THG Plc (HG0.MU) Q4 FY2025 Earnings Call Transcript & Summary

Hello, and welcome to THG's Q4 Trading Update. We are joined this morning by Founder and Chief Executive Officer, Matthew Moulding, and members of the executive team. [Operator Instructions]. I will now hand the call over to Matthew Moulding.

Good morning, everybody, and thank you for joining us this morning. I'm delighted to report. [Audio Gap] 2025 on a high, delivering our strongest quarter of the year and a record H2 that was 14% ahead of the top end of our guidance. This means that we enter 2026 with significant momentum. Our performance is a direct result of the strategic focus on core categories and territories and the incredible dedication of our teams. For the fourth quarter, the group delivered revenue growth of 7%, driven by a successful trading period over Cyber that saw revenues climb by around 8% across November and December. The strong half 2 means we've delivered our first full year growth since 2021, a testament to the business' response to a tough macroeconomic backdrop these past few years. THG Beauty delivered an outstanding performance with Q4 revenue growth of 6.4%, well ahead of our guidance. This was powered by exceptional results from Lookfantastic in the U.K. and Ireland, which grew by an impressive 16.2%. Our loyalty members continue to grow alongside spend per account with customer retention rates at all-time highs, demonstrating the health of our customer base and the quality of the proposition supporting repeat purchases. Our strategy to focus on core, high-margin prestige brands, enhancing the customer experience with new partnerships like Uber Eats, and expanding on brand visibility through retail collaborations is now clearly delivering. THG Nutrition also had an encouraging quarter, delivering revenue growth of 8.5%. Myprotein maintained its position as the world's #1 sports nutrition brand, and our off-line expansion strategy continues to bring our innovative products to a wider audience through exciting collaborations and new retail listings. Whilst whey and commodity prices have remained elevated year-on-year, we continue to diversify our channel and category mix with high-margin categories like our activewear range, delivering excellent growth in 2025 and is set to exceed 15% of Myprotein's revenue mix in 2026. At group level, this strong underlying performance was achieved alongside taking decisive actions to streamline our operations. The strategic changes in less rewarding beauty markets alongside the disposal of noncore assets has now largely been annualized, setting us up for a cleaner comparison and a strong start to the new year as well as further illustrating the hidden value in the group. Looking ahead, our goal is to build on this strong foundation. We have high confidence in our trading momentum as we begin 2026. In THG Beauty, we will continue to accelerate our digital leadership, using AI and virtual tools to enhance personalization. For THG Nutrition, we will continue to drive our global off-line expansion with new range expansions for major U.S. retailers like GNC and Kroger set to launch in the first half of the year. Across the group, we entered the new year with a clear focus on delivering unparalleled quality, value and innovation for our customers, all built on a more streamlined and efficient business. We've now got some time for a few questions. Thank you.

[Operator Instructions] We'll now take our first question from Andrew Wade from Jefferies.

First one for me on the nutrition side of things, obviously, very strong performance in the U.K. or excluding Asia, I should say. Could you just talk through sort of the shape of how Asia performed within that and also a bit about price volume, if you can as well? That's the first one.

Yes, sure. Look, so I think just to give you the breakdown in the numbers, it was 12.2% for nutrition when you take Asia out of the question -- out of the equation. And so we reported 8.5%. Asia is our second biggest market. What we don't do is give every single territory and try and break that down, as you know, Andrew. Well, I think just to give you some clarity around Asia, the proposition and the brand strength throughout Asia is really good and really strong. Well, for anyone that follows currencies, you'll be aware that the Japanese yen, in particular, has suffered, what, another 5% just in the last couple of months devaluation. So it's really struggling as a currency. We've got loads of actions and initiatives that we're working on throughout Asia and especially within Japan, where we are switching to a licensing model in some areas as well, which will actually have a bit of an impact in those numbers at the same time because more revenue has gone through the licensing aspect of that model than it would have been in the previous year as we steadily progress to try and sort of derisk ourselves from that position. So it's a slightly more complex number than just a straight line revenue figure on there. But to give some clarity and confidence, the brand strength across Asia is in a really good position.

And then I guess, probably this is on the nutrition side of things as well. I mean, across the group, your top line number came in a bit ahead of the top end of the guidance. But we're sort of looking at the overall EBITDA being sort of consistent with where we were before. Is that to do with sort of continued elevated whey prices? And how should we be thinking about that into FY '26? Is it going to be a sort of slightly higher revenue environment, but with margin rebuild being a little bit slower than previously thought?

Sure. Look, a couple of factors to take into account here. Naturally, we're pricing when it's going up, and it's been going up, it's been incredible, the demand for whey products across the globe. That has an impact on your numbers. And so there's an element that feeds into that, yes, you're right. The other thing to take into account, though, is we have seen an opportunity in marketing. And so actually, we've invested more heavily into marketing. I think there's probably about GBP 3 million of additional investment going into marketing during Q4, probably, I think just that quarter. And I think that splits about GBP 2 million into Beauty and GBP 1 million into Nutrition, if you were to do the rough maths on it. And that's because with the changes that we've made to the business model over the last couple of years, as we've gone into a real focus of high profit territories for us and pulled away from the lower profit territories, then there's been a real opportunity to spend more in marketing. So the customer dynamics and the data is really strong. And what we wanted to do is to underpin the next year, but the years ahead. So it's not a simple answer that I can say to you, it's a higher revenue and the EBITDA position going to stay static, something for the future now. It's a live situation. What I can say is, though, is if whey pricing does fall considerably, then obviously, that will have a dramatic impact on return to profitability of -- or an increase to profitability. And so I think I did a LinkedIn post and I even mentioned it on the call to put things into perspective for people. I think the math we did around Q3 was GBP 65 million of annual profitability has been temporarily taken from us since the IPO date just because of whey pricing. It will come back down because that's what happens with commodities over time. But the market has seen explosive growth, which is a good factor as we see it. On the one hand, we are seeing demand for protein across the globe reaching new highs. Supply is struggling to catch up, but it will catch up. But that does mean we've got a far, far bigger market in which to play into now as well.

Yes, absolutely. Okay. Well, sounds like you're well set up for next year with that additional marketing investment as well. So my last one was on the HMRC VAT side of things. Any update on progress there?

Yes, sure. So in terms of -- for those, as a recap, the HMRC lost the case. They made an application to appeal for the case and were denied. And so they've now, albeit somewhat late, made another appeal to a higher court for the opportunity to appeal. So there's a lot of appealing and appeals going on, but this -- we'll find out in due course whether that's in a few weeks or a few months, we'll find out whether they've been denied on that. For now, what we've chosen to do is to not change our position on the VAT. So we're still paying over the VAT to HMRC even though some of our competitors aren't doing so and so that makes an unfair sort of market position, but it's a very -- it's a prudent way to take this, and we'll get that money back in the future anyway once that HMRC, if they were to lose, they have the right of appeal, that comes back to us, and that's quite a material number. To put it into perspective for you, today, I think when we first notified the market on this last year, it was about GBP 30 million that we were due. That number is now at GBP 55 million. So it's a sizable chunk, and we just prefer to take this position, keep increasing the value that's due to us. And then that way, we've got the strongest position should the outcome there become clear in the weeks ahead.

We'll now take our next... [Audio Gap]

Dues coming. If that VAT comes back to you from HMRC, would you be, in any case, required to refund some of that to the end consumer because they're probably the ones who eventually paid that money as part of the pricing they paid for the product?

Sure. So short answer is online is in good growth. So it's certainly not in decline. That's in good growth. In terms of the answer for the VAT money, no, that stuff -- that money is for THG plc and nothing related to consumers. How we are accounting for this is the consumers, we're suppressing our margins by doing this. And so yes, that money comes back to us. So as and when we get success on that and then that will be a value payable to THG plc.

We'll now take our next question from Lara Simpson from JPMorgan.

I just wanted to touch on free cash flow actually. I mean you obviously saw a much stronger momentum in the second half of the year, both on Beauty and Nutrition. So interested if you could just talk about how that translates into free cash flow generation in Q4 2025? And then maybe just run through some of the sort of operational working capital factors that influenced conversion through the year. And then maybe just first thoughts on 2026, how you're thinking about sort of CapEx and cost discipline to drive cash generation in the year ahead?

Sure. Look, I'll let Matt or Steve go into the detail for you around the sort of the levers for free cash flow for next year. But just to give you -- you've always got to look at our free cash flow over a period of, let's say, 12 months rather than just even Q4. Q4 is obviously a great period for us, and we generate a good deal of cash there. But at the same time, when you see opportunities and you invest in your marketing, what we will do as well is, from time to time, we'll take different positions around working cap. So we may take on more stock if brands have got opportunities that they want to put to us or we feel that there's an opportunity to come out of the traps faster in Q1. So there are from month-on-month, quarter-on-quarter, some variances, but obviously, Q4 was a really strong cash generation period for us. But Matt, I don't know if you want to talk about it.

Yes, I think you covered the [indiscernible] on point, Matt. So you would always have to look at it over a full year. Q4 generates a strong cash inflow, but that's more a bit of seasonality within the year and offsets Q1, Lara. As Matt touched on, the really strong momentum we saw ourselves was particularly in Beauty that we took a little bit more stock cover just to ensure that we could make sure that we took full advantage of that sales momentum, that means that working capital is slightly heavier in the year than we anticipated, but that's purely phasing. And as you go into FY '26 with the EBITDA where consensus currently sits around the GBP 100 million mark, you'd expect to be generating in the region of GBP 20 million to GBP 25 million of free cash flow next year.

And then just a follow-up on the Beauty side. You've obviously done a lot of work on sort of portfolio optimization. I know you've had the luxury sale and sort of withdrawals from some of your areas in Europe and Asia. Are we now going to be sort of back to business as usual? Or should we expect a little bit more portfolio optimization on Beauty over the next sort of 12 to 18 months?

Look, I think portfolio optimization is done. So the pullback in some of the areas of Asia and the Europe that you're seeing, that annualized now. So that's how the portfolio optimization is done.

And we'll now take our final question today from John Stevenson from Peel Hunt.

I need to improve my speed on the buzzer, obviously. But I'll stick to Beauty, actually. I've got 3 questions. Can you put some numbers behind the performance improvements in the sort of beauty brand portfolio? And are we entering sort of 2026 in growth? Second question, I don't know if you can talk about the learnings from the Lookfantastic store. I think it's been over about a year now. How has that panned out? And have you got plans for more? And I don't know if there's any more we can do on the KPIs for Lookfantastic. You mentioned obviously great retention, but can we talk a little bit about what's happening on active baskets and sort of general spend levels because it's clearly a really, really strong performance that's carrying to the year ahead.

Sure. Look, I think in terms of -- look, I'm going to go off the top of my head here, John, because I've not got it in front of me. They're granular details. So forgive me for this. But when you look at the own brand, the beauty side of things, to give you an idea of the scale of impacting half 1 even of just the Perricone brand, right? Fantastic brand, Perricone. The first doctor brand that was out there, really do -- it really is a high-quality brand. But it had some timing issues around some of its order flows into retail and various other points that were causing some challenges. And that swung that business from being a tiny profit business to -- I think it probably lost somewhere in the order of about GBP 4 million in half 1 of negative EBITDA. So you've got a swing there of, I don't know, GBP 5 million, GBP 6 million of EBITDA in 1 half on that. A lot of those issues have obviously been addressed now. Second half, I don't think it was quite a complete reversal. Well, it has seen massive improvement. And then as we come into half 1 for this year, you'll see that, that swings back. So that's a nice profit lever for us for half 1 because we've dealt with some of the challenges that, that brand brought to us. But it's obviously a sizable revenue business with sizable margins that are attached to it. So it does get impacted. And look, I'm sure if you wanted to speak to Matt, Damian or the team afterwards, they'll give you the granular detail on that. That's me talking off the top of my head, but it won't be a million miles away.

Spot on, and the growth in [ X brands ] is about 150 basis points better because of that playing through. So exactly as you said now.

Yes. And then I missed your other questions, John, because I was scrambling in my head to think about Perricone.

Yes. Second question was the store -- how the store has done? The impact you've had in terms of halo? And then any plans for more stores?

Look, the store is bloody epic. I've got to say I hate stores as a general rule because it's completely outside of my personal wheelhouse. So it's not something I can quite comprehend that well. But it's traded incredibly well, this store that we have in Altrincham in Manchester. So we are going to roll more out. We've got one coming in Bristol. There's just been various delays on various things, issues with fit-out or whatever, but that's coming as well. So look, if I could press a button today and have a portfolio of a dozen stores across the U.K., that would be a lovely place to be in. And they just take quite a bit of work to get done to make them roll out. I think at the same time, you want the industry to help fund these. You can open a store anywhere tomorrow and throw a CapEx at it, but it will be your CapEx. Whereas if you work in partnership with brands, they will share the CapEx on it. And so we're not rushing into this head over heels, what we're doing is a steady approach. We'll probably open maybe the Bristol one plus another one this year, and then we'll just steadily way -- work our way through it and do it with the brands. But so far, so good. I mean, look, the beauty sector and industry is having a real purple patch right now. And I do think that market is outpunching pretty much any other market. So look, I think you'd have to be careful that you don't run in and open 40 stores and find that the market changed in 5 years' time or something, but it's been really positive so far.

And that positivity reads through into the sort of the overall online piece as well? And you get a halo around the store, yes?

Yes, indeed. It does, yes. You get a really good halo effect. We see it. You can see the data, the benefits. If you looked at the likes of Boots, you can imagine the huge benefit that you get on their beauty portfolio from their store portfolio across the world and there's no doubt by having that, it's a marketing tool at the same time. So our approach when we were trialing this first store was, well, look, let's assume it loses a little bit of money and we'll just get the halo effect off the back of it. Actually, it's been miles better than that. And so you sit there going well, and we can see and track the halo effect at the same time. So it has been a real positive.

Fantastic. Brilliant. And then just finally, I don't know there's any else behind the KPIs that look fantastic just in terms of sort of active basket spend levels, obviously, some big drivers this year.

Yes. Look, I think, look, it's a big business. The beauty retail divisions, GBP 1 billion of revenue. So there's a lot of different factors that make up its performance. What I can say is we've completely -- we've had a really, really strong time on things like LED devices. We can obviously lean into these things when the market and the trends come that way. There's been some good brand performances at the same time. The app has been a great success for us as well, keeping people on there. The loyalty schemes have played a key part at the same time, and we launched those about 2 years ago. So there's a whole host of things that you need to be right on. But at the same time, I think the market is really positive as well, right? I think TikTok's had a real impact on the market, the youthful side of it, the customer demographic has changed where the market has shifted from 20 years ago being from 40s to 60 years of age to now being probably 14 years of age to 70 years of age. So the market is growing in lots of different ways, and we're just trying to make sure we play our part on that through all these different initiatives.

With this, I'd like to hand the call back over to Matthew for closing remarks. Over to you, sir.

Okay. Well, listen, thanks, everybody, and thanks for jumping on the call at short notice as well. And more importantly, thanks for the support from everybody from THG staff to all the stakeholders and investors, and look forward to speaking to you in a few months now. Cheers.

Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.