Moneysupermarket.Com Group PLC

LSE:MONY

Earnings Call Transcript 2022-Q4

[Peter Duffy, executive]

Four brilliant brands helping customers and users to save money every day. Good morning, and welcome to the Moneysupermarket Group full year results for 2022. I'm Peter Duffy, CEO; and I'm joined later in the presentation by Scilla Grimble, our Chief Financial Officer.

In 2022, the business performed strongly ahead of expectations. Even though the energy switching market was closed, revenue grew by 22% to GBP 388 million and EBITDA returned to growth, up 15% to nearly GBP 116 million. We continue to execute our strategy well, and results are coming through.

When I joined, there was significant work to do. But much of that is now done as we deliver tech and data-led savings platform that both supports our strong brands and brings innovation to consumers and providers. We've centralized our data. We've rolled out new marketing tools, and we've made significant progress to platformize our technology. In other words, building features once and then deploying them across our portfolio.

And as you've just seen, our brands are strong and more relevant than ever. Moneysupermarket's latest ad campaign showcases the breadth of savings opportunities for customers and it's resonating well.

MoneySavingExpert has again been a trusted source for people seeking advice to navigate these uncertain times, and you'll be seeing more of Quidco and our travel brands over the coming months. So what's that meant for the business? Well, firstly, we've grown both revenue and profit for the first time since 2019. We're becoming more efficient. We operate with fewer people compared with 2020 despite having acquired 3 businesses.

And finally, and importantly, we're confirming guidance in line with market expectations for 2023. Not only has this all allowed us to help millions of households save GBP 1.8 billion, but it's also enabled us to maintain the dividend at GBP 11.71 per share despite these macroeconomic and regulatory headwinds. And we continue to have a diverse and engaging working environment. We were first in the most recent FTSE Women Leaders review, and we're in the top 50 inclusive companies, U.K. Employer list.

Now before I hand over to Scilla to present the numbers, I wanted to give you an update of the key trends in our core markets of insurance, money and home services. And then after Scilla section, I'll return to run you through our strategic progress. We expect to continue to deliver more in 2023 despite the ongoing macroeconomic pressures. Several of our verticals are nondiscretionary purchases and saving money will stay at the fronts of the consumers' mind. And we hope for further recovery in some channels after the pandemic, the energy crisis and the regulatory changes over the last 3 years.

So let's start with insurance, which is just under half of our revenue. We expect to see continued recovery in car and home insurance switching in 2023. New General Insurance pricing regulation that was introduced in January 2022 had significant impacts on car and home insurance switching. Insurance providers, especially those with big backbooks took time to work out their new customer acquisition strategies. But as expected, in the second half, we saw new ways to acquire customers beginning to emerge.

For example, we saw about 1/3 of our car insurance providers launching new products across the course of the year. Market switching trends improved after an initial fall in '22, and that trend has continued into '23. Car insurance switches were 14% lower in H1 but recovered to 6% down in H2. And as you can see in the slide, the trends in home insurance and car were similar and they can both continue to improve.

In quarter 4, the market for car insurance only reduced by 4% year-on-year, and our car insurance revenue grew in that quarter. Premiums are on the rise again, given claims inflation, and this was particularly the case in H2. Last year, average new business premiums rose almost 25% for car and around 10% for home insurance. We expect premiums to continue to rise as insurers adjust to the ongoing rise in claims costs.

Travel is now our second largest insurance channel behind car. In '23, we expect volumes to continue to recover, although policy type will revert to pre-pandemic norms as consumers' confidence and travel builds again. In '22, we saw a recovery with sales volumes in quarter 4 at almost 85% of 2019 levels. Revenue grew by more as people traded up to more comprehensive insurance policies, although this began to moderate in the second half.

Next, Home Services, which in '22 was around 10% of revenue although it did represent around 1/4 of the group revenue in 2019. Now clearly, that's all about energy, which is still the biggest uncertainty in that vertical. The simple issue is that whilst there is demand from consumers for energy switching, there are no attractive tariffs to switch to. Now we're confident that we'll be switching -- there will be a switching market, but we don't currently see that that's going to return in '23.

So let's take a moment to understand why that's the case and the triggers for reopening to happen. As I've said, there is demand. We believe that consumers will switch their energy provider when conditions allow. Most households are on the price cap and a significant number of suppliers, they didn't choose. And as you can see in the chart, search traffic for switching was actually higher in '22 than in '21, even with marketing turned off of the channel.

However, we need supply of deals for providers to resume offering profitable fixed tariffs, they have to be able to buy energy in the wholesale markets sufficiently below the price cap for them to make a profit. Now that's not the case at the moment. The price cap is updated every 3 months. And although forward energy prices have fallen recently, this can always reverse. Now once wholesale prices fall below the price cap, the market stabilization charge comes into effect. This was the additional regulation introduced last year. That means that when a provider wins a new customer, they must compensate the outgoing energy provider.

The effect of this is that the gap between the wholesale price and the price cap has to be wider again for fixed rate deals to be profitable. The market stabilization charge is in place until at least the end of March 24. And then we have the energy price guarantee that was introduced in October last year to protect customers from exceptionally high energy costs. At the moment, that means that if a price cap is above GBP 2,500, the government rather than customers will pay the difference.

Now that threshold will increase to GBP 3,000 in April, but this measure does not impact providers' profits or their incentive to offer fixed tariffs. So together, all this means that the energy switching market will return, and our conversations with suppliers suggest that they're keen to get back into the market. It's just difficult to predict when that will happen. Otherwise, with Home Services, Broadband and mobiles are seen by many as nondiscretionary purchases with most contracts linked to inflation, price increases should provide a catalyst to shop around.

Our market share in Hong Kong is strong and it improved again in '22. Now finally, money, which is a bit more than 25% of our revenue. Starting with borrowing, which is about 75% of the vertical, demand was strong with net consumer credit returning to pre-pandemic levels. On the provider side, we continue to have very good coverage, offering more than 120 credit cards and over 65 loan products. But as you can see, conversion in quarter 4 was lower than in the rest of the year as providers have repriced credit, especially loans upwards in the face of macro uncertainty.

And we're continuing to see this dampened Q4 conversion continue into quarter 1. The banking side of money is dependent on promotional offers and providers competing for customers, which means it's more difficult to predict. But with higher interest rates, current and savings accounts become a more attractive source of bank funding. So different markets, different challenges, different opportunities. But our group's purpose is to help households save money and our strong brands, our unique breadth of product offering and our increasingly efficient operating model positions us well for '23.

I'll talk more about that in a few minutes, and I'm now going to hand over to Scilla to take us through the financial performance.

[Scilla Grimble, executive]

Thanks, Peter, and good morning, everyone. As Peter said, 2022 was a strong year. Revenue grew 22% or 8% excluding cashback. Money had an exceptional year, our travel channels rebounded strongly, and the trends in switching in the car and home markets got better as we moved through the year. Adjusted EBITDA grew 15% and basic EPS increased by 30% more than EBITDA, driven by a decrease in our effective tax rate and deal fees in 2021.

Tech investment rose by GBP 6 million as a result of our recent acquisitions, but growth was behind revenue, so our reinvestment rate fell slightly to 13%. Operating cash flow was more than 50% high year-on-year, reflecting our stronger trading performance and some one-off working capital outflows in 2021. And as Peter has mentioned, we've held our full year dividend.

Looking now at revenue by vertical. As I said, group revenue increased 22% or 8%, excluding cashback. This is a strong performance considering there is no energy switching. Peter has already touched on some of the market factors of insurance. It grew 8%, largely driven by travel insurance. Travel Insurance was our second largest insurance channel in the year with revenue about 20% above 2019 or pre-pandemic levels.

As we moved into Q4, we saw improving trends in the car insurance switching market that we're pleased to have continued into the start of 2023. Money's performance was exceptional, up 37% with double-digit growth in all channels. Banking was particularly strong as we benefited from the good availability of attractive products and editorial coverage. Whilst borrowing performance was strong for most of the year, we did see conversion soften after the mini-budget. This hit first in loans but moved into cards as Q4 progressed.

This softer conversion reflects the higher pricing users are seeing in their results tables. Home Services revenue fell 42%, reflecting that the energy switching market was closed for all of 2022, but only from October in 2021. Broadband returned to growth in the second half as we lapped the loss of the large B2B contract in July '21, and there was good growth in mobile, boosted by some attractive provider offers.

Moving on to travel, which had its best year since 2019 as COVID-related restrictions were largely absent from Q1 onwards. Revenue was around 50% to 2019 levels. And finally, cashback which had its first full year of trading as part of the group. Revenue grew year-on-year driven by the rebound in travel. This offset declines in retail, which softened following the moderation in online shopping as people return to physical stores and declines in services, which was affected by the same trends in the energy and insurance markets as seen in the rest of the group.

Moving on to gross margin where the story is very consistent with insurance. Gross margin reduced by 2.7 percentage points year-on-year to 67.7%. So margin was broadly flat H2 on H1. To remind you of the moving parts then, the full year consolidation of Quidco was a drag of about 4.5 percentage points, reflecting the structurally lower gross margin to the cashback proposition. The loss of the low-margin home services B2B contract in July '21 somewhat offset this, giving a margin benefit of about 100 basis points.

Moving on from these expected changes in margin. We also saw about 50 basis points of benefit from money coming from the exceptional performance of the higher-margin banking channel. Other mix impacts were about mutual. Margin benefited from the mix out of lower-margin energy, but this was offset by the mix into travel insurance and the weaker conversion we saw in car and home insurance following the FCA GI implementation. Device mix now has a negligible impact on margin, and we expect this to persist going forward.

Turning to costs. Distribution costs increased by GBP 10 million to GBP 40 million, mainly driven by the step-up in investment to support our MoneySuperSeven campaigns. Distribution costs was slightly ahead of guidance, partly due to the early launch of the latest MoneySuperSeven campaign and also our decision towards the end of the year to put some marketing investment behind Quidco and icelolly.

Admin costs increased by 11%, which was due to a full year of Quidco and icelolly ownership. Elsewhere, we continue to benefit from the work we've done to streamline the organization and improve our tech and data estates. Excluding the acquired businesses, we now operate with around 170 fewer heads than we had at the start of 2020. This work has helped us manage inflationary pressures. Indeed, excluding acquisitions, admin costs were stable year-on-year.

Looking forward, we expect our work on costs to limit operating cost growth to mid-single digits in 2023. And within that, we expect to hold distribution costs flat year-on-year. On to cash flow. Operating cash flow grew 59% to GBP 104 million. I'm pleased that we have delevered to 0.3x EBITDA. And remember, this measure includes deferred consideration. Working capital returned to normalized levels following the one-off movements in '21, and we further improved our working capital management across the group, so had a nearly GBP 5 million working capital inflow in the year.

Turning to our capital allocation policy. The Board regularly reviews our approach to deploying cash, and it remains consistent with recent years. That is, we prioritize organic growth, followed by our commitment to the ordinary dividend. We then look to M&A to support and accelerate our strategy. And finally, we remain committed to returning any excess capital to shareholders.

As earnings have returned to growth, the Board will continue to review the scope for growing the dividend in accordance with our capital allocation policy. Looking ahead to 2023, we've confirmed that we're confident of meeting market expectations for EBITDA. And in that guidance, we're assuming no energy switching for the year. Those market trends I've highlighted from the end of 2022 have continued into the start of this year, namely a stronger switching market in car insurance, reflecting higher search traffic and softer conversion in borrowing, particularly in loans, reflecting the higher cost of credit.

We continue to focus on efficiency in our ways of working. However, we do expect, given the inflationary backdrop from operating costs to increase by mid-single-digit percent. Operating cash flow should remain robust and putting all of that together will mean further deleverage this year. I'll now hand you back to Peter.

[Peter Duffy, executive]

Thanks, Scilla. So the foundations of our tech-led savings platform are in place. We've moved our data to Google Cloud Platform, and we've closed our legacy data warehouses. We're now using a rich, single source of real-time data, which will drive growth as well as help us become more efficient. So whether you're working in our marketing or tech teams or product or finance areas, everyone has seen the same data presented in the same way. And that data can then be used operationally in the customer proposition as well as in our marketing tools, which in turn is going to drive efficiency. I'll talk more about that in a second.

So in marketing, we've now moved on to 3 leading platforms, SA360 for PPC, Contentful for SEO and Braze for CRM. And this allows us to gain new users at a lower cost and improve our marketing. We're continuing to platformize that building features once and deploying them across our brands, yielding cost efficiencies and improved revenue performance from new features being rolled out faster.

And as well as moving our channels onto common platforms, the ongoing approach to upgrade our technology has allowed us to remove duplication to simplify, to automate, making us more efficient and agile. Excluding the acquired businesses, we now have about 170 fewer heads compared to the start of 2020. This all feeds into the strategic pillars that drive value. Efficient acquisition that's attracting customers and users to our sites in the most cost-effective way, we now have all the tools to do this, and we're seeing the benefits of the revamp of our advertising and updating our marketing capabilities. Next, retain and grow. That's increasing customer retention, cross-sell and engagement. We had to get our data in a good place first before executing in this area. This is in place now, and we're making good strides and we've started improving user journeys to encourage repeat purchases across the multiple channels, and we've got more to come.

And then finally, expanding our offer. That's growing the group further. This could be new channels, new distribution routes or new customer bases. We've made progress here with our 3 acquisitions in 2021 and our B2B offering, which will yield more benefits as we embed them further into the group. So I'll now go further into how all of this is working. Our price comparison brand, Moneysupermarket is a well-trusted brand. Almost 90% of U.K. consumers have heard of it, and it finished the year at a top of a peer set in terms of Net Promoter Score.

Last year, we repositioned it to be more clearly about saving and the campaign was elevated in '22 with the inclusion of Dame Judi Dench and the mission to help save Britain GBP 1 billion. The ad campaign is Moneysupermarket's best performing yet, both in terms of short and long-term impacts. The ad is in the top 5% of U.K. ads for grabbing attention and the top 3% of all ads for its positive portrayal of women.

And since launching the campaign, our share of branded search has grown and remained at the highest level since 2018. We've launched our Moneysupermarket price promise on car and home insurance, which is the first step towards a reinvigorated proposition to make us the first choice for consumers to save money. Refer-a-friend scheme is being trialed, and we will continue to evolve our offer further. On SEO, Moneysupermarket now ranks in the top 2 organic search results for most of our channels.

PPC has also become more effective than last year. By using machine learning, we can now bid for more search terms, make bids more targeted. We can use our first-party data, and we can adjust our bids more frequently. So as an example, we've been able to reduce our cost per clicker by 6% for car and home insurance whilst at the same time, increasing our share of clicks. Time required to create an e-mail campaign has collapsed, in some cases, from a week to less than a day, and this will allow a test [indiscernible] approach, which in turn means better campaigns and the right users and better retention and engagement in the long run.

Now our content-led brand, MoneySavingExpert continues to offer content and tools to guide and support users, which has been particularly valuable during the current cost of living crisis. Traffic grew in '22. MoneySavingExpert was again named the most recommended brand by YouGov and quadrupled its social media followers to 1.3 million in the year. We started trialing the MoneySavingExpert out in the summer. The feedback to date has been positive with 4.8 out of 5 star ratings in both the Apple and the Android stores.

And the app isn't just a different way to get MSE content. It has its own unique tools like bill buster that identifies personalized opportunities to save. And it's the first proposition that uses the group's open banking capability. It will be the start of a suite of more personalized experiences that will help users be in control of their finances. With our cashback brand, Quidco, we've made great progress integrating it. We've brought the website and the app data onto the group Google Cloud platform. We're migrating CRM operations on to Braze.

The group's comparison services are already powering Quidco compare journeys for home communications, for travel, for pet insurance and car insurance launched last week. The Ice Travel Group brands are now sharing product offerings and capabilities. Travelsupermarket is using icelolly's proprietary bidding technology that allows providers to bid for more prominent positions on the site. And the TravelSupermarket travel insurance and car [indiscernible] are now available on icelolly.

So with an improved offer and the combined reach of the 2 brands, ITG has been able to capitalize on the post-pandemic recovery in travel. Now data, which is the lifeblood of our business, and we have vastly improved our ability to store and use it. Data latency has reduced from 24 hours to about 10 seconds in the last couple of years. For example, with our CRM, we can now retarget faster those people who've come to the site, run an inquiry, but left before completing the transaction. We can also capture new data better, previously, adding new data required manual work and coordination between tech and data teams.

It could take weeks, and that process is now largely automated and can take seconds. Let's look in a little bit more detail about how we are becoming a tech-led savings platform. The breadth of its offer has always been one of the strengths of Moneysupermarket Group. We offer you the ability to compare products across practically all your household bills. So the data set we now have means we can better serve our customers and users and help them find new ways to save more money.

Historically, this innovation was done in individual verticals or brands. But with our new platform-led approach, we do it once for all brands, meaning we can bring new ideas to market faster. A number of our biggest channels are already platformized, meaning the journeys are increasingly using the same underlying code. Energy, home communications and car insurance are alive, money will be following soon. And this means we only need to develop and test new features once, new improvements can then be rolled out across other brands. Clearly, this reduces maintenance costs and speeds market.

And this doesn't just make running our tech estate more efficient, but it also creates new opportunities. In the slides, you have the example of motor insurance comparison, making car comparison redeployable as a service has allowed us to launch the MoneySavingExpert Compare+ tool in May. It went live on Quidco last week. And we've also now opened it up for B2B partners with 2 new partners going live in the last month. But our tech and data platform is really about improving ways for customers to save money.

In July, I talked to you about how we were planning to simplify the user experience for returning customers. Now the core of this is a rebuild of question sets, which are going to be dynamically tailored by customer to facilitate additional savings and therefore, enable more cross-sell. In 2021, 90% of Moneysupermarket users inquired in more than 1 channel, more than 1 of our 7 channels. In '22, this figure had risen to 21%. The change being driven by the recovery in travel insurance. But this is too low given the breadth of our offering.

And as I explained, we've got work in place to begin to improve this. Traditionally, price comparison focused on capturing information, the information required for the specific product being compared. We've pivoted the focus to our users by building a shared profile that becomes richer as they acquire across more channels. And this will be going live on credit cards, on loans and car insurance shortly. It means that when you come to us, we can offer you the easiest journey.

For example, customers wanting to borrow often compare between getting a loan and a credit card. Normally, they'd have to go through the full question set for each product. When this is live, a customer who initially looks for a loan can then compare against a credit card by answering only 4 questions instead of 16, and it's still going to meet all the requirements of the regulators and the providers. So the initial trial results on this are promising. Returning customers get to results pages faster, fewer users need to go back in their journey to begin to correct mistakes.

So we're going to continue to expand the channels that use this shared user experience -- shared user profile, home and pet insurance and next. And we have a strong pipeline of improvements that then build on that to make users more loyal and valuable. Now I've also spoken previously about the group being a 2-sided marketplace. So there's been a lot of work on how our centralized data and efficient platform can not only help customers and users but also providers as well.

In '22, we launched a first set of propositions to help providers quote more effectively. And now our data enrichment tools can give insurers access to real-time data that enables them to offer more competitive pricing. And then secondly, tenancy advertising. This is where providers pay to promote their products and flag spots on our sites. Decision Tech had a real strength in this, using it in energy and broadband. But the expertise had remained in DT since its acquisition in 2018.

So last year, we expanded tenancy capabilities into car, home, pet and life insurance and Moneysupermarket and Quidco. We've seen strong demand from providers and we have plans to continue to extend our offering across channels and to enrich it with more advanced targeting capabilities, of course, using data. So in conclusion, we built a scalable, tech-led savings platform, which is the foundation of an efficient group with market-leading brands.

In '22, we deployed advanced digital marketing capabilities, with centralized, real-time data and best-in-class tools. Our brands enjoyed fantastic trust from consumers, supported by powerful campaigns and a common purpose to help households save money. And we extended our tech-led savings platform with new capabilities that enable us to innovate and operate efficiently. Our consistent strategic execution and our strong trading performance against the backdrop of challenges in some end markets demonstrates the strength of our business model and the diversified group.

And it also sets us up for the next phase of our strategy where we will deliver innovative products for providers and will help customers save more money. In turn, making them more loyal and more valuable. Thank you.