EMEA and APAC, but a decline in America. As I mentioned, the wholesale decline was due to four main factors, three planned strategic shifts and one market. Firstly, we planned to reduce volume, both range and depth, into EMEA e-tail accounts to accelerate migration of demand to our own channels. Secondly, we planned to not renew a distributor contract in China to enable us to begin to build solid foundations for a D2C business beginning in Shanghai. Thirdly, we plan to reduce shipments into two large U.S. wholesale customers to right-size their in-market inventory. However, in America, we are also negatively impacted by deep industry-wide destocking across all of our wholesale customer base. As a result of these factors, taken together with a conscious decision to not push against these stocking trends in America, we have a healthy inventory status across our wholesale customers. In America, in-market inventory is down 20% compared to last year, and in EMEA, in-market inventory is down 23% compared to last year. Revenue declined by 3% constant currency, with all of the decline volume-related, which cost 11 percentage points. This was part offset by average price increases of 4% and retail space expansion of 4%. This slide illustrates the principal margin drivers for both gross margin and EBITDA margin. Price next COGS inflation, latter of around 6%, generated 0.7% of percentage points of gross margin. At EBITDA margin, price net inflation was flat, such that average price increases funded inflation through the profit and loss account. Retail sprays grew gross margin by 1 percentage point, but diluted EBITDA margin by 0.9 percentage points due to the temporary cost drag from new stores. Very good supply chain savings of £10 million improved both gross margin and EBITDA margin by 1.1 percentage points. Kenny will describe what we've been doing here later in his presentation. The impact to the above was to grow gross margin by 2.8 percentage points, with EBITDA margin broadly level. EBITDA was, however, further negatively impacted from the additional US storage costs we had previously guided, which reduced EBITDA margin by a further 1.7 percentage points. Performance by region was in line with plan in EMEA and Asia Pacific, but results were below expectation in America wholesale. In EMEA, we grew DTC by 20% constant currency. This growth was led by the continued multi-year growth in our conversion markets of Germany, Italy and Spain, increasing DTC constant currency by 29%, 62% and 88% respectively. This was supported by good DTC growth in the UK of 8% and also France of 19%. All growth was volume-led. In Asia Pacific, revenue declined by 3% constant currency, mainly due to the exit from a distributor in China. DTC grew 26% constant currency and was led by Japan, with DTC growth of 41%. EBITDA margin declined due to lower revenue, with margin expansion resulting from an increased mix of Japan, our most profitable market. As expected, DTC trends were weak in America, with DTC declining by 3% constant currency. This was all lower traffic and footfall in both e-com and retail, only part mitigated by better conversion and new and maturing stores. As explained, wholesale declined by 22%. EBITDA was 31% lower, reflecting lower revenue and inventory storage costs. Profit before tax was £26 million, 55% lower than last year. Depreciation and amortisation charges were up due to a combination of annualisation of IFRS 16 rent depreciation from new stores and also increased DC space. In addition, continued investment in IT system capability increased depreciation, including charges from implementation of Northern Management System, nominal channel functionality and EMEA, and the annualization of the global ERP solution going live in Japan from September of last year. Interest charges were higher, mainly due to higher interest rates on bank debt being roughly double last year at 6% and lower average cash. The effective tax rate was 26.4% compared to 22.8% last year, with the increase all due to the increase in UK corporation tax to 25% from April of this year. The interim dividend will be held flat at 1.56p per share, and the share buyback programme is progressing well. The cash outflow in the first half was typical of our normal seasonal cash profile as we generate the majority of our cash in the second half. The working capital outflow was mainly reflected in the normal build of seasonal inventory together with higher trade debtors as we ship large volumes to wholesale customers through August and September. Trade debtor days are higher than last year by five days, reflecting the increased mix of EMA customer debtors, which have an average normal payment term of 60 days compared to around 30 days in America. CapEx of 16 million was mainly spent on new stores and IT projects previously mentioned. In the half, we drew down 25 million pounds of our working capital facility, but this has now been repaid in full. We have too much inventory. As previously said, we have minimal markdown risk below cost. This is because we sell a high proportion of continuity product, with four out of five pairs being black, together with strong product margin structures. We know we need to reduce inventory levels, and we will do this in a managed way. We will not negatively impact the brand. For example, we will not accelerate inventory reduction by marking down our icons. we will not negatively impact availability by aggressively turning off future purchases. Nor will we push inventory into wholesale at a faster rate than pull demand. As a result of slower trading expectations, it will take longer to right-size our inventory than originally expected, and we now anticipate inventory to be right-sized through the course of FY25. Thank you.

Thank you, John. I'm now going to walk us through the business review. I'm going to talk first about the brand and about product. I'm then going to focus on regional performance. I'll take a deeper dive into the United States, outlining the actions that we're taking there. And then I'll give you an update on the investments we are making and also the successes we have had in the supply chain. As John's just said, we have continued to take a medium-term view in managing our brand. In the run-up to Black Friday, we clearly communicated to our customers that our most important iconic products would remain at full price. Over this weekend, we did discount our seasonal colours, but we held price on icons. We want our consumers to trust us. In the USA, our inventories are too high, but as you've just heard from John, 80% of this inventory is in core continuity product. We will not mark down this product, so it will take us longer to turn it back into cash, but this is the right thing to do. We will continue to take brand-first decisions despite the tough trading environment that we are facing in the United States. Our major brand moment and spend occurred after the end of half one in mid-October with the global launch of our Made Strong campaign. Made Strong talks to the rational and emotional truths about the Dr. Martens brand and our wearers. The purpose of this campaign is to raise brand awareness around the world of Dr. Martens and to bring new consumers into the brand. We adopted a key city approach to the campaign with high energy events coupled with out of home marketing and social media. Later, I'll show you how this came alive across all of our regions. Given the very recent launch, it is too early to evaluate campaign performance, but we've seen a big step forward in brand PR coverage. Turning to product, for those of you who joined our product teaching, you heard me talk about the fact that we've increased the pace of product innovation, and we've got a very strong range for autumn-winter 24, the strongest product that I've seen in my five years in Dr. Martin's. I'm not going to go through all of the products in detail, but on the left of this image, what you see is our new 1460 sub boot. This is a product that offers protection in a wet environment versus via an innovative waterproof shell. Then you see the Odrick snow plow bringing the puffer loop to one of our most successful styles. And then the 14XX protection pack. This is the 1461 shoe version of 14XX. I've got no chance of doing the team's work justice in this area, but we've got a brand new outsole with innovative grip technology and clearly a protective upper. This is inspired from the brand's industrial heritage. And then finally, the casual ZebZag boot, a durable, lightweight product with added comfort. for that youngster who previously has worn sneakers. These are just a sneak peek of the exciting newness that we're going to be launching as we move into the next year. We've also told you before about the important role that collaborations play in driving brand heat, and our recent collaborations have performed fantastically. Here you see a creeper that we launched globally with Supreme this month, and the creeper style will then feature in our main range from March next year. Then a collaboration targeted specifically at the L.A. community in the U.S. with local brand Born and Raised. The high profile Born and Raised event following this up in L.A. again to focus on this key USA city. And lastly on collaborations, a recent project with our long-term collaborator, Mark Jacobs, celebrating 10 years of the Jaden platform boot in vegan leather. These collaborations have completely sold out and they continue to drive brand heat. Given we're talking about the first half, I'm moving on to sandals. We have previously communicated that sandals presents a sizable medium-term opportunity for us. Today's sandals represent 9% of our total business globally. In half one, our DTC pairs were up 8%, and we expect to see continued growth in this business into next year. Adam Owen joins us from Birkenstock in December as our new global head of design to further increase our focus on this category. Turning to our overall regional performance, we've delivered strong results in EMEA, which has been led by direct-to-consumer. Our conversion markets continue to be an engine for growth, whilst our most mature market, the UK, traded plus 8% in DTC. Our EMEA wholesale business is incredibly clean, with sales to consumers up and inventories down 20%, as previously mentioned by John. In the USA though, we are facing a more challenging environment. Our shoes and sandals are performing, but our boots are down. Our new leadership team there is starting to embed. Wholesale inventories are down in line with sales. And our Dr. Martin's inventory, as John has said, is too high. In Asia-Pacific, Japan is our best performing market. China is down in H1 as we planned. And we have streamlined the Korea business for future growth by closing some concession stores. And we've extended the contract of our Australian distributor. Providing a bit more context on the United States, we are taking focused action here in a tough macro environment. We fixed all of the operational issues that we said we would in LA by April. We have changed two thirds of the USA leadership team and that new team is now working at pace. We have refocused our marketing spend with a better balance across boots, shoes and sandals from October. In terms of what we're seeing in the market right now in the US, we see a continuing weak consumer environment and a cautious wholesale customer base. The total boots market across all brands in the USA is significantly down year on year. And there was a very warm October which impacted the start of winter product. So what are we doing to meet these challenges? We're continuing to invest in marketing the brand in a disciplined manner. We are delivering new product innovation into the market, but this is going to take time to ignite. And we continue to deliver upgrades to our website to improve the conversion. In the first half of this year, we have set up our distribution center network in the Americas region for future growth. And we have also configured it to deliver speed and cost efficiency. As I said, we fixed the issues in LA by April, and we have subsequently added automation to improve the pick-and-pack efficiency of this distribution center. We expanded our New Jersey DC, and we can now ship both direct-to-consumer and wholesale orders from the East Coast, which will help with speed and efficiency. And in Canada, we've moved to a bigger DC in Toronto, which is a better place to serve our future business. Moving to USA Retail, we opened seven new stores in the USA in half one. Here are two examples from California. We opened Laceritas in July and Victoria Gardens in June. We do not plan to open more stores in the USA in the second half, and that is to enable our teams to focus on peak trading in a difficult environment. However, going forward, our plan is still to build a stores network of 100 to 120 stores in the USA, and we will begin opening stores in this market again in FY25. Moving to marketing. Our new USA Marketing team has focused our spend on key cities. We made the decision to move our major marketing investment from September to October this year, one month later than in FY23. Like the other regions, they launched the Made Strong campaign with an event in New York City in mid-October. This event was attended by 1,200 people, had 300 media attendants, but most importantly reached 22 million people on social. We also delivered outdoor advertising in key cities, and we will continue to invest in USA Marketing. Reigniting Boots is our number one focus in the United States. Therefore, we chose to launch our latest and exciting product innovation, 14XX, in New York in October alongside our MaidStrong event. For those of you that attended our product teaching, Adam gave you a sneak preview of this product. This product looks like a Dr. Martin's boot and delivers breakthrough innovation and technology. Since that launch, we've seen significant press coverage from the 14xx event, and it was well attended by influencers. It has driven press coverage with a reach of more than 55 million people so far. The headlines that we've received, Dr. Martin's launches ultra-modern 14XX range. Dr. Martin's 14XX is a new but old era for the brand. Heritage meets future in Dr. Martin's workwear-inspired 14XX incubator. As we move into the new year, you will see this 14XX collection inspire the main range of Dr. Martin's. Lastly on the USA, I wanted to touch on wholesale, which as I've said, has been difficult. We are taking actions to further elevate our business in the United States, just like we've done in EMEA and in Japan. Here you see an example of our recent glass box execution with Nordstrom at the Grove in LA. We held a VIP event with the goal of driving coverage and raising awareness of Dr. Martin's at Nordstrom. All of our activity in the USA combined in the last four weeks has driven an increase in PR coverage of 45% year on year on the Dr. Martin's brand. We're starting to take actions and we will take more actions as we move into the new year. Moving on to a mayor where we had a stronger performance. In EMEA, we grew DTC by 20% in the first half. All of our core markets grew significantly in the region, with Italy direct-to-consumer, the standout performer, at plus 62%. In the first half, we opened 11 new stores and we have further stores to open in EMEA in the second half of the year. In early November, we opened our second store in London's Oxford Street and it's quickly established itself as a top performer, attracting a different consumer to our other store west of Oxford Circus. Like the USA, we've supported Made Strong across Europe with events, with social media and outdoor marketing, forming the bulk of this campaign across the region. Emea e-commerce was up 19% in the first half. Our new stores continue to support our digital business in the region. We've always said that we don't want to become retailers. We want to be a brand first, digital first business. Here you see the impact in three different geographies on our e-commerce sessions in specific areas where we've opened new stores. The stores raise awareness of the brand. So firstly, you see Munster in Germany, where sessions are up 42% online. Then you see Oberhausen, also in Germany. where since the store opened, sessions are up 33%. And then finally, Milano, where when we opened our first store in Via Torino, sessions went up 33%. And then when we opened the second store, we saw a further 21% increase in sessions. We've seen this phenomenon around the world, and we will continue to use stores in key locations to build awareness, to build range awareness, and importantly, to encourage try-on. Moving to Japan. Japan continues to be our most important market in Asia Pacific. In the first half, our Japan DTC business was up 41% in constant currency. We opened two company-owned stores in the first half, and we also opened a new franchise store with our partners in Sukubu. This brings our total owned store count now in Japan to 42 stores. As in other parts of the world, we also supported the launch of Made Strong in Japan. I had the opportunity to attend our Tokyo Made Strong event in October, which drove real buzz in this important global city and continues to support this market. Back at our full year results in June, I outlined a number of investments that we are making this year to support the future growth of the Dr. Martin's brand. These investments are a combination of both operating expenses and CapEx. All of the numbers are unchanged and in line with the guidance that we gave to you in June. Some investments, like the USA Distribution Centre projects that I outlined, are complete, while others, like our new demand and supply planning systems, are now underway. The benefits from many of these investments will be derived for the business in the following years. Supply chain. As John said earlier, we saw good gross margin improvement in the first half, and this was driven predominantly by supply chain savings. This is a result of hard work which has been done by our supply chain teams over the last five years. And what's the major driver of that? Well, back in 2018, Dr. Martens used to buy a finished product from a supplier and had limited visibility on the cost components of that product. Today, what we do is we procure all of the key product components, things like leather or the granulates that make up the sole, and we work with our suppliers on detailed costing, also allowing them to make sensible profits. This also ensures that we have even greater control on the product quality of the brand. In the first half, we also benefited from improvements that we have made in inbound freight. So back in 2018, we had about 10% of our supply chain costs under our direct control. With the work that we've done, today that number is 70%, and we will grow this to 90% in the medium term, offering further improvements for gross margin. Finally, touching on sustainability, we know how important this is to Dr. Martin's buyers, so I wanted to update on three important consumer-facing projects from the first half. We launched our UK-authorised repair service in October, and it's absolutely fantastic to see people getting their old docks repaired. Following on from the successful Depop trial that we did in the UK, we will be launching our second-hand re-wear program in the United States next year in the first half. And this will be accessed via drmartens.com. Also in spring-summer 24, we'll be launching the first products using the recycled leather from Genex Napa, a business that we invested in last year. We'll give you a broader update on sustainability at our full year results. So in conclusion, We've delivered good performance in EMEA and APAC, but the USA consumer backdrop has deteriorated. We are highly focused on reigniting the boots market there, and we're taking significant actions to make a difference in the USA. We are supporting our new leadership team there to turn around the performance of the USA. Thank you so much for your attention and for listening in. We're now going to take questions. We will take questions in the room first, I believe, and then we'll take questions on the call. I think we probably know most people, but if you could just say your name for the benefit of everyone else and where you're from, and then we will take the questions. Thank you so much.