The Pebble Group plc (PEBB) Earnings Call Transcript & Summary

Welcome to the Pebble Group Interim Results Webinar. [Operator Instructions] This webinar is being recorded. I now hand over to Chris Lee, CEO; and Claire Thomson, CFO. Chris, over to you.

Thank you, Tamsin, and thank you, everybody, for your [indiscernible] time us today. These are the half year results for 2023 for the Pebble Group. My name is Chris Lee. I am the Chief Exec of Pebble Group and joined by, I think, it's about 550 people in our business of great quality and one of them is with me today, Claire Thomson, our CFO. We've been part of the business for -- well, myself 23 years, Claire about 16. So really investing in that business emotionally, absolutely, but also financially and the management team, we have around about 9% of the share capital of the group. In terms of how we're going to do things today, just going to give you a little introduction into the industry that we're part of and then some highlights on the half year results and then Claire take you through some numbers, and then we'll go into each of the businesses, our business Brand Addition and Facilis in turn. And we aim to be done in around about 20 minutes and take some questions at the end. So when we say that the Pebble Group 2 businesses called Brand Addition and Facilis our sort of operations within that organization within the [ Pebble ] group. And in terms of the industry part of, we're really part of promotional product sector. And promotional product are all around us. It's a much bigger industry than people have actually realized it first. And so it's all businesses, all sizes, all sectors, in all geographies they're using promotional products to promote their brand. And so you'll have some in your office, at home, in your car, where you've received a gift and a product from a company, which really is kind of trying to make an attachment between you, the stakeholder and the business itself. And on an overall basis, I think the business -- the industry is worth about now $50 billion. So again, much higher than most people would think. In terms of how we fit into that industry. So if we start at the top there, the global industry around about $50 billion. The stats tell us that sort of half of that is in North America, and we'll come on to why that's important, in a moment. And where Pebble Group fits into that is we've got visibility of about $1.5 billion worth of that industry, and that's through our 2 operations at Facilisgroup and Brand Addition. Facilisgroup, about $1.4 billion goes through our technology. So we're not making the sales there but actually, we're helping those sales move efficiently from a distributor or from a supplier to a distributor into the end user. So our technology is helping that process. We have visibility about $1.4 billion of that market. And in the U.S. [ pay ], that's around 6% market share. In terms of our products business Brands Addition. Brand Addition sales and products are some of the best companies in the world, some the best-known brands in the world and really looking to produce quality products to engages their stakeholders and delivered on a global basis on a -- with a real provenance to the product of where it comes from, whose hands it made in and kind of what factories have made at. And that business has around about an 8% market share but those really large corporates what we estimate. So that's how we fit into the industry. In terms of the highlights for the half year. In terms of profit growth, around about 12% EBITDA level. Net cash, kind of generates about 5 -- sorry, $4 million more than we had on the balance sheet this time last year, and Claire will talk about how the working capital cycle works. And that's after the first dividend that we made this year as well, we kind of -- so really, it's around about $5 million like-for-like difference in terms of where we are with cash versus last year. And how do those numbers come together? That's through Facilis and Brand Addition, they're doing all hard work. And on a sterling basis, revenue growth in Facilis is 24%. On a dollar basis, that goes around about 18%. So we had a little bit of a tailwind there. And that GMV is really growing through the gross merchandise value, that is, which is what are our customers pushing through our system in terms of sales. We talked about that $1.4 billion on a global basis. Generally, second half weighted. I think that might be about $1.5 billion by the end of 2023. And Brand Addition, less growth, but I still think I really see performance from that business in a really difficult economy, with some of the large corporate budgets have been tested. And Brand Addition growing, I think, is a super performance. And to put on top of that, growing that gross margin, again, in a very difficult circumstances by 3 points, I think, is a super performance from that business. So there are highlights. Claire will take through some of the numbers.

Thank you. So kind of continuing the theme of the highlights. These are the group KPIs and all moving in the right direction. So that incremental revenue translating through to EBITDA and our EBITDA margin moving forward as we starting to see the impact of the high-margin [ SaaS ] business, so less on our overall group profile. And that kind of goes all the way down the P&L. So our EPS is moving forward at the half year. And as Chris has already touched on, cash is $4 million ahead of where we say -- where we were this time last year and $5 million on a like-for-like basis when we take into account the dividend. This slide is just kind of giving you a bit of context on the kind of financial dynamics of the group. And in particular, we've got that products business in Brand Addition and the tech platform in Facilis and they are quite different in terms of their impact on revenue and EBITDA. So left-hand side is revenue. And you can see there that those product sales in Brand Addition are the lion's share of that. Facilis tech platform, much small proportion, with fast growing but smaller proportion of the sales, and that translates through to EBITDA then when we are earning on those in Facilis revenues of 50% EBITDA margin. And so that -- and we're now seeing -- as Facilis continues to grow, Facilis is getting towards being 50% of our group, and we've signaled that we expect that to continue, and we'll push past that number as we move through 2024. I'll walk through a little bit more detail now. So P&L, we touched on -- everything is moving in the right direction. Revenue growth of 5% for the group, that splits into kind of the 24% with Facilisgroup and then that growth at Brand Addition, which, as I think we've already said, was smaller, but a great performance in what's been a tough macro. You can see our margin, our gross profit margin moving forward. So we were at 38.5% this time last year, we're now just under 43% as a combination of 2 things. So again, it's the impact of the growth in Facilis on the overall group financial dynamics, but also that super performance at Brand Addition where the gross margin has moved forward by 3 points. And again, I've said it already but just to reiterate, as we move it that's translating through to adjusted EBITDA, we've been investing heavily in our tech platforms at Facilis and that's starting to come through as we signaled it would at the year-end in our D&A charge. But again, all moving forward in the right direction and then operating profit is ahead of where we were this time last year. Cash flow remains really kind of straightforward and that strong profit to cash conversion metric continues. Just to recap for those that are new to the story, although those who've kind of forgotten, the working capital in the group is all related to Brand Addition, and that movement in the working capital cycle is in line with our usual experience where we are high working capital at half year, and that will unwind as we move to the year-end. And again, this week, we've signaled that we're expecting to land a cash number that's out there in the market for the year-end, and it's kind of consistent profile with where we were last year. I've talked about investment in CapEx. You can see that, that's moved forward this first half and have continued to invest in those platforms at Facilis. And again, we've talked about the dividend, you can see that payment going through there. Other than that all fairly straightforward. Balance sheet, again, nice and simple. So the current assets, the piece in there is of interest is the investment in our platform at Facilis, and that's kind of -- we have invested in that over the last 18 months significantly. We brought new products to market, and that's been amortized over 3 years. The rest of the working capital and the balance sheet really stays with Brand Addition. So that's the blue-chip customers that we'll come on to talk about, so it's high-quality assets underwritten by our customers in terms of any stock that we're holding for them and our receivables and payables are just moving in line with the sales volumes, all metrics remain as consistent with prior years.

Thank you, Claire. [indiscernible] go for it.

Okay. So again, we introduced this slide at the year-end and just kind of reemphasize our use of capital. So number one, we had $50 million on the balance sheet at the end of December '22, and it will be around about $17 million when we get to this year. And then we think that's a sensible place for us in terms of cash, and touched on Brand Edition and its use of working capital. So there's no working capital in Facilis Group. Brand Addition does require working capital as it grows. So there will always be a little bit of investment there, but that's proportionate to the sales volumes. And capital expenditure we have been investing in Facilisgroup to increase our product offering, around our product offering and increase our addressable market. We're at the peak of that investment in '23. And so that will be coming down as we move through '24, which is something that we've signaled and the investment in Brand Addition is generally at consistent level every year. We've introduced our maiden dividend -- well, we did introduce our maiden dividend in '22 and signaled that we want that to be a progressive policy, and that's what we intend to do in terms of our kind of immediate uses of cash.

Thank you. So taking that, I'll run through for Facilis and Claire will do Brand Addition and then we'll finish with some ESG and heading to questions. So a little bit about the model. So the way the promotional products businesses work, you have suppliers who are specialists in product categories, the end users of the brand once kind of all products. And so that creates that need for a distributor in the middle to sort of bring all together. Facilis, what we're trying to do is bring technology to that market to help efficiency sort of supplier and a distributor and into the customer. And that's kind of what the premise of the business is based upon. On a historic basis, as we look back and what's been going through the business is that $1.4 million of our customer sales, what we call the GMV, the gross merchandise value. That's through 238 partners now, around about 1 million orders, and we have some preferred suppliers that we try and help the supply of the good suppliers and our customers come together to make great efficiencies and support each other in kind of growing their own businesses. So technology at both that market is what Facilis does. Looking back, and these all historic. So sort of the revenues and the EBITDA, the growth on the top is really created by the KPIs below. So really all moving in the right direction. And this is probably one of the few businesses in this industry that wasn't affected by COVID. You can see some nice lines all moving in the right direction, it's all in U.S. dollars, which is the home currency of our business. So partner growth has been fairly consistent, which will drive GMV and therefore, that -- those lines going up. And you can see there that GMV is generally bigger in the second half than it is in the first. And again, if we kind of help our customers work with a great group of suppliers and the preferred suppliers that we use and they can kind of grow each of those businesses and get great pricing, great products and service, that kind of preferred supplier spend helps our business as well in terms of growing. So looking back, sort of those KPIs at the bottom have really driven the numbers at the top. As far as looking to the future, we have invested very clearly and spent thoughtfully some investment in the CapEx. And so now as we look forward, on the left-hand side are the products that we're going to have in market. So the top product called Syncore, that's what everything has been based to date, our performance and our financials has been based to date. That's an order workflow system that's helping our customers efficiently manage with their suppliers and their teams and to help them professionalize and grow. We're bringing a couple of new products into market, commercial stores and orders, which there's a couple of things. It helps us sell more to existing customers from the store side but also the order side is taking us to the long-fragmented tail in the promotional products industry in North America. So they're quite different products within the same industry. And rather than kind of talk about Facilisgroup, this product, this product, this product. On the right-hand side, what we're kind of bundling all that together and saying, we're here to provide technology and services to the promotional products industry. We drive the GMV forward by using those products, and we're going to kind of trying grow the attach rate that we collect from that GMV, and that becomes our income. So that's sort of right-hand slide. This is -- this kind of half year is really hand over to say that's the main KPI that we'll be using on the right-hand side here, how we're driving GMV forward, the attach rate that we're able to collect from that and the multiplication of those 2 is the income that we receive at the end. And then -- so I think that's our elevator pitch in that right-hand graph. And -- but what we want to do is to make sure investors who know us pretty well and kind of once you get into the detail, but we will supply information that helps them really kind of get into the detail. But kind of beginning to summarize this, we'll bring new products into the market, the way we've described them in the right. In terms of customer numbers, you can see sort of Syncore, our main products, and that's something that we sort of should never take for granted. We can continue to invest into. And that's continued to grow in terms of customer numbers. But our new products now, Commercio was nonpaid and it's where we kind of spoke to you last, and had around 130 customers, and they turned into now 55 paid, which kind of a large proportion our existing Syncore customers, so taking more than one product from us now. And our orders product, which is aimed at the order workflow for the really long tail in the promotional products industry and that's kind of out there and been tested at the moment. We hope to launch that early next year. And on the right-hand side, growth in all these 3 areas, we hope kind of move that forward. We invest in the business and the business was like just over about $10 million. We've taken that over to $20 million, we really want to kind of demonstrate to an investor community and for our own ambition, but we're taking that beyond $30 and $40. And we really think we can kind of use investment we made in this industry and the large, fragmented nature of it to kind of push ourselves towards $50 million. If we do that, it will be a huge success. In terms of what that's meant in capital expenditure, you can see on the left-hand side of the graph here, our EBITDA has grown. So the sort of 2020 to [ 2020 ] sort of 2023, they're our actual numbers. And we can see that our EBITDA is the sort of the total and we split that pretty evenly. We spent our cash has stayed quite similar because we've been spending and investing in CapEx on a new product. And so as that new product is happen, it'll continue to be invested in and -- but now sort of less heavily than when you started those up and launching them, that curve comes down slightly. So as that curve comes down, our cash elements of the cash conversion goes up. And if our plans come together, our EBITDA keeps moving forward, and you create this [indiscernible], which kind of is a growing cash balance. And again, that's sort of a demonstration of the principles we're trying to look for rather than any sort of forecast, but continuing to grow our profitability and got helpful with new products to do that and coming down but still absolutely investing in our products but coming down slightly from the peak, and that kind of [ should create ]. If we do things right, a nice cash balance again. And then sort of we start -- we put this in our full year results to say what we're trying to do in 2023, and that is continued to [indiscernible] Syncore. Partner retention is very, very important, and we must keep an eye on that, and it's very high and -- but also attracting new partners into that. In terms of kind of putting Commercio out there, it's now paying for products but we need to keep investing into that and developing products to make sure that becomes a market leader. And then the third thing, we're kind of well on the way to launch an order. So we're at kind of various stages of those 3 different goals but all in a sensible place and very much ambitious to let's keep going. And Claire will talk you now through with Brand Addition. Go ahead.

Yes. So just touch again on. So this is the model of the industry. So the brands on the right-hand side that create the demand and the suppliers that are generally product specific that kind of supply the products. And so Brand Addition sits in the middle. So Brand Addition is, we've said sales product, it's a large distributor, but it's working solely under contract with some of the largest brands in the world. So everyone at Brand Addition customers would be a familiar name to you. So in the first slide, what we showed for Facilis, so the financial dynamics of the half of the prior years and then the half, first half, along the top. And revenue moved forward by about 3%, which is a really sensible performance in what's been a tough macro for Brand Addition. And then the pie charts at the bottom are showing kind of telling the story of where the -- how that revenues move. And what we're seeing in Brand Addition is our technology clients, they spend a little bit less with us this year as some of our consumer-facing clients, but we've seen real strength in what would be a more traditional sectors are transport and engineering. And so that combined that kind of resilience and geographic and sector spread. And has [indiscernible] that Brand Addition has managed to move its revenue line forward in what's been a difficult environment. Again, we'll kind of reemphasize, I've said it a couple of times now but the team have done a super job in moving the gross profit margins forward. And that's been in response to our customers at Brand Addition asking for us to supply more services. So kind of the way in which we work with them is more complex, requires -- required investment on our half and our customers have been willing to pay for that investment and we've managed to move that in gross margin forward as a result of that. And so kind of the -- if the revenue line and the EBITDA line as percentage of EBITDA [indiscernible] revenue stayed fairly similar. We have managed to move gross profit forward in response to those demands from our customers. And I think we introduced this graph at the full year -- on this chart of the full year. We can't often get asked about what happens to Brand Edition in a downturn or if life gets a little bit tough. And look at this slide, it shows that this is a great business that what [indiscernible] started. So we've got pandemic, we've got Brexit, we've had challenges with supply chain, freight, inflation, FX, whatever. Like if you look over that period since IPO, manage to grow that Brand Addition revenue by 20%, it's moved its margins forward. We've got 100% client retention of its top 10 clients, which is the vast majority of its revenue, and we've been really successful at winning new business. So I think Brand Addition over time is a very strong proposition. It's a great business, and this slide shows how kind of it can react to anything that [indiscernible]. And then again, kind of share -- reiterating our goals for '23 as we did for Facilis. So holding on to those customers is very, very important. And so kind of making sure that we retain and all of our major clients is a key focus for the team. And winning new because that means that we can continue to move that revenue line forward and again, are now kind of focusing on the success that we've had with gross margin and making sure that we retain those improved levels.

That's great. And taking the [indiscernible] on ESG. ESG really naturally weaves its way into Brand Edition and Facilisgroup. So Brand Addition very much from our customers and sustainability and looking for kind of more and more sustainable solutions, whether it's products or it's freight and Facilis certainly on the community side and the sort of efforts we can make there, they're engaging our suppliers and our partners in terms of making a positive impact on the community. So we have some people who are dedicated in our business to looking after this and do a super job of it. And so we've evolved what we call our 4 cornerstones. We've had been a public company now for almost 4 years and kind of keep learning and keep evolving in terms of what we're doing to make sure we're communicating clearly. We're putting our targets out there, and we kind of again articulated how we're doing against those targets. So there's a piece on that in terms of the 4 cornerstones, how they've evolved. In terms of how we're engaging with our stakeholders. Over the last probably 6 months we've been out to investors, to suppliers, to our teams, to our customers and ask them what's most important to them and pull our materiality assessment out there. And so a small print, but this is on our website now in terms of thepebblegroup.com, and we'll be bringing out our third stand-alone ESG report alongside our report and accounts early next year. So it's something that we want to ensure we do best practice at but we're not doing it for the sake of doing it to tick a box. We're doing it when it actually does make a difference in our tone of voice and making it naturally weave into the business rather than trying to force anything in there. And then that really takes to the end in terms of the outlook that we put, I think we've got 2 wonderful businesses. I think Facilis has some amazing potential, some people working extremely hard there to really drive kind of new products into the market and push kind of our customer numbers forward. So we have some super people there on Facilis side and a very differentiated business with wonderful opportunities. And on Brand Addition again, a kind of more mature business, but some kind of think it's about 400 people from Asia to the U.S. and everywhere in between in Europe, and really working hard to push those businesses forward. And in what is a difficult market, we certainly asked a lot of ourselves and our teams and we're able to say in a quite challenging space and in full year 2023, we do expect expectations to be in line with the market. So I think that's us. I'm really happy to answer any questions. I hope that was okay [ for all. ]

[Operator Instructions] We've got a few questions already. These results seem to show good resilience. How have the markets you operate in changed over the last 12 months with the current economic environment?

Yes. I think that's been a little tougher. So I think on Facilis for our customers, so you see the growth in GMV, so the growth of our -- what we see the sales our customers are making haven't grown at higher rates, and that kind of gives you a sense of that economy in the U.S. And our customers are very entrepreneurial businesses with some great sales people in there who will drive those businesses forward. So that rate of growth slow in last year, I think, has been a bit tougher in this year than perhaps even in last. And then on Brand Addition, that probably comes out rather than on an overall basis, probably a sector basis, as Claire said, technology and our consumer businesses. And our customers remain our customers. So they spend a little bit less rather than we lost customers. And then -- but we've had some of our engineer in our transport sector with some new business have really smooth that out. So I think it is -- it feels a little hard out there. But equally, there's 2 great businesses with slightly different opportunities, but differentiate business in a really interesting market, I think we'd probably hold our own. And I think we're pretty tough on measuring ourselves sometimes. And we call it solid performance when we've been out speaking to the market. I think we're probably getting a little more credit than we give ourselves sometimes [indiscernible] what we do.

And what percentage of revenue is in U.S. dollars? And how does that move in exchange rates affect revenue and profit?

Yes. So it's probably about 30% of revenue is in U.S. dollars. So I think if we compare it against last year -- so compared against last year, then I think we've had a tailwind in the first half, and that's probably we're going to have a headwind in the second as we move into -- as we move into H2. I think when we're talking about Brand Edition U.S. and Facilis U.S., it's just important to remember that it's the bottom of the P&L that we translate in. So it's the translational effect that we'll have on the whole group as opposed to the kind of all the way down.

Great. And can you tell us more about the Facilis customer base, who they are, where they're located and what gives you confidence for 2024?

Yes. So the Facilis -- I suppose our addressable market is widened [ than it has been ] now. So there are something like 20,000 businesses in the North American promotional products market. And I suppose our goal is to say to every one of those businesses, we have some technology that can help you. And that's kind of why we've rounded out the technology stack. If I look back kind of what is our flagship product, we call Syncore is very much aimed at entrepreneurial growing businesses in that sort of -- in the subsector of that. We think there's about 1,600 of those that have revenues of $2 million to about $30 million. And there often, management-owned businesses extremely entrepreneurial salespeople who would like kind of systems to help give them time to sell, so something that's sufficient, gives them good visibility. And so our Syncore products, I suppose, our business addressable market is a whole 20,000 there and then sort of Syncore, our flagship is a subsection of that, but then the new products coming out, give us access to that widen [indiscernible]. So again, the proposition for Facilis, if you're in the North American promotional products distributor, one of those 20,000, we've got some technology that came out of your business become more efficient to grow.

Great. And the orders product is addressing a different and much larger by number, customer cohort to Syncore and Commercio. How are you marketing it?

So yes, it's slightly different. And so that will be involved being at trade shows much more online and a much more direct marketing than we've done in the past. So it is a much sort of wider audience that needs to be looked at that slightly differently. But as market we know extremely well. We all know the trade associations. We have the trade shows that go there and the websites that have been sort of viewed. And so it is a slightly sort of more mass-market marketing exercise than we have in the past. But that's market we know extremely well and it's based in North America.

Tremendous. Can you tell us a bit more about the pipeline for Syncore?

Yes. And so in terms of the investment we've put in, we've got to have steady growth, and that's throughout COVID as well. We saw the partner numbers that we showed on an earlier slide, and that's been nice kind of interesting growth. And don't forget, there is a little bit of attrition in there. So those growth numbers are slightly higher. We do want to sort of make sure we're growing that responsibly, both for internally managing that, but also responsible in terms of the quality of the businesses that will be joining us. And so I think we have invested more in the sales team in order to sort of grow that pipeline. And what we need to do now is see that investment into fruition. But I think we're in a stronger place than we have been perhaps in the last couple of years in terms of pipeline. But pipeline is one thing is that reality is another. So we need to kind of turn that potential into some results.

Tremendous. And how happy are you with the conversion rate for Commercio from the trial customer set to paying clients?

I think there's 2 sides of the same coin. So we went from 130, 150 nonpaying customers to 50 who are paying. And I suppose on the external, that sort of 30% conversion, isn't that good. I suppose you could position that way you want. I'd probably like that to a bit high, but I would. So I kind of think as I judge ourselves internally, I think we'd like that to be a little bit better. If I flip that around and say that 20% of our existing Syncore customers are now taking another product from us. I think that's quite good. So depending on which angle you want to take on that, I think you can kind of look at it either way. But the facts are, we had 150 turn into 55, nonpaying 150, 55 paying and 20% of customers are taking another product from us. So you can kind of make your own judgments, which side of coin you want to look at.

Great. And can you explain what's meant by the attach rate? What determines this metric?

Yes. So it's pretty simple math. And so we're trying to drive the GMV forward. So the sales that go through our system. And obviously, kind of on that, what we'd like to do is provide quality services and technology that allow us to keep the greatest percentage of that that we can because our customers are receiving great value from us. So the 2 key metrics we want to do is provide technology and service to push the GMV forward. And then what is the highest percentage rate we can take from that and lead times one by the other, and that adds the power income. So it's really a way of saying we're trying to move GMV forward. We're trying to increase the percentage that we retain of that, and that's in kind of summary, how we're kind of looking to drive revenue.

Great. And that's the end of questions. Do you have any closing remarks?

Now again, sort of always an opportunity to probably say thank you to the teams. So our 3 brands, Pebble Group, Facilis and Brand Addition, we have some amazing people working really hard across those businesses. That's from North America into Europe and Asia, and it's thank you to those guys. They are the sort of people who produce these results. And I think, as I say, we always want a little bit more, but I kind of look back and I look at the external environment and say the guys who have done an amazing job and [ long way ] that continue.

Great. Thank you very much, Chris and Claire. And to everyone listening, you'll be taken to a web page to give some anonymous feedback on today's presentation. If you are unable to complete it now, you'll get a follow-up e-mail. We'd be really grateful if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.