HOTC.L Regulatory News (HOTC)

2 March 2022

Hotel Chocolat Group plc

("Hotel Chocolat", the "Company" or the "Group")

Interim Results

Hotel Chocolat Group plc, a direct-to-consumer premium chocolate brand, today announces its interim results for the 26 weeks ended 26 December 2021. All numbers are shown post-IFRS16 unless otherwise stated.

Financial highlights:

1 Underlying EBITDA in H1 FY22 excludes £1.5m of share-based payment charges (H1 FY21: £0.2m).

Operational highlights:

Angus Thirlwell, Co-founder and Chief Executive Officer of Hotel Chocolat, said:

"I am delighted that we have achieved a great set of results both in terms of sales and profits, indicating the global strength of the Hotel Chocolat brand and our direct-to-consumer business model. These results enable continued new job creation based in our British manufacturing operations, as well as roles in technology and multi-channel retailing.

"In the UK, we continued to entice many new customers to Hotel Chocolat, growing our active customer database by 38% to 2.3m. Our unparalleled pipeline of new product launches means I am confident we will be able to excite and retain their custom for many years ahead. In the US, our digital model drove an increase of 119% in our active customer database, with our Velvetiser in-home drinks system proving a great hit, and in Japan our customer database grew strongly, with the JV business now truly multi-channel, across online, digital partners, and 31 stores.

"A key personal highlight in the period took place in Ghana, where we launched our pioneering Gentle Farming programme, meeting with farming families, local community groups, and the government. Our programme funds an achievable decent living income, hand-in-hand with replanting indigenous trees to shade the cacao and regenerate biodiversity.

"The last two years have been a period of very significant change both globally and within the business as we have evolved from a UK store-led brand to a globally ambitious digital-led brand with a broad-range of luxury cacao products. The team has successfully managed to adapt to the continuously changing landscape and we have remained focused on our opportunities, delivering a sustained acceleration in growth over the last 18 months.

"Since the end of the financial reporting period, trading has continued to be in line with the Board's expectations. The multi-channel performance of the UK remains encouraging, and the new markets continue to show promising potential for growth and profitability.

"A focus on bringing happiness through chocolate in every aspect of our business model will further strengthen and nurture the appeal of our brand, helping us achieve our goal of becoming the leading global direct-to-consumer premium chocolate brand."

For further information:

Notes to Editors:

Hotel Chocolat is a direct-to-consumer premium chocolate brand, involved in every stage of chocolate from growing to making and distributing. The business was founded in 1993 by Angus Thirlwell and Peter Harris and has traded under the Hotel Chocolat brand since 2003. The Group sells its products online and through a network of locations in the UK and USA, and in Japan via a joint-venture. The Group has an organic cacao farm and hotel in Saint Lucia, offering complete cacao immersion through tree-to-bar experiences in a UNESCO World Heritage Site. The Group was admitted to trading on AIM in 2016.  

 Chief Executive's statement (inclusive of financial review)

RESULTS

CHIEF EXECUTIVE'S STATEMENT

I am pleased to report strong progress for Hotel Chocolat during the 26 weeks to 26 December 2021. Revenue for the period increased by 40% year-on-year and profit before tax increased by 56%.

Our strong brand and direct-to-consumer multi-channel model accelerated further in the UK, whilst the US and Japan both continued to deliver promising growth.

Brand

Our brand purpose is to make people happy through chocolate. This means bringing happiness to all the groups we connect with, including customers, team-members, growers, suppliers, and local communities. This remains our 'North Star' and by continuing to follow it we will achieve our business goal of becoming the leading global direct-to-consumer premium chocolate brand. Our commitment is to progressively improve year-on-year, every year, on delivering this plan.

In the period we made some good steps towards this through our three brand pillars:

1/ Originality - nurturing creativity to bring real innovation 

Our stunning new Christmas and Holiday box designs with hand-tooled snowflake embossing demonstrated our in-house design skills driving a lift in sales of gifts. The further evolution of the Velvetiser in-home drinks concept with rolling momentum on recipes also evidenced our innovation capabilities.

2/ Authenticity - being the real deal in people and products

With consumers increasingly looking for brands that are true, we saw growing loyalty, repaying our investments and belief in the importance of authenticity. This is driven by products that hero cacao not sugar, and a team who know their stuff, with expertise all the way from designing and growing, to making, retailing, and delivering.

3/ Ethics - using what we have to bring happiness to all stakeholders - our Hotel Chocolat family, our customers, our growers, our partners, our communities and our planet

The Gentle Farming initiative evidenced our progress. I have been in countless cacao industry conferences over the last 20 years with endless promises and lots of talking, but little real progress on alleviating the subsistence farming that causes a poverty trap leading to the desperation where child slavery and other unethical behaviours can develop.

We have been learning and experimenting with cacao growing on our own farm and this is where our concept of Gentle Farming originated: pay more to the farmer in return for increasing bio-diversity for the benefit of all. The cacao tree thrives growing in the shade of other trees, rather than as a mono-culture. Working with The Eden Project, we honed the idea in order to be ready to launch to our c2,500 farming families in the Eastern Region of Ghana last November. This is a long-term commitment by Hotel Chocolat, and we will be reporting on progress transparently.

We also opened Project Chocolat, our new visitor attraction on our organic cacao farm in Saint Lucia which gives visitors first-hand experience of our roots to wrapper approach.

Customers 

Most scaled chocolate brands focus on FMCG, selling mainly through grocery, which is the largest distribution channel globally for chocolate. Our huge advantage, as we see it, is that we know who our customers are and can develop a close relationship, without intermediaries. We can see the behaviours of our 'wide church' of customers across multiple different cohorts and adapt our conversations with them to be best matched. We can predict which cohorts would most like to hear about our latest product concepts and invest in earning enduring loyalty.

All markets and channels are focused on developing the active customer database. We view stores as a prolific way of recruiting and retaining multi-channel customers, as well as trading profitably through the till too. We view wholesale partnerships as an opportunity to advertise our brand to discrete customer pools using tightly curated range collections.

Our team

The Hotel Chocolat Family, has been put to the test over the last two years, as have all families and businesses. We drew on our culture and worked as a team to 'keep the chocolat flowing', behaving with 'equality, respect and grace' and following our 'be brave, be kind' principle. We know that we could not have achieved these results without our team cultural strength.

Markets

All markets achieved growth. Whilst we have yet to reach overall profitability in the US & Japan, we have a clear line of sight as to how we can achieve this, with clear strategies and KPIs measuring our progress. This of course will unlock huge growth potential in two of the largest chocolate gifting and home-barista markets in in the world.

1) Wholesale sales made by the Group to the JV are reported in the Group total within UK & rest of world

UK

It was a mark of our brand appeal and direct marketing skills that we attracted over 0.6m new active customers during the year, increasing our active database to 2.3m. A combination of compelling product ranges and data-driven marketing were the key to this growth. Active relationship management programmes give us proven opportunities to attract more attention from our customers through an annual calendar across categories, across channels and across seasons and occasions.

We remain fully committed to physical locations as a powerful way to recruit profitable new multi-channel customers. We opened two new stores and relocated four to significantly larger and better sites on improved lease terms. We have already negotiated ongoing improved lease terms for 35% of our leases, with a further 43% of locations having a lease event in the next 24 months. As planned, we will use these opportunities to renegotiate or upgrade to better sites on better deals.

USA

Since late 2020, our strategy has been digital focused, driving overall +150%2 growth in sales with active customers up by 119%. Given three of the four physical locations were in commuter locations, we decided to close the stores and focus on optimising range and supply for the online business model. The brand is proving to have strong customer appeal, so

focusing on supply chain efficiency and honing the range to ensure both customer relevance and profitability enhances the scaling potential of the model. 

2) At constant exchange rates, sales at consumer prices excluding fulfilment revenue-share deductions

Japan

Our joint venture had fast growth, with consumer sales up by 131%. We opened nine new stores in the period taking the total to 31, whilst also growing online and digital partner channels. Whilst the government never mandated lockdowns, ongoing public health guidance continues to result in lower retail footfall during the pandemic. Despite this the active database grew by 1,000% proving the popularity of our VIP Me loyalty programme.

Saint Lucia

Visitor numbers have begun to recover significantly.  We invested to extend the Rabot Hotel and opened our Project Chocolat visitor attraction on our organic farm, where we originated Gentle Farming. Both are well positioned to capitalise on the recovery in visitor numbers to the island, who come predominantly from USA and UK.

Operations

We continued to invest in capacity, and were able to mitigate inflationary pressures, with a combination of improved efficiency and scale economies. Having installed a new hot chocolate production line to support Velevetiser, a new chocolate production line is on track for installation this autumn increasing chocolate-making capacity by over 60%.

FINANCIAL REVIEW

Revenue

Group revenue increased by 40% year-on-year to £142.9m, driven by multi-channel growth in the UK, USA & Japan.

Profit before tax

Profit before tax increased by 56% year-on-year to £24.1m.

Gross margin

Gross margin declined by 120 basis points from 61.0% to 59.8%. Whilst all channels grew sales, online and wholesale both grew faster than retail which has higher gross margins. Higher input costs reduced gross margin by 80 basis points, and FX by 10 basis points. A higher proportion of sales were generated from third party-produced products which have lower gross margins but also incur lower overheads. The impact of category mix was partly offset by price adjustments which were timed to coincide with the improvements from the refreshed gifting product range.

Operating expenses

Operating expenses grew more slowly than sales, diluting by 40 basis points. Within this a planned investment in increased customer acquisition marketing increased operating expense by 330 basis points, but this was more than offset by a 370 basis points dilution in other operating expenses as a result of efficiencies and scale economies.

Underlying EBITDA

Underlying EBITDA is a non-GAAP measure and increased 35% year-on-year to £33.8m.

Share based payments

Share-based payment expense of £1.5m (H1 FY21: £0.2m) related to the share-based Long-Term Incentive Plan and an all-employee Save As You Earn plan.

Foreign currency

The business manufactures the majority of its products in the UK; however, it does purchase some premium ingredients and materials in foreign currencies, predominantly Euros and Dollars. The Group hedges its forecast foreign currency purchases up to 18 months ahead. The movement in exchange rates have adversely impacted margin by 10 basis points.  The Group's export focus remains on the USA & Japan.

Finance income and expense

Finance expense of £0.8m reflects £0.5m of interest charged in relation to Right of use Assets, £0.2m of interest for the RCF that the Group has in place, and £0.1m of realised derivative interest. Finance income of £0.2m is driven primarily by interest from a related party.

Earnings per share

Basic earnings per share in the period increased 47% to 14.2p (H1 FY21: 9.7p). The effective tax rate for the year was 19.9%, compared to the prior year effective tax rate of 21.5%.

Dividend

In order to fund an acceleration in growth, the Group raised a total of £60m equity via placings in 2020 and 2021 and paused its progressive dividend policy. The Board are mindful of the potential growth opportunities in the USA and Japan, and the Board will continue to review potential reinstatement of any dividend relative to the potential opportunities for re-investment in service of profitability and growth.

Cash flow and closing cash position

The Group had access to a £30m Revolving credit facility (RCF) with Lloyds Bank, and a further £20m RCF was added during the period with Bank of Ireland. Net cash inflow from operating activities was £29m (H1 FY21: £33m), operating profits grew strongly, working capital increased £3.6m in the period in comparison to an £8m reduction in H1 FY21, primarily as a result of building inventory for continued sales growth, and for restocking stores that were closed in Q3 FY21 due to UK lockdowns. Net cash (being cash minus borrowings) at the end of the period was £53.8m (H1 FY21: £45.6m).

The strong cash position is a result of the strong sales performance and cost management. Prior to the date of publication, as at 27th February 2022 the Group has net cash of £27m.

OUTLOOK

Since the end of the financial reporting period, trading has continued to be in line with the Board's expectations. The multi-channel performance of the UK remains encouraging, and the new markets continue to show promising potential for growth and profitability.

A focus on bringing happiness through chocolate in every aspect of our business model will further strengthen and nurture our brand appeal, helping us achieve our business goal of becoming the leading global direct-to-consumer premium chocolate brand.

Angus Thirlwell

Co-founder and Chief Executive Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 26 December 2021

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 26 December 2021

CONSOLIDATED STATEMENT OF CASH FLOW 

For the period ended 26 December 2021

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

For the period ended 26 December 2021

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)

For the period ended 26 December 2021

NOTES TO THE INTERIM FINANCIAL INFORMATION

1. Basis of preparation

The consolidated interim financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs), as adopted by UK international accounting standards.

The accounts have been prepared in accordance with accounting policies that are consistent with the Group's Annual Report and Accounts for the period ended 27 June 2021.

The Group's Annual Report and Accounts for the period ended 26 June 2022 are expected to be prepared under UK IFRS.

The comparative financial information for the period ended 27 June 2021 in this interim report does not constitute statutory accounts for that period under 435 of the Companies Act 2006.

Statutory accounts for the period ended 27 June 2021 have been delivered to the Registrar of Companies.

The auditors' report on the accounts for 27 June 2021 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

2. Significant accounting policies

At the year ended 27 June 2021 the Directors undertook a rigorous review of financial forecasts and available resources in order to consider the Group's ability to trade as a going concern.

The assessment included a review of a Base case and Downside scenario. The base case assumed ongoing growth in FY22 as the Group evolves from a UK-store-led brand to a global digital-led brand. The base case included the necessary overhead and capital spend required to deliver FY22 growth.

The Board also considered the levers available to mitigate the impact on profit and cashflow if performance and the pandemic were to follow the downside scenario. These included:

Since 27 June 2021 the Group has consistently performed ahead of the Base case. To assess the Group's position as at 26 December 2021 the Directors have reviewed an updated Base case reflecting current performance.

On this basis the Board has a reasonable expectation that the Group will have adequate resources to continue in operational existence for a period of at least 12 months from the date of approval of the financial statements and will not breach any covenants over the remaining term of the current facilities. For these reasons they continue to adopt the going concern basis of accounting in preparing the consolidated financial information and have concluded that there is no material uncertainty in relation to going concern.

The interim financial results have been prepared by applying the accounting policies that were applied in the preparation of the 2021 Annual Report and Accounts which are published on the Hotel Chocolat website, www.hotelchocolat.com. There are no new or amended standards effective in the period which has had a material impact on the interim consolidated financial information.

3. Profit from operations

Profit from operations is arrived at after charging/(crediting):

4. Finance income and expenses

5. Earnings per share

Profit for the period used in the calculation of the basic and diluted earnings per share:

The weighted average number of shares for the purposes of diluted earnings per share reconciles to the weighted average number of shares used in the calculation of basic earnings per share as follows:

As at 26 December 2021, the total number of potentially dilutive shares issued under the Hotel Chocolat Group plc Long-Term Incentive Plan was 3,254,989 (27 December 2020: 501,073). Due to the nature of the options granted under this scheme, they are considered contingently issuable shares and therefore have no dilutive effect.  

6. Property, plant and equipment

As at 26 December 2021, the net book value of freehold property includes land of £4,564k (27 December 2020: £3,893k), which is not depreciated.

7. Trade and other receivables

*Restated 26 weeks ended 27 December 2021. During the period ended 27 June 2021, clarification of guidance issued by the FRC resulted in a change in accounting policy in relation to 'cash in transit'. Previously this had been classified as cash and cash equivalents but going forward will be classified as other debtors. The consolidated financial statements include a prior year restatement to correct the classification of cash in transit of £2,069k.

8. Trade and other payables