THG Plc (THG) Earnings Call Transcript & Summary

Hello, and welcome to the THG Q4 2023/2024 Trading Update Call. My name is Laura, and I will be your coordinator for today's event. Today, I'm joined by Founder, CEO, Matthew Moulding and the team. Please note, this call is being recorded. [Operator Instructions]

We will now take questions. [Operator Instructions] We will take our first question from Gary Martin at Davy.

Congratulations on the strong set of results. Just a few for me. Just starting off just on free cash flow delivery into FY '24. I mean a good job was done in '23 in terms of that breakeven. But what really provides confidence on '24 free cash flow delivery?

Gary, it's Matthew Moulding. So we've got the full senior team here. I'll take most of the questions. And so it would be my voice you'll hear. If anyone else steps in, they will introduce themselves beforehand. And I'll start with this myself and then maybe Matt Rothwell or Damian wants to step in. Look, I think, first and foremost, if you were to take a step back and look where we were at this time last year, I think the cash outflow for the group this time last year was around about GBP 230 million. on a free cash flow basis. And I think we had an operating cash flow positive about GBP 90-odd million. And so the performance of the business over the following 12 months to get cash flow breakeven and in some quarters, actually on an LTM basis, cash flow positive, just shows you how the business has adapted to the new world. What we've done is, is we've got working capital efficiency throughout so the stock in our business is really well tightly managed. There's still a little bit more that will come out over the 2024, probably somewhere in the order of about a GBP 30 million stock reduction is something that we're looking at. We're obviously expecting an EBITDA improvement in 2024. And there's 2 notable areas where you would expect to see that. You've obviously seen the strong momentum in Beauty. Beauty EBITDA actually was up quite considerably over last year despite some of the challenges we've had in the manufacturing arm for the first half of the year. So you should see some material improvement there. And then Ingenuity is expected to contribute quite a bit more through this year as well. So a combination of continued working capital efficiency improved EBITDA. Again, it's probably in the exceptionals that are very light again this year, massive reduction year-on-year, but we'd expect them to remain light unless we do something in the M&A space. But generally speaking, we'd expect those to be the key drivers. Plus, once you return the business back into growth on a negative working capital model, you generate cash and the more growth you have, the more cash you spit out. So it will be a number of different factors that drive that, but all of the levers that are in our control, we will be obviously taking a strong discipline on.

Excellent. Very helpful. And then just you mentioned EBITDA improvement. And I know I'm conscious that you're going to give a more formalized guidance for the full year, '24 in April. But I guess -- I mean, just kind of where we stand right now, I mean, are we still kind of broadly in line with market consensus in terms of your expected outcome for EBITDA into 2024? And if you could just even provide a few of the moving parts if it's going to be above or below, that would be really helpful.

So the short answer there, Gary, is yes. As we stand today, we don't very much expect to be in line with that. Key moving parts of those 2 divisions, I would say, we spent last year really getting a return back on our money that we've invested in the Nutrition division through that supporting consumers through the cost of living crisis. And then we've seen a massive improvement in profitability through Nutrition in this year, which was a real key focus for us just to prove the value of everything we did last year. And we did that as well in the face of reducing pricing to the consumer towards the end of the year as well, which is something that we promised to do this time last year. So the sensible thing for us to sit back and say is, well, look, we've done a lot of that, yes, we're going to do more licensing deals, et cetera. But even if you were just to assume that the Nutrition division just repeated its performance for next year, the 2 key drivers of Ingenuity and Beauty would be the levers that would get you to that consensus number, slightly more from Beauty than Nutrition in terms of uplift and then that's where you would get to. Clearly, it's January 2024, isn't it? And it's always lively. So but I think we've shown really good discipline on being able to deliver what we said we're going to deliver. So hopefully, whatever the world throws at us, we should be in good order.

Gary, if I can just give one data point. Steve Whitehead here. So the continuing EBITDA number for 2023, the margin was 6%. So with that, the consensus is 7%, I think to all of those points Matt touched on, it's really the full year effect of that, coupled with the business being growth driving more operating leverage, that will underpin the confidence in delivering that 7% consensus number for 2024.

[Operator Instructions] We'll now take our next question from Andrew Ross at Barclays.

First one is just on the loans on your balance sheet. Obviously, there is still long time until they mature. Would be interested in the latest as to how are thinking about, any potential refinancing on how you might do that? I appreciate you wouldn't want to be specific to any high level language, but it would be helpful? And then the second one is, I guess, is there anything new to say around strategic options. I mean I don't see a paragon statement, which is helpful but one company for the evolved since you noted post Q3?

So look, in terms of the balance sheet and the loans on there, as you said, the long-dated -- we have an RCF, which is -- has never been used in the entire duration of it. So we've never drawn it ever clearly, at some point, we'll end up refinancing that as in just renewing it or something. So small cost really to have in terms of the unutilized, but it's a really great flexibility tool for us to have on the balance sheet. And then in terms of then the term loan B and the bond market, that's trading close to par, which is very strong in this market and look at some point, obviously, we'll look to refinance that in the years ahead before that comes due for maturity. So I think the balance sheet, more generally, if you look at the cash position, obviously, we're not consuming cash in that regard at all. So we always have the optionality of reducing our CapEx further. So about GBP 170 million of cash that we generated at the operating cash flow for last year, we chose to reinvest GBP 125 million of that into CapEx, which we could obviously reduce that down when we've been doing our automation programs and the global infrastructure rollout that we did between 2020 and 2022, our CapEx bill was double that. So obviously, we've got the optionality if ever we wanted to do that to then create more free cash flow by reducing our CapEx. We've also done a little bit of M&A towards the end of the year by buying Biossance in the U.S., which we think is a really, really strong deal for us, given the small level of outlay. So we could obviously then start to just pay some of that down if we so chose to do internally. I mean we've even looked at whether to start -- when the bond markets were in a problem, we look to maybe even buying our own debt back, but there's actually no trade available really in our debt at any form of meaningful discount even during last year, during the wobbles of the market. So look, we've got plenty of time on with the loans, and we'll just take a sensible approach to it, but we probably will renew the RCF facility at some point in the first half even though we've never used it. The second question, strategic options. I mean look, we've got -- so if we were to look at maybe at the summer, there was a lot of criticism towards our Beauty business, right? People -- I did some of the investor calls myself actually and people were saying, well, let's just have Nutrition because the value of nutrition is multiple times your market cap and so on and so forth. I think today's numbers prove that Beauty is incredibly strong. It's a fantastic market. I think as we get through Half 1, it will be -- people will see that as very exciting. Nutrition, we've had that profitability focus, obviously, throwing up a huge amount of cash as well. The brand strength is incredible. The optionality we have for either of those 2 divisions is obviously incredibly strong. We look at the optionality. We are going to retain ownership of everything that we do. We just don't believe being set on the U.K. market with 3 really good divisions is the right place for us to be able to create the growth platform for those 3 divisions and those 3 business units. And so what we will do is when the time is right, we will pick partnerships in which we want to then grow them out further. We've done all that separation work. We've been doing the U.S. optionality work as well. And sure, I would think that as the capital markets start to improve this year, as interest rates start to fall and inflation passes away and capital comes back into the global economy, then the optionality only increases for us on a month-by-month basis. So if we had an update to give to say we are definitively doing this, we would obviously be bound to do that. So we've not made that specific decision yet. But options are obviously improving for us all the time, and we'll take the right ones for the divisions as and when we choose to do that.

We'll now move on to our next question from Andrew Wade at Jefferies.

A couple of questions from me. First one on Beauty, sort of a bit more detail on the offline and licensing arrangements there. Could you talk a bit about the growth opportunity there and also how you're managing the brand impact of wider distribution. That's the first one on Beauty. The second one on Ingenuity. Obviously, encouraging to see Holland & Barrett today. That's the operational fulfillment agreement. Is there any -- and we've got the GMV, but anything you could give us on sort of revenue take rate contribution, that sort of thing.

Sure. So when we get to the Ingenuity piece, I've got John Gallemore here, so I'll let him touch on that briefly, just seen as he's done the work on it with his team, along with the Ingenuity team. So they'll cover that in a second. If I go on, John, you want to do that now, we I'll start with that.

Yes. Okay. Look. So specifically on the -- just to remind you, in terms of the services, the Ingenuity office, there's 3 key pillars to it. So there's the front-end technology services, there's the demand generation, digital marketing services, including content. And then the third element is the downstream fulfillment services. And as [indiscernible] called out, that's the element that Holland & Barrett, amongst other Ingenuity clients are taking advantage of, which is namely automation investment decisions that we delivered back in 2021. So in essence, they have given us their U.K. and Ireland DTC fulfillment services whereby we will hold their stock in our warehouse. We will process the orders and then take an advantage of our courier management tools, we will ensure that we manage the final mile delivery for them. So what they'll get from that is a lower cost service, but also improving service levels and in terms of [indiscernible], I think probably the best way to think about that is it's going to be enhancing through EBITDA margins.

So that's the Ingenuity piece. Is that complete for you?