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, and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions on the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an Operator, thank you. So we will now take questions again, please press star one to signal, to ask a question, thank you. We'll take our first question from Gary Martin at Davy your line is open, please go ahead.
Morning, all. Congratulations on the strong set of results. Just a, a few from me. Just starting off, just on free cash flow delivery into FY 2024. I mean, a good job was done in 2023 in terms of that break even, but what really provides confidence on 2024 free cash flow delivery?
Hi, Gary, it's Matthew Moulding. So we've got the full senior team here. I'll take most of the questions and so it'll 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 want to step in. Look, I think first and foremost, if you were to take a step back and look at where we were 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'd had an operating cash flow positive about GBP 90 million.
So, you know, 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 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 2024. Probably somewhere in the order of about a GBP 30 million stock reduction is something that we're looking at. We're obviously expecti`ng EBITDAR improvement in 2024, and there's two notable areas where you would expect to see that. You've obviously seen the strong momentum in beauty.
Beauty EBITDAR actually was up quite considerably over last year, despite some of the challenges we 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 EBITDAR, you know, again, there's probably in the exceptionals, who were very light again this year, massive reduction year on year, but we'd expect them to remain light unless we do something, you know, 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'll be a number of different factors that drive that, but all of the levers that are in our control, we will be, you know, obviously taking a strong discipline on.
Excellent. That's really 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 2024 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, with market consensus in terms of your expected outcome for EBITDA into, 2024? And if you could just even provide a, a few of the moving parts, if it's gonna be above or below, that'd be really helpful. Thanks.
So, the short answer there, Gary, is yes. As we stand today, we'd very much expect to be in line with that. Key moving parts of those two divisions, I would say, you know, we spent last year really, you know, getting a return back on our money that we'd 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 to, you know, the sensible thing for us to sit back and say is, "Well, look, we've done a lot of that. Yes, we're gonna 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 two 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, you know, it's January 2024, isn't it? It's always lively.
So, you know, but I think we've shown really good discipline on being able to deliver what we say we're gonna 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 Wiser here. So we the continuing EBITDAR number for 2023, the margin was 6%, so without... A 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 in growth, driving more operating leverage, which, that will underpin the confidence in delivering that 7% consensus number for 2024.
Excellent. Thanks. That's a pretty good color. I'll pass it on.
... Thank you. Once again, ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. We'll pause for just a moment while waiting for them to queue for questions. Thank you. We'll now take our next question from Andrew Ross at Barclays. Your line is open. Please go ahead.
Morning, all. I hope all is well. My first one is just to ask about the loans that sit on your balance sheet. Obviously, there is still a long time until they mature, but would be interested in the latest as to how you are thinking about any potential refinancing, you know, how you might do that. I appreciate, you know, it wouldn't be specific, but any high-level language would be helpful. And then the second one is, I guess, wondering if there's anything you need to say around strategic options. I mean, there's obviously a paragraph in the statement, which is helpful, but, you know, wondering if your thinking has really evolved since you last spoke post the Q3. Thank you.
Sure. So look, in terms of the balance sheet and the loans on there, as you say, they're long dated. We have an RCF, which 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. It's a 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 the term loan B and the bond market, that's trading at close to par, which is very strong in this market. And look, at some point, obviously we'll look to refinance that, you know, 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 don't, we're not consuming cash in that regard at all. So we always have the optionality of reducing our CapEx further. So of our GBP 170 million of cash that we generated at the operating cashflow for last year, you know, we chose to reinvest GBP 125 million of that into CapEx, which we could, we could obviously reduce that down, though, you know. When we've been doing our automation programs and the global infrastructure rollout that we did between 2020 and 2022, you know, our CapEx bill was double that. So obviously, we've got the optionality, if ever we wanted to do that, to then, you know, create more free cash flow by reducing our CapEx.
We've also done a little bit of M&A by, towards the end of the year by buying Biossance in the U.S., which we think is, you know, a really, really strong deal for us, given the small level of outlay. So we can, we could obviously then start to, to just, you know, pay some of that down if we so chose to do, you know, internally. I mean, we've even looked at whether to, to start to... When, when the bond markets were in a, a problem, we looked at maybe even buying our own debt back, but there's actually no trade available really in our debt at any, any form of meaningful discount, even, even during last year, during the wobbles of, 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, you know, in the first half, even though we've never used it. The second question that you-
Strategic options. I mean, look, we've got, you know... So if we were to look at maybe at the summer, there was a, you know, a lot of criticism towards our beauty business, right? People you know, I did some of the investor calls myself, actually. People were saying, "Well, let's just, you know, let's just have nutrition, because, you know, the value of nutrition is multiple times your market cap," and so on and so forth. I think today's numbers prove that, you know, beauty is incredibly strong. It's a fantastic market. I think as we get through half one, it'll be, you know, people will see that as very exciting. You know, nutrition, you know, we've, we've had that profitability focus, obviously throwing off a huge amount of cash as well. The brand strength is incredible.
The optionality we have for either of those two divisions is obviously incredibly strong. You know, we look at the optionality. We are gonna retain ownership of everything that we do. We just don't believe being sat on the U.K. market with three, you know, really good divisions, is the right place for us to be able to create the growth platform for those three divisions and for those three business units. 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.
You know, 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.
Thanks for that.
Thank you. We'll now move on to our next question from Andrew Wade at Jefferies. Your line is open. Please go ahead.
Morning, I have 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 rates? Contribution, that sort of thing. Thanks.
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 seeing as he's done the work on it with his team, along with the Ingenuity team.
Yeah.
So they'll cover that in a second. In fact, go on, John. You want to do that now? We'll start with that.
Yeah, okay. Look, so specifically on the, just to remind you, in terms of the services that Ingenuity offers, there's three key pillars to it. So there's the, 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 you rightly called out, that's the element that Holland & Barrett, amongst other Ingenuity clients, are taking advantage of, which is namely the automation investment decisions that we delivered back in 2021. So in essence, they are giving us their U.K., and Ireland D2C fulfillment services, whereby we will hold their stock in our warehouse, we will process the orders, and then taking 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 tariff, I think probably the best way to think about that is, it's gonna be enhancing to EBITDA margins.
So that's the Ingenuity piece. Is that complete for you?
Yeah, I guess, when John talked about enhancing the EBITDA margin, is that at a group level, at the Ingenuity-
Yeah.
External-
That's at the group level, yes.
What, what, what level is that?
Yeah, it'll be double-digit EBITDA margins.
Lovely. Thanks, John.
So then coming to the beauty, licensing opportunities. As a, you know, and I'm presuming you meant beauty and not nutrition, 'cause we actually in nowhere in the release did we actually talk about, beauty licensing-
Yeah
...deals. But so,
Yeah, no, you're right. You're right, of course. Yeah.
So, look, I'll cover both opportunities in case I've misunderstood it. Beauty actually is a brand owner in itself, as you know, and we do have a number of licensing opportunities within the beauty side, and there'll be some announcements, you know, that we're doing there in terms of the ESPA brand and some of our other brands where we've been building that similar model out. It's a really accretive model to do the licensing when, if you get the strategic partnerships right, because clearly we're just recognizing the pure profit element. It does impact your revenue line slightly, because obviously you're not recognizing the gross value of those sales, you're just taking the profit.
But Beauty does have a number of those opportunities, whether it's through major hotel groups, where we've licensed out with the Vanguard Group, who are basically the amenities supplier to everywhere in the world, you know, for hotel products and airlines and the likes of it. So if you went on a number of airlines at the moment, you'll see that in business and first class, some of our brands are very prominent there as the products you get given on there. But so the beauty side is something this year we will be expanding further, but obviously, Myprotein is the one in nutrition, where we've made the most progress over the last 12 months.
Yeah.
That was, you know, I think we had just under GBP 2 million, maybe just over GBP 1 million pounds worth of revenue from licensing in 2022, which was with a Japanese distribution partner. We've, we've expanded that relationship quite significantly in 2023, where those revenues are in excess of GBP 36 million across a couple of partners. That includes Iceland as well. We're obviously then recording just the pure profit of that. What you'll see in, certainly the first quarter and the first half, is there's a number of new partnerships coming, that'll be in, you know, things like even protein pancakes, which might sound quite niche to some people, but actually the volume and the value of products is quite significant just in the U.K. alone, never mind Europe and other territories.
And you'll also see there's a very strong likelihood we're going to do something around yogurts with major dairy groups and ready-to-drinks, which are all products that would typically go onto the shelves, and in areas that the brand wouldn't ordinarily reach. So super powerful for us, great brand, great marketing, and we've even got a coffee brand, a really, really strong coffee brand, where we're doing a protein partnership as well. So they're all kind of the licensing side of things where we're building the brand out. So obviously, the gross sales of Myprotein across the world will continue to grow quite significantly.
You know, you might see some variations in the top line revenue growth as we switch around the model slightly, but the profitability should remain very strong in that, and we think it's the right decision for the brand.
Just to add, the ongoing KPI to track those comments that Matt's just made, is around those total brand sales, which is something we're going to give going forward in each update. The total brand sales captures those sales that we record the revenue of, and also those retail value of the sales through our third party partners. The figure for 2023 was +5% for nutrition, and on Q4 basis, effectively exited Q4 on a total brand sales basis of broadly flat.
Great. Thank you very much.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now take our next question from Paul Rossington at HSBC. Your line is open. Please go ahead.
Good morning, gents. Well done on the numbers today. Can you talk a little bit about Ingenuity, please, and just where we are in terms of rotating out of some of those smaller, less profitable contracts that you've been looking to exit? And then refocusing on those enterprise clients, it looks like the monthly recurring revenue is moving in the right direction, but how much more work is there to do on the account base within the Ingenuity business? Thank you very much.
Sure, Paul. So look, I think it's the strategy of that pivot is probably somewhere around 18 months old now, and I think you can see the results of that in Q4, in particular, where we've seen two months of double-digit growth for Ingenuity. So that's compares to probably over the preceding or previous 16 months. I think it was somewhere around double-digit down. And so you've switched that model around now. So the onboarding of the enterprise clients now versus the exit of the smaller clients has resulted in us getting growth of double-digit in the last couple of months. So there'll still be a few bits and bobs that will be exiting all the time, which is just purely down to length of contracts and things like that.
But I think now, the vast majority of that work is done, and then it's all about layering on top now some of these enterprise clients. And as everybody knows, with enterprise clients, they take a lot longer to land 'cause they're more complex solutions a nd a lot of comfort and planning needs to go in place to get these projects live. But equally, they are sort of, you know, very long-term contracts and long-term partnerships that can grow and grow and grow. And so that's been the reason for the focus, but the vast majority of the work is done there, and we'd expect Ingenuity to be in growth from this moment onwards.
Thank you very much. And just one more follow-up from me here. Can you just, because I can't recall exactly the names of the deals, but can you just remind me of the two, well, maybe the one or two, the two or three bits of small M&A you did in the second half of last year, and just the progress you're making on those in the various territories that you've acquired?
Sure. So, Biossance was the one that we announced, I think, somewhere in the start, maybe the end of November, start of December. We paid $20 million for that brand. It's a U.S. beauty brand. I mean, the previous owner probably spent as much as $500 million building that brand throughout the U.S. It's prior to our acquisition, 55% of the sales were online through its own dotcom. It was already a partner to THG, so we were selling the product in the U.K. on our U.K. websites. And for that $20 million, we got essentially $20 million of debt book, which is mainly Sephora and people like that, and stock, the vast majority of which we'd expect to realize.
So the net, apart from the financing cost of it, we actually expect the deal to actually cost us nothing within year one. So that was the largest piece of M&A that we did. We then bought, just a bit earlier, over the summer, we bought City A.M. as part of our media marketing revenues, which was turning over about GBP 5 million with the revenue, but maybe losing GBP 1 million at the time. It's broadly a break-even business from the moment we've bought it. We paid GBP 1.5 million for it. Put a bit of extra investment into it, but nothing, you know, it hasn't really cost us too much at all. So net-net, they were the two pieces of M&A that we did last year.
Okay, thank you. Just one last thought. I think, and correct me if I'm wrong, because I probably am, but I thought you were linked to a potential deal or an acquisition in Australia, in the media, or did that or have I got that wrong?
No, no, no.
Or, it didn't happen?
Absolutely correct. So it got leaked in Australia, I believe, that we'd made a bid for a business called Adore Beauty, which is listed in Australia. It's a territory that we already operate in. We've got great infrastructure there. So there were... It was a synergy play and great strengths that we could bring together by doing that. We haven't been able to agree on the valuation of that. I think, you know, when it got leaked, the shares bounced, and they haven't come down. It's not quite like the U.K. over there. They've actually stayed broadly, you know, near where our offer price was.
So, you know, they now want a premium on top of that and, you know, given that U.K. market valuations are where they are and THG's market valuations are where they are, we don't wanna pay a premium for a synergy play in Australia right now. So clearly, if that was to change, we'd reopen discussions, and we'd look to do that, but for now, we're parking that.
Thanks for the color. Thank you very much.
Thank you. I'm now happy to hand it back to Matt for closing remarks, as there are no further questions. Thank you.
Okay, well, listen, thanks, everybody. Appreciate, you've had a busy morning for some people because there was another business that was updating just before us. So, apologies for the rush to get everybody online, but I think it's been a strong finish to the year for us and, you know, pleased with where we are. And thanks, everybody, for their support.