Earnings Transcript for THG.L - Q2 Fiscal Year 2024

Matthew Moulding: Good morning, everybody, and thank you for joining us this morning for our interim results. We're going to do things slightly different today than the previous presentations that we've done. We've kept away from doing a walk-through on a video of our presentation. Instead, what we've done, we've put the presentation online earlier, along with the detailed RNS. And then with a lot going on in the group at the moment, we think that a lengthier Q&A section will probably provide more value for everybody. In terms of the H1 itself, I think what I would say is it's been a solid half in general, but the makeup of that half has been somewhat a bit different than maybe we would have anticipated 6 months or 12 months ago. Following the business model changes that we've made through 2022 and 2023, the Beauty and Ingenuity divisions have delivered record performances, so we're really pleased with the progress that we've made through those business model changes. And we see good momentum there as well coming into the second half and there afterwards, so that's been a particularly pleasing performance. We've also got more contract wins, with great positivity feeding through in terms of the Ingenuity progress, so again, that's been solid. We've faced some headwinds in the Nutrition division. Probably the biggest factor that you'll note in there has been through FX. We've taken in excess of GBP5 million worth of profit hit from FX, principally around the Asia and the well-documented volatility in the Japanese yen. I think one of the things to note from there is, whilst that volatility is still there today, as we look forwards to 2025, it's probably the first time now for a few years that we've been able to look forward to 2025 -- or the year ahead with some form of positivity around the FX there. So, we're pleased with the direction of travel there, but that has been a frustration for us. And one of the things that we've been able to do to handle that FX is we've launched our own manufacturing. So, in the sense of being able to manufacture within territory. So that will steadily now start to build to scale, and that does reduce our reliance and impact from FX volatility in the region. It's certainly done that across Europe and the U.S. and other territories where we've done that through the years. And that's why we don't particularly ever note any volatility in those regions. I think the other area to really bring to everyone's attention is obviously the rebrand. It's been a major rebrand, probably the most -- well, certainly the most complex brand rebrand we've ever done. The last time we did a rebrand, for Myprotein, was in 2018. To give you some idea of the complexity

Operator: [Operator Instructions]. Today's first question is coming from Wayne Brown calling from Liberum. Please go ahead.

Wayne Brown: A lot to get through, so I'll keep my questions brief. I think I've got three, maybe four, if may be a bit bold. On Nutrition, I know that the rebranding from an operational perspective, and the product, looks great, et cetera, but clearly -- if you can just run through what's gone slightly wrong with the guidance that was given. Is it the fact that there were elements of the actual rebranding and getting through the old product that didn't go according to plan? Or just explain where the disconnects happened on that front. And then if I may take them maybe all upfront. And then on Japanese yen, that has moved 10%, I think, in the last three months, positively, so just curious if the impact of that is going to be seen in H2 this year or next year. And I don't want to sound glum but -- or negative, but could the timing of opening the facility then just be the wrong timing? And how should we be thinking about that in the numbers? And then on Ingenuity and separating that out. I think that's clearly, our view, very interesting and exciting and should get people focused on some of the parts in due course but just curious on two fronts on that. What could happen that would -- what could happen that the split does not happen? So, what are the risks in this actually not occurring? And then maybe you could just speak about the cash attractions that -- what could look like in the RemainCo if you could ring-fence and fund Ingenuity. Thank you.

Matthew Moulding: So, Wayne, I'll tell you it's -- this is probably useful for everybody really. Maybe the best thing we could do is actually just go one question at a time. So, ask as many as you want, but -- because I'll forget them all. But I think, the first question, sorry, Wayne, was the one around what's potentially gone wrong with the rebrand on the Myprotein business. I mean look. I think you do a rebrand when your momentum is good, right? That's got to be the golden rule. Now you wouldn't ever go into a major overhaul rebrand into headwinds. So, to wind back to when we took the decision to doing it

Wayne Brown: No. I think -- No. You didn't miss anything. You answered that well. I think the -- just the last question, in two parts, was on the Ingenuity. Why could the split not happen? So what risks are there that we should think about? And then just looking at the cash attractions that would remain in RemainCo if you ring-fence and fund Ingenuity separately.

Matthew Moulding: Sure, yes, sure. Look. The cash attraction point kind of follows on to the next point, which is both of those businesses are highly cash generative with minimal CapEx, so as a result, you can sit there and that -- we -- our stakeholders, ourselves now having got 4 years, 5 years’ experience in the markets, we recognize that that's very attractive for being listed, to have those assets generating that cash and being able to do dividends and share buybacks, et cetera instead of diverting those funds into technology and infrastructure which then builds a new business model. And so, I think those cash attractions are really clear. Obviously, if you -- I mean, if you were to take a step back, the rough math would have been free cash flow of the RemainCo would have probably been somewhere in the order of GBP80 million-plus in the prior year, in 2023, versus, for those that follow up the detail of our numbers -- I think we had a free cash flow of about minus GBP13 million, so what that then means is, well, Ingenuity was about minus GBP97 million, 90s, something like that, so to give you that minus GBP13 million. So, you're putting that money into Ingenuity to build that asset. So, if you've had that -- if you then take a step back and say, "How are those businesses performing?" Well, in 2023, we had Nutrition performing and Beauty and Ingenuity undergoing their business model changes, so if you were to think, well, Nutrition should be firing for next year and there's no reason why we'd expect Beauty not to be firing, then the core RemainCo business should be performing incredibly well, which means that you've got a very cash-generative business. Because for the past 3 years, there's always been something in one of the divisions that we've been overhauling, so as a result then, the attractiveness is pretty clear for all to be there and what that could then mean for the market. And you've got two very strong stand-out assets that people can start to focus on. Then what you've got is Ingenuity. You're probably not far off, as a stand-alone business, $1 billion of revenue in a profitable business in -- at EBITDA level but with significant depreciation charges and various other things, which I know is not -- in a high-interest environment not the most ideal scenario to be in because you get these huge depreciation charges and you end up with big reported losses and things like that. And so, taking that away. Having a $1 billion type revenue business, strong positive EBITDA growth, great trajectory but requiring cash investment to do that, that is something that, having spoken to our stakeholders, we've got a strong view that actually there's a lot of support for that as a stand-alone business. And it's actually the combination that's posing the biggest challenge. And so, look

Wayne Brown: Okay. Thank you, very much. Just -- and any views on -- as to why the merger might not take place? Or is that getting into territory that you're not comfortable in discussing?

Matthew Moulding: Look, Wayne. I can't really get into too much on that, but what I would say is, look, we obviously -- if just to take a step back. If Ingenuity is not in THG, as a very large-scale business -- we've probably got about 4,000 staff in that business with that $1 billion of revenue and strong EBITDA performance. It's fair to say, as it can have its own banking and funding and finance facilities -- have quite a substantial scale. And then on top of that, it's obviously an attractive asset in that sector, to some considerable degree, so it's not like we're exiting something in any way, shape or form. This is all really going to be around making sure that our current stakeholders can partake. That's an important point. What we -- one thing that's -- probably isn't entirely clear is we won't be forcing anybody to not be part of Ingenuity should we go down this route. This is something that all stakeholders will be able to partake in and because it's got its ability to be able to go on its own way and to do that very successfully. So, look. There's no reason logically as to why something would stand in the way of this. We know that from a stakeholder perspective, that there will be support there for it. We know that it can stand alone on its own feet, with a good banking package behind it, et cetera, but until these things ever happen, there's always a risk.

Operator: Our next question today will be coming from Monique Pollard of Citi. Please go ahead.

Monique Pollard: Good morning, everyone. Three questions for me as well, if I can, please. The first question is just on the guidance. So, the EBITDA guidance, we're talking about the low end of the range. And it seems to me, to get to that low end of the range, you need about a 12% adjusted EBITDA margin for Nutrition in the second half of the year. I'm just wondering if that's the right way to think about it and whether that's reasonable just given the commentary that sort of it's in September now that we're sort of exiting and getting back to growth in that Nutrition segment.

Matthew Moulding: Yes, sure. So, look. I think the other points to put into that as well is going to be how the other businesses are performing as well. So, the -- sure, I think, just on a straight-line basis, the 12% is probably the accurate basis in which to look at it. And in the off-line business, we deliver that and more. The -- what I wouldn't rule out as well is some of the strong performances we might see in other parts. I think it's fair to say that both Ingenuity and Beauty have outperformed in the first half beyond anyone's expectations externally. And there's no reason why we -- that could not -- might not be the case as well for the second half. I mean look. And key trading is ahead, so we can't be certain with anything. And we also, quite rightly, Molly, will react to however the market is because we do -- I know, too -- much to the frustrations of many people, we always take long-term decision-making. And we're passionate about that, so when there are these moments of volatility, we'll go away and we'll figure out what's the right thing for the business. And if that meant that we didn't deliver 12% in Nutrition for that period, then we would do that and for the right reasons. Now we would hope that there are positives elsewhere in the group that would offset that. I mean, as an example, though, there are things that provide us with various tailwinds into the second half, products that Myprotein hasn't been able to have on-site because of the rebrand. Even basic things like the advent calendar wasn't there last year, and that's going to be launched any day. And these are nice accretive things. In terms of the Beauty side of things. Sure, it's been a tougher half 1 for Nutrition, but with Beauty, we've now come into half 2, launched the advent calendars. And that's a big revenue driver for that division, and those have gone incredibly well as we've come into the second half. And we'd expect to sell out of those very, very soon. And so, there are aspects everywhere, but I think those maths are broadly correct, Molly, in terms of what you've said. And equally, though, we wouldn't hesitate on taking the right decisions. And if that meant that we don't do 12% in that division, we won't do it, right? And -- but what that will mean, as we've proved in previous years, is that Nutrition will have an even stronger period next year because we'll have done the right things for that business.

Monique Pollard: Understood. The second question I had was just on Beauty. Was wondering if you could give us any sense of the trends that you've seen across the different segments. So, your two biggest segments, skin care and hair care, but also the smaller segments, the fragrance and cosmetics; and if you could call out anything that has led to that sort of deceleration that we saw in the Beauty performance in the second quarter versus the first quarter, please.

Matthew Moulding: Yes, sure. So, the -- I think, just to talk about the various categories. If you take OLAPLEX out of the hair care sector, actually that's really strong, but OLAPLEX has been -- you may recall, had a really strong couple of years and then have suffered a few knock-backs. And so those guys have faded away a bit, but the rest of that category is really strong. Skincare remains really solid for ourselves as well. I think fragrance continues to get stronger and stronger for us, and even in cosmetics. Cosmetics is -- especially for Cult Beauty, is going incredibly well, so I think it's fair to say that, as a sector, it's alive and kicking and going really well. We've put fragrance into one of the advent calendars. So, for Cult Beauty, it has two advent calendars. They look very similar, but one has got fragrance in, which is a hazmat product, so it can't go on planes, so only the U.K. got to choose that this year. So, you could choose between that and a different one that didn't have the fragrance in. The fragrance advent calendar sold out within the first week, which is like just wild and ridiculous really. The other one is about to sell out as well, so just -- but there was limited volumes, obviously, that we put in place. So that gives you an idea of how that market is shifting. I think premium beauty is doing incredibly well. And I'd be surprised if the wider beauty market isn't similarly doing very well. I think, in terms of why did -- Q2 maybe be a little bit slower than Q1 for Beauty, it's really just in the rounding’s. There's a lot that we're doing around profitability focus. And so, you'll have seen a stronger second quarter profitability for Beauty than the first quarter. If you recall some of those business model changes

Monique Pollard: That's very clear. Thank you. And then the final question was just whether you were able to quantify in any way the potential positive buying flows from the transfer to equity share category on the stock exchange.

Steven Whitehead: Monique, a few different numbers from different bankers, but isn't it always [indiscernible]? Probably 60 million-plus, if you look at the direct index funds and then those that will shadow or track those index funds. So that's 60 million shares, with an estimated caveat for that number.

Monique Pollard: Thank you, very much.

Operator: Our next question today will be coming from Charlie Rothbarth of HSBC. Please go ahead.

Charlie Rothbarth: I just wanted to ask you a quick question about what the -- appreciate you haven't given the granular detail in the release, but what would make up the balance sheet for Ingenuity? And what would have to sit there from RemainCo to support it?

Matthew Moulding: So, there's kind of like -- obviously we're well advised on this in terms of the process and the likes. There would be a circular that we would distribute which has got the full breakdown of the different balance sheets and how that would look, so there's not really a great detail that we can provide ahead of that. It'd be remiss of us to do that. Instead, what we can do is point to sort of the cash positions and -- of each business area. Now what I can say is, on our first estimates of -- ahead of a circular, it's probably safe to assume for -- and this is public information, as I'm told as well, within quite a few analyst reports, but we'd anticipate about GBP150 million worth of cash outflow in Ingenuity, to the point at which it turns free cash flow positive, which is about 3 years out. And so -- which is dramatically down from the investments which have gone into it, as I talked before, I think, in 2023, in the 90s of cash investment. That's the cash outflow, free cash flow that it used up. So, if you think from the 1st of January, it's probably, 3 years, GBP150 million of outflow. So that's probably the most pertinent number, I think, to be able to give to you. The actual breakdown of what the balance sheet say of which assets and all the rest of it would go into a circular, but -- and then how we would fund that GBP150 million, clearly, as a strong-EBITDA business, there would be an element of facility going to it. And then there'll be other funds that would go into it as well.

Operator: We'll now move to John Stevenson of Peel Hunt. Please go ahead. Your line is open.

John Stevenson: Thanks. Good morning, guys. Yes, another demerger question. I guess, are there any implications for the future service agreements and margin structures that are required to deliver sort of successful demerger relative to the current agreements that the businesses have got with Ingenuity at the moment? Essentially, I suppose, does the pricing structure need to change on an ongoing basis? And the second question, just on Nutrition, obviously a raft of new agreements in place this year both in terms of the retail partners and licensed income. Can you put a sort of number on annualized GMV you'll have in place by the year-end?

Matthew Moulding: Sure. So, on the Ingenuity service agreement. We already have one in place actually from the separation work that we did. It's a proper stand-alone arm's length which is -- which has actually been through another review as part of its legal contractual terms, so there's not anticipated to be any differences, any changes to that other than the standard reviews that are in place. And so that work has all been done. And pleased with that. So, then coming on to the second question, in terms of the various agreements we've got. So, look. The GMV we -- on the Müller agreement, for example. That only went live in -- a week ago, I think, so that's going to be some while before we get the GMV value from those kinds of contracts kicking off, but obviously, we'd expect that to take a decent part of the market share, which then hopefully gets to roll out into more international markets and so on and so forth. But we are expecting considerable success there. I think where we were -- I think -- I don't know if it was in the RNS, but if the sales for the half 1 for Nutrition were back 7.5% -- from memory, it was about the GMV improvement talking about a 6-point-something, 6.4...

Unidentified Company Representative: 6.8...

Matthew Moulding: 6.8, there we are. So that gives you an idea there of that positive GMV. We obviously expect that to scale quite considerably from here on, but what is certain is -- again is we're in GMV growth in September all day long. And I'd expect that for the rest of the year, so yes, we are expecting the brand to get further and further reach. And we've got other exciting partnerships in the pipeline as well.

John Stevenson: Okay, brilliant. Actually, while I'm on the mic, can I ask just one more, on Beauty? Obviously, margins are already back at 6%. And I guess, when we look at the business, retail media is only going to grow from here. The mix of prestige brands, I guess, only grows from here, so what's your view in terms of medium-term margins?

Matthew Moulding: Look. I think it's definitely got the potential, right? So, one of the things we've done is quite an extensive cost-saving exercise throughout THG. And getting that operating leverage to feed through is where the real next level of upside is, so if we can get all of our divisions now working together -- to take a step back

Operator: Ladies and gentlemen, that will conclude today's question-and-answer session. I turn the call back over to Mr. Matthew Moulding for any additional or closing remarks. Thank you.

Matthew Moulding: Okay, well, look. Thank you, everybody. I think, in terms of that half 1, that I can speak on behalf of the team. It's been a pretty brutal exercising, putting the business through change and adapting. And I think I'd just like to say thank you to the wider team that have really put the effort and energy. And it's not been the easiest of periods in which to go and make all that happen. And I'm just delighted in various aspects of the progress that we've made but also very much aware there's plenty for us to do for the going forward as well and for the rest of the year and into next year. I'd also just like to thank all the stakeholders who've supported us in taking long-term views and making the changes to the business models as we see and -- see fit and choose to do. And our confidence is that we are going to be able to repay that with some outstanding numbers to come in the future. So, thank you.