THG Plc (THG) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for taking the time to dial in this morning and hear about our trade update. In terms of the people that I have with me, I have a subsection of the senior management team of John Gallemore, the CFO, but also a specific responsibility for Ingenuity. I have Matt Rothwell, the Deputy CFO. And then Adam Knappy, who leads our marketing as a Chief Marketing Officer; and then we have Kate as well, who leads our IR. And obviously, we'll all be ready to answer any questions at the end of this, but I just want to give you a brief update on the trade performance of the business through Q4. In terms of the financials, I'm pleased to report an outstanding performance at the end of what has been quite a transformational year for THG. Our overall group revenue has increased to GBP 558.7 million for the quarter, which is 51% up year-on-year. Now that's an acceleration from the Q3 growth that we saw of about 38.7%. So particularly pleased with that. But as the divisions were to break down, you'll see a key standout was our Beauty division, where we saw a real acceleration in growth versus where we've been in previous quarters. The general outperformance was across most territories in the world and generally across most categories, even though it was very strong. We saw a great performance across many other categories within the group. And you'll note as well, we're really pleased with the Ingenuity progress that we've made, and we today announced a number of contracts from a selection, which have got some major names in there, but particularly pleasing is the fact that there's a lot of personalization that is involved within those contracts. In terms of GP and margins, we saw consistent gross profit growth throughout the period. What we've then done with that progression in gross profit is reinvest that for long-term growth where appropriate. And I'm pleased to announce that we created 3,000 jobs in the year. So we went from 7,000 to 10,000 workforce. We opened 5 warehouses across the world. And so we've really invested across our global distribution. We continue to invest at pace across our technology stack. And you'll see some data in our release around our customer acquisition, and we're really pleased with the progress that we've made across various aspects of our customer acquisition. And what all that means is, we've still been able to make all of those investments and yet maintain what has been very stable EBITDA margins, which is also really pleasing. The performance has allowed us to take a look at our guidance, and we were previously guiding for 2021 the 20% to 25% growth. And we set that to the IPO, and we stood by that through the rest of the year. We've obviously now got a much higher base following the performance that we saw in the second half and in Q4. So off a much higher figure than what we predicted at IPO. And then including the fact that we've made an acquisition of Dermstore, we're now increasing our guidance to 30% to 35% growth for 2021, and we support that by saying as well that we'd expect there to be stable EBITDA margins, as you've seen through 2020. In terms of some of the operational highlights, we did make a lot of investments in various distribution centers, as we talked about. But really, the performance is also down to some fantastic performances across the colleagues that we had in our distribution centers. We've brought a lot of additional space on board. It brought a lot of additional headcount, enabling us to be able to operate in a COVID-safe environment, but the dedication of people coming into work and helping us deliver these numbers is greatly appreciated. And those efforts allowed us to have record timings in clearing the Black Friday volumes. And to give you a feel, just on Black Friday alone, we typically get something around about 20x more orders in a day than we would do on a normal day. So that's the kind of task just on that one 24-hour period that the organization is stress tested to deal with. So we're really pleased at being able to get that volume out in record time. And then we also touched on some of the customer numbers in the operational highlights as well. 3.5 million new customers that we acquired during Q4, which is really strong. We previously gave some information in the last update that we gave at the start of December, where we said we'd added 1.7 million in November alone, but 3.5 million is a material number to us. And that compares to 10.7 million new customers that we brought on board during 2020 as a whole. And a particular highlight as well is the progress we've made across various aspects of our marketing channels. We often talk about our influencer platform and the progress that we've made there. But the number of downloads of our apps has really been a highlight. We went from almost none, I think it was less than 100,000 downloads at the start of the year, to 2.6 million downloads by the end of 2020, which is great as an underpinning of future growth. And then in terms of Ingenuity, it's been another strong quarter. The business grew at 144% in the Ingenuity commerce piece. And the tech aspect of that grew considerably higher. The partnership element was -- is a slight drag on that, and that's just purely down to timing on when we bring partnerships on board, and that's the likes of payment providers who pay to access our technology stack for our customers, so on and so forth. So we're really pleased at the progress across the Ingenuity commerce and the progress we're making there. And then in terms of some of the new clients that we talk about in there, Glaxo being a name many people will have heard of, AkzoNobel, Creed. There's a lot of personalization, as we touched on earlier, that goes into those client wins, which is a real highlight for us as well. We've also today announced an addition of another nonexecutive in Tiffany Hall, and she brings significant retail and plc experience. And then in addition to that, we've also added 2 strategic advisers to the Board, which is there to support our non-execs and help them assessing risk and doing detailed reviews across the group. So in summary, it has been an incredibly transformational year for the group. We've been able to deliver increasing revenue growth and a number of upgrades, and that's despite the task of bringing THG to the public markets. So we're really pleased in that. We're pleased in the creation of jobs. And we're also very pleased to have been reinvesting the proceeds that we've raised at IPO and some of those proceeds and deploying them for future long-term growth because that is the key reason in which we came to market in the first place. But especially pleased as well in the commercialization of our technology. And all of those factors mean that the upgrade that we've given, we've got good momentum and good confidence in being able to do that. And so with that, thank you, and I'd like to thank all of our colleagues once more for the efforts they've put in, and then I will hand back to Hugh for any Q&A, please.

[Operator Instructions] Our first question is from the line of Charlie Muir-Sands at BNP Paribas.

Congratulations. I just have a few, please. Great news with respect to the deals you've announced today. I realize that the amount of revenue that each deal generates very much depends on the growth rates that the business has achieved, given that it's quite a variable cost model. But I wondered if you could help us think a little bit about how Ingenuity e-commerce revenues might continue to ramp up into 2021. Secondly, the guidance that you've given, the 30% to 35% growth in year ahead, my estimate at least is that I think M&A from particularly from Dermcare might add around 11, 12 percentage points. So without wanting to be churlish, is the sort of the organic outlook potentially conservative? Or is it based upon the fact that you've got that higher base than you expected? Or how should we think about that? And then finally, again, on the year ahead, you've guided, very helpfully, stable EBITDA margins. I understand that Dermcare is likely to initially at least be margin dilutive. So what are the offsetting levers you've got to achieve stability at the group level?

Sure. So I'll let John talk on Ingenuity in a second. My two pence on Ingenuity would be, if you looked at the revenue profile of that commerce asset, I think, for last year, for 2019, the total revenue of that nascent division was about GBP 5 million. In terms of where we finished this year, I think it's somewhere -- is it -- what is it, John?

Just on the GBP 20 million.

In the GBP 20 million. And then obviously, so you get in the direction of travel there as to how that's progressing, it's obviously growing quite rapidly, but I'll let John answer that. In terms of the outlook guidance that we've given of 30% to 35%, Dermstore equates to about 8% or 9% of our revenue in terms of what we've forecasted and guided to on that. So essentially, you've gone from a 20% to 25% increase in sales for next year in terms of guidance to what we're guiding now of 30% to 35%. So you've got a small increment that we've given elsewhere. It's obviously off a much greater base. So when we were giving that 20% to 25%, we were talking about THG sales growth for this year being 25%. We've delivered slightly more than 41%. So it's off a much bigger base. Obviously, we've got strong momentum right now coming into the new year. It would be somewhat imprudent of us, I think, to come with anything stronger than that with all the unknowns that are in the marketplace. We do have great momentum, but there needs to be some sense applied to -- in terms of how we approach the new year. But Dermstore is about 8%, 9% of revenue. And so there's a small element of additional upgrade on there in terms of the overall percentage growth, but actually offer a much, much bigger revenue number. And then we'll see how Q1 delivers and see how the macroeconomic looks, and then we'll review the situation through the year as we've done this year. And then sorry, yes, your EBITDA margin guidance. Yes, look, I mean, just generally speaking, we've guided to stable EBITDA margins. You're right that from the outset Dermstore is dilutive. We have got tiered Ingenuity commerce, which is progressing, which is obviously very accretive. We've got our own brand business, so on and so forth. So we do expect to be able to, through the year, maintain our EBITDA margin despite the dilution effect that would see in Dermstore.

Okay. So we now go to the line of Rob Joyce at Goldman Sachs.

So 3 from me. Look, sorry, if I actually just missed that just on Ingenuity. But just within the guidance for the group, what do we think that GBP 20 million revenues goes to in 2021 on Ingenuity commerce? Second one -- sorry...

No, no, no. Go ahead. We'll get all the questions. Actually, you're right. Sorry.

Yes, yes. So they're all Ingenuity, I'm afraid. So I'll just get to it. And then, yes, just looking at the subscriptions of the Ingenuity contracts, they do seem to be getting potentially more complex or definitely more wide-ranging in what you're doing. Is there any change there in terms of how that impacts long-term margin opportunities? And then final one, the -- so far from Ingenuity, it looks like we're seeing a series of incremental wins, albeit with some increasingly larger brand owners. What do you think could be the tipping point that leads to an organization taking the decision to sort of roll out Ingenuity organization-wide?

So on that revenue guidance, the best thing -- best way for me to show you that revenue guidance would be as we touched on GBP 5 million for 2019 was just that, what I -- that nascent division delivered. Then you're talking circa GBP 20 million for 2020. If we didn't win another contract this year, that revenue would be about GBP 31 million for this year. So obviously, then with -- just in terms of if we didn't do anything else, that shows you how that revenue channel is progressing. Now obviously, we've gone from 5 salespeople to 54 salespeople in recent months. So we do expect to then bring more contracts on board. As you would imagine, we've got a strong pipeline of contract wins that we're working on. So it's gone from GBP 5 million to GBP 20 million with a GBP 31 million revenue if we did nothing else for this year. And so you can see the direction of travel very clearly there. So I think that hopefully answers that question. I think -- I mean, John, do you want to answer the -- I mean the complexity point I'll answer for you, while John does the second question because I can't actually remember what that was. But the organization-wide, typically, you've got to look at how these contracts develop. Go back a couple of years, the very first contract that we won with a major CPG was only a GBP 400,000 contract in total for 1 year. And now that is a, I don't know, probably GBP 150 million 10-year contract. And we just keep progressing through the organization. So I don't think you'd ever get a major global CPG worth hundreds of billions of market cap that just says "Right, we're only going to use you from the off." And really what happens is there's a land-and-expand strategy. So that's why it's quite -- for us, personally, announcing these contracts is really important because it's the first step of them building those contracts out to be really meaningful. And you're right on the complexity point of these contracts as well. A real highlight for us is the personalization element that that's now running through a lot of our contracts. And that's quite a difficult feature to be able to give to people. And so we think that's a real value driver and a real stickiness to contracts. And it is worth just reminding people, we don't get churning contracts. It's -- you'd never say nothing because then you'll lose a contract when you get off the phone. But it is negligible churn versus an industry rate probably of 30%. And then as we add more complexity to the contracts with personalization and so forth, it only makes them stickier. John, what was the second point? Do you remember?

Yes, it was just the incremental wins and the scale of some of the clients we're winning, would there be a tipping point where we get it all. But the one point I would make on the type of clients that we're dealing with, so a year ago, we only had 9 clients, it was pretty nascent. Today, we've got 59 across 67 brands. Now 20 of those 59 are in the Forbes G2000 list, which means they're very large organizations. So I think you're right to point out to the scale of some of these clients that we're winning. And typically, it's a land-and-expand opportunity with it than where we might start with one brand and one category. And I think the complexity of the solutions we're able to provide, but also the way we develop the solutions, for example, the AkzoNobel with Homebase is a concession within Homebase. I think that's a model that we can roll out. And so the personalization is a model we can roll out. And the ability to develop the model then will reduce churn going forward. And we'll make it more likely that we do expand within these organizations.

Really helpful.

We now go to the line of Amy Curry at Morgan Stanley.

And just the first one, could you talk us through your high-level plans for Dermstore over the next 12 to 24 months? And secondly, more broadly, your plans from [ THCBD ] Retail websites in the U.S. over that same time period.

Sure. You can -- essentially, from the outset, what we would normally do with anything is we would put our technology through immediately. So by the time we announce it, we probably would have integrated it within 48 hours of that. And so the Perricone MD brand that we bought, that was fully integrated within the first week operating on a tech. What we will be doing with Dermstore is it runs on its own technology and our tech team have been comfortable with that technology. And so we are going to leave it on that technology for a period of time, which is likely to be up to 12 months. Now during that period, what we are looking to do is build lookfantastic out to be -- to pick up more of that customer base. And what we will look to do over a very -- over a year, 2 years, is rebrand that to lookfantastic over time. That's the initial plan. What we've done in the past with smaller pieces of M&A is we've, over a period of time, migrated customers over to lookfantastic and doing it that way. And that's been incredibly successful for us. But the longer-term plan would be that we would end up rebranding because what we want to do is lookfantastic is a very significant global brand, and we want to make it more dominant and more awareness across the U.S. So there's a plan in play to do that. And you may have seen that when Amazon bought Souq.com in the Middle East, and they've rebranded that to Amazon to great success. So that -- but what's more relevant for us outside of the overall branding piece is how we trade that business. Clearly, it's going to be a valuable channel for us for our own brands, for partnerships with existing brands. We've got some crossover of relationships, which is fantastic, and we've got some new relationships to bring to each other. And we're already working on those as we speak, as we wait for competition clearance to come. But it will be a great opportunity for our own brands to get greater presence across the U.S., and that's a primary focus. And then obviously, with our beauty box business, which is going really well, and we already have a good presence in the U.S. with our beauty box business, we'll be looking to expand that more aggressively as well, which will be great for our partnerships with external brands, but also for acquiring customers for the greater U.S. piece. And then the final thing will be, you'll see us make more investment across the U.S., especially across -- within New York as we build out more resources there, which will then benefit our Nutrition division, our Ingenuity client win as well in terms of building out a sales team in the U.S. there. And so it gives us the scale to be able to accelerate investment in the U.S., too.

We now go to the line of Andrew Ross at Barclays.

Great. I've got 2. The first one is to go back to your app download numbers, which are pretty impressive. Could you give us a bit more color in terms of how you're getting people to download the apps, and then once they do, how their behavior is changing compared to how they behave on the web? That's the first question. And then the second one, back on Ingenuity. Can you give us some color as to how your partners have traded over peak trading and how the technology has held up? Would be interesting to hear on how that's performed in a busy period.

Adam, do want to cover these apps and how we're getting people to download and how we engage?

Yes. So we -- as Matt touched on, we launched our apps at the end of 2019. And throughout the year, we've leveraged the similar online channels and mechanics to encourage people to download and engage with our apps. So CRM. There's obviously an element of visibility and brand marketing that goes on within the app ecosystem, influencers, communicating and showing customers that we have an app that we can engage with. So that's grown through the year. And what we're generally finding in terms of app behavior that people engage with that are generally engaging more with the app than they would do on a traditional website. I think going forward in terms of our plans for the app through this year, we're going to be investing heavily with THG's ICON studio launching this year, which will be one of Europe's largest studios and been able to put more and more proprietary content into our app ecosystem, which will increase the engagement levels, but we're finding that customers who engage with our app generally retain, spend more versus engaging with just our website on its own.

Okay. And on the Ingenuity point, just in terms of how our clients traded, I'll give you one simple stat for the Cyber period. So that the clients we had a year ago through that period traded up. The GMV on those clients was plus 270% over the Cyber period. So they performed extremely well. And in terms of how the tech holders, what Matt mentioned earlier in the call that we have to prepare for a 20x sales spike on Black Friday. And you can see how the tech held off for THG itself with the sales growth we've delivered. So our Ingenuity brands get the benefits of that same tech, which performed extremely well for them.

We now go to the line of Marcus Diebel at JPMorgan.

On just a question on cash distribution. I know it's very early in the IPO and it was never really a subject. But given the strong momentum of the business, the profitability that's coming through, has anything changed in terms of cash distribution given the momentum is so strong? Or should we still remain quite cautious on that front?

I think, look, in respect to cash, I've got Matt here as well. Our guidance on cash is, we obviously made some significant investments in the years leading up to Brexit, et cetera, both in working capital and all those things. 100% cash conversion of EBITDA to operating cash flow is where we see this business as a -- on a normalized basis, and that should be how everyone looks at it really and that's how we try and guide people to look at it, 100% conversion of EBITDA into operating cash flow. And then we seek to invest that in capital projects there afterwards. But Matt, I don't know if you have anything different.

Just to supplement that, so we'd have GBP 750 million to GBP 800 million of cash on balance sheet at the end of the year, Marcus. Obviously, the Dermstore acquisition, we anticipate completing at the end of January. And that will be a material deployment of that cash. But otherwise, our guidance is unchanged from what Matt has confirmed.

Yes. I mean more in terms of distribution also to shareholders. Again, I appreciate it's very early, and you said in the past that's not a big topic for now. But given this momentum, is there may be some room to rethink this already? Or is that a clear topic maybe for next year?

No. I mean, look, I can give a more medium-term view on that. I mean, we've got -- we're very, very focused on making this group into a major global player, and we see opportunity in so many areas. So we need to be -- take our responsibility seriously and delivering that. And so we will be investing in growth and continue to do so for a good number of years to come. I would genuinely see it a failure on ourselves if we started to pay a dividend and we couldn't see greater value for shareholders and investing in that growth and taking this group on to become a major global player. So that's a stronger view as I can probably give without embarrassing myself in that. I'm not a big believer in dividends for this group in the near term. I think we really need to capitalize on the opportunities in front of us. And if one thing that this pandemic has proven is that -- is there's going to be incredible opportunities across the globe in the weeks, months and years ahead, and we want to be at the forefront of capitalizing on that. And that's very much the reason why we came to market in the first place, is to really move this group on.

Before going on to the next question, which is Simon Bowler of Numis.[Operator Instructions]

Three questions from myself. The first one is, could you just give us a sense where your marketing cost ratio landed in the year just gone? It's typically been quite consistent around about 8.5% to 9%. So just to confirm if we're still in that sort of ballpark. And then 2 questions on Ingenuity. One is, I guess, re-asking, to an extent, the question from Rob, which was just thinking around the margin profile on some of these more kind of complex contracts with personalization elements to them. Is it the same kind of percentage margin you're expecting to make on those sorts of contracts and work versus that you previously spoken to? And second, I thought it was a really useful number that you gave in terms of that kind of GBP 31 million kind of fiscal '21 revenue on no new contract wins. This might be too difficult or unnecessary to ask but how would that kind of GBP 31 million build in, say, fiscal '22 or fiscal '23 from the contracts you've currently got and you about?

Sure. Do you want to answer the marketing one, Adam? Yes. I mean, look, we don't give too much detail on that, but just broad sense is your marketing cost stable at previous levels.

Yes, absolutely. So we've yet to finalize the full marketing composition, but what you generally see in Q4 is slightly higher marketing cost of sale given 2 factors. So the mix that beauty contributes to sales, and then generally through Q4, there's an element of seasonality within your marketing cost. Look, we've not seen anything outside of how we've been trading through 2020 or the same kind of trends as we'd see in previous years.

Yes. And that's what we factored into the EBITDA margin guidance that we provided, so we're comfortable there. And it's an element of -- the overall cost of sales has remained comparable to what we outlined at IPO over the full year, which is it's always remained around the 10% level for the group is the cost of sale.

And Simon, just on your Ingenuity point on the revenue progression, the GBP 31 million number also, it excludes revenue share, which will become an increasingly important part because you're obviously -- as you launch a brand online, the revenue will would be relatively small to begin with. And then obviously, as you scale it up, it becomes much more meaningful. So the revenue share adds on that becomes more meaningful in the years ahead, especially -- so on a 10-year contract, you can imagine, as you get into years 2, 3, 5, 7, 8 and onwards, it becomes -- the intention is that revenue share becomes really meaningful to the number. So this is just pure tech services. I mean, we're not -- we can't really guide out to what next year, the year after and so on. We're trying to give you direction of channel -- a travel rather with all these different channels that we're operating in, the new contract wins that we've got, so on and so forth. And part of that is we also don't know which of those contracts are going to turn into the GBP 50 million, GBP 100 million, GBP 200 million contracts until you get further into them. All I would say is, is we are expecting to see a continuing trend of where we've been, and that's reflected in the fact that we've made such significant investments in salespeople and through the Ingenuity commerce workforce as we scale up that operation. John, I don't know if you've got anything you'd add.

Look, I think about the quality of the clients that were built that I just touched on. So 30% of our clients are in that world's large list. And they're across a whole range of different categories with a whole range of different brands. So as we develop out the complexity of our solution, then the addressable market within each of these clients grows. I think the likelihood of churn diminishes as the [ tap ] of what we do becomes ever more complex. So I think in terms of addressable market, then that just continues to evolve and grow, and that's seen through the quality of clients that we're bringing on board.

There's no margin change on that personalization aspect. However, it's not that somehow it becomes more negative or positive. It's already a strong margin in many ways, but we expect that to be a continuation.

Okay. As that was the final question for today, can I just pass it back to you, Matt, for any closing comments at this stage?

Look, I think the key closing comment really is, obviously, it's been a very strong quarter for us, and we're incredibly pleased, but I can't reiterate enough that there has been a major drive across the organization to make this a reality. And that's across all corners of the business from the people in the warehouses who've made this day in, day out during lockdown in some periods and that's been all across the world, but also to the people in the commercial operations who've been operating from home. It's a big ask on the operation. And this quarter, in particular, is a tough one for many people to make happen, especially in the conditions that we've had. So I'm just very grateful for the contribution everybody has made. I'm really pleased with the outcome. And hopefully, we can come in Q1 with some similar positivity. But thank you for everyone for taking the time to dial in. And hopefully, we'll speak to you in a few weeks.