Samarkand Group PLC - Annual Results FY24 and Update on Future Strategy

12 August 2024

Samarkand Group plc

("Samarkand", the "Company" or together with its subsidiaries the "Group")

Full year results FY24, Update on Future Strategy, Share Option Grant

Samarkand Group plc, (AQSE:SMK), the consumer brand owner and cross border eCommerce distribution services group announces full year results for the year ended 31 March 2024 ("FY24").

FY24 Financial highlights

·     Revenue decreased by 3% to £16.9m (2023: £17.5m).

§ Brand Ownership revenues increased 16% to £7.7m (2023: £6.7m).

§ Brand Acceleration revenue decreased 18% to £8.2m (2023: £9.9m).

§ Distribution revenues increased 13% to £0.74m (2023: £0.66m).

·     Gross margin increased from 55% to 60%.

·     Adjusted EBITDA* loss decreased by 60% to £0.9m (2023: £2.2m), a second year in a row of over 50% reduction in adjusted EBITDA losses.

·     Net loss after taxation increased by 4.3% to £4.8m (2023: £4.6m) as a result of a non-cash impairment charge of £2.1m (2023: £nil).

·     Q4 adjusted EBITDA loss was £80k demonstrating ongoing improvement in run rate.

·     Cash and cash equivalents at 31 March 2024 was £0.9m (2023: £2.0m).

·     Owned brands, Napiers the Herbalists and Zita West revenues grew 90% and 9% respectively over the prior year on the back of strong sales in the UK and ROW.

·     Sales of third-party brands in China declined c18% year over year. We do not see any short to mid-term improvement in the trading environment in China and will continue to adjust our portfolio and operations accordingly. 

·     The independent auditor's reports on the Annual Report and Accounts for the year ended 31 March 2024 was unqualified but included a material uncertainty in respect of going concern (note 2).

FY24 Strategic and operational highlights

·      Significant reduction in adjusted EBITDA losses compared to prior year as a result of adjustments to the Group's cost base and an improvement in gross profit margins as the Group focuses on its core activities and its goal of moving the Group into profitability.

·      Strong growth in Brand Ownership year over year which has contributed to improving gross margins and reduction in losses as well as reducing the Group's dependency on the Chinese market. Brand Ownership now accounts for c46% of Group revenues

·      Our portfolio of owned consumer brands has maintained strong momentum with revenues increasing 16% compared to last year. Napiers the Herbalists, a natural herbal health and wellness brand and Zita West a highly specialised supplements brand for fertility and reproductive health, grew revenues in their core UK market at 90% and 9% respectively year on year.

·      Brand Ownership growth was generated by product quality and packaging upgrades, new product development, marketing enhancements, development of social commerce channels, successful launch into the China market leveraging our existing capabilities and flexible manufacturing capacity enabling the Group to respond quickly to consumer and channel demand.

·      Napiers the Herbalists run rate revenues are in the range of £3.0m to £4.0m and Zita West run rate revenues are in the range of £2.0m to £3.0m and with significant potential for further growth and development for both propositions.

·      Recognising the changing market dynamics in China in terms of weaker consumer demand, increased competitive intensity, heavy promotional discounting, rising cost of sales and high levels of in market inventory across the industry, the Group adopted a more selective approach to distributing third party brands in China, concentrating its resources on fewer brands where it believed the conditions are right for success in the current operating environment.

·      Investment in Nomad Checkout solution was withdrawn in the year as a result of insufficient market traction from merchants and logistics partners. In the current operating environment, the Group does not see the conditions for sustainable commercialisation of this offering therefore, an impairment charge of £2.1m has been recognised which represents the carrying value of the Nomad platform.

·      Continued selective reduction in operating costs as the Group concentrates more of its resources on the most attractive and profitable activities. Key highlights include warehouse relocation to a more cost-effective fit for purpose site and the reduction in Group administrative expenses, before exceptional costs, by 17% when compared to prior year.

Post year end highlights

Q1 FY 25 Trading

·      Q1 FY25 revenues were 17% below prior year despite healthy growth in our owned brands and distribution in the UK and ROW which grew 40% compared to the same period last year. The decrease in revenues is attributable to challenging trading conditions in China and disruption while we adjust the Group's strategy and operations in the market.

·      Q1 adjusted EBITDA loss is estimated to be 27% lower than the prior year despite the reduction in top line revenues.

·      Owned brands sales in the UK have started strongly with Napiers the Herbalists and Zita West achieving year over year growth of 122% and 20% respectively.

·      China revenues were impacted by shifts in the portfolio of third party brands we distribute, weak overall eCommerce market performance and reduction in historical sales peaks as the market adjusts to weaker consumer sentiment. Our focus on profitability also meant that a number of potentially unprofitable sales activities were rejected in the first quarter.

Owned Brand Portfolio Adjustments - Acquisition and Disposal

·      Acquisition of Optimised Energetics Ltd completed on the 21 May 2024, a natural health and healing brands owner and a manufacturer of premium skincare. For a 12-month period ending 31 March 2024, Optimised Energetics Ltd generated £1.2m of revenue and an EBITDA of £0.3m on an unaudited basis.

·      Disposal of our probiotic brand Probio7 completed on the 13 June 2024 for a total consideration of £1.3m to be satisfied by initial consideration of £1.1m in cash and deferred consideration of £0.2m payable in cash, in equal instalments over a 12-month period.

·      The disposal of Probio 7 enables the Group to increase resources behind our faster growing brands Napiers the Herbalists, our natural herbal apothecary brand and Zita West, our specialist supplement brand for fertility and reproductive health.

·      Unsecured, unconvertible loans made by the Directors on a bridging basis to enable the acquisition of Optimised Energetics Ltd were repaid on 18 June 2024 following the disposal of Probio7.

Strategy Update

·      Our strategy has shifted in the course of the last 18 months as the performance of our owned brands primarily in the UK has continued to deliver strong growth in revenue and generate positive contribution. At the same time, due to evolving China market dynamics and the costs of operating in the market, the returns generated from distributing third party brands have become less favourable.

·      As a result, we increased resources behind our owned brands and adopted a more selective approach to distributing third party brands in China. In the future we intend to work as the China market partner for a smaller portfolio of third party brands.  

·      Our future is as a scale up platform for meaningfully different, high potential, niche brands in the health and healing space, brands targeted at specific consumer segments with long term growth potential, specifically natural herbal health and beauty and fertility and reproductive health

·      Our platform offers brands shared sales, marketing, supply chain and logistics and corporate services. Our growth playbook covers innovation and product development, DTC, eCommerce and premium retail sales, social commerce and internationalisation. Our operations playbook includes warehousing and logistics, manufacturing and sourcing services.

·      As a scale up platform for niche, founder led, health and wellness brands we see opportunity to invest to accelerate growth in our existing brands and scope for future acquisitions to strengthen our portfolio and add to our platform services. 

FY23 Option Grant

As communicated in our FY23 annual report, the Remuneration Committee and the Board approved a bonus payout of 90% to the Executive Directors. The Bonus Scheme was based on the achievement of pre-set Group Financial and Non-Financial Performance Targets for the year ending 31 March 2023.

To align the executives' interests with those of shareholders, and manage cash costs, 100% of the bonus payable is deferred into Company Share Awards in the form of nil cost options. The number of options to be granted will be determined by the price of the last equity transaction by the Company, which was the open offer in September 2022. 50% of the bonus award was to be granted after the approval of the 31 March 2023 accounts and will vest one year from the date of grant, the remaining 50% to be granted a year from the first grant date.

As the Company has been in a close period since the signing of the Accounts last year, due to the expected Acquisition of Optimised Energetics Ltd and the disposal of Probio 7, the first tranche of the award was not granted after last year's signing of the accounts. The Company will therefore grant both tranches of the bonus options shortly after the signing of the 31 March 2024 accounts.

David Hampstead, Chief Executive Officer of Samarkand Group, commented:

"I am pleased with the progress being made in shifting the business towards profitability and in defining the future direction of the Group as a scale up platform for high potential, meaningfully different, health and healing brands, anchored in fast growing consumer segments, with the ability to introduce those brands to the Chinese consumer. The disposal of Probio7, the acquisition of Optimised Energetics Ltd and adjustments we are making to our approach to the China market leave us well positioned for future growth and profitability as a platform for brands.

Once our goal of moving the Group into profit is secure we will focus on increasing investment behind the scaling of our owned brands and to selectively add to the portfolio in the future through acquisition.

Whilst the underlying value of the Company, in terms of its assets, capabilities and potential, is not currently reflected in the share price, we remain focused on improving the underlying performance of the business, reaching profitability and increasing shareholder value.

We are also delighted to separately announce the appointment of Guild Financial Advisory as our new Corporate Adviser."

A copy of the full accounts will be made available on the Company's website www.samarkand.global

For more information, please contact:

Notes to Editors

Samarkand is a consumer brand owner and distributor operating a scale up platform for niche, premium, multichannel, health and healing brands. Core owned brands include Napiers the Herbalists, Scotland's oldest natural herbal apothecary, Zita West, a leading specialist supplement line for fertility and reproductive health and Probio7, a long-established probiotic supplements brand. Platform services include marketing, sales and channel development with a focus on social commerce, China market entry, international expansion and manufacturing.  In addition, the Group works as the exclusive China market partner for a select portfolio of niche luxury skin care brands and connects these brands to the Chinese consumer via cross border eCommerce.

Founded in 2016, Samarkand is headquartered in Tonbridge, UK with offices in Shanghai.

For further information please visit https://www.samarkand.global/  

Chairperson's Statement

I am delighted with the progress being made in Samarkand in shifting the business towards profitability and in defining the future direction of the Group as a scale up platform for niche, differentiated, health and healing brands with the special ability to introduce those brands to the Chinese consumer.

I would like to take this opportunity to thank the entire team for their contribution and commitment, as well as their resilience and adaptability in moving the group forward over the last 12 months, particularly in the face of an increasingly difficult trading environment for international consumer brands in China.

The momentum behind the Group's portfolio of owned brands is encouraging and the future for those brands looks promising on the basis of the categories, segments and trends which they tap, their differentiated positioning and the agility of the teams that are managing these brands.

The acquisition of Optimised Energetics Ltd and disposal of Probio7 are positive strategic adjustments to the portfolio of owned brands which improve the growth profile of the portfolio and lock in manufacturing flexibility as well as providing the group with some additional working capital to enable it to pursue its strategy.

While China no longer defines the entirety of the Group's activities it remains an important aspect of the platform and gives the Group a differentiated capability in offering niche brands the opportunity to reach Chinese consumers.

Board and Governance

Our Board which was established at the time of the IPO is operating well, bringing a wealth of experience to the Group I would like to thank my fellow Directors for their service and commitment in the last year in which their guidance to the business has been invaluable.

Summary and Outlook

Samarkand has consistently demonstrated its ability to adapt to changing market conditions and keep moving forward. The shift to focus on the portfolio of owned brands will accelerate the Group's path to profitability. The Group has proven it is able to acquire niche, premium health and healing brands and improve the top and bottom line in those brands. I look forward to seeing further growth and development of the Group's owned brands including the recently acquired Natures Greatest Secret and BeNatural Essentials.

Tanith Dodge

Chairperson

CEO REVIEW

We have made strong progress towards our goal of becoming profitable despite an increasingly challenging trading environment in the Chinese market where consumer confidence remains low, competitive intensity is accelerating and promotional warfare between brands and channels is now the norm.

By concentrating our resources on profitable activities, scaling back and withdrawing from less attractive activities we have further reduced adjusted EBITDA losses by c60% year over year despite a small decline in headline revenue year over year.

I am especially pleased with the growth and contribution generated from our portfolio of owned brands and am excited about the future potential for these brands. Both Napiers the Herbalists and Zita West are well positioned against key trends, and we are confident in their long-term growth potential. I would like to welcome the Optimised Energetics team to the Group and while we have known them for a long time through our Napiers partnership we look forward to working with them to grow and develop their brand, Natures Greatest Secret and to solidify their position as our platform manufacturing capability.

The disposal of Probio7 and the addition of Optimised Energetics Ltd leave us with a well-positioned portfolio of high growth, high potential, differentiated owned brands and the addition of vertically integrated manufacturing further strengthens the competitiveness of our platform.

We are clear that our future lies in building a portfolio of high growth, high potential niche health and healing brands and leveraging our resources across these brands as a shared platform for profitable growth. We see lots of opportunity to further expand our brands to new consumers and markets and will increase investment in them selectively as and when funds are available to do so.

The ability to introduce brands to the Chinese consumer will remain an important group capability and a differentiating factor in our platform for brands. As a result of changes in the Chinese market place the balance of risks and rewards of distributing third party brands in China has become less favourable. Therefore, we are being far more selective on the number and nature of third party brands we work with and increasingly work with local partners to leverage their sales and marketing reach vs doing everything with our own resources. In line with our overall strategy more of our China resources will be focused on the development of our owned brands in the market and a smaller portfolio of select third party brands.

Once our goal of moving the Group into profit is secure we will work on increasing investment behind the scaling of our owned brands and to selectively add to the portfolio in the future through acquisition in terms of brands and additional platform services.

Whilst the underlying value of the Company, in terms of its assets, capabilities and potential, is not currently reflected in the share price, we remain focused on improving the underlying performance of the business, reaching profitability and increasing shareholder value.

David Hampstead
Chief Executive Officer

FINANCIAL REVIEW

Overview

Group revenues for the year decreased by 3% to £16.9m (2023: £17.5m). Revenue in China decreased as the changes in the market dynamics with weaker consumer demand, increasing competition, rising promotional discounting impacted the Group's ability to generate good quality revenue in this Market, revenues decreased 17% to £9.8m (2023: £11.7m). Revenue growth in the UK and ROW increased significantly due to strong growth in Brand Ownership, with new sales channels, new product development, increasing marketing focus and reach. Revenues in the UK and ROW increased by 24% to £7.2m (2023: £5.8m).

Revenues in Brand Ownership up 16% to £7.7m (2023: £6.7m), Brand Acceleration is down 18% to £8.2m (2023: £10.0m). Distribution revenues increased by 13% to £0.74m (2023: £0.66m).

The Group's gross margin increased to 60% from 55% in FY 2023, driven by increase in revenues from Brand Ownership as a % of total revenue and a change in channel mix.

Operating expenses

Selling and distribution expenses, have increased to 34% (2023: 31%) of revenue, as a result of increasing promotional discounting and competition in China. Although, contribution margin is 2 points ahead of FY 2023 because of the structural changes in the sales mix and the focus on operational efficiency.

Administrative expenses increased to 48% (2023: 44%) of revenue as the Group has taken a non-cash impairment charge in relation to its Nomad Platform. In addition to the impairment charge, the Group incurred a number of significant non-recurring costs which have been shown separately in the financial statements. These items include redundancy and restructuring costs as a result of the Group's adjustment to its cost base in light of the challenges presented by changing market in China. Excluding significant non-recurring costs, administrative expenses have decreased to 32% (2023: 37%) of revenue with selective adjustments made to its cost base. The Group's total head count as at 31 March 2024 was 87 (2023: 104).

Depreciation and amortisation

The total depreciation and amortisation costs were £0.3m and £0.7m respectively (2023: £0.4m and £0.8m).

Adjusted EBITDA

Adjusted EBITDA means the non-GAAP measure which is defined as Earnings Before Interest, Taxes, Depreciation, and Amortisation and exceptional items. It provides a useful measure of the underlying profitability of the business and is used by management to evaluate the operating performance to make financial, strategic and operating decisions and provides the underlying trends on a comparable basis year on year.

Adjusted EBITDA losses decreased to £0.9m (2023: £2.2m), after deducting £2.1m in impairment charges, £0.5m in restructuring costs, £0.2m for share-based payment expenses and £1.0m in depreciation and amortisation expenses. The decrease in losses is a result of the adjustments made to the Group's cost base, improvements made in operating efficiencies and continued strong growth in our owned brands. 

Earnings per share

Basic and diluted loss per share was 8.15 pence per share (2023: restated 8.03 pence per share).

Net debt

At the year end, the Group's net debt position was £1.3m (2023: £0.01m), excluding the IFRS 16 lease liabilities, net debt was £0.6m (2023: net cash £0.6m). The adjustments made to the Group's cost base including the reduction in its head count and the improvements to its operating efficiencies with targeted marketing and structural changes in its sales mix and activities saw the Group's negative operating cash flow fall to £0.6m from £2.4m.

The decision to stop support for our Nomad Checkout product saw a reduction in cash outflow from investing activities by £1.0m to £0.2m (2023: £1.2m). Repayment of borrowings and lease liabilities, the net cash used financing activities was £0.3m (2023: £1.5m).

Financing costs of £0.26m (2023: £0.16m) comprised of interest expenses of £0.1m (2023: £0.1m).