from Cannapreneur Partners
Samarkand Group plc : Interim Results
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Samarkand Group plc (SMK)
15 December 2022
Samarkand Group plc ("Samarkand", the "Company" or together with its subsidiaries the "Group")
Interim Results for the half-year ending 30 September 2022
Samarkand Group plc, the cross-border eCommerce technology, services and consumer brand group, announces its unaudited interim results for the half year ending 30 September 2022 (“H1 2023”).
David Hampstead, Chief Executive Officer of Samarkand Group, commented: “The first half of this financial year has included some of the most turbulent months in China since the outbreak of the pandemic with continued lockdowns across much of the country and restrictions on the flow of goods. As I described in our last full year results, we adapted quickly to the situation and I’m pleased that at the half-year point our revenues are up against prior year by 15%. Our key objective is to return to profitability and in that regard, we have also made strong progress. Adjusted EBITDA losses reduced by 48% from £2.6m in H1 2022 to £1.3m in H1 2023. We continue to drive further cost efficiencies and improvements in operational leverage across the business whilst maintaining good strategic progress across our other objectives and expect to finish the year within guidance.
Our open offer announced in September, received strong support and a further £1.9m of net proceeds was committed from existing shareholders and I thank them for their continued support. The opportunity in front of us remains compelling despite the challenging backdrop we are faced with in the immediate-term, and we continue to make progress towards our strategic goals.
Our cross-border eCommerce technology is being adopted by more merchants and from an increasingly diverse base in terms of geography and product category. Our core eCommerce Acceleration business is where we have experienced the most challenges related to supply chain disruption in China yet despite these headwinds, we have achieved revenue growth of 2% and made a material improvement in contribution margins and evolved the portfolio of brands we work with.
We release these interims shortly after a peak trading period for the Group known as “Singles Day”. This is a major shopping festival in China that takes place on 11th November. It took place this year during a period of heightened COVID disruption with bonded warehouses used by the Group in lockdown for two weeks in the run-up to the event. The leading eCommerce marketplaces have not released figures on 11/11 however industry analyst have reported that the beauty and skincare category is down on last year. Given the challenges we faced and the direction of industry trends, we are pleased with the performance of our portfolio over the singles day period, which performed in line with our expectations.”
Chief Executive’s Review
Overview
The disruption to supply chains, consumer habits and the economy in China as a result of the pandemic has been widely reported. Prevention measures remain in place and major cities can undergo mass testing and lockdown at short notice. It is likely this will continue for the remainder of the current financial year and possibly beyond, although we remain optimistic about a slowly improving picture.
We have adapted well to new ways of working and altered some of our sales channel mix to navigate the ongoing situation. In the first half of this financial year, we have been able to increase revenue and reduce losses. Adoption of our technology has grown through the partnerships we have formed with large international logistics companies and through our own marketing initiatives. Our brand acquisitions performed ahead of acquisition economics and have the added benefit of reducing the Group’s exposure to some of the disruption encountered in China. There will undoubtedly be further challenges to overcome in China but it unquestionably remains a highly attractive market for international brands.
Our Market
The period in review saw an eight-week lockdown for Shanghai, the Group’s base of operations and which represents a significant customer base. The COVID situation in China continues to make headlines in Western media with widespread testing and lockdowns. That said, the situation in China has steadily been improving with the loosening of restrictions on transport and travel leading to a reduction in logistical issues when compared to the peak earlier in the year. Although the overall situation remains fluid and difficult to predict, we remain positive in the long-term outlook for cross-border eCommerce in the world’s second largest economy and largest eCommerce market. It is frustrating that factors beyond our control are impacting performance, although the resilience of the business has come to the fore and we retain a strong degree of confidence in our medium-term prospects.
The Group has, through its past acquisitions, diversified revenues. Revenues from our core eCommerce Acceleration business, both through Nomad Technology and our traditional distribution channels, contributed to 57% of total revenue in H1 2023 vs 65% in H1 2022. Revenues on our owned brands from the UK and international markets contributed 28% for total revenues in H1 2023 vs 20% in H1 2022.
We will continue to explore opportunities to leverage our brands, infrastructure and technology outside of China where there are compelling and profitable opportunities to do so.
Strategic Progress
Recognising the disruption we have faced in China we continue to execute well against the priorities identified at the time of our IPO, with the added imperative of returning to profitability in the next financial year, towards which we are making good progress.
eCommerce Acceleration
Our eCommerce acceleration business where we operate as the China market development partner for a number of prestige international brands was most impacted by supply side disruptions in China in the first half. We work with a high-quality portfolio of niche prestige brands targeting high end Chinese consumers and maintain a strong funnel of new and emerging brand opportunities to ensure our portfolio remains balanced as our business evolves. Due to the impact of COVID on logistics into China we shifted some of our sales from direct-to-consumer to B2B which reduced the revenue attributable to our Nomad Technology but was necessary to maintain sales.
Adoption of our cross-border Checkout technology solution
We launched two new enterprise retail merchants in the first half of the year and expect to add new enterprise merchants in the second half. Our partnerships with three major logistics companies (SF Express, FedEx and ECMS) have started to yield client opportunities in multiple territories including South Korea, Japan, Hong Kong, Europe and USA. The timelines for the implementation of these channels have taken longer than anticipated. Sales cycles have also been extended due to the uncertainty surrounding the situation in China.
Growth of our owned brands
Zita West Products continues to perform ahead of management forecasts. Revenue for H1 revenue has increased 81% compared to prior year. Revenue outside of China, predominantly in the UK, grew at 24% in the first half. We continued to leverage our infrastructure to expand the brand in China adding JD Worldwide and Douyin stores to our existing TMALL Global store and working with key influencers to raise the profile of the brand in China.
The acquisition of Napiers the Herbalist was completed in November 2021 and has since been fully integrated into the Group’s eCommerce operations have been consolidated into the Group. The acquisition of Napiers gives the Group an entry into the high-margin beauty category in addition to the existing health and wellbeing portfolio. Since the acquisition of Napiers the Group has developed 12 new beauty and skincare products. These now make up more than 50% of the top 20 products sold and will be launching across the Groups beauty channels in China in the coming months.
Path to profitability
Moving the business towards profitability is a key objective and we continued to seek opportunities to improve efficiency and operating leverage in the first half. Simplifying our organisational structure as well as reducing our network of offices and expenses has enabled us to lower our run rate cost base in the period.
Investment in our Checkout DTC technology remains at a high level in relation to the income generated from it to date and expanding the commercialisation of our solution remains a top priority for the Group.
Outlook
Current indications for the second half are that the underlying trends from the first half are likely to continue as is the volatility in the China market. The focus for the remainder of the financial year and into the next is for the Group to reach a self-funding situation which we are well on the path towards.
Our acquisitions have diversified our revenues, with revenues from our eCommerce Acceleration business decreasing and revenues from our UK and international markets increasing. The Company has been forged in the world’s most advanced, competitive and innovative eCommerce market that is China. We are committed to realising the opportunity in China while recognising that we are well positioned to further exploit emerging opportunities in new markets through our technology, infrastructure and the partnerships we’ve built over the last 5 years.
FINANCIAL REVIEW Overview
During the period the Group’s revenues increased by 15% to £8.3m (H1 2022: £7.2m) with gross margin decreasing to 54% (H1 2022: 57%).
Revenues from our core activities, Brand ownership is up 36% to £3.1m (H1 2022: £2.2m), Nomad technology is down 10% to £2.7m (H1 2022: £3.0m) with revenues from our distribution business increasing 29% to £2.3m (H1 2022: £1.8m). The disruption caused by the widespread COVID lockdowns impacted our ability to fulfil orders to China from our UK warehouse, which impacted our Nomad technology revenues, the Group reacted quickly and effectively by moving inventory to our Bonded Warehouses and increasing sales through our existing B2B distribution channels which were less affected by the lockdowns.
The Group’s gross margin has decreased from H1 2022 from 57% to 54% but has improved from those levels achieved in FY 2022. The change in gross margin is a result of changes in our product mix, sales channels and supply chain pricing pressures not all which could be passed on to our customers.
Adjusted EBITDA loss improved by 48% from £2.6m to £1.4m.
Operating expenses
Selling and distribution expenses decreased to 28% (H1 2022: 46%) of revenue, as a result of more efficient and targeted advertising spends and product pricing changes to adapt to the increasing distribution and inflationary costs seen in the last 6 months.
Administrative expenses, excluding one-off costs such share-based payment expense, acquisition and restructuring related costs, decreased to 42% (H1 2022: 49%) of revenue as a result of tighter controls over other administrative costs. Staff costs have remained the same at £2.5m (H1 2022: £2.5m) due to the timing of reductions. The full effect will be of these actions will be reflected in the full year results. The number of employees at 30 September 2022 was 117 (30 September 2021: 133), down from 158 at 31 March 2022.
Earnings per share
Basic and diluted loss per share was 3.9p and 3.8p per share respectively (H1 2022: 6.5p per share).
Net cash
At the period end, the Group’s net cash position was £0.9m (H1 2022: £7.9m), excluding the IFRS 16 lease liabilities, net cash was £1.6m (H1 2022: £8.8m). The Group’s reduction in staff and operational costs has resulted in 51% improvement in operating cashflow from negative £4.3m to £2.0m. On the 21 September 2022, the Company raised gross proceeds of £2.0m pursuant to a Placing and Open Offer dated 5 September 2022. Furthermore, acquisitions in H2 2022 and the payments of deferred consideration in H1 2023 reduced cash balance by £1.5m and £0.1m respectively.
Inventories
The Group reduced gross inventories from £4.4m at 31 March 2022 to £3.4m at 30 September 2022. Improvements in inventory management and ordering process has resulted in the Group holding lower inventory levels. To reduce complexity, the Group focused on reducing the breath of inventory in its UK and bonded warehouses.
Depreciation and amortisation
The total depreciation and amortisation costs were £0.2m and £0.3m respectively (H1 2022: £0.2m and £0.2m). The Group continued to invest in its Nomad Technology platform with a total of £0.6m (H1 2022: £0.5m) development costs capitalised during the period.
Adjusted EBITDA loss
Adjusted EBITDA loss improved by 48% from £2.6m to £1.4m. The improvements in adjusted EBITDA loss is driven by the decrease in staff cost and operating costs.
Condensed Consolidated Statement of Comprehensive Income For the six-month period ended 30 September 2022
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