THG Plc (THG) Earnings Call Transcript
October 17, 2023
Earnings Call Speaker Segments
Welcome to the THG Q3 Trading Update Q&A session. [Operator Instructions]. We are joined this morning by Matthew Moulding, Chief Executive Officer; Damian Sanders, Chief Financial Officer; Steven Whitehead, Group Commercial Director; and Matthew Rothwell, Deputy Group CEO. [Operator Instructions].
Good morning, everybody. This is Matthew Moulding here. I think we're going to go straight into Q&A, but just so as everyone can tell with the voices, et cetera, I will be answering all questions that come forward. That's the plan, but if anybody else is to step in, they will announce themselves and address the questions. So I think we're going to go straight into Q&A.
Thank you. [Operator Instructions] We'll now take our first question from Andrew Wade at Jefferies.
We've all seen in the press over the weekend about the potential or the stories about the potential U.S. IPO of the Nutrition business. Any update you can give us there? Any sort of strategic update from that perspective you can give us? That's the first one. And then the second one, I'm very interested to read about the Myprotein concept store. Could you give us some -- your thoughts on what that might mean? I'm guessing that there's some sort of an element from a U.S. physical angle there, but also on the group's broader physical and multichannel strategy.
[indiscernible] I mean, both of those are pretty long answers to give to those questions. And I think, look, if you were to wind back in terms of the first question around nutrition IPOs and the weekend press, et cetera, I think if you were to wind back to 2011 -- to 2021 rather, we made an announcement to make it really clear. We've got 3 very distinct divisions, each of which are global leaders. And as a result of that, we then went off and spent the balance of 2021 and most of 2022 doing a huge separation exercise, which actually costs us GBP 15 million in which to implement it. To give you an idea of the scale of making these business units to be able to operate completely stand-alone. And we announced in the market late in 2022 that we completed that work and now we start to report on a divisional basis. Clearly then, since then, we continue to do a lot of preparation work for each of those divisions to make sure that we've got full optionality as to how we take them forward in their own funding platforms and their own growth platforms. And as part of that, naturally, we will ensure that each of our divisions are ready in terms of U.S. reporting for all markets, really. But obviously, the U.S. being the biggest market that you will want to ensure that your divisions are well prepared to be able to do that, whether that be for listings or whether that be for partnerships, et cetera, et cetera. So very much a continuation of the strategy that we set out in 2021. The divisions are fully separated that work is done. And we then -- of course, our auditors work with us on an ongoing basis and ensuring that way, U.S. ready for anything we want to do with each of those divisions, not just Nutrition but Beauty and Ingenuity alike, so that we can capitalize on any partnership opportunities that arise. On your second question in terms of the concept store based in Manchester and our broader off-line inspirations for the nutrition brand. I think it's worth just taking a step back on that latter part of off-line opportunities. Clearly, the Myprotein brand, in particular, in our Nutrition division has got great appeal for offline channels. And we could very quickly expand off-line back within our core products in retailers all over the world. And most retailers are super keen for us to be able to do that. We resist the core aspect of it because otherwise, your margins would become quite challenged in that. We sell direct to consumers. If we were to then put our core products into all of retailer over the world, you end up with a price disparity in doing so because the retailer needs to make a 40%, 45% margin. And so as a result, you end up with 2 different price products and or you end up with much, much lower margins by doing that. So what we've done instead is and done this over a large number of years now, is we've steadily been building out our offline presence through developing product lines that work and are unique for different retail channels. And so almost all of -- but certainly by the end of this year, all the major retailers of grocery channels will probably have some form of presence of Myprotein in their stores and that will be typically in bars and snacks. And you've seen us make moves in drinks and things like that. So we curate and develop a range of products across the Myprotein business that can then doesn't challenge or cause conflict with the core model, but it allows our consumers to be able to engage with the brand at scale in all forms of retail channels. That then has been rolled out across the rest of the world. And more recently, this year, we've made some significant progress across the U.S. So one of the major retailers there where we've curated a range of products to go into U.S. channels, already in Asia in places like that, where we've got great success. And then similarly, as part of that, what we are also doing is licensing the brand. We licensed the brand in certain product categories in Asia and there's some big brand, some big retailers out there that we do that with. We've obviously done the Iceland partnership. And what people will see is in the weeks ahead, the months ahead, there will be a good number of license partnerships that we'll be announcing where these are categories that we want to do ourselves online because there'll be various reasons to that product that doesn't work for us online. But it's the right way to build the brand out and it's a great revenue opportunity and a great GMV opportunity. I mean, just in Iceland partnership. That's probably a GBP 40 million to GBP 50 million GMV run rate by the end of this year, which most Nutrition brands aren't that big in total, and that's just one small angle. So you get an idea that there are hundreds and hundreds of millions of pounds of GMV opportunities, which we can take a good clip of that royalty fees. And so the off-line strategy there, is progressing well, and we're doing it all the time in a careful consideration of how we grow this brand for the long term. We don't want quick wins but then we have to unpick in a year's time or 2 years' time as conflicts around. In terms of then the store opportunities that we have, sure, we get opportunities all the time, brought to us to say big retailers have got a lot of spare space. That's not secret. They won't footfall. And the Myprotein brand has got a very, very strong avid following. And so when someone like Iceland has partnership with us, it's fair to say they see a completely different consumer. [ Pilot ] into their stores than they would otherwise have had before. And that's a good thing all around for everybody involved. Now we don't just want to go and be a store in store and put the brand into partnership with all these different people without really knowing it's going to be a success and careful consideration. So the concept store is before we go into partnership with anyone at all in this kind of way in the U.K. or internationally, like you say, in the U.S. that we want to make sure that we've got the right concept. And so we're doing that at the moment in Manchester. It is worth saying, Andy, as well that those partnership opportunities aren't just limited to nutrition. We get very similar conversations in Beauty right that there are -- if you look in the U.S., it's quite a common thing across the major players that they will have Beauty store in stores. So if you were to look at [indiscernible] out there in the U.S., they've done it, we get similar opportunities as well. Here, we Lookfantastic or Core Beauty that we evaluate at the same time. So I hope that should answer our first questions, Andy.
And we'll move on to our next question from Anubhav at Liberum. Please go ahead.
I have a couple of questions, please, Matt. Firstly, on the Beauty business. I just wanted to ask, you mentioned manufacturing is back in growth. So if you could give a comment on the online e-commerce part of it. Is that already back to growth in the third quarter and what are expectations for the fourth quarter? And if you could remind us if there were any particular difficult comps or one-off last year that would impact performance in the fourth quarter. And then my second one is on Ingenuity. At the start of the year, I think you mentioned the target of adding GBP 1 billion in GMV in the Ingenuity business. How far progressed are you on that? And if you are on track?
I'll answer the Ingenuity one first because it's a quicker one. Yes, we are on track. Obviously, there are accounts that we don't announce for confidentiality reasons or just requirement to do so. But to give you an idea of how that pipeline and that enterprise model is moving forward. There are a number of clients where the GMV that they would bring alone are almost at that scale. And just one of those is at that scale and never mind, the momentum that we've been building through the year on that. And you can also see that, I think as a statement in the RNS that says Ingenuity despite is pulling away from all the small accounts that we decided to do over a year ago when we appointed to that. Now that's -- I think in September, we've got about -- or even for the September it was about minus 2% or something like that in September. So that gives you an idea despite us pulling away all those small accounts, then you've got that kind of the enterprise impact coming back. But GMV major client wins, the pipeline is really strong there. And then coming back to your question on Beauty on the manufacturing side. Yes. So the manufacturing is in good order now and back to strong profitability as well, which is one of the great things, right? Because as you're allowing orders to be pushed out, whilst there's a global destocking, then you don't have that volume going through your facility, you've got a big fixed cost base. So you go from strong profitability to not in that division and now with strong profitability is back. We're also on a -- we've addressed cost base in there, et cetera. So really pleased with where we are with that. In terms of the rest of the Beauty division, on the retail side, on the brand's performance, I think we mentioned at the half year that our 2 biggest brands, Perricone and ESPA have been trading incredibly well. Really pleased with the progress on those brands. On the Core Beauty that Lookfantastic business. Yes, they are in growth. Core Beauty has been in growth now for a good period of time. And the rest of the retail business has been back in growth. So really pleased with that. But also what's important there is that's in growth where we've pulled away from -- for the past 6, 9, 12 months, we've been pulling away from those orders where they're not making an immediate profitability where you normally take a 2-year view. And so -- and we're still in growth despite having pulled that back. And relative to the market, that is a very strong performance. You only need to look at the wider e-commerce and retail landscape to appreciate that. And then there was one other question, I think relating to Beauty wasn't that? That's it. No. Okay.
Yes, that was related. If you could just comment on what your expectations are for the fourth quarter on the beauty retail side and maybe if there were any one-off impact last year that would impact performance in terms of comp.
We see the impact of last year. Look, last year, we had, obviously, at the Royal Mail strikes in the U.K. So the U.K., whilst it's probably, I don't know, about 1/3 of the group sales more broadly. It over indexes in peak in the sort of November period and we obviously have the Royal Mail strikes, which had a knock-on effect where one or 2 of the couriers actually fell over as well as the volumes came into them. So there was a really disruptive Q4. Obviously, we're not expecting that to happen again. And I understand from even the data had yesterday all the career plan is, it seems to be very robust and super strong. So we should hopefully see some benefit from that this year. But I wouldn't want to sort of factor anything in for that. In terms of what you should expect from Beauty and Nutrition more generally, look, we're running nutrition to recover our price investment we made to consumers through the cost of living prices. So broadly speaking, we're trying to run that to a flat basis at the moment but seeing a really strong return to margins and profitability, and that's reflected in the fact that Q3 was a record ever profit quarter for Nutrition, which shows some payback on what we've done with consumers over the past 12 months. In terms of Beauty, what should expect there is actually, I think, continue to be in growth. So we should see some growth in there. To what extent will depend on how big the Q4 period is, but the momentum across Beauty, as you can see, 5% constant currency growth is by standout in the industry and that's on a global basis. So the U.K. is performing well for us. So I think we're expecting positive momentum to continue. But obviously, November is a key trading period and we'll see after that.
We'll now move on to our next question from Andrew Ross at Barclays.
I've got 2 if that's okay. First one is to keep going on Beauty, which definitely feels like it is improving as you go through Q3 in the core retail business. But I guess some of that is being hindered at least from a growth perspective of deprioritizing some of the unprofitable sales. Can you give us a sense in terms of what the core Lookfantastic business or Dermstore in the U.S. kind of the core markets are growing in beauty right now, in the beauty retail business to kind of get a sense of the underlying progress in that industry as we lap through the pandemic comps and various other factors? And then my second question is to ask about 2024, and I appreciate you're not going to guide on that now. But when we think about the moving parts of THG generating cash next year, maybe you could just kind of run us through a quick reminder as to how you see that? I understand, are you kind of comfortable with that 160-ish of EBITDA. I mean, just remind us of moving parts beneath that you've clearly made a comment on CapEx this morning, but helpful just to go through that to make sure we're all clear around that cash generation for next year.
Sure. So I think to answer your points, the 160 of EBITDA [indiscernible] answer a number straight on. But the 160 does -- is very reasonable for us for next year. So we are comfortable with that. We're comfortable with the CapEx as well, which obviously, as we've made those big investments over the prior 3 years in infrastructure and investment, which we believe is one of the key differentiating practices to why we're performing better than the market. But as we've completed that, the CapEx now starts to fade away, and you've seen that really from highs of GBP 200 million a year of CapEx to now be the guidance of around GBP 100 million, GBP 110 million shows you how that's abated now. And so yes, in terms of what you should expect for next year, the numbers you talk about there, Andrew, are right and very much where that we're comfortable with. And then in terms of the top line, I would expect to be in growth in doing that. I love it. Now what we're most focused on as we've been consistent in saying is that we've been most focused over the past 12 months of making sure that the balance sheet is strong, that cash generation is strong. It's worth pointing out that we've become cash generative 15 months ahead of plan because over the last 12 months, as I put in my comments, I think, we've generated GBP 5 million free cash flow despite the fact we've made gross CapEx investments of GBP 140 million over that 12-month period. So we'd expect that to be able to roll forward into next year, higher EBITDA, less CapEx, that would be coming into there and returning to some growth at the top line as well. In terms of then, you talked about Beauty and how the core market is performing. I mean, look, we're very fortunate in that Nutrition and Beauty are very robust categories and relative to some of the other categories that consumers engage with. It's also worth pointing out in the U.S., the dollar rate is actually the 2 areas in the group where we've suffered on a constant currency basis, which is all very temporary, is the dollar at the moment. So in Beauty, I think we talked about 5.1% constant currency growth in September alone, which is 1.3% or something like that or 1.1% on a reported basis. So you've got about 400 basis points impact on Beauty on constant currency. And that's because almost entirely down to the U.S. in reality, the euro is very stable, both the U.S. and the dollar has impact in that division, which we've got that momentum to come back the other way as the world normalizes. But the U.K., in particular, remains robust even in places where we've been pulling back our orders in Europe as an example. Sure we're pulling our sales back in Europe as we're seeking more profitability from orders on a first-time basis. But actually, the core performance is robust. So the categories in which we operated in, we're very pleased with and we're fortunate with the very high repeat as well, which also helps relative to other categories and core markets remain robust as there are some areas where you would say -- Australia is probably a bit weaker on a Beauty basis, but stronger on a Nutrition basis. But we're quite a small player over there. But that is the wider market, strangely over there but Nutrition is going from strength there. So there are some pockets of territories where we know we can do better, but some of it is a little bit market-related. But generally speaking, I mean, the core markets in Beauty are in good growth. And the U.K. in Beauty is a good market. One final point I would say on Beauty as well is there was a lot of people 18 months ago entering the market. Everybody we joked about [indiscernible] possibly the next people to come into an [indiscernible] Beauty at one point. And now what we see is a serious pullback of people who've entered this market. I think one of the big U.S. luxury players has just pulled out. Various other people are pulling out of Beauty. And that's because to win in Beauty, you've got to have large scale, and we've got that. We're one of the largest in the world on the retail platform and we're hugely well invested. We've got automation where our Beauty in all core markets is operating from, which means we can operate on a cost base and no one else can operate them. And that's one of the real benefits of the investments we've made. And so other people have tried to enter the market and now pull away, which is a nice sort of tailwind we'd expect to get the benefit from in 2024 as well.
Thank you. [Operator Instructions] And we will now move on to our next question from Gary Martin at Davy Group.
Just a quick couple of questions from my side, just starting with the rebrand launch on THG Nutrition. Are you expecting this disruption that was caused in Q3 to continue into Q4? And could we just get a general update on just the progress and any incremental changes off the back of the rebrand relaunch. I mean did it move the dial at all in terms of sale or profitability? If you could to get some color there. And then just a second one, just on regional sales of THG Nutrition. I'm just conscious that you've semi covered this already. Would it be possible just to get a more detailed color just on sales by various regions in terms of THG Nutrition?
Sure. So in turn, it pretty much -- we've done a lot of [indiscernible]. It's focused on the Nutrition performance there, around the rebrand very much as we've expected and anticipated. You got a little bit of disruption in the months you do the relaunch, purely because your new product development, you rather do a changeover of your old brand into new branding. Things like you would launch new products, but you've got to delay those new products, even things like advent calendars, which is very popular in my protein. We decided that actually, we will do it in this year. And so we're doing some boxes and things instead, but they'll return next year just in terms of make sure we get the timing of the branding right, et cetera. So you get that kind of disruption. But more than happy with that and perform to get most of it in the very first month that happened, which was August. And we're not really not seeing much from that on the go forward. And just as a reminder, on what we're trying to do with Nutrition broadly on a constant currency basis is just keep it flat this year. At any time, we could go -- we could press the accelerator to put more sales in an investment of the margins, but we're delivering record margins, record profitability in that division. And it's just the right time to do that given probably this time last year where we're on our worst-ever margins, our worst ever profitability that we've delivered in Nutrition because we were supporting the consumer. And so we're just happy to manage that at the moment the way that it is, make sure that we get that brand swap over. So this -- you don't want to be doing your highest sales in the middle of a rebrand. So it's been quite smooth, very pleased with it. I think the engagement with the new branding has been really strong. We've got some announcements to come, which will further cement the branding. Some high profile stuff that we're doing there. And sales have just continued to get better and we think the premiumization of the brand in terms of its look and feel is well worth it. In terms of territory splits, I think the biggest thing I would say on Nutrition that affects it. Yes, it's got some dollar. So it gets a bit of impact from the dollar in the U.S. has been decent for nutrition over the past sort of 12 months. But Asia actually is one of the key areas where the Yen in particular, as everyone will know, that currency has been -- not been raised in interest rates. And so as a result, there's been a fair devaluation of the Japanese Yen. But all things considered, demand everywhere is strong, but you're just getting some constant currency movements. So we're not trying to play around with that and try and offset it. We're just very focused on making sure profitability is strong, cash generation is strong, and we continue to make good progress. The U.K. is a territory remains really good, really good for nutrition, and we're constantly making strides there. Europe, contemplate at all in Europe for nutrition either at and all those territories in different times in your journey with the brand, you'll get different bumps in territories, but that's just been good in Europe. And we've got no real complaints there. So I think we're in a good position with Nutrition, where we can kind of dictate how we want to push sales or not at the moment. We're just happy executing the rebrand and maximizing profitability in the near term.
Thank you. That's all the time we have for Q&A. I will now hand it back to Matthew for closing remarks. Thank you.
Okay. Well, thanks, everybody. I think you get the impression we're very pleased with how things are in the business than the progress we're making on numerous fronts. Thanks for everybody for their support, and we look forward to updating you on how Q4 has traded as we go into January. Thank you.
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