THG Plc (THG) Earnings Call Transcript & Summary

Welcome to THG's Q3 2024 and demerger update. There will be a brief introduction statement given by Matthew Moulding, Founder and CEO, followed by a Q&A session. [Operator Instructions] I'd now like to turn the call over to Matthew. Please go ahead.

Good morning, everybody, and thank you for taking the time to dial in this morning. Quite a lot going on in our announcements this morning. So prepared for a lengthy Q&A session, if that's what's necessary. So a few of the points to update in there. We've obviously announced our updated plans regarding the Ingenuity demerger, which has been successfully supported by an equity raise as well, which was going to organize and confirmed this morning. Around GBP 50 million of that GBP 95 million equity raise was from existing long-term and institutional supporters. And within that, myself, added GBP 10 million of that equity raise. And at the same time, we've done a strategic investment with And that's where that relationship with Frasers nice way. That relationship just keeps flourishing and a small step there between us as we continue to work closely together. I think in terms of some of the things to note with the Ingenuity deal, what this raise means is obviously, there's been some dilution in the shares this morning as those shares get issued by that actual dilution unwinds as the deal completes. So the value of the cash that goes across to Ingenuity would lead to an equal and opposite removal of that dilution from THG Plc shareholders. And then with the additional value that on top is being -- will be paid for Ingenuity, there'll be a further reduction in shares in issue in PLC. And then just as a reminder, GBP 282 million worth of property leases also move across with the Ingenuity deal at the same time. I think some other things to update on. We've got our Q3 trade update in there as well. We're pleased with the Beauty and the Ingenuity performances, in particular, I think the strength that we're seeing in those businesses is really testimony to the work that we've done over the last couple of years in repositioning those businesses. And Myprotein business went through the peak stresses and strains of its rebranding in July, but we've seen fantastic momentum since then in September. It was the second best month of the year with only January being better so far. So we feel there's good momentum there as well. I think, obviously, there'll be plenty of Q&A. So maybe pause at that moment and then switch to Q&A, if that's okay, please.

[Operator Instructions] Our first question today will be coming from Wayne Brown calling from Panmure Liberum.

I've got 4 questions, if I can take them one at a time. I promise I won't be long. In the RemainCo, can you give us a view as to what you think the sustainable level of debt should be in that business and what you're comfortable with, please? And then I'll go on to the others after, if you don't mind.

Sure. Look, I think one of the things to remind there is, obviously, all the facilities remain within RemainCo. And so there's no change in that regard. The existing facilities are obviously more than adequate for RemainCo. Let me just remind you as well way about that business with the RemainCo. If you were to look at 2023 performances, we delivered GBP 1.9 billion of revenues in RemainCo, which was about GBP 105 million worth of EBITDA. Our EBITDA then fed through to GBP 77 million in free cash flow, which was after interest payments and lease payments and everything. So obviously, the things that aren't included in there is if you make a capital -- debt repayment or any M&A. About GBP 77 million with the free cash flow. So that is obviously quite a significant cash generation. And then if you were to about your interest that you're on there, you're obviously a much higher pre-interest cash flow figure. So the sustainability levels could be much higher if we so chose to do within RemainCo. Well, that's not been the thought process here. Our thought process is around making sure RemainCo has got full optionality for what direction of travel, it will take post demerger in December this year. So with that kind of strong cash flow generation, clearly, the existing facilities are very much adequate and supportable for what we want to do. And the Board will decide as we go through next year as to whether it's a case that we use the free cash flow that we generate from RemainCo to either further pay down debt or whether we use it for other corporate purposes such as share buybacks or dividends or even M&A. So the sustainability, obviously, of the cash flows and the balance sheet for RemainCo is very strong.

Yes. No, I don't think I'm doubting that the free cash flow now obviously gets freed up, et cetera. I was just trying to get a view as to if the Board has given thought now as a RemainCo vehicle thought that capital allocation framework would look like? And what do you think the right level of debt that should sit within this business on an ongoing basis? And it sounds like that needs further thoughts is what I'm hearing, but you're clearly comfortable at the moment.

Yes. Look, it's low down the list in reality because that's more of the fun part of the job to sort of get to. So the kind of discussions we'll be having when the time for it is to start to probably map out what's our strategy around, what levels of leverage do we want to run to, what debt, et cetera, but that's something for post demerger and for the future.

I mean, probably worth, Steve here, just reiterating that we have committed over a period of time to our debt investors to reduce gross gearing, gross leverage, which we've done previously by reducing the -- committing to reduce the RCF from GBP 170 million to GBP 150 million, which we announced when we did the extension. We've also reduced the gross leverage by GBP 282 million with the lease liabilities that transfer on the demerger. And then so obviously, if you look at that free cash flow within 3 years, net debt becomes net cash. So ultimately, you're getting back to that position where perhaps more traditionally unexpectedly as a PLC, you're in that 0 to 1x leverage target trajectory. So that's very much from me, the option for that.

Sure. Next question is maybe a little bit more of a geek one just so that I'm thinking about this correct. And IFRS, I think, does unfortunately come into play here. When I'm thinking about all the leases that are sitting within Ingenuity, there's obviously a cash component to the fact that Ingenuity will be paying rent on those sites. And that's obviously an IFRS charge that currently exists. That then obviously gets charged back to RemainCo in the future and probably currently still does under the current contract, which is a question, I suppose, inherited in my statement as a service charge. But that GBP 77 million of free cash flow, does that take into account that kind of service charge kickback? Because there's obviously a disconnect between the P&L on an EBITDA line, and the cash flow -- and the cash flow statement. So I'm just trying to get a sense of -- in a long-winded way, I'm trying to get my head around, the lease costs of 50 million-ish are obviously off-balance sheet now in Ingenuity, fine, but the recharge back in the contracts, is that all reflected in the free cash flow, not necessarily in the group EBITDA?

Yes, it is.

Fine. Okay. So there's no other changes to those contractual terms now that it's a separate vehicle, everything is just status quo?

Exactly.

Fine. Okay. On the rebrand then of Nutrition, -- can you just opine on us? Because it feels is it just blame on the rebrand feels a little bit of a blunt instrument to be honest. And I think a lot of people are speaking to public question in their minds as to -- is that really the case? Or is there something fundamentally else going on here in the industry or your position within the industry? I mean I understand that, obviously, fighting for new customers on Google is exorbitantly expensive, and that's a structural issue with Google opening keyword searches to the whole world now. So that's obviously a challenge. But if it is then just the rebrand and not necessarily anything else that's going on. Can you just comment on -- this has to be one of a really disappointing rebrand in the scheme of rebrands and if you're looking at all consumer brands, are you looking at maybe revamping the team that runs Nutrition? And can you just talk about the quality of the people running the business in light of what's been a very, very disappointing performance?

Yes. So you won't be surprised that I totally disagree with the summary there. I think just to come back to the management teams. And actually, maybe before I do that, let's just go back to Beauty. I think this time last year, I probably had the same question on Beauty, which is disappointing, is the industry changing? Have you lost your position? Is it Sephora or is it Amazon? Is it any other competitor or dynamics, et cetera? And here we are now at the time, very much we made clear, but we're making business model changes. We do these things for the long term. But let's be clear, there's always any pain to do that now. Now talk -- if you're a PLC listed business, everybody likes straight lines, but straight lines don't exist for a long period of time. And to get the overall, we have a long long-term trajectory upwards, we've got to do these pivots and business models from time to time. Now if you fast forward to where we are today, 12 months on from the calls to say that Beauty was totally disappointing and the rest of it, it's now delivering record margin structures and probably the only beauty business in its space that's delivering the growth that it's doing. So we've seen that payback from doing that. Similarly, we did the same with Ingenuity. We overhauled that business model, putting through extensive change and a lot of people were quite rightly questioning, well, it's not a proper business model. And here we are now delivering record performances in Ingenuity at the same time and couldn't be happier with where that's positioned. So then when we look at Nutrition, it's also worth remembering that Nutrition is -- it carried on growing through COVID and there afterwards. So we put the other 2 business models through those changes, but we carried on growing where most of the businesses, if you look at all of what people might suggest their online payers or whatever, they've all seen 15% to 20% reduction in that top line as the High Street has reopened. We carried on growing and held on to that within our Nutrition division ahead of doing the rebrand. Now the reality of around doing a rebrand. This is a truly monumental level of effort that's required to do a rebrand of the scale of Myprotein. And that's because of the complexity that sits within the business. It's operating in every country of the world with DCs all over the world with where you've got localized languages on the products. You've got also localized flavors where the flavor in one country has to be different to another country. So when you come to do a rebrand, you are very much faced with quite a complex overhaul of doing that. Now what we've chosen to do, I think I mentioned it in the September update is, in doing that, typically, what people would do is they would drop out a lot of stock to do that to help speed through any form of rebrand. If you do that, though, that means in a lot of the bargain stores or outlets, you will see Myprotein products sold at a heavy discount on [indiscernible] branded. If we will allow that to happen, that means that our off-line strategy, which is a huge market, everyone's seen the grocer and the off-line retail growth that they've seen post-COVID, that means that, that market is close to us because why would they want to support a brand that is discounting it's product in the outlet stores. So as a result, we've stayed firm. We've grown our off-line strategy. And I think the Myprotein team has done a fantastic job of growing the off-line strategy throughout the world. We've only dropped out GBP 1 million of GBP 100 million worth of Myprotein stock in the last 12 months. And if you were to go back the year before, it was GBP 400,000. So we have kept all of that stock within the Myprotein protein business on our websites and not let it go into the off-line channel to disrobe that growth strategy we have in doing that. When you put that product online, you need to sell through the GBP 100 million worth of stock and go through the old brand and transition to the new brand. With all that complexity that comes through the world, it is going to take a period of time to do that. When we launched this rebrand, we launched it into tailwinds. You wouldn't ordinarily launch a rebrand of this complexity if you had volatility in your whey pricing or you had currency challenges or things like that. So when I look at the micro team -- management team and as I've proved before, I'm more than adept to changing management teams across the team. We've only been listed over 4 years, and we've had quite a few changes that we've done, including firing myself as Chairman. The -- I'm more than happy to go in and change some of the management team. But when I look at the micro team management team, who I speak with and work with daily and hourly, what I can tell you is, these factors are largely outside of their control, I want them to rebrand, to go and follow this strategy. To do that, they've got to transition, which means discounting the product online on our website to do that. If you do that, you bring the average selling price down, which proves to be a challenge. You've got to move through that stock. So that naturally comes. What they can't control is whey pricing globally, we're not big enough to do that. And we can't control the Japanese currency either. We're not big enough to do that either. So there are factors that whoever I get to do that job, they've got to deal with those challenges and follow that strategy. So for me, the answer is, was the decision to rebrand the wrong decision, and should we have stayed with the previous branding, and that would have done us for the next 10 years. And if that was the wrong strategy, that certainly sits with me and not the micro team.

So Matt, Myprotein question was not about is rebranding right or wrong or -- obviously, evolution takes place. It is more about the management of that. I think I'd probably ask my 4 questions already. I may come back for a couple more, but I don't want to hog the call for too long.

We'll now move to Monique Pollard of Citigroup.

Can you hear me okay?

Yes, it's a little bit tricky, but I think we can -- we should be fine.

Okay. I'll try and talk loudly. Sorry, there's a bit of background noise. So the first question I had was, when we think about the profile of your cash flow going forward, you've got the material reduction in the lease liability. You've got the higher sustainable free cash flow going forward. But when you have conversations with the rating agencies, what do you think will change? And how will that affect your ability to refinance at more attractive terms, that EUR 600 million term loan coming due at the end of 2026?

Well, look, just so you've got continuity of voices. I'll answer that, and obviously, the team will jump in here as needed. I mean, look, we -- in terms of doing the refinancing of the balance sheet, you could do that before doing this transaction. Clearly, by doing this transaction, you then got a very strong proposition by which as interest rates are falling as well, we should be able to get the keenest deal. Now it's worth us on noting that that's a good couple of more than 2-and-a-bit years away yet. But that said, those conversations with the rating agencies already began as we started the planning around Ingenuity demerger. We've got a very clear steer from them of how they see it. To give you a recap on that, 2 out of the 3 rating agencies include your leases as being part of your gross leverage. So the fact that a large majority of the leases are moving out of PLC is obviously a huge positive for them. The second thing to note is the rating agencies typically also remove your spend on tech from the calculation of your earnings as well, which given we've got about GBP 60 million worth of tech spend as we build that asset out, that's a second massive positive for the credit rating agencies. So we shouldn't be surprised that post this transaction that they would be receiving very positively from the credit rating agencies because you've got a very different business whatsoever that looks out through which then will naturally over the course of next year going and refinance our balance sheet for the years to come.

Excellent. And the second question I had was on Beauty. So the 3Q trading was slightly better than the Q2 but kind of similar levels. I'm just wondering if that is a reasonable run rate to think of the peak trading or whether things like the success of the beauty advent calendars, et cetera, makes you think that the peak trading could be stronger than the trading that we've seen in the 2Q and the 3Q?

Yes. Look, I think in reality, I think anyone in online retail would say to you that summer wasn't the easiest time trading online. It just wasn't. September was -- has picked up more broadly for everybody, I would hope that's pretty much a trend. So Beauty is in a really good position. We've got some great momentum in Beauty, which is reflected in the numbers this year. So you can always get bumps and things -- and Q4 is a key trading period. But what I would say is, is the Beauty momentum coming into Q4 is really good, and we feel really positive. All of that said, there's a lot of rides on November. So if I was to sit there and say, if I was a betting person today, I would think you'll see good momentum in Myprotein, but Beauty will be -- should be the standout performance. As we then get into next year, given that I'm expecting whey pricing to fall considerably next year, and I've got good logic behind that, I'd be expecting that micro team starts to come back to its own and be the star performer. But for the remainder of this year, like yourself, I do expect that Beauty is going to be stepping into no pressure on the Beauty team.

And I just had 1 final question, which was just on this lease liability because the lease liability going forward for the RemainCo, the PLC? Does that just -- do you just take the current net liability and do a straight reduction of the GBP 282 million? Or is there a bit of duplication, which means the reduction in the lease liability to the PLC is quite as much as the THG?

Matt whispering to me, so I might answer get him answer that...

[indiscernible] coming off. It's not quite that straightforward but not far off. You just had about GBP 30 million on top, which is subleases between Ingenuity and Nutrition actually for -- Nutrition production facilities that sit within some of the fulfillment centers, so the very extensive arm's length agreements are such that you have subleases for that part of the space. So you'd be looking at about GBP 60 million sat on the balance sheet RemainCo. If you took away what goes to Ingenuity, add another GBP 30 million, and you can see the extent of deleverage that's going on in RemainCo.

We'll now move to John Stevenson of Peel Hunt.

Again, I've got a couple of questions. Actually, Mike, I'll start with the lease question that was the last one on the mic. Can you just confirm what the cash rent is going to be for RemainCo going forward? And then second question, can you comment on the annualized size of your off-line Nutrition business now? Obviously, we've seen a raft of launches, both in terms of licenses and wholesale agreements. It's scaling extremely well. It would be good to get an idea of what the sort of the annualized run rate might be? And also any feedback you're getting from retail partners in the U.K. and overseas, there seems to be some pretty strong POS and differential products going into the U.K. supermarkets? Just interested in terms of how that's actually going through a sell-through level and still...

Sure. So cash lease cost guys...

Cash lease cost, John, will be more like 20% in RemainCo. Whilst the lease liability is higher in Ingenuity. The P&L charge is more balanced, and that's just because you've got slightly longer leases in Ingenuity.

And then answering the question in terms of the off-line piece for Nutrition. Look, for this year, I'd expect -- and I don't think we disclosed this, but let's say, it's about a little bit more than GBP 40 million of net sales to our business. That's after you give funding support to retailers and the rest of it. So for this year, which is a big step-up on the prior year. We're obviously expecting a big step-up again next year. The run rate has been going in a really good direction. So it is core and fundamental, but the plan is that within a few years, we can get this to be hundreds of millions. And that's not just a plug in a number out of the sky. There's an account-by-account rollout that we target, that we underpin, some of them come our way and some of them get delayed, et cetera. In terms of the feedback we get from retailers. Naturally, it's been very strong. Myprotein has got an avid following. So it brings a different type of footfall for retailers as well. We recently launched across the estate in WH Smith. We launched that with the old brand and then that switches to the new brand at the end of this month, and then that will be supported by some pretty good activity going in there. We're in Boots. Good feedback in Boots. Just launched in Holland & Barrett in the U.K. as well, and plenty of other places. Most grocers now would have a snacks range from us. And the Muller partnership teams have gone really well, soft launched, first of all, in Morrisons, now it's in Morrisons Sainsbury's. I think it's going into WH Smith, so some of that range as well, but it's gone across retail. U.S. similarly has been a really good extension for us, got -- some really good comps out there that all set to launch within the weeks ahead. And then even in Asia, things like in Japan, there's a lot of licensing we do in there, in particular, where people will manufacture in, we're trying to navigate some of the challenges the volatility of the Japanese yen, where we won't recognize the revenue, but we'll get a good income stream by actually licensing the product into certain retailers and launching ranges that way, and we've been doing quite a bit of that of late. The strength of the brand is outstanding. So in terms of its current positioning, the feedback on the rebrand is super strong. But even then, we'll still be tweaking with that rebrand, but that is something people won't really see behind the scenes. It's not something that's disruptive to the business. Well, I think anyone who understands the extent to what's required on a rebrand will appreciate when you are the guys started buying it, making it, putting to the websites and then selling it down to consumers all over the world, it's a pretty complex exercise.

Okay. That's helpful. And actually a final question on, if I can, just in terms of the -- how the physical split is going to work within head office? I don't know the extent to which the group sort of benefits from essentially working together and how that's going to work post demerger? I know, obviously, there are Board members, people like John, I guess, who are maybe more naturally inclined to be swinging towards Ingenuity. How might that split go in terms of personnel?