Revolution Beauty Group plc (REVB) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Revolution Beauty Group PLC Interim Results Investor Presentation. [Operator Instructions]. Before we begin, we would just like to submit the following poll. I would now like to hand over to the executive management team for their presentation. Tom, good morning, sir.

Good morning, everybody, and thank you very much for joining us this morning. I'm Tom Allsworth. I'm the CEO of Revolution Beauty, and with me today is Neil Catto, the CFO. And we're here to present our half year results for the period ending 31st of August. Taking you through to the highlights. Adam and I returned to the business just 13 months ago. But we're delighted with the results we've managed to achieve so far and in fact, very proud of the progress we've made. When we did return, the company was in a precarious financial state having lost GBP 12 million in the previous half of last year. We immediately put in place a turnaround strategy. I focused on cost savings and financial discipline and stock management, whereas Adam focused his attention on product strategy and retailer relationships, we're delighted to have achieved a positive EBITDA in every single month since our return. We've now had 13 consecutive months of profitability. High-quality revenue. In the first half of last year, the company was chasing sales to generate cash, and therefore, the sales were artificially increased by sales of outlet, discontinued brands, categories, license, et cetera, all of which had a detrimental effect on the gross margin. You can clearly see this year that great progress has been made with the 11-point increase in our gross margin. And this demonstrates that the sales this year have been more true quality sales rather than chase sales at discounted margins. Disciplined and reduction in costs. We've made great book strides in that area. It's pretty self-explanatory. We've worked really hard to reduce cost in all areas, including operations, marketing and overheads, but at the same time, ensuring that there's been no detrimental effect on the day-to-day operations. We've now basically taken the company back to a more appropriate size. It simply got too big and out of control. Online sales grew by 22%. As you can see from the fourth bullet point, this is -- our strategy around growth is focused around TikTok shop. There's no doubt that in history, it tells us that our sales direct to our own consumer via various different online platforms has always been a really good indicator of the future sales performance in store. So, we are therefore very encouraged and I'm happy that online sales have been growing because it does give us an indication that the new products we've been bringing out, Adam have been working on, are well accepted. And our reaction has been really strong for those new products to date. Focus on product innovation, as has been covered on previous presentations, when Adam and I came back, we pivoted our new products towards a slightly lower retail price point, targeting more sort of GBP 5 to GBP 8 rather than the GBP 9 to GBP 12 that previous management had tried to do. This better meets the demands of the Revolution consumer and as a result in underlying sales growth. Our priorities for now moving forward are relatively simple. We have very, very clear objective, that's to grow the business to increase profitability and therefore, to generate cash. We believe that we now put a really strong strategic plan in place to achieve all three of those things. We're going to drive growth by increasing productivity in our existing doors, through better NPD, that Adam has been working on, together with better execution of operations and increasing service level. In fact, our service level to our major retailers at the moment is the best it's been since our return. We also will be expanding into some new retailers. We have our successes already with Etos in Netherlands and also Kroger in the U.S. We're going to regain some space that's been lost. We've had a few hurdles along the way since our return. We've taken a few steps forward and a step back. But what's encouraging is that the retailers where we've actually lost space are already talking to us again about how we can go back and rebuild that space, dm in Germany is a very prime example where we're already gathered extra additional space after it looked like we're going to lose space, and the same in target in the U.S. We're also going to be launching some new brands, which I'll come on through in a slide in a moment, and we're going to open new categories in Skin, Hair, Gifting and Fragrance. And obviously, that includes the Debenhams collaboration and our first Debenhams PLT product will be launched in late in a couple of weeks' time. So excited about that. In terms of profitability, obviously, growth is going to help that, but we also must keep our costs under control and we need to continue to manage stock very well, which has been one of the highlights over the last 12 months. We really managed to increase our ability to manage stock well, keep stock lower and keep it relevant to our current market offering. We also want to make sure that we increase our -- continue to increase rather our gross margin. We're now up to 43.6%. It will creep up a little, a few more percentage points. I'm not sure that we think it's going to go massively higher, but we think it can get to 46%. So there's a little bit more headroom there for us to aim at. And then the third, obviously, objective is cash generation. It goes without saying that if we achieve the first two, we will start to generate cash. We're also seeking to increase our EBITDA margin over the next 3 years currently running just under 7%. We're looking to increase that step by step over the next few years to 8%, 9% and 10%. So also noted change this results period in the amount of exceptional cash items previously previous management and us in our first period had to deal with high exceptional cash items such as legal fees with the FCA and restructuring cost redundancies, et cetera. But you'll see in the figures that Neil will be presenting today that our cash exceptionals have reduced from in the millions of pounds to a few hundred thousand. So that will also enable us to generate cash as we move forward. As a bridge here, similar to what you've seen in the past, which one to explain in more detail the underlying growth story, although the sales in the first half of last year were GBP 49 million. The margin was down at 33%. So it clearly indicates that the sales weren't particularly good quality. It was Built into that with some artificial sales in outlet and discontinued brands categories and licenses. So we have calculated that the overall base sale in the last period's first half was around GBP 44 million. So in terms of our like-for-like sales, we've achieved this period at around an 8% growth rather than being flat, simply because we're comparing like-with-like. Turning to the future. I'm delighted to confirm that September and October have got off to a good start, and we're fully in line with our expectations. We're launching two new brands, which we will cover in the future slide in a moment. We're also focusing on new products and Adam's got some great new stuff coming out over the next few months, which will help to build our growth in our existing retailers over the next few months. The other thing to point out for the future is the extension expansion of TikTok shop across Europe. As we covered in our previous presentation, Tiktok Shop has led our focus on the digital marketplace and our ability to market our products. it definitely has a dual effect by having TikTok shop working really well. We obviously grow sales which is obviously important, but as important is that we get a halo effect from the marketing and the exposure that TikTok shop gives us, and we've seen that in our U.K. retailers and U.S. retailers, as TikTok shop has been successful in different launches. We've seen growth of those particular SKUs in store there. So what's really exciting now is that as TikTok expand through Europe, there are nine, I think, TikTok shop areas opening geographies opening over the next 6 or 12 months. including Germany, France, Spain, Ireland, Belgium, Austria, Netherlands and Poland. So that gives us, as I say, an ability to grow our sales in those areas, but more importantly or as importantly, the dual effect and the halo effect to the retailers that were currently in those territories, hopefully will mean that they were able to grow their sales as well. So there is very much a knock-on effect always around by the success we've seen to date in TikTok Shop. This is probably an exciting bit for today to announce that literally last week, we launched BH and Freedom into Primark. This is a major collaboration for us and a new thing for the business in this current half year, we're working on now. As you may be aware, when Adam and I returned, Revolution had an entry price point low-cost alternative range under the brand name ReLove. This has been around for several years, and they've gone through several iterations because of various different management teams have updated it. We spent the first couple of months, funny enough, trying to update it ourselves, but in the end, look to each other and decided that probably the best thing was to start fresh. Especially as we already owned two brands, BH and Freedom, but they were sitting dormant. BH is a U.S. founded brand that hit retail sales of over GBP 100 million in 2019, but after a change of ownership and then change of management, it spiraled into administration. Revolution acquired it in 2022, but then with various things happening in the business, it was sat dormant and it was never actually used. In fact, BH has a global social media community similarly in size to Revolution with over 7 million followers, 3.7 million instagram and 1.8 million in Facebook. So it is a real good strong foundation and base to build upon. Freedom, as some of you may remember, was a brand that Adam and I launched originally in 2014 alongside Revolution. But back then, it was similarly priced to Revolution and because Revolution took off as such a rocket ship, we decided back then to drop it. However, it's now coming back as a lower price point, so there is a clear differential between it and Revolution. As you can see from the imagery, these are actually images taken from within Primark. BH is a very bright and colorful brand, think Colorpop to Two Faced, Sheglam. Whereas Revolution is stripped back, sleek and understated. Think Rhode, ReFi and Morphe. The business needs these type of low-range brands to be to supply to discount retailers such as Primark and many others. But we also need them as a business to protect revolution's price points in the likes of Superdrug and Boots. The Primark collaboration is a great opportunity for us to test both brands and to test the product assortment we're offering. We're already in discussion with various other retailers in Europe and the U.S. to expand both of them. But we want to launch and learn in Primark for the next couple of months before we decide on the assortments on which retailers to work with. But we see both of these as an opportunity to grow over the next few years alongside Revolution's return. Thank you, and please let me hand over to Neil to take you through the financial highlights.

Thank you, Tom. Good morning, everyone. I'm going to take you through the numbers for the first 6 months to August 2026, the income statement, the balance sheet and the cash flow. I'll also touch on what they tell us as we head into the all-important second half of the year and beyond. Here's the highlights. Back at the full year results in July, we talked about FY '26 as a story of two very different halves. Well, the first half of this year shows that the second half recovery last year was not a one-off. It's now the shape of the business to be profitable in both halves. And in fact, we expect a higher level of EBITDA in the second half of the year. The highlights of the first 6 months where adjusted EBITDA was a profit of GBP 2 million compared with a loss of GBP 12.5 million in the same period in the previous year. That's a swing of GBP 14.5 million. And as we -- and we've now been EBITDA positive in every single month since September 2025. That's come from two things. First, much better quality revenue with gross margin of 43.6% up 11.4 percentage points; secondly, a much leaner cost base with operating costs GBP 9.3 million lower, down by 1/3. Reported revenue was broadly flat. But once you strip out last year's one-offs that Tom was talking about, underlying revenue grew by 8%. And net debt was GBP 25.7 million. That's GBP 4.5 million lower than a year ago and broadly where it was at the year-end despite the usual working capital build ahead of peak trading. Turning to the income statement. Revenue was GBP 48.4 million, 2% below last year's GBP 49.4 million. But last year's first half, included around GBP 4.7 million of sales that we are deliberately not repeating. Those outlet clearance sales, nonrecurring, license income and the discontinued brands and categories. Stripping those out on an underlying basis of GBP 44.7 million, revenue grew by 8.3%. By region, the U.K. returned to growth, up 1.7% to GBP 15.6 million as our U.K. digital channels recovered. The U.S. was down 2.8% at GBP 10.2 million and rest of the world, down 4% at GBP 22.6 million. Both of those declines mainly reflect the brands and license income we've exited. And actually, we've won new customers in both our international direct and distributor channels. Online sales were up 22%, driven by TikTok shop, and we see that as a really good lead indicator of brand health. Gross margin up 43.6% was significantly higher than last year's 32.2%, where margin was held back by clearance activity and heavy gross to net charges. Encouragingly, it's also ahead of the second half of last year. So the result in the first half was the result of better product ranges coming through with realistic forecasting and tighter stock management. So not a one-off. Operating costs came down from GBP 28.4 million to GBP 19.1 million. Within that, distribution costs were down 24%. Marketing was down 1/3 and admin costs were down nearly 40%. And that's the savings program we delivered in the second half of last year, now fully embedded in the business. Below EBITDA, depreciation and amortization charges were steady at GBP 2.3 million. Adjusting items, which is mainly restructuring and nonrecurring legal costs fell from GBP 1.7 million to just under GBP 0.3 million. With the FCA now successfully concluded and the refinancing completed. Those costs have come down significantly, and they are no longer a significant cash drain on the business. Net finance costs also fell from GBP 1.7 million to GBP 1 million after the refinancing as a result of the accounting for the modification of the RCF on the refinancing. Putting that together, the loss before tax was GBP 1.9 million compared with GBP 18.4 million last year, a huge improvement of GBP 16.5 million. Moving on to the balance sheet. A couple of things here that I'd like to draw your attention to. First half, inventory was GBP 22.8 million, 8% lower than a year ago. It's up from the last year-end when it was GBP 19 million, but that's normal as we are building stock for peak trading and Christmas gifting. But most importantly, it's fresher, more relevant stock. And you can see that in the stock provision, which has come down from GBP 9.8 million to GBP 8 million since the year-end. As far as liquidity and funding is concerned, we have our GBP 28 million revolving credit facility, which runs to July 2028, with cash of GBP 4.3 million, net debt was GBP 25.4 million, and that's GBP 4.8 million lower than a year ago and broadly in line with the year-end. Finally, looking at cash flow. We started the half with GBP 5.9 million and ended it with GBP 4.3 million in the bank. And you can see on this chart, the movements in the period. Adjusted EBITDA contributed GBP 2 million, and cash adjusting items were down to GBP 0.3 million. That compares with GBP 1.7 million in the same period last year. So it's a much lower level than we've seen in the previous periods. Now that all of the legal issues are out of the way, and we've completed the restructuring and refinancing. Working capital was close to neutral. We added GBP 3.8 million of inventory of GBP 3.5 million of receivables as we built for peak. That was funded by GBP 7.1 million of higher payables. Overall, we generated GBP 0.6 million of cash from operations compared to an outflow last year of GBP 0.7 million. We spent GBP 1.2 million on capital expenditure which were related to investments in retail fixtures or stands to support our space in our retail customers, and we made GBP 1.4 million of interest and lease payments. Currency movements added GBP 0.3 million. So cash came down by GBP 1.6 million over the first half. That's the normal seasonal pattern for us. The second half is when the stock we built turns into sales and cash. We expect the second half to be cash generative, and that's how we'll keep bringing the net debt down. So that's the financial picture for the first half, a profitable half, a much stronger gross margin, a lean cost base, a net debt heading in the right direction. September and October has been in line with the board's expectations, and we remain confident that we're trading at the top end of current market expectations for the full year. That's adjusted EBITDA of up to GBP 6.6 million. This morning, [ Souza House Broker ] has also published updated forecasts. And that note is available on the Investor Meet Company platform. And then for the first time, those forecast around to FY '29. So for this year and the following 2 years. So I'd encourage you all to read the note. For our part, what I'd like to highlight is the shape of it. Steady top line growth building to 10% year-on-year. And very importantly, continued improvement in margin. On Souza's numbers, adjusted EBITDA margin moved from 0.068 this year to over 8% by FY '29, and adjusted EBITDA grows at a compound rate of just under 20% a year. That's exactly the progression we're focused on a return to growth but profitable growth as well. So thank you. And with that, I'll hand over to -- hand back to Tom to summarize, and then we're happy to take your questions.

Thanks, Neil. Well, I think we've made clear what our strategy is and objectives are. We want to get this business back into some clear growth and profitable growth. We've laid out a strategy of how we're going to do that. To increase productivity in existing doors, open new doors, et cetera. Bring new brands in, have better NPD at a more successful price point. It's -- it's a very straightforward clear plan that the whole business understands and is working towards. In doing that, we want to improve our profitability, and we've set clear targets on increasing both our gross margin and increasing our EBITDA percentage. Obviously, the effect of all that will be that we will then generate cash, which will allow us to reduce our overall debt. I think what's clear now is that we're past the turnaround stage. Last time we met with everybody, we were in the middle of a turnaround. We're now past that. We're now in the rebuild stage, and we're very confident now about where we're going and what the future looks like. We're aware of the figures that Souza have put in the market today, as Neil mentioned, and we are very confident in hitting those numbers. All I have to say is that you have a passion at a motivated team here that are determined to do the things we've laid out. and to get this company back to where it was previously. And we are absolutely confident we have the correct plans in place to achieve that. So thank you very much again for your time and more than happy to answer any questions.

Perfect. Tom, if I may just jump back in there. Thank you very much indeed for your presentation this morning. [Operator Instructions]. Just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Tom, at this stage, so if I may hand over to you to chair the Q&A with the team. And if I pick up from you at the end, that would be great.

Thanks, Jake. First question comes from Hanna. Looking forward, that introduction will rightly be a key focus. What do you think is a normalized free cash flow margin for your business? And what size of annual free cash flow do you think can be achieved once the turnaround plan is completed?

[ Honey ] (sic), longer term, we're looking to get to that EBITDA margin up to double digit. And then free cash flow off that, that will comfortably cover our interest and CapEx payments. A lot of the new opportunities we're focusing on around much more CapEx like than we have done previously. And our interest payments are getting lower as we reduce net debt. So you can work out from that, that we can generate a decent level of free cash flow margin. And we'd also expect those interest payments to come down as we reduce the net debt. So we have got to make sure that we've got sufficient headroom to reinvest in the business and make sure that we get that return to growth and invest in marketing where necessary, but we're quite confident of seeing that margin progression and free cash flow coming through.

Thanks, Neil. Question from Brian. Where are your products manufactured?

The majority of the products still come from the Far East, but we've got our own manufacturing facility in the U.K., and we manufacture around 15%, 20% of our products in the U.K., all things like fixing sprays, primers, things that are noncolor based are all made in the U.K.

Thank you. Three questions from Ash. Can you update us to debt maturity profile and any progress on refinancing? He's got a couple more, but I'll leave you with that to start.

Our RFC runs through until 2028. Obviously, we'll have to refinance it at that point, but we're under no pressure from a cash point of view, we don't see having to raise any further cash. And in fact, we're looking to reduce our debt, as Neil explained if we achieve our aims and getting to a double-digit EBITDA margin with our interest relatively low and CapEx relatively low, around half of that should be generating free cash. So we should be in a good position from next year.

Okay. Can you give us an update as to anything that you're worried about seeing included in the autumn budget measures and how they might have affect Rev B?

We don't see any major issues coming up with the budget. I think that it's fair to say that in times of economic hardship that people generally tend to turn to more mass lower price point products, generally, not just in makeup, but in makeup. So the price points we're at in Boots and Superdrug for Revolution and then the new price points we're bringing out for BH and Freedom, I think, allow us to remain confident that there will be a demand for our products even through more difficult financial times in the U.K.