Moonpig Group PLC (MOON.L) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Moonpig Group FY 2024 Full Year Results Q&A session. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to Nickyl Raithatha, CEO, his opening remarks.

Hello, everyone, and thank you for joining today the full year results Q&A session. Hopefully, you've all had a chance to look through the announcement and to watch the presentation video. I'll say a few words, and then we'll get straight into Q&A. I'm really pleased today to report a strong set of results for Moonpig Group with the underlying trends in our business, giving us confidence in our outlook for the future. The second half of the year, in particular, saw a significant step-up in growth trajectory, and this momentum has continued into the current year. The growth was underpinned by our card brands, Moonpig and Greetz, where order growth stepped up 10 percentage points in the half from minus 5% to plus 5%, and new customers stepped up 11 percentage points in the half to plus 3% growth back into positive territory for the first time since the pandemic. We're 18 months into completing our tech replatforming, and we're only now really starting to see the benefits translate into customer metrics, which is powering this change in growth levels. We delivered this growth, whilst maintaining high profitability levels, EBITDA and PBT margins up in the year, and it all translated into a 30% increase in operating cash flow, which reduced our leverage to 1.3x at the end of April, ahead of expectations that we laid out earlier. Our strategy is to build a customer loyalty business, driving an increasing share of wallet from our customers each year, and we've made strong progress on our strategic goals in the last 12 months. Our subscription service plus has exceeded expectations and is driving significant value in the business. Our new creative card features are being adopted at record rates. Our AI roadmap is running at full speed and driving a more relevant and personalized customer experience than ever before. And we're making great progress with digital gifting by integrating the experience, gift experience into the Moonpig card and unlocking instant delivery capabilities. So these initiatives and more delivered by our continued investments in technology, our product range and our brands are powering our growth and underpin our growth expectations for the current financial year. We expect revenue growth in the mid- to high single-digit range in FY '25. And in the medium term, we expect the business to deliver double-digit revenue growth, EBITDA margins between 25% and 26% and consistent mid-teens EPS growth. Our continued strong cash generation has the potential to drive another 0.7 turns of deleveraging this year, taking us below our leverage target of 1x, which in turn will give us the financial flexibility to consider returning excess capital to shareholders. So in a macroeconomic climate that remains challenging, the resilience of our market, the loyalty of our customers and the return on our technology investments is really starting to show, as Moonpig Group's continues to demonstrate a unique combination of top line growth, high profitability and strong cash generation, and we're excited for the long-term prospects of the business. We'll be sharing more details on our key strategic initiatives and our outlook for the medium term at our Capital Markets Event on October the 16th. But for now, I'll turn it over to questions.

[Operator Instructions] Our first question comes from Jonathan Pritchard, Peel Hunt.

Two, if I may. Just the stronger performance in the second half, was that a case of you just sort of nailing the big events at great Mother's Day, Valentine's -- or is it something actually more fundamental that you've actually got this you sort of cracked it from a growth perspective, just a bit of your thoughts on that? And then I'm sure this is in your pack of Q&A, but just on the timing of any sort of distribution. It would appear that you're not going to make a huge amount of progresses and the criticism, but not a huge amount of progress in the first half. So would you think any sort of conversations would be more second half or 12 months from now? Or do you think it might be sooner than that in terms of the cash return?

I'll take the first and I'll pass it to Andy for the second question. The change in growth we saw was pretty much like consistent across the second half. So we did have 3 peak events in the half, and those are all successful. But -- the key change, which is moving into positive order growth, that has been every month in the half, moving into new customer growth, that's got consistently better through the half, as we've kind of gone on kind of peaks haven't been different to the non-peak. So really, we look at this as an underlying trend in our all-year-round business has really just stepped up that's new customers, existing customers and orders, which I think is a really healthy place to be. So yes, and maybe on cash returns, Andy.

Yes. Hi, Jonathan. Yes. I think you're right. I think what you're calling out is the fact that our cash generation is strongly weighted into the second half of each financial year. And therefore, we expect our net leverage to be broadly unchanged at the 1st of October, but then reduced significantly in the second half of the year. In terms of approach to returning capital to shareholders, I think that's something we're looking to update further on at the Capital Markets event that we will hold in mid-October. Clearly, if you look at the trajectory of cash flow in the business, if we chose not to return cash to shareholders in the second half of the year, we'd be lower than our target leverage by the end of the financial year. And so, at the [ end of the summer ], I think it will be appropriate to provide further updates.

[Operator Instructions] Our next question is from Andrew Wade at Jefferies.

Congratulations on a strong second half there. Just -- first of all, I just wanted to touch on sort of squaring the circle on the guidance. You sort of talked about mid-single-digit growth from the ex-breakage number sort of say 5% of that, if you take even the top end of that 25% to 26% EBITDA range, it gets you sort of [ 91-ish ] and that compares to consensus of [ 94 million is ] for EBITDA. I just -- but you say you're trading in line. So I'm just wanting to square the circle on that. Will it come up slightly above that 25% to [ 6% EBITDA ] margin range? Is that the balancing factor in there?

Yes. So I think and -- hi Andy, what we're trying to say in terms of the revenue guidance is obviously, we've printed revenue for this year of GBP 341 million. Within that, there's a mid-single-digit breakage. And so, GBP 5 million to GBP 6 million worth of excess breakage from COVID vouchers. So we're saying effectively apply our revenue guidance to the lower number, sort of around by the GBP 335 million rather than the GBP 341 million. In terms of EBITDA margin, we'd expect to be sort of towards the top of the -- or maybe slightly above our medium-term range. If you look -- we've obviously just reported an EBITDA margin rate of 28%. But within that, there's just under 2 percentage points of benefit from that and sort of a onetime breakage. So if you sort of strip that out, you get to a rate, which is slightly ahead of 26%, and we'd expect to broadly meet that in the year ahead.

Great. Okay. That's very clear. Secondly, sort of just I think I already know the answer, but just to sort of run it by you, I guess, the math on the mid-teen EPS growth versus double-digit revenue growth, presumably, the differential comes from leverage over the interest and depreciation there rather than anything else? Or is factored into that some benefit on the interest line or some lowering of depreciation sort of interested, as to the mechanics there?

Yes. Absolutely. I think the primary driver there is deleveraging. So obviously, we've got a business that is generating in this current year, GBP 50 million to GBP 60 million worth of operating cash flow and growing in future periods thereafter. If you just take an interest rate on that, you'd see that's something enough to bring you into sort of the mid-teens.

Okay. Yes. So implicit within that is that there's some benefit from deleverage...

Yes. If you think about the ways that we might allocate capital, you'd either get benefit from deleveraging or as we've signaled in [ small ] announcement, you'd look at returns to shareholders, and there are ways to do that, that would be EPS accretive.

Got you. And then finally, on the sort of -- well, I guess, a question for Nickyl. Sort of looking at the gift attach side of things, could you sort of talk about what momentum looking like on the gift attach side, if your aspirations in terms of where you can get to on gift attach have changed? And what the big initiatives that you've got coming up to drive gift attach [ rate ]?

So I think probably the first thing to say is we are operating in a world, where sort of the cyclical impacts on gifting are much more pronounced than they are on cards. But despite that, I think what we showed in this half was if gift revenues up 4% year-on-year in what is likely a challenging market. So it really talks to sort of the power of the business model, where we bring customers in for cards, we upsell them to gifts, and we can drive gifting growth even without having to push that and kind of push water uphill from an online marketing perspective. That said, attach rate was kind of stable in the second half. That's not kind of where we want it to be. I think what we'd expect going forward is that attach rate is back in growth. Our attach rate is in the sort of high teens range at the moment. And we see no reason why that shouldn't move into the high [ 20s and even 30s ] in the sort of medium term. So our aspirations for the amount of customers that can add gift to their cards hasn't changed. We think there's still a huge runway to grow. And it really comes down to continuing to improve our algorithms and improve our range. And actually, I think on the algorithm side, where we're really excited. There's a lot of development using sort of new machine learning and AI capabilities that are kind of allowing recommendations to be powered by a much more intelligent models than previously. So previously, where we would have had a rule-based model that kind of that would essentially say, if you see card x show gift y, I think now we're starting to introduce semantic search, where we can really interpret the customers' intent from all of their behavior from the message they write inside the card, from the way they browse, how they browse and use that intent to suggest the range of gifts. And so, I think over the next 6 months to 12 months, we will expect to see the quality of that cross-sell in particular, on sort of the smaller missions. So birthdays were pretty well optimized. But on get well soon or new baby, we haven't put the same focus, but I think these new models allow us to really catch up fast. So expect to see the data science capabilities really start to come through in the next year. And on the range side, we're making great progress. So we've got -- we launched a couple of new brands like Hotel Chocolat was one of the big launches this year. It's been incredibly successful and moved straight to like #1 in terms of kind of chocolate sales, which is really good to see and obviously at a slightly higher price point than our previous chocolate offering. And we've got some exciting launches coming this year, in particular in the sort of the kids' categories. We've got some really, really exciting brand launches coming, and we're very confident those will kind of further step up. So attach rate in a challenging environment, I think the model is working, but we have a lot we can do organically to push it.

[Operator Instructions] Our next question is from Caroline Gulliver at Equity Development.

Good morning, and congratulations from me to a really good turnaround, really good set of results. I just had a -- it's Caroline Gulliver here. Congratulations from me, too, on a really strong set of results of momentum. I just had a follow-up question to Andy's question really on gift attach and all the initiatives you've got going on. I completely get that it's cards first, and that's the best way to market and the best way to get people in. But I'm just wondering what you're doing on sort of overall brand marketing and maybe introducing new customers to the idea that you're actually selling gifts and selling experiences and how you're getting the message across more widely or whether you just want to focus very much on cards first from a marketing perspective.

Thanks, Caroline. It's a great question. It's something we've talked about in the past. So I think like the beauty of our model is that we sell gifts without having to market them directly. And I think if we look at our flower business, we know we're probably top 3 online florist in the U.K., but we have no marketing costs associated, and so we're probably more profitable than the rest of the online flower industry combined. And so that kind of talks to the model of like why we believe so firmly in card first when you drive the volume, and you can use upsell and cross-sell to sell guests. And I think when we have tried in the past to sort of acquire customers profitably from a gift first perspective, so trying to acquire a flower customer or a chocolate customer, it's hard to get the paybacks on those customers because they tend to be less loyal because when you come to our site and buy flowers, you don't give us the same data about who you're buying for and why you're buying that you do when you buy a card. And data is ultimately what powers the loyalty, which powers the sort of the sustainable profitable growth. That said, I think there is a really interesting point about how can we increase awareness and perception of the fact that Moonpig is a great place to get a gift from as well as your card. And so, I think what we've really been doing on that front is, apart from improving the range, I think we're using different marketing channels to sort of make it clear that you can put a -- buy a gift with a card. And so, for a couple of years, a lot of our above-the-line marketing on TV didn't feature any sort of gifts, whereas now we're starting to sort of introduce gifts in the background alongside the card. We're experimenting quite a lot with the new digital channels. We're seeing some great results with TikTok at the moment in terms of some of the campaigns we're running there. And again, those are probably things were actually highlighting the fact that you can actually put a gift inside a card now is a really powerful combo and I think that's driving awareness as well. So that -- alongside the fact that we're continuing to improve our packaging, improve the unboxing experience, so that actually everyone that receives our gifts becoming more and more comfortable that Moonpig is a great place to buy gifting. So I think it's a combination of the algorithms, the brands we're bringing onboard, photography on the site, all of those things alongside starting to introduce elements of gifting into our marketing, but we're not going into a gift first marketing world because we just don't see the paybacks. And quite honestly, now when we're starting to see the order growth in cards that we're seeing, we don't feel the need to.

Our next question is from [ Shaun Kelley ].

How are you doing today? I just wanted to follow up on the gift attach point, if I can. So I was wondering if we could dig a bit more into some of the more expensive Experiences in particular. Are there any different strategies for driving [ attach bps ], particularly for those more expensive products, as compared to some of the slightly lower ticket items.

Yes. Thanks. Yes, it's a good question. I think it's something that is probably one of the key reasons why kind of -- we've done the acquisition of Experiences 2 years ago, and we're only really now starting to see the momentum of those Experiences' sales on the Moonpig side. It's because it's a more complex product and a more expensive product than our average gift. I think there are sort of 2 elements. One is for customers that our average gift previously was in the sort of GBP 15 to GBP 20 range. That's kind of what customers tend to pay for a gift on average -- have been. And the Experiences' businesses Buyagift and Red Letter Days themselves on their consumer websites, the average [ Experiences ] they sell is in the sort of GBP 80 to GBP 90 range. So quite a difference. What we're really focused on is the sub GBP 50 range for sales on Moonpig and that's been -- and that's kind of where we've really seen the traction. So actually, I think as a starting point, just making sure we have a great range of products that are available for sub-GBP 50. And there's a lot of gourmet products, so dinner for two, meals for two, afternoon tea for two, there's some subscriptions, so HelloFresh subscriptions and the like that have been really successful with our customers. So kind of -- I think rather than trying to get them from [ GBP 15 to GBP 80 ], I think we're kind of moving from [ GBP 15 to GBP 50 ]. And actually, that's where we're seeing traction. Bearing in mind that most Experiences' gifts are for 2 people to use because it tends to be an overnight stay for two or afternoon tea for two, so -- so kind of when people look at the price, they kind of -- they can kind of rationalize it that way. I think the other element, and this is really, really important is that the new capabilities we're building into our recommendation algorithms using these kind of new AI technologies is going to allow us to personalize our recommendation engine in a much more powerful way than we've done before. And so, we've launched kind of version 1 of this about 6 months ago, where we could kind of have a relatively [ crude ] recommendation that basically looked at whether you bought a gift above GBP 30 in the past. And if you had, we would show you a different more premium and gifting cross-sell page to others. I think that's kind of a very, very basic version. We're getting much more sophisticated at that. And so, over the coming year, we'll be able to differentiate customers based on their previous history and based on what we know about them, which I think, again, unlocks a way for us to show higher-priced items to customers that have the propensity to buy that and much lower price items to others. And so, we're confident that like over time, this will continue to grow, and we've seen great growth in digital gifting in the past months.

[Operator Instructions] There are no further questions on the webinar. I will now hand over to Nickyl Raithatha for closing remarks. Please go ahead.

Thank you, everyone, for your continued interest in Moonpig and for joining today. We've announced a pleasing set of results. It's a step change in revenue and profit growth during the second half of the year, and we're really confident that the growth will continue, as we go through the rest of the year. Our business has a unique combination of top line growth, high profitability and strong cash generation, and we remain extremely well positioned to continue this consistently over the next years. We look forward to seeing you again in a few months at our Capital Markets event on the 16th of October. Thank you very much.