Applied Nutrition Plc (APN) Earnings Call Transcript & Summary

Welcome. I'm Thomas Ryder, the Founder and CEO of Applied Nutrition. We're here today to cover our FY '25 full year results. Today, I've got with me my COO, Steven Granite; and CFO, Joe Pollard. Most of you may know us. But for those who don't, I'm going to spend a couple of minutes talking you through the ingredients of our business. Firstly, we operate in a rapidly growing market. And whilst we continue to grow, we're only just scratching the surface. Applied Nutrition truly is a global business, selling into over 85 countries, including Asia, Middle East, U.K., Europe and many more. Our B2B business model, utilizing distributors allows us to access new markets whilst growing in existing markets, whilst delivering market-leading margins. The supplement industry is not just for body builders anymore. It encompasses everybody from your elite athlete all the way to somebody that just want to make a health-conscious choice. In order to cater for this broad consumer base, we've developed a wide range of products that cater to the requirements of all users. And finally, we are proud of our roots in Knowsley, where we have our headquarters, we employ over 270 people. We have our in-house manufacturing, our warehouse and our logistics. Our first full year as a listed company has once again demonstrated our ability to deliver with a year of continued momentum and opportunity. Joe will cover the numbers in more detail, but our strong trading has enabled us to deliver full year results ahead of market expectations. The performance reflects the strength of our strategy, disciplined execution and growing traction in the market. We've continued to make strides in line with our strategy, increasing sales with existing customers. We've won new customers, and we've entered into new geographies. In the year, we have deepened our relationship with our existing partners and secured new partners across both existing and new geographies, all while continually broadening our ranges, our flavors and our formats. Looking ahead, we've had a strong start to FY '26, a continuation of what we saw in Q4 FY '25. However, given that the financial year is still in its early stage, we are maintaining our current FY '26 market expectations. And finally, as we continue to grow within this growing market, we've decided to invest to expand our manufacturing capabilities and capacity to cater for this growth. I'll now hand you over to Joe to talk through the numbers.

Thanks, Tom. I'm now going to discuss our FY '25 financial results. As an overview for our FY '25 results, we've delivered over the targets we set at IPO, and we'll discuss these metrics in more detail in the coming slides. Revenue has increased by 24% as we added over GBP 20 million of revenue across existing and new customers compared to FY '24, and we have seen growth across all geographies. Gross profit and adjusted EBITDA both increased by around 19%. This has resulted in an adjusted EBITDA margin of 29%, which is in line with the guidance we provided at IPO. Free cash flow conversion was strong as a result of careful working capital management despite the revenue growth. Net cash at the end of the year was GBP 18.5 million after the pre-IPO dividend, leaving the group in a strong net cash position and with the ability to use its balance sheet strength going forward. Overall, total group half 2 revenue was strong, delivering circa GBP 60 million, which is up 25% on half 1. As we consider the geographic split of revenue, growth in the U.K. was particularly strong as we continue our channel diversification strategy and deepen our relationships with key partners. Europe also saw significant growth across key territories such as France and Spain. While the year-on-year growth presented for our international sales shows 3% growth, excluding the sales to the exited distributor, we noted in our half one results, international sales were up 13%, and there was significant momentum in half 2 with international sales 20% above half one. Overall, total group half two revenue was strong, delivering around GBP 60 million and up 25% on half one. While gross margin has decreased slightly, this was not unexpected as a result of significantly higher than historic whey protein prices. However, whey protein represents only around 19% of the group sales. And therefore, despite significantly higher purchase prices, the impact on margins has been muted. Carriage, logistics and import duty costs provided a small headwind as a result of shipping prices from China being slightly higher in FY '25 than FY '24 on average. The investment we made in new production capacity at the start of FY '25 resulted in efficiencies and a benefit to our gross margin from staff costs. Overall, gross margin for the year remained higher than FY '22, FY '23 and the average of the FY '22 to FY '25 financial years. As we have previously discussed, we consider our product sales mix to be well balanced. Currently, our largest product group is whey protein. However, this accounts for only 19% of our sales. The significant diversity and balance in product mix provides the group with a level of protection against gross margin volatility and means we are not overly reliant on any one product or product group. In FY '25, the average price of whey protein purchased was 30% above the FY '24 cost. However, we have a proven track record of being able to maintain margin stability despite such changes with the current year included. Some secondary effects of high whey protein prices have resulted in some consumers looking for alternatives such as beef protein, which has a more stable input cost base. From a foreign currency point of view, the group continues to have an exposure only to U.S. dollars and euros at a material level. In terms of administrative expenses, as a percentage of revenue, these decreased by 0.6 percentage points as a result of efficiency as we scale. In addition, the group invested in its staff overhead base during early FY '24 as we look to ensure the group was well placed to be able to complete an IPO. Adjusted EBITDA margin was 29%, which was in line with our IPO guidance, a 1 percentage point decrease from FY '24 being driven primarily by an increase in costs as a result of being a listed business. All adjustments to FY '25 related to the costs of the IPO process, and we do not anticipate any further IPO-related costs in FY '26. Free cash flow generation in the year was GBP 16.5 million, which is 72% conversion on an after-tax basis, leaving a year-end closing cash balance of GBP 18.5 million. The largest effects of this were a pre-IPO dividend of excess cash, GBP 7.3 million increase in working capital. However, this represented an increase slightly below the increase in revenue as a result of careful working capital management. Tax paid of GBP 6.3 million. The company will continue to be a very large company for the purposes of corporation tax and therefore, be expected to pay all of its estimated corporation tax related to the financial year within that financial year. CapEx of GBP 1 million as we expanded our production capabilities to an estimated GBP 200 million of revenue. In FY '25, while working capital usage grew at a lower pace than revenue, as we continue to expand geographically and with larger customers, there is a possibility that there may be periods where we strategically choose to accept growth opportunities that might increase working capital usage at a higher rate than revenue. Customer concentration of the group continues to be low. And in FY '25, we did not have any one customer that was greater than 10% of the revenues of the group. The top 5 customers represented 38% and the top 10 customers represented 51% of group revenue. Management do not consider revenues to have been materially affected by customers placing a first pipe fill order as the largest new customer during the year had sales of less than GBP 2 million. We have shown that over time, customers tend to grow with us as illustrated here by showing the average relationship length for customers by size of revenues, and this relationship length increases as revenues get larger. We consider this to be a future benefit as there are a significant number of customers with smaller revenues with us that can be grown over time. Here, we have set out our capital allocation policy. In terms of our policy of driving shareholder returns, we have delivered results for FY '25 that are above market guidance. While we will consider dividends and share buybacks at the appropriate time, we do not envisage any will be made before FY '27. We continue to look to invest in organic growth and to optimize our operations, having extended our manufacturing capacity to circa GBP 200 million during FY '25. Tom and Steve will shortly discuss our plans for investments over the next 24 months. As noted earlier, our cash position of GBP 18.5 million at the year-end maintains our strong balance sheet. We also continue to assess earnings accretive opportunities where it makes sense to do so, for instance, where it might give us access to new markets.

Thanks, Joe. I'm now going to talk about the market opportunity. Sports nutrition is no longer for body builders and professional athletes. It's part of an everyday routine for a much larger pool of consumers, such as the fitness enthusiast who might train 3 or more times per week and the health-conscious consumer who is making healthier choices, for example, increasing protein in their diet, taking a multivitamin or consuming creatine for the many well-documented benefits. We recently surveyed 2,000 people and 80% said that supplements are not a luxury, but now a necessity in their diet and lifestyle. Also interesting was that 64% of people said they are switching nightclubs and bars for running clubs and gyms. As a result of the expansion of the traditional sports nutrition user into sports nutrition, health and wellness consumers, we have capitalized on the shift by extending our range to appeal to these new category consumers with products such as Collagen stick packs, Greens powder, Berberine capsules. We've softened our designs. We bought out smaller packs, key products to target new channels such as grocery, which is where they are shopping. Sports nutrition, health and wellness is now becoming a consumer staple in their basket and is no longer considered a luxury spend.

I'm now going to talk you through the progress that we've made against our strategic priorities. FY '25 has seen us once again deliver against our multi-pillar global growth strategy, existing customers, deepening engagement with all major retail partners, expanding our presence in retail, U.K. and internationally. Additional listings in specialist channels across U.K. and Europe. And we've seen total placements across grocery and High Street increased by 95% versus last year. And for new customers, it's seen us expand into new geographies, including Eastern Europe, Latin America and Asia. We also have an exciting opportunity in Canada, working alongside one of Canada's largest distributors. Now looking at our D2C. We've launched the Applied Nutrition app, and we've also enabled the subscription option via our app and website.

Thanks, Tom. During FY '25, we announced a new joint business plan with the U.K.'s largest health and wellness retailer, Holland & Barrett. The JVP was focused on giving Holland & Barrett early access to new innovative products and giving Applied Nutrition a trusted platform to sell our wide range. This was a multiyear JVP, and we are very pleased with the outcome of year 1, which ended in September 2025. We are now executing the agreed plan for FY '26 and have some exciting launches planned, including the campaign featuring Jamie Carragher and Michael Owen's to promote our 40-plus range, which will be listed in Holland & Barrett nationwide. As a result of this joint business plan, you will now find a lot more of our products in a lot more Holland & Barrett stores nationwide.

Now looking at NPD. This slide is a great example of how we look at new product development. We look at it from 3 different pillars. Example, keeping products fresh. If you look at the critical way, that's a product that's been within our range since 2015. We've recently reformulated this product, making it taste much better, undergoing informed protein. So now every single gram of protein is validated by a third-party tester. It's now delivering more protein per serving, and it's been received really, really well from the market. Innovation. If you look at the protein sparkling water, we were the first company to bring a carbonated collagen sparkling water to the market. Again, it's been received really, really well. Then you look at market trends. If you look at creatine, hydration. We took 2 trends in products, creatine, hydration. We brought them together as consumers generally would use both of those. Again, it's been received really, really well. We also look at different formats for hydration, for instance, stick pack, effervescent, as well as the powder. NPD really is the heart of Applied Nutrition and is what's driving a lot of our growth.

Thanks, Tom. We are delighted to announce that due to the continued growth of the business, we have plans to occupy a new 84,000 square foot warehouse and headquarters across the road from our existing 2 buildings in Liverpool. This new site will increase our internal storage capacity for pallets by 180%. Whilst we release the site, we expect CapEx in the region of GBP 3.5 million to GBP 4 million for the fit-out and equipment to operate the site efficiently. This will include very narrow aisle racking and forklift trucks to maximize the storage capacity. Currently, our 2 warehouse buildings are full, and we are storing product in 3 third-party warehouses in the local area. Having stock in 4 different locations creates inefficiencies, particularly when you have to collect several different ingredients and packaging from multiple locations to make a single finished product. The new site will enable us to bring all of the sites store products back into one location. Our existing finished goods storage warehouse will become a warehouse for all raw ingredients and packaging. The current building, which houses a production facility will house more production space with a small area for stock to feed the production lines for the next day. The new building will then become finished goods, e-com fulfillment and our new head office, which better reflects the global business that we are today. This is a significant milestone in our company's history, which will drive efficiencies and unlock much needed capacity to enable further growth. Before IPO, we installed Phase 2 production, which was 2 new semi-automatic high output lines. We expected this to enable us to grow to GBP 160 million of revenue. Since installation, we've successfully implemented several initiatives and processes that have further improved our productivity and enabled us to increase capacity to circa GBP 200 million of sales. Also, in late FY '25, we purchased a stick pack filling machine to enable us to bring this function in-house as we see demand for stick packs increasing and our NPD pipeline has several products in a stick pack form. We have not yet operated this machine as we need to extend the factory internal footprint first. For clarity, this is not included in the GBP 200 million capacity mentioned. During late FY '25, we also installed an additional and faster capsule filling machine due to the growing demand for these products. However, due to the continued successful execution of our multi-pillar strategy, we now need to push the button on Phase II expansion of our production facility. During the next 12 to 24 months, we will extend the production footprint into Phase III in order to house an additional gelmaking machine as we are getting close to capacity on the existing machine, an automatic bagging line to increase capacity and efficiency. Several products listed in the growth channel are in bags, so we need now to invest in this machine to ensure we can continue to efficiently fulfill the growing demand. Also, an automatic tubbing line, which is the same as we currently operate [ on line four ] to give us more capacity for hero products such as creatine, ABE Pre-Workout and Collagen. We expect these 3 machines and the factory extension to cost between GBP 2 million and GBP 2.5 million and should be completed within 1 year. This would then give us a new sales capacity of circa GBP 300 million. Finally, we are also considering the purchase of an automatic effervescent tablet machine due to the increased demand for the endurance range. One of the drivers behind this is the Vimto Hydration tablets, which are now the #1 hydration tablet in the whole of U.K. grocery. This will cost circa GBP 2.5 million and payback is currently 4 years. If volumes continue to grow, then clearly, the payback period would reduce. We do have more products going into an effervescent format such as Collagen and Debloat, and we are concerned that our external manufacturer may not keep up with our growth. Therefore, the Board's preference is to take this process in-house, subject to sign off on a business case.

Okay. So now we look at marketing. Since 2014, we've been hell-bent on driving trust and credibility with global consumers, signing ambassadors like Paddy, The Baddy, and exhibiting at global fitness shows. I personally just got back from the Dubai Muscle Show, where I was able to meet tens of thousands of consumers who tested our products, tasted our products, give us real-time feedback, which allows us now to go back to the drawing board and become an even better brand. So now moving on to outlook. The strong acceleration in growth in the final quarter of FY '25 has continued into the first quarter of the new financial year. We move into FY '26 with positive trends in market share across key channels with a clear opportunity to capture further share in both U.K. and internationally. We're also investing to further increase our capacity and manufacturing capabilities to support our continued growth. Finally, despite a strong Q1 FY '26, given that the financial year is still at an early stage, the Board believes it's prudent to maintain current market expectations for FY '26. So now let's look at the investment case. Hopefully, we should have covered this off within our presentation, but these are the real reasons why we believe Applied Nutrition is a good investment. We have significant market opportunity. We are a trusted brand with broad consumer appeal. We operate a successful B2B business model. We've got scalable in-house manufacturing capabilities. We've got an impressive financial profile. We have multiple pillars of growth. And we've got a really, really ambitious team ready to take on all of the opportunities that lay ahead of us. Thank you all for listening, and now we're ready to take questions.