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.

Tamsin, thank you very much. Hi, everybody. Thanks for giving us your time today. As Tamsin said there, we're going to go through the half year results for '24 for The Pebble Group. I'm going to follow a usual format. I'll kind of introduce it, giving a bit of background to our industry and some highlights. Claire will run you through some numbers, and then we'll dive into the individual businesses, Facilisgroup, Brand Addition and take some questions at the end, happy to do that. So I think it will be about 20, 25 minutes and with questions at the end. And so it's myself and Claire sort of center, a great business with a super group of people. I've invested both financially and emotionally as well. I've been part of the business for 24 years and Claire for 17. And so being a big part of our lives as well as our sort of work lives. In terms of the industry that we're part of, promotional products are all around us. So all businesses, sectors, sizes and different industries and geographies use promotional products to promote their organizations albeit with their customers, their suppliers or their people. And when done well, promotional products are kept engaged and people remember the events, the person or the brand when they receive those goods and a really cost-effective way of business and engaging with their target audience, and that's the wide business that we're in. In terms of the size of that industry, it's a $50 billion industry. So this is a large global organization. Half of that is in North America. And our lens into that industry in The Pebble Group is through 2 different and differentiated businesses. So that $50 billion, we see about $1.5 billion. And then taking the different businesses one by one: So Facilisgroup is the vast majority of that. We're not actually buying or selling the product itself in Facilisgroup. What we're doing is providing software to small- and medium-sized promotional products distributors in North America and to enable them to go efficiently and grow efficiently their sales of promotional merchandise to their end users through a technology platform. We actually sell products with brand vision to some of the largest companies in the world under contract. And so those were Brand Addition organizations who want creative product, deliver consistently and know where that product comes from, and that's what Brand Addition specializes in. So through those 2 organizations, that $1.5 billion is our lens into that $50 billion industry. In terms of what we think we are, and I think as we get to the end of this presentation, we'll pull this slide up at the end, and it would be nice to see. Hopefully, we're going to reflect these 5 items as we talk through the organization. So we believe that this industry, I've been in for 24 years, and it definitely has moved in how the product is used and the sophistication around it. And we think the future will really be centered around great use of technology and sustainable product and a thread through what we are doing as a whole group and in the individual businesses in making sure we're advancing technology and sustainability expertise. We're doing that on a global footprint, particularly on Brand Addition. And at the moment, Facilis is only in North America. And I say, not only Claire and I have been here a long time, but we do have some great experienced people all around us and actually bringing new people to help us evolve and develop as well. And then you'll see from our businesses, both cash generative and -- based upon a strong balance sheet. So we don't have any debt. We do generate cash and we have choices on what to do with that cash. And again, we'll talk to how that goes. So I think there are 5 really decent cornerstones that we think were investable, but hopefully, we can demonstrate that as we walk through. In terms of highlights for the half year results, as a group, our EBITDA pretty flat year-on-year, and that's a reflection of the industry as a whole. But still, I think it's a very respectable result. Our gross margins have improved, and that's principally based upon advances that made at Brand Addition and we talked about the cash kind of been in a good place. In our businesses, we have evolved the leadership and the leadership people in Facilisgroup over the last 12 months, and I've taken quite a central role in that business much more than I ever have done in the last 12 months, as I said. Some nice indicators what we look at to predict our future revenues is based on the GMV or the sales that go through the platform by our customers, and that's moving forward, as are all the preferred suppliers that go through the system as well. And Claire will talk about the capital expenditure, has been very high over the last couple of years and very deliberately so. But as those investments in those products are peaking, they will be coming down, and we'll kind of talk to how that's actually happening. And then at Brand Addition, a tough second half last year, very much sort of back on track in the first half of 2024. Super retention levels of some very good clients. And those gross margins, moving forward, demonstrating that those customers that we're working with and some of the biggest organization in the world are really valuing the services that we provide to them. So I'll hand over to Claire, who should talk through the numbers, and then we'll go through the individual businesses.

Thank you. So the financial highlights really showing you that our financials are in a sensible place. So revenue, pretty much in line with last year, it is slightly down. But what we have been able to do through moving our gross margins forward and control in our cost is make sure that we kind of keep hold of that EBITDA and manage our profitability. As Chris has said, our cash is in a good place. So cash is ahead of where it was this time last year, and that's after paying GBP 1 million extra in dividends and also from starting the share buyback program that we announced back in May. Recap here on the financial dynamics of the businesses. So there are 2 very different business models. The chart on the left shows you the revenue -- the group's revenue split by business. And the dark blue slice of that chart is the revenue generated by Brand Addition, the business that's selling product. And then the smaller pale blue element is the SaaS revenues of Facilisgroup. And we can see that those kind of SaaS revenues are coming through excellent EBITDA margins, mean that the profitability of the group is split 50-50, even though the revenue is -- the lion's share of that sits with Brand Addition. I'll answer through through the financial statements. But again, the other point I've just made on revenue so that we were down 4% versus last year, but we're kind of managing the impact of that in our profitability through moving gross margins forward, and that's been done in Brand Addition. The guys have done a great job of that and managing our cost base so that our EBITDA is maintained. The group's balance sheet is largely Brand Addition. So when you look at this, then think the working capital all comes from Brand Addition. Facilisgroup that has very minimal working capital in it. Noncurrent assets includes the investment that we've been making over the last couple of years on intangibles in the software products at the Facilisgroup. But below that, we've got working capital that belongs to Brand Addition. And it's kind of really high quality, backed by some of the largest businesses in the world and translates really efficiently to cash. And cash flow, as I said, kind of we're in a good place, ahead of where we were this time last year, have a really well-trodden, predictable cycle in terms of our working capital, and you can see that kind of when you look at '24 versus '23. We have an outflow in the first half. That peaks in Q3, and we're now coming out of the other side of that, and cash is coming back into the business. CapEx, we said would reduce and it is reducing. You can see that there. And then you can also see those incremental dividends being paid out and the ongoing -- impact of the ongoing share buyback program. And this slide is kind of taking you from the operations and the operating uses of our cash, which is what we're kind of setting out on the left-hand side, where we're saying that's what we -- the dark blue bits are also managing the business as usual also. We kind of -- we've got a strong balance sheet, as we've said, debt-free and a sensible amount of cash that we're comfortable with the quantum that we've got there. The business needs working capital and Brand Addition needs working capital as it grows, so there will always be a little bit of investment there, but that's proportionate to sales. And then we have a kind of ongoing levels of maintenance CapEx. What we're seeing on the right-hand side is like what do we do with the excess cash flow that the business is generating. And obviously, we have choices around that. We have been investing in the product development at Facilisgroup over the last 24 to 36 months. But what we signaled last year and is happening this year is that, that investment is coming down. So that means that there are going to be more cash in the group, which gives us other nice decisions to make. And so we can say that that's the kind of -- that's what we're showing there in point 4. We have increased our dividend distributions, and we would like to continue doing that. And then we've got choices around what's left with that remaining excess cash flow, what do we do with it. And at the minute, we're choosing to use that through a share buyback program.

Okay. Thanks, Claire. And so kind of that's some of the group matters underneath there. The group's numbers are basically made up from 2 businesses, Facilis and Brand Addition. I'll walk you through Facils, and then Claire will do the same with Brand Addition. So the chart at the bottom there talks about the way the industry is structured. The brands create that 50 million on the right. The brands create that 50 million of demand. We have a supplier network that might specialize in drinkware, writing instruments, apparel on the left-hand side, and the distributor brings all that together. And where Facilis helps is providing technology that helps the efficient movement of orders between the suppliers and the distributors. And sort of expanding on that a little bit further, if we sort of say, on the left-hand side, what I'm trying to do here is really sort of explain where Facilis is actually pointed towards. So on the left-hand side, we've taken that sort of $24 billion, $25 billion of spend in North America and put it into 3 different buckets. So the bucket at the top, the first $8 billion, is about the top 100 distributors in North America to do that. And right now, that's not in our target market at the moment. And then at the bottom, there's a really long tail of entrepreneurs, good salespeople, who go out there and want to sell to -- sell promotional products on a sort of [ sole ] business basis. So looking just to have a nice lifestyle. In the middle of here is really where Facilis' sweet spot is. We have a small-, medium-sized enterprises, who offer management-owned businesses, who have grown from being single salespeople into having a [ network and ] infrastructure around them. And Facilis customer average is around about $6 million of spend. But in that sort of middle book, it was around about $5 million of sales that they're actually generating. And our sort of flagship product, Syncore, which generates the majority of our revenues at the moment; is very much pointed at those 1,600 SMEs. We have about 240 of them at the moment. And what that does is bring, through technology, a product search tool, CRM and an order workflow and real discipline and visibility around the businesses and through buying technology and the $1.4 billion sort of GMV that goes through that, there's around about $1 billion of spend, and we try and take that spend and point to the best suppliers in the industry and support our customers interacting with those best suppliers. And so Facilisgroup really has 3 things that it brings, it's technology, supply chain support and then a community in bringing all those partners and suppliers together to make the very best of the relationships. And that's what Syncore does and Facilisgroup brings to those customers. And that is a real cornerstone of what we're doing, and winning more market share is an important part of our growth. Equally, Claire talked about sort of rounding out our offering, developing new addressable markets and new product, and that's where orders and stores are coming in. And so stores really pointed towards our Syncore customers at the moment, and stores is an e-commerce platform. So if Syncore sits at the back end of them and sort of interacting between the distributor and the supplier, then actually, the e-commerce platform stores sits between the distributor and their customer, trying to support that sort of order and consolidation spend through the e-commerce platform. So that is through its major development points, and now we're trying to continue into evolve that product, [ but ] really try and sell that product now into our existence Syncore customers. And our orders product is pointed at really long tail we talked about before, those really sort of individuals or selling promotional products, sometimes kind of using no systems at all or might be something provided by the industry trade bodies. And what we'd like to do is use our expertise in this industry and workflow and our supplier relationships and to provide them some technology that really helps support a very smooth order workflow for those businesses. And if we can do that, that really expands the total addressable market that we have as an organization. So that's the development that we've been putting over the last 12 months. And on the right-hand side, how we translate that into our income, is our products who want to drive GMV, drive sales through our platform. And in doing that, also provide value to the people putting those sales through that allow us to increase that attach rate, that percentage and what we actually keep and that sort of bottom line. Then sort of the GMV multiplied by the attach rate gives us the income, and that shows you the 2023 full year numbers on the right-hand side. In terms of our actual performance, it's been pretty steady performance over 2020 and 2024, the first half. There is a tough market out there. And so the market is, on an overall basis, pretty flat. So that means we've been in line with the market. We'd like to be ahead of it a little bit more than we are, but we've actually done a very solid performance. And you can see here, partner numbers are made pretty stable. GMV is going up slightly, as is the spend through preferred. But what this is over the cycle, 15% CAGR business growing its revenue on really strong margins of 47%. And if we can get back to that growth and make sure on an ongoing basis, we're a double-digit growth business kicking out circa 50% margins. This is a really powerful organization and something I've been really enjoyed getting involved with a lot more over the last 12 months. In terms of partner numbers, there's 2 charts that we shared. The chart on the left is what we shared when we did our full year numbers for 2023, and it show that actually the numbers have come down slightly. Most of that is in the middle where our customers or our partners have actually sold their own businesses. So not real underlying attrition. But you can see on the right-hand side of the chart, that's steadied out. We've actually won a lot more customers on a sort of bringing into the -- and attracting to the platform. And what we're really doing is making sure that quality partners have joined us as customers. So they have to be above $2 million in sales to sort of pass our entrance exam. So that means that their businesses that will be able to take advantage of our technology, our supply chain community that we bring together. And that's the bar that we're setting, which is new, really, in 2024. And then on the right-hand side, our overall -- where we got to 240, gives us an underlying attrition range of 2%. So that's the 98% retention that we have. In terms of -- this is a bit like my school report. This is the year that I've really concentrated on over the last 12 months. And so I'm not going to go through it in detail, but I will talk about the 4 points at the top. And so really important, growth starts with looking at your existing customers and really important that we don't take those existing customers and partners for granted. We keep very close to them and then we keep evolved in our technology and our relationships, and we've been very sort of keen to do that. We do want to bring new partners in there. We're very clear that we want to grow by winning market share. But also, it's making sure the benchmark of which they bring on is correct. So good businesses, the right size, and that's been very important in defining what we're doing on point 2. And then we've got some super suppliers that we work with some of the best in the industry, and we really want to help our preferred suppliers and our partners get the best out of each of them, work together and really push more and more of those businesses together. And that helps Facilisgroup Group, it helps our partners, it helps our suppliers, a real win-win-win in that situation. And then the fourth thing is we definitely want to bring -- we don't want to just have Syncore product, and that's it. We definitely want to round out our offering both in terms of offering the e-commerce platforms and go to a different addressable market. And we spent a lot of time trying to get that side of our business right as well. So they are the 4 things that we're really focusing on in 2024, and there will be a version of that, that will evolve into 2025 as well. Claire, can you talk about Brand Addition?

Okay. So this is the diagram that we shared earlier in terms of pitch in the industry. And so Brand Addition is one of those distributors that sits in the middle and it's the conduit between the brands and the suppliers. The Brand Addition is -- works with like large international brands on an international basis and selling products under contract. The financial metrics run across the top of this diagram, kind of sensible position on revenue versus a return to stability after the challenging second half that we had last year. As I've said already, great progress has been made on our gross profit margin. So they are at 35 points versus 33 last year. And that -- kind of that, along with control of the costs, mean that we've been able to manage our profitability really sensibly. The bottom of the chart is showing that nice spread of revenue by sector and by geography. And kind of that's helpful for Brand Addition and build some resilience into the Brand Addition model. What we kind -- what we're trying to show here is kind of the bottom -- if you look in the middle chart on the bottom shows a story of 2023 and those kind of really big swings that were difficult for us to manage in both the consumer and technology client sectors. And hopefully, you can see from the chart at the top is that that's really -- those kind of large swings have really narrowed down this year. And so we've got kind of movements around about the middle, but what I would call a normal -- normalized level of trading. We've got some stability back and the business can handle kind of volumes and fluctuations alongside kind of growing its margins and controlling its costs. Continue to that excellent client retention. It's kind of the team really locking up the clients and that helps, as Chris said, kind of growth starts with holding on to what you've got. And so we've done a good job there. And again -- I think I said it about 5x now, but the gross margin improvement really makes a difference and is really important when the macro is slightly uncertain. So progress in '24 for Brand Addition, so client retention, as I've just said, remains really strong. And the opportunity to take our existing clients into new geographies exists across the client portfolio in Brand Addition. And this exactly what the team has been doing. Tender activity is in a really sensible place, and there's a lot going on. I think what we feel is the final decision-making around those tenders is a little bit slower than has happened historically, but the activity levels are still there. And Brand Addition have appointed a new Global Marketing Director that's kind of working again at how we go to market and making sure that we position our business the best way possible to be on those tenders when they come out and be in the best position to convert.

Thanks, Claire. And so underpinning the 2 businesses, and we do this at Pebble Group level, is our ESG policy. So -- but really, what it means is doing things the right way for the right reasons, and we've bought into that for a long time. That can now come under a banner of ESG. And so Kirsten, who is on the screen here, so he leads that from our business, supported really well by Lucy Penfold, who works with The Pebble Group as well, and making sure we're addressing, when it's relevant, that topic across both of our businesses in our group. And it's not always done in exactly the same way as we've got quite different businesses, but it's done in a way that's right for that business because our results obviously matter to us, but results the right way matter as well. And so ensuring that we are following best practices, but it must be in our tone of voice and our approach and must be very kind of genuine, that's the way we're going to approach ESG, and we do. And Kirsten is on an interview, you'll be able to see him as you take that QR code. I talked about Facilis and its community. And so if we have technology, then we have that supply chain element where we're trying to bring that together. There is an element of community that's not always obvious in Facilisgroup from the outside anyway, it's very obvious from the inside. So we run events, we're in touch with our partners and customers on a daily basis and actually trying to support those businesses to grow and be successful and doing that by not only kind of building our relationships with our customers, but actually customers building relationships with each other and our suppliers. And we hold 2 major events every year. One is part of the wider industry and 1 actually kind of is a Facilis Group event only. And again, I've had the opportunity over the last 12 months here really to get really close to this and have lived and breathed it, and it's a very important part of bringing people into the business and also helping them stay. So it's a form of ESG, but again, it's been going in Facilis for a long time. It's running the business for the right reasons, the right way, and then good results should pop out the other side as well. And that's really kind of a trough through everything. So in terms of where we are looking for the end of the year, it is definitely heads down and making sure we are going to hit those results for full year 2024. We've got a kind of super cash position. We are growing the returns that come to shareholders. But that's -- we're able to do that because of, say, cash, no debt, et cetera. And talked about a lot of us have been here for a while. And I think that's a good thing, and it gives the company a real heart and soul. But also, we want to keep moving forward. And part of moving forward, we're really pleased that on Monday, we announced that [ Anne ] had become our new Chair, she brings a great skill set, and we're really looking forward to working with her. And around Facilis Group and Brand Addition, there are new senior hires and new leaders that are coming into the business all the time. And they definitely kind of freshen our organizations up and keep us moving in the right direction. So I hope we kind of -- you'd be able to recognize some of the points that we make here and what we've talked through. But I think we're 25 minutes in and just like to say, thanks ever so much for your time. And from here, I'll hand back to Tamsin and we'll happily take questions.

[Operator Instructions] And the first question is, are there plans to expand Facilisgroup outside North America?

I think there, I think Facilisgroup can, and I think it should. But equally, I do believe there's further inroads we can make right now in North America. So we talk about our capital allocation slide, and that's no different. And our time and efforts place in North America now will bring us the biggest benefit, and that's what we're concentrating on. But if this is Horizon 1 for this group, which I [ can ] think can be kind of -- can be really excited in the journey we can go on, Horizon 1 is definitely focusing for Facilisgroup on North America, but then Horizon 2 can be where else can we take it, can be in different sectors, into different geographies as well. But right now, I feel there's a really good job we still need to be doing in North America to grow.

Excellent. And are there any further areas of hiring needed in Facilisgroup?

I think we've got a super leadership team that is there. And again, it's a nice opportunity asking that question for me to say how I've enjoyed kind of working. I've worked very hard over the last 12 months in that, and so I should, but that's been a very enjoyable experience as well getting to know our team, our leadership team and our partners. I think always looking to evolve and keep moving forward. And we hired a new Chief Products Officer, who is making a big difference. And so I am leading that business still. And we are working out is that sustainable and right for our team, for our customers and for our suppliers. And so we are working out the long-term [ precedent ], how does that look. But overall, I think we've got a really strong management team. But that doesn't mean that kind of stops firing on there, I think, we're ambitious to grow. So that probably does mean over time, new leaders come into the business as well to add to what we already have.

Great. And you talked about getting back to double-digit CAGR and a 47% or maybe more EBITDA margin. How long will that take? Or maybe a better question, what needs to happen for that to be achievable?

Yes. So last 12 months at Facilisgroup, it's easy for me to talk about having sort of lived and breathe there, it has definitely been 1 of just taking stock and really sort of coming together and making sure we've got the right people and a clear approach to the market and again, making sure what we have has been thoroughly stabilized. And I hope that that's a position we're now in. And so really we put on the -- I think, on the Facilisgroup chart that said, progress in 2024, there was 4 points on there. And if we can take all those 4 points this time next year, I believe, we will be towards that double digit again. So it is making sure we've got great relationships in the customers we already have, and we hang on to those, absolutely win more in market share, support our suppliers and our partners in working together and pushing more through our preferred partners and again, growing into real material income from the new product we've invested in. So those 4 areas -- and again, exactly kind of how it all kind of pans out, time will tell. But if we get that right, I do believe that we hit those numbers.

And in the current market, which has been somewhat challenging, which promotional product categories are doing well and which are more challenging across the group?

So if I think that means sort of actually product categories, I think, in terms of physically what they are. And it's not -- I don't think one category is better than the other, I think the great thing about promotional products actually kind of you can put your brand on almost anything. And so the -- what is -- so the industry has been flat. It hasn't gone backwards. It's been flat. It's still a large industry and very important part of people's marketing mix. And -- but I think it's the overall budget of the corporates in North America and in Europe that have been under pressure, and people have been a little bit cautious about. So I think it's our -- it is businesses marketing budgets that will affect where the promotional product spend as opposed to writing instruments gets kind of -- is under more pressure than apparel. That really doesn't matter to us or our customers. What does matter is that those budgets are there for people to spend and invest with us, with our customers.

Great. And you talked about reduced capital expenditure, but what does that actually mean in practice?

Okay. So in the back of our presentation, we shared some numbers in terms if where we see CapEx go in the full year, and we put those out in March, and we're kind of still standing behind those. And that includes a reduction this year of $1 million in spend. And what we're guiding to was is that there'll be at least that number again next year. On the capital allocation slide, we point out that there's always a level of maintenance spend in Brand Addition, and we expect that to continue. But what we're also saying is -- when we get to 2026, people should be thinking about Facilis as around about 20% of revenue is its total CapEx budget as we hit maintenance mode on some of those new products?

Great. And what are the priorities for you on new Chief Product Officer of Facilis? Is it getting the core single product back to growth or the new orders and store modules?

Yes. And I think it's a bit of both. It's all of that. I think we've got some super people working in technology throughout the business and in the Facilisgroup, especially. And I felt -- and again, we got some help from 1 of our nonexecutives, Dave Moss, who is the founder of Blue Prism and much more experienced than myself and been involved in the sort of leadership of technology businesses. And I think -- so we have some great people who are in there and still with us. And -- but what I think we needed was a very clear leader of technology from the business, both internally and externally. And I think that's what we have and that's what we've recruited. So that does mean we're seeing all of the above. And again, but sort of where exactly sort of those that daily time is spent, I think, is very much up to him, he will be the person that will sort of decide that. But we are thinking carefully where capital expenditure goes. But now we do have a clear leader for our customers to recognize and our suppliers as that is the person who's owning tech in Facilisgroup, and that same goes for internally, have that clear responsibility for who has that as well. So very much up to him, which direction we go and in terms of what will be the best commercial to benefit on a long-term basis for us.

Great. And you've got a new Chairwoman. Why did you pick her on? And what does she bring to the company?

Yes. Well, I think [ you ] pick each other. That's for sure. It's sort of -- it's definitely a relationship that you have. And so we needed -- so our former Chair stepped down, I think, at the AGM in the end of April. And so I sort of took that title for the time being, but always on a temporary basis while we got an independent nonexec in. And so we went on a thorough search against a job specification and got some external help with that. I think I saw 11 in total, quality people on that short list. And it was absolutely great, the enthusiasm that those people saw in the business and the opportunity they saw was -- took a lot from that, that capital markets and is particularly small cap, a little bit of pressure now and sometimes seen as less attractive to private equity markets. But there was a queue of really good people wanting to be involved in our group, and I took a lot from that. We had some with quite traditional background in terms of managing the Board, some in the marketing background, again, with really high quality and a couple from a technology background. Now, [ Anne ] falls into that technology background, but has also been an experienced investor and nonexecutive director as well as an exec director. And I really love that mix of skills and background that she had, but also the questions that she asked me about the business and the enthusiasm she displayed for it. So we're thrilled to welcome her to what is a strong Board and really looking forward to working with her.

Great. The last question at this stage anyway. The share buyback program is still happening, but it's taking a while. Can this be accelerated?

I think we are kind of obvious -- I think, I Chris just referred to as wanting a Chair and making sure that we're on the right side of governance. And kind of what we've chosen to do as a Board for the time being is to operate firmly within the [ marked ] safe harbor. So we kind of -- would we like it to go a little bit quicker? Yes, absolutely. But that's challenging to do in a small cap business where liquidity is difficult. So yes, we'll do all we can to kind of move that along. But I think accelerating it at the minute is probably not on the agenda.

Okay. Lovely. And that is the end of questions. Chris, do you have any closing remarks?

I think always at this place, Tamsin, it's nice to say thanks to all the teams. There's a lot of people across The Pebble Group, Brand Addition, Facilis, who are working really hard on our behalf. It's been a real pleasure to get to know the Facilis team a lot more over the last 12 months. But Brand Addition, I don't think I forget you guys as well. So thanks to everybody there. And we're easy to find if you need us, and appreciate you spending this sort of 30 minutes with us now. Thank you very much.

Great. Many thanks to you both, very much appreciated. And to everyone listening, you'll now be taken to a web page to give some feedback on today's presentation. If you can't complete it now, you'll get a follow-up e-mail about an hour later. 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.