THG Plc (THG) Earnings Call Transcript & Summary

Good morning, all. Thanks to everyone for joining us for our maiden full year results and Q1 trading update, which follows our successful listing on the London Stock Exchange in September of last year. It's been a truly monumental year for THG. If anyone had told me 12 months ago, all the things we would be handling as a group over such a short period of time, I simply wouldn't have believed them. Key driver for our IPO was to provide us with the financial firepower to step up investment in our proposition, global infrastructure, technology and our brand portfolio. We were delighted by the strong reception to our IPO. Taken us 16 years to get to this point but we have a young, diverse management team who all passionately believe we are very early on, on this journey. The year has, of course, been dominated by COVID and the dreadful toll it has taken. Pandemic by necessity cost all of us to spend much more time at home, which has changed permanently retail habits. This shift comes with responsibilities for all those that have continued to flourish through the pandemic. Successful businesses need to play their part in communities. And I'm pleased to say that THG has invested across all of our communities. In the short time as a public company, we have demonstrated consistency of outperformance across all areas. This is entirely due to the dedication, passion and resilience of our talented workforce and through significant investment in their ongoing development. Key driver for our IPO was to accelerate our brand portfolio to help us evolve the business model and support growth plans for many years ahead. We are pleased to have been able to deploy a significant amount of the capital raise at IPO with the acquisitions of Perricone MD and dermstore.com, strengthening our Beauty division. We've also made significant investments in our nutrition supply chain as well as in our sustainability strategy, both of which should resonate very well with our customers all over the world. So overall, it has been an exceptional year. As I look ahead, we see huge opportunities to deliver on our strategy with a continued investment in our people, infrastructure and strategic M&A allowing us to deliver for all our stakeholders. We'll finish with some Q&A where the wider team are available to answer any questions as you wish. With that, I will move into the presentation, starting with some of our key highlights. So in terms of the 2020 financial highlights, it's been a record financial performance for THG. We delivered GBP 1.61 billion worth of revenue, which was 41.5% up year-on-year. In terms of how that was made, Beauty was the biggest contributor for THG delivering just over GBP 750 million worth of revenue with a growth rate for the year of 57.1%. Nutrition wasn't too far behind at GBP 562 million worth of sales, which was 36% growth year-on-year. And then Ingenuity delivered GBP 118 million, which was just negative 2% year-on-year. Now it's worth noting that, that excludes the Ingenuity Commerce piece. So this is really around the manufacturing, the hosting, the translation services, content studios and so on. And so obviously, that would be affected during COVID, as you would expect. But then the Ingenuity Commerce piece delivered GBP 19.3 million worth of revenue from very nascent business just a couple of years ago, and that was 160% growth year-on-year. And then finally, our OnDemand division, which is the licensing, and it's actually where we came from as a group with websites like Zavvi in there and the personalization aspect of our business model. That broke GBP 100 million worth of sales for the year, delivering 69% growth year-on-year. And so we had strong growth across all business units and fair to say across all regions. We had a 61% sales mix that was outside of the U.K. The U.K. remains a really strong market for THG, but we've seen extensive growth in multiple territories across the world. We had a robust operating cash performance, GBP 177 million worth of operating cash flow, which was just over 117% of our EBITDA -- of our adjusted EBITDA. And despite all of the disruptions that you get within IPO, we managed to deliver those numbers. And it's worth just highlighting that I believe THG was the largest IPO that happened on the London Stock Exchange last year. So we're particularly proud of these numbers given that backdrop. In terms of the operational and strategic highlights for the year, significant investment has gone into our fulfillment and manufacturing, but that's not just in the U.K., that has been on a global basis. We've actually opened 5 warehouses and fulfillment centers across the world. At the same time, we've added 10.7 million new customers to our platform, clearly helped a little bit through COVID, no doubt, but it's been really great to bring that 10 million new customers in a given year. Importantly as well, though, we've really increased our workforce across numerous territories, but especially in the U.K., and then the same time, we've played our part in the local community. We've committed GBP 10 million to support the Northwest region and some of the international markets we've even contributed to as far away as India. Anywhere we've been operating, we've tried to play our part in the community. And then at the same time, we've added to our Board and the diversity of our Board. We have 2 non-execs through last year. And then we've also developed a special adviser capacity for our Board. And so we had 4 special advisers joining the Board. And again, that's just all about strengthening the governance of the business. And similarly, we made some investments around the IPO proceeds. We invested GBP 365 million in M&A, principally in Beauty, but also across our manufacturing capabilities in the Nutrition business. And then I thought it would be useful just to give you an overview of the changing shape of THG and a little bit more information around our makeup. The largest division, as we've touched on is Beauty. Now Beauty is the largest global D2C platform out there. And that's the primary focus for THG. Lookfantastic. It might not be the biggest, say, within America, but it has far-reaching capacity in terms of taking brands direct to consumers, and there's probably got about 30, 35 different territories where Lookfantastic is operated, and it really is a truly global platform. At the same time, we have a fast-growing subscription box business, where we take people's brands, including our own, and we deliver them to customers on a subscription basis, month in, month out. And that's all about trying to tap into the changing ways that marketing money is distributed away from off-line and trying to get them into direct sources and digital sources, and that's our attempt at getting brands marketing dollars put into our Beauty division. In our Nutrition division, we have a stable of brands in there and they truly operate on a global basis. The largest of which is Myprotein and the operate in 50 to 60 different dedicated territories and is scaling fast. We also have a growth category focus. So we launched Myvegan, Myvitamins. We've got a particular focus in the drinks and bars and snacks categories as well. So we do have a real breadth of range across that nutrition offering. And then we manufacture in-house about 80% of everything we sell in our Nutrition division. We do that through a BRC AA grade manufacturing facilities. And we have them, not just in the U.K., we have them in the U.S., and we're expanding those now. Obviously, within Poland, we have them in other continents and territories. In terms of our OnDemand division, as I touched on earlier, this is where the group actually came from. We've got websites like Zavvi. It had a real entertainment focus over the years. And it's really evolved to become a licensing and a print on demand platform where customers get a real different experience where they can curate product for themselves. And we can work with major film studios, but many other brands now it's gone beyond entertainment. And as you'll see from my numbers, this is in a very high-growth and the capability that we're building for OnDemand is now becoming a bedrock of our Ingenuity business as we offer those services out for other clients. Our Ingenuity platform truly is a global D2C platform. Many other people might have a particular strong focus on a given territory. But because of the needs of our own brands to be able to build out a successful international business, whether that's in the Middle East or Australia or America or the U.K., then we really have to build the technology end-to-end to enable them to do that. A particular highlight for our platform is just the progress we've been making around our apps, but we also have an influencer platform, which has grown incredibly fast. We offer translation services, personalization services and so on and so forth. As a result of those capabilities, our Ingenuity Commerce platform has an incredibly strong pipeline of new business. So with that overview into our results, I'll hand you over to John Gallemore now is going to take you through financial statements and give you a general group financial overview.

As Matt described, the performance presented completes a remarkable year for THG. We exceeded our expectations for the year, delivering accelerated growth, improved margins and strong operating cash generation. What is particularly pleasing is that the sales growth has been across all sectors of the business and in all key geographies. Just to call out some key numbers. Group revenues increased by 41% to just over GBP 1.6 billion. Gross profit of GBP 730 million increased by 43% on the prior year. The gross profit margin of 40 bps at 45.2%. Distribution costs and administrative are largely consistent with the prior year. This resulted in a reported adjusted EBITDA of GBP 151 million. One point to highlight is that we chose not to take any government contribution towards a cost of furlough, self-funding the 100% of wages that we've paid to all furloughed employees at THG. Following updated guidance from the FRC on the accounting treatment of furlough costs, we have reclassified this GBP 2.6 million charge to not consider an adjusted item. After adding back the aforementioned furlough cost, the group delivered adjusted EBITDA of GBP 153.4 million, up 38% in the prior year at a consensus margin of 9.5% of sales. Moving on to the group income statement. THG has certainly faced unique circumstances during 2020. This is not just with respect to our public listing and performance way above expectations since then. But at the same time, our response to some of the challenges caused by the pandemic. This resulted, amongst other things, an accelerated rollout of our localized fulfillment centers, the securing of our global delivery routes as well as welfare provided to our colleagues and charitable assistance to various agencies. As a consequence of these circumstances, there are a number of adjusted items, one-off in nature that we have reported. To help you understanding of these, I will walk you through them now. As the bulk of these were noncash in nature, we have split them out on that basis. The largest item by far, relates to the share-based payment charge of GBP 332 million. At the heart of our culture is a firm belief that all staff should have the opportunity to share in the value created as we grow the business. And for well over a decade now, we have gifted substantial equity value to hundreds of our team, transforming many lives in the process. There is an accounting charge that comes with such schemes. This is a notional noncash charge to reflect the perceived value to the company of the services provided by our colleagues to exchange the shares awarded. As a consequence of our share price performing significantly ahead of expectations post IPO, our existing share award scheme is vested in full, resulting in the full charge of the scheme being taken in the year. The second non cash item impairment on assets held for sale under IFRS 5. Earlier in the year, as the pandemic hit, the group was marketing for full of property assets for sale. As has been the case with many other businesses owning property, plant and equipment and right-of-use assets, we have assessed the clear impact of COVID-19 on these asset values. At the same time, we reassessed the impact of already committed construction obligations to complete the build of some properties in the portfolio to the required specification. The impairment resulted from this exercise. Portfolio was sold in September 2020. Again, this is a nonrecurring, noncash expense. Following the disposal of the property group, the remaining right-of-use assets were impaired by a further $54 million resulting in lower ongoing depreciation charge to the business over the life of those assets. I just touched on the cash adjusted items, which fall into 4 main areas: firstly, ARPU and related restructuring fees of GBP 14 million; secondly, distribution on new facilities as well as completing the commissioning of our Poland distribution facility to service all of our European customers, we accelerated the global expansion of fulfillment centers in the year, opening a second site in Singapore, with further facilities in Ningbo in China, in Dubai to establish our Middle East footprint; 2 additional sites in the U.K.: one a dedicated print on demand facility to provide advanced personalization capability, not just for our own brands, but also for Ingenuity clients; and 2 further sites in the U.S., in California and Texas. Our ability to roll out so many sites in such a short space of time is facilitated by the deployment of our proprietary warehouse management software, Voyager. The exceptional distribution cost reported related to the cost of commissioning these sites. Thirdly, distribution COVID-related. As we have seen from an earlier chart, 65% of THG's revenue is overseas, we are an exporter of goods. To minimalize delivery costs, transit times to customer but also our carbon footprint, we have a strategy of deploying fulfillment centers as close to our global customer density as we come. That said, in certain regions, particularly Southeast Asia, we do rely on airlines to penetrate individual territories. 80% of our airfreight is carried in the hold of standard passenger airlines, which have been heavily disrupted through the pandemic. When many of our competition have lost these key markets at certain time through the year, we have maintained service continuity throughout. There has been an incremental cost of securing new delivery routes in these key shipping lanes, with essential to continue to service our very important customers in these regions and also to take share from those less-able to respond. Other items is principally made up of charitable donations made locally and nationally to support the efforts of various agencies, in fighting the pandemic, including the provision of PPE at the time earlier in the pandemic when it was at critically short levels of supply. Following the recording of these largely noncash and nonrecurring adjusted items, we report an operating loss of GBP 482 million. Excluding these adjusted items, the group generated an operating profit in the year of GBP 45 million. Moving on to cash flow. We ended the year in a really strong net cash position with cash on our hand of over $770 million and a net cash position of GBP 282 million. Operating cash conversion improved in the year to 117% of adjusted EBITDA, guide to circa 100% on a go-forward basis. As outlined at the IPO, capital expenditure as a percentage of sales is expected to reduce from elevated levels of over 10% of revenue in recent historical periods to a target of 5.5 to 6.5 in the medium term. The near-term has seen elevated spend levels as we have accelerated our investment in infrastructure that will allow us to accelerate, differentiate and localize our proposition. Examples of just some of the specific projects either completed or in progress are the world-class content studio facility in Manchester that we call ICON, they're producing localized video to service not just our global influencer network but also Ingenuity clients such as Homebase; the OnDemand facility in Manchester, allowing further differentiation and elevation of proposition through a range of personalization techniques; continued expansion of both our Nutrition and Beauty manufacturing capability, improving the speed, quality and range of new product innovation and differentiation to global markets across our brands, but also those of Ingenuity clients. We have also delivered substantial capacity build and globalization of our fulfillment capability, supported by increased headcount capacity at our HQ in Manchester. The experience of the past year is certainly taught us the need to continue to localize a lot more of what we do. Cash adjusted items as previously described, and mainly fees and expenses related to the IPO; fulfillment center commissioning; COVID-related distribution costs necessary to maintain servicing key overseas markets; and charitable donations. Acquisitions in the year include the Beauty brand Perricone MD, and modern nutrition manufacturing capability. Our cash position is described with GBP 770 million on hand, provides a super strong liquidity base to enable us to invest in a disciplined way in our future growth. I will now hand over to our divisional CEOs for a more in-depth review of divisional performance.

Good morning, everyone. I'm Rachel Horsefield, CEO of THG Beauty. 2020 was a transformational year for our Beauty business. And today, I'll be talking you through the highlights, along with our strategic priorities for 2021. THG is uniquely placed within the beauty industry. We combine digitalization through Ingenuity with being a brand owner, operating a third-party retail platform and having a subscription box business. This unique operating model enables THG to develop deep and long-standing partnerships with Beauty brand owners and provide solutions across all areas of digital transformations as they navigate the transition from traditional into digital retail. Ingenuity has powered the international growth of lookfantastic, and has internationalized our beauty brands, which through physical retail channels typically fail to penetrate beyond home markets. During 2020, our business saw accelerated growth as consumers increasingly purchased online and brands invested in their D2C propositions. Availability of products, continuity of supply and breadth of our range, coupled with our frictionless Ingenuity, online retailing environment were key factors in the high repeat order rates and increased average order values that we saw last year. Digital sampling is growing in importance to brand owners and also to our customers. Our Beauty Box subscription business has seen our subscriber growth increased over 0.5 million people per month. And our global footprint has also continued to expand with our acquisition of U.S. retailer Dermstore, which will add circa GBP 135 million of sales in 2021. The online beauty and skin care sector, in particular, is growing rapidly, and the acquisition enables us to further strengthen our position as the world's leading pure-play beauty brand owner and retailer. Dermstore was not our only U.S. acquisition last year. We also extended our Beauty brand portfolio with the addition of U.S. Prestige skin care brand, Perricone MD, which joined our collection of Prestige skincare and haircare brands. Perricone MD will now benefit from the powerful and sustainable infrastructure of THG Ingenuity, which has a proven track record of scaling revenues and enhancing the margins of acquired brands. Evolution continues across our brand portfolio with increased D2C sales and EBITDA margin across all of our own brands. Brands are able to grow online without being restrained by store-based retail channels and limited geographic reach to take their place on the global stage. To give an example of our end-to-end capability as a brand owner, 46% of our brand portfolio revenue came from products, manufactured in-house by our BRC A grade approved facility last year. And this capability significantly enhances the speed in which we're able to bring product to market. As we look ahead, THG BRC has a long track record of growing at a faster rate than the overall online market. And we have ambitious plans to be globally recognized as the digital strategic at the center of conversations with both large and cult Beauty brands. Our beauty M&A strategy is to acquire industry-leading brands and intellectual property, typically constrained by store-based retail channels and limited geographic reach. Through immediate implementation of THG's ingenuity platform, brands gain direct access to consumers across the globe. This enables THG brands to reach a truly global audience while directly controlling every element of the consumer experience and delivering material accretive margins. Our own brand portfolio continues to benefit from market trends towards premiumization and integration on the Ingenuity platform. This experience is highly relevant when Beauty brands are looking for a partner to help them drive their own D2C strategy. Subscription beauty bottlers continue serving as a customer gateway and drive brand and customer loyalty. Beauty Box has been a powerful addition to THG Beauty's operating model, enabling brand partners to connect with new customers that they potentially may have struggled to reach through traditional channels. Beauty Box acts as a highly cost-efficient customer acquisition channel through digital sampling. Therefore, the subscription platform is highly synergistic across brand partners, THG owned brands and our customers. Finally, we engage with the beauty industry, not only as a retailer, but as a technology partner that can internationalize brands online through lookfantastic, can also roll out local language brand D2C website through Ingenuity Commerce. Furthermore, THG Beauty is both a product developer, manufacturer, and our subscription business puts products into the hands of over 0.5 million beauty enthusiasts across the globe each month. This capability gives us the potential to partner with every Beauty brand across the globe as their digital strategic partner, and enables us to occupy a unique position in the very center of the beauty industry. I'll now hand over to Lucy, CEO of our Nutrition division.

Good morning. I'm Lucy Gorman, CEO of THG Nutrition, and I am delighted to share with you today a selection of our 2020 highlights. Following the late 2018 overhaul and rebranding, THG Nutrition continued to deliver strong results across the portfolio, with revenues of GBP 562 million, growth of 36% on the prior year, driven by both high-repeat purchase rates and accelerated new customer acquisition. Myprotein continues to be the market leader in sports nutrition in Europe, the digital leader in sports nutrition globally and the best-in-class brand in the home U.K. market, where it is ranked #1 by consumers across all purchase drivers. Innovation is a key component of our strategy and success. Powered by THG Ingenuity and our well invested BRC AA grade accredited in-house product innovation and manufacturing facilities, including new assets added in 2020, we are able to leverage data insights from our expansive customer base to inform new product development across our brands and categories with over 200 new products launched in 2020. Myprotein is the only player active in all of the top 10 global sports nutrition markets, and our vertical integration allows us to offer the broadest product range as well as unique and bespoke flavors in each market to better appeal to local trends and taste. This is key to our localization strategy and fueling our international growth. Myprotein brand has evolved from being primarily U.K. focused and addressing a traditional core sports nutrition customer as acquisition in 2011 to a leading global brand family, spanning multiple major health and wellness categories and now catering for over 65% of households. 2020 saw continued success for our Myvegan brand, which grew at 92% year-on-year and was recently certified as the world's first plastic neutral sports nutrition brand, in keeping with our 2030 sustainability strategy. A powerful example of our innovation in product development was the launch of our Clear vegan protein powder. Working closely with a network of leading R&D partners within the industry, THG Nutrition commercialized a world first unique P-protein hydrolyzation process. This enables THG nutrition to redefine P-protein, transforming it from a poorly soluble powder to a fully soluble, clear and clean tasting product. This level of innovation has transformed a product originally created for a ready-to-drink beverage into a new ready-to-mix plant-based format. Clear vegan is now a top 4 SKU within the brand family with over 200 5-Star customer reviews, whilst also having a positive impact on the environment given P-protein's sustainability. THG Nutrition is no longer a niche sports nutrition player with a family of direct-to-consumer, aspirational health and wellness brands. In a recent survey, Myprotein consistently ramped above leading wellness brands across major attributes such as consumer trust, offers good value and makes a positive impact. The 2018 rebranding in Myprotein and the introduction of new subbrands, Myvegan, Myvitamins and MP Clothing has allowed us to better address opportunities, broader addressable market beyond sports nutrition. Through entering new territories and categories such as vitamins and healthy snacking, our total addressable market has extended to the GBP 350 billion health and wellness markets, with compelling growth opportunities in Asia, U.S., Australia and Middle East. We are growing the brand family's lifestyle and wellness community through the development of our apps, digital magazines, content and social media engagement and our proprietary influencer platform; and finally, through product collaborations with leading influencers and brand franchises. Our vertical integration strategy is a defining competitive advantage. And with the enhanced capabilities we now have in-house, we are well positioned to innovate and launch new products, with best-in-class taste and flavors across our categories, with a particular focus on the ready-to-drink and convenience market. And now I'm going to hand over to Hannah for an update on exciting momentum within the Ingenuity Commerce division.

THG Ingenuity is rapidly establishing itself as the partner-of-choice across all retail sectors. The brands which are looking to grow globally online and at pace, Ingenuity eradicates complexity and a need for multi-partner relations through its capabilities across all elements of e-commerce, technology, operations and digital brand building. As an end-to-end solution, it allows brand owners to focus more exclusively on their market strategy, knowing that THG has an integrated capability to deliver all aspects of e-commerce with resilience and speed. Ingenuity Commerce is the fastest-growing business unit in THG, and we are developing into an undisputed platform of choice in the enterprise e-commerce market, servicing major CPGs and retailers across a wide range of verticals and markets. Increased growth in demand for online has created a challenge for brands lacking digital presence or for those in need of a solution upgrade. This creates a huge opportunity for Ingenuity commerce, which delivered year-on-year growth of 160%, with a 324% increase in live sites, fully supported by the end-to-end solution. The opportunity remains compelling, and the pipeline is strong and diverse, expanding into new verticals, territories and products, supporting new brands and existing clients on their digital transformation journey. I'm now going to take you through 2 key client case studies starting with Homebase. In September 2020, THG announced a 10-year digital transformation partnership with Homebase. Through this agreement, Homebase will utilize THG Ingenuity Commerce's proprietary end-to-end e-commerce solution to replace its current digital platform. This solution includes web development, hosting and security, payment infrastructure, e-commerce management, digital strategy and data services, and the production of digital-first content from THG's new state-of-the-art content studio in Manchester. This major long-term partnership with Homebase is part of THG Ingenuity Commerce's strategy to expand into the retail sector, which is facing so much change, a predominantly offline industry that presents huge potential for digital growth and the development of immersive, frictionless omnichannel customer experiences connecting in-store and online. The Homebase proposition launched in early 2021 and delivers a comprehensive consumer journey through features, including click and collect, endless aisle, loyalty, digital kiosk and immersive content-rich experiences such as shop the look, all powered by the THG Ingenuity platform. Initial launch week saw revenues plus 200% on 2019, plus 50% versus prior year and plus 100% on our targets for that period, with initial traffic levels plus 26% versus pre migration. This being testament to the robust SEO migration work and the wider marketing channel support provided by THG. Looking ahead, we're moving into Phase 2 of the technology solution build out as we look to fully digitalize the approach, embracing omnichannel retail. The second case study to call out is Elemis, a category-leading premium skin wellness brand owned by the L'Occitane Group. Elemis has partnered with THG Ingenuity in 2020 to accelerate the international rollout of their D2C proposition across Europe and Asia to complement their existing D2C in the U.S. and the U.K. This partnership positions Elemis for long-term international and digital growth, complementing its existing strength in channels such as specialty retail, spa and travel. The digital partnership builds upon an existing product development and manufacturing relationship, which we've held for a number of years. With the client, we have launched 13 fully serviced sites from May onwards in a range of territories, including Hong Kong, Singapore and the Netherlands. We have condensed a 5-year program of works into 12 months. This is one of the many examples where we're able to deliver results rapidly for our clients. Now with a proprietary D2C technology solution has built its own brands to leadership positions globally, now offers the end-to-end breadth of services, positioning THG Ingenuity as a truly unique solution within the market. The continued innovation across our own brands as well as applying significant focus across personalization and sustainability sees us continue to add real customer value as a future of D2C, where we have real advantage and capability to deliver. We remain focused on expanding and diversifying our revenue streams, landing new contracts in new markets and verticals, expanding the size and scope of our existing clients and creating new products and services to target subsets of the market and address specific skills gaps within the client's e-commerce infrastructure. And a final priority is leveraging the power of our data generated across our proprietary platform. We capture so much information by owning the value chain, which provides meaningful insight on a tactical and strategic level to help our partners make the right decisions to fuel their growth. I'll now hand you back over to Matt Moulding to complete our divisional review.

Thank you, Hannah. And on to the fourth trading division within THG, which is a business that we like to call OnDemand. Now it's been a key year for OnDemand, breaking GBP 100 million worth of revenue for the first time in 2020, but at the same time, it was actually the fastest-growing division within THG, delivering 69% growth within the year. There are 3 key components to the division with the heritage of this division dating back to when we started the group 16 years ago in entertainment. And so with that, we have Zavvi, which is really a movie and a game based D2C offering with a particular focus around personalization and licensing and customizing products for consumers. We also have Pop in a Box which is a subscription-based business of collectible items, again, with a theme of entertainment and gaming from the movie studios and so on. And then we have IWOOT which is very similar to Zavvi with the personalization aspect, but its real focus is around the home section. And all 3 of these businesses are set to truly benefit from the rollout of the personalization capacity as we add 3.6 million square feet in the months and years ahead. And with that, I'll hand you over to John, who's going to take you through operations.

Our growth is supported by a global infrastructure network to present what is quite a busy image of our global footprint. But I made the point earlier on the resilience and differentiation that results from building a localized approach, and this manifests in many areas. We manufacture a majority of products that we sell across our own brands in Nutrition and Beauty as well as servicing clients. We do this across continents, North America, U.K. and Europe with more growth imminent into new regions in this capability. Our warehousing network, powered by proprietary software Voyager, continues to expand with new sites last year opened in California, Texas, Singapore, Ningbo, Dubai and the U.K. as well as completing the commissioning of our Poland facility to service all of our European customers. We aim to expand our network by nearly 4 million square feet. The impact of this kind of localization is demonstrated in Australia where we're in the process now of upscaling in our Melbourne fulfillment center. Last week, we switched our model in nutrition to 100% service from within country, whereas 3 months ago, this was fully serviced from the U.K. There will be a huge positive impact on cost and time of delivery that, in turn, will have immediate impact on customer lifetime value. This is the benefit of localization. Within these facilities, we are now rolling out our a very successful U.K. OnDemand operation with further deployments planned in the U.S., Europe and Australia. Our 31 data centers ensure that page load times are optimized in all markets, and we continue to roll out innovation and localization with both payment provision and delivery optionality. Combination of technology and complex physical assets mean that we now power over 300 localized websites on the platform. This architecture provides not just local relevance, but equally as important resilience as has been demonstrated by our strong performance over the past year. I'll now hand over to Adam Knappy, CMO, for a review of marketing.

An important element of THG's customer acquisition strategy is providing high-quality user experiences while establishing long-term relationships with our customers. We drive brand growth through digital execution accompanied by ever-growing influencer platform and the ability to produce in-house digital-first content. We have gown our influencer platform to over 90,000 creators through 2020, with plans to continue to invest in the platform to further drive traffic and marketing efficiencies across THG. We launched 50 new apps through 2020. And we see our apps as an increasingly important way of connecting with consumers, engaging them through exclusive content, educational materials as well as operating as a very effective sales channel. We continue to fund our media relationships, adding leading social sites such as Pinterest, Snapchat and TikTok to the group and platform this year. We continue to invest in our digital ecosystem that has delivered proven results with highly predictable marketing costs, consistently achieving costs at under 10% of group revenue. I'll now pass you over for an update on THG Eco.

Hello, everyone. I'm Steven Whitehead, THG's Group Commercial Director. At THG, we are committed to implementing the highest standards of ESG, and you will hear a lot more from us on this important topic during 2021. Since the IPO, we have developed a group-wide sustainability plan, including the formation of a Board sustainability committee, which includes our ESG special adviser, Alan McGill. A significant area of focus for the group continues to be a reduction of our energy use and related carbon footprint. Accordingly, in 2020, THG and our Ingenuity platform achieved carbon neutral company and service certifications, respectively. Certification was issued in accordance with the carbon neutral protocol, the leading global framework for carbon neutrality. We consider certification as a beneficial first step. However, our focus is to embed sustainability best practice into every element of our vertically integrated business model. During 2020, our own brands launched several sustainability initiatives. Myvegan, itself a certified plastic neutral brand launched sustainable September campaign. And within THG Beauty, ESPA launched RecycleMe for those hard to recycle beauty packaging items to ensure end-of-life plastic is processed in an environmentally-friendly way. RecycleMe is now being rolled out across the entire Beauty division. THG Eco initiatives for 2021 are broad-based and will include group-wide plastic neutrality, led by investments to in-house recycling technologies and know-how, enabling us to offset double our plastic usage with a particular focus on the hard to recycle plastics typical of the beauty industry. Reforestation carbon offsetting by a technology-enabled solutions to plant millions of trees annually is another key focus for '21. All energy rollout programs and the launch of carbon light delivery options will all be seen too. Further details will be provided later in the year as we publish our 2030 sustainability framework. Detailing our key priorities across climate and nature, supply chain and employees. We built out all these solutions, these are, of course, always available to Ingenuity clients, enabling us to deliver digital transformations sustainably. THG Eco is a hugely exciting area for us as it enables us to be responsible and impactful for our own people, consumers and Ingenuity clients. We look forward to sharing further details during the year. I now hand over to Matt Moulding.

So in addition to our 2020 full year results today, we are giving you a Q1 trading update as well. And I'm pleased to say that we've seen a strong acceleration in the performance of THG through the quarter. And that is pretty much across all areas of the business. Overall, as a group, we've delivered 58.2% sales growth for the quarter year-on-year. Now that compares to the full year results that you've seen of a growth of 41.5% for the year. So it has been particularly pleasing. In terms of breaking that down, THG Beauty has been the standout performer given the scale of that business. It's grown at 90.4% in the quarter. With a contribution made as well from the dermstore.com acquisition, which happened and completed during February as well. THG Nutrition has continued with strong momentum. And we anticipate the U.K. gyms reopening now actually. So we should see some benefit from that. But despite that, that's been a really strong quarter as well, delivering 32% growth through Q1. Our Ingenuity business as a whole grew at 26%. Within there, the Ingenuity Commerce is 188% growth. And so you've seen real strong momentum continue through in the quarter there, as you've seen in the quarters leading up to it. THG OnDemand has been the fastest-growing area overall, with 114% growth as personalization and licensing has been a real favorite as we built that division out. Moving on to the strategic priorities. I just wanted to give everybody a bit of a sense of what to expect for THG certainly in the year ahead, but possibly the direction of travel beyond as well. In terms of where our main focus is, clearly, we have a plan around territory expansion. We've got a focus around the U.S.A. You've seen that with the Dermstore and the Perricone acquisitions, but we're making significant investments in our New York office in the U.S. But also we've got a real focus around the Middle East and India and Australia. There's numerous territories where we believe we've got fantastic opportunities that are typically higher -- our highest growth markets, and we're looking to capitalize on them further. In terms of our infrastructure, we'll continue to invest in our infrastructure in numerous ways. But one of the key things is investing 3.6 million additional square feet of global fulfillment and personalization capacity. And that really will take us a step forward in terms of our ability to be able to serve customers at scale, at speed anywhere in the world. We're going to continue to evolve each of our trading division and business models, and we'll do that in part by identifying and integrating selective M&A as you've seen that we've done in the 6 months that we've been a public company. And our key areas of focus here is around identifying brands but also infrastructure and sustainability investments that we can make to further improve our group. We've also got a focus on partnerships. We want each division to be able to identify and deliver industry-defining partnerships. And that's something you should see feeding through in our updates in the next 6 to 12 months. And Ingenuity remains a key strategic pillar for THG. We're going to build on the 16 years of so far building our end-to-end platform. But it doesn't stop there. Every year, the projects get bigger and more numerous, and we aim to further build out our technology stack. And talent remains a key focus. We believe we'll add at least another 3,000 new roles to THG this year. And I'm pleased to say that within that number, we expect about 1,000 graduates and apprenticeships to be taken up within THG across the world. And so in summary, I thought it would be worth just leaving you with a few highlights, both from the 2020 full year results, but also from those Q1 numbers that I've just talked through. It has been a transformational year for THG on many different levels, not just the IPO, but just how we've had to respond to COVID and then how we've built our business out and deal with the challenges of scaling the business at the speed that we have. We've also been able to deliver some disciplined M&A, which we believe sets each of the individual divisions of on a track now to become world-leading in their given fields and we've got real momentum, as you've seen in our Q1 trade update. We got real momentum across all areas of our business, but also especially in Ingenuity Commerce. We've seen some great wins. Some of which that we've announced today, other ones that we're not in a position where we can't talk about them. And then we've supported that with the launch of THG Eco through the year. And that will be backed up with further investments selective M&A to help strengthen our proposition and really strike at the heart of what our consumers want and all of our key stakeholders want from our group. And so we move forward with purpose. We're going to advance our strategy, and hopefully, we'll be able to come forward with an excellent 2021 to support the year that we've just completed. Thank you for everything, and thank you for your support.

[Operator Instructions] Our first question is from Andrew Ross at Barclays.

I've got 2, if that's okay. First one is on the Ingenuity pipeline. Could you just confirm to us the number of partnerships you did actually sign in Q1? And then if there is any comments on how the pipeline is looking as we go through this year, that would be very helpful. And then my second question is about exceptional items and how you're thinking about those for '21? How should we be thinking about one-offs related to distribution facilities, distribution costs? And then also share-based comp charge, appreciate the charge in 2020 was related to both FGA shares vesting. But in terms of the post-IPO LTEP, should we be expecting a recurring share-based comp charge from here?

Yes. I'll come back on the question in terms of pipeline build. So in terms of the relationships signed in the quarter, it was actually 31 new clients. Just to put that into context, in the same period last year, we signed just 3. Now the reason that's been accelerating some, which is just to build in the business development team, which is finally coming to fruition. So a year ago, we had just 3 people in this part of the business. We're now up to nearly 60 people. And it's not just within the U.K., but internationally, we did put a couple of ANZAC accounts on the press release, just to reflect the fact we're doing so well in Australia and New Zealand. We just opened up a sales function down there at the moment. And similarly, we're going to be building out the sales function in the U.S. as well. So the pipeline is looking very strong as evidenced by the number of new clients we're signing up.

Andrew -- and touching on the adjusted items forward guidance, we anticipate that to be in the region of GBP 50 million for 2021. As Matt touched on over the next 2 years, we're looking at rolling out approximately 3.5 million square feet of new warehouse capacity. So that will probably incorporate around GBP 20 million of warehouse integration costs over FY '21. And then we have further costs relating to COVID infrastructure -- sorry, COVID freight costs, that is costing us more money to make sure we get product to our customers across the globe, particularly into Asia, and we don't anticipate any major transformation in global flights capacity in the short term. And then there's a small amount coming through relating to M&A and integration there. And in terms of the share-based payment charge, we believe very much in having a meritocratic structure and rewarding the very best people to want to work for THG, and it's important that we reward those people accordingly, and we have the appropriate structures in place to attract the very best talent.

What will be an ongoing charge was the question.

There won't be any current -- there is not a current charge for FY '21. No.

Okay. So from an accounting standpoint, there's nothing you're going to book for LTEP plans that have been put in place post-IPO and kind of a recurring cost of business?

So there's no new scheme to come on that. We do already have pre-IPO, the existing scheme, which has I think is a couple of hundred million pounds left to allocate on there. Now as we allocate some of that, there might be some charges that are in their, Matt has talked about. But there are -- in answer to your question, you shouldn't be expecting a new scheme to come to the table at any time in the near future at all.

Our next question is from Charlie Muir-Sands from BNP Paribas.

Just following up on those 2 topics, really a bit further, first, please. I wondered on -- with respect to the pipeline of what you've recently signed and obviously, the growth rate you've reported so far for Q1 for Ingenuity Commerce revenues, what might be a realistic outcome for the full year? I appreciate you've given guidance for the group. But given the phenomenal growth rates there, it's obviously something that's quite tricky for us to drive forecast. And then the second thing was that you appear to have raised your, sort of, let's say, mid-term M&A guidance budget. Is that purely really a one-off to reflect Dermstore? Or do you think you're going to be spending that kind of elevated amount per annum for the midterm?

Thanks, Charlie. Yes, I'll just pick up on in terms of growth rates going forward. So actually, just to refresh, we delivered just over 160% growth. Consensus this year requires us to build 175% growth, and we're comfortable with that.

And then just picking up on the M&A. Sort of thoughts going forward, Charlie. The key purpose for the IPO was really to try and capitalize on scaling the group in a post-COVID world. We're seeing significant opportunities there. And so we have given a small uplift on in terms of M&A potential guidance in the holdback term. There's a strong pipeline of potential opportunities. And as a reminder there, as well, Charlie, our principal focus really is across a few different areas, but principally, Beauty remains a major focus for us in terms of scaling our investment there. Infrastructure, and infrastructure can relate to anything regarding our technology. It can be in terms of manufacturing, product development and so on. And then obviously, from an ESG perspective, as we seek to ensure that we can offer the strongest ESG services to our clients, but obviously, for ourselves as well. And that's the reason for doing that is to give us that flexibility.

Fantastic. And if I could ask just 1 short follow-up question. Within that Q1 growth rate that you've reported, would it be fair to assume around 10 percentage points come from M&A contribution?

So we don't disclose the specifics. What we do is as we make any form of investment, we would declare what we expect that investment to deliver and then leave that there. Now what we guided to with Dermstore being the principal piece of M&A was GBP 135 million worth of sales for this year. And so you can quite quickly work back if we acquired that business during February, you can work out what 6 or 7 weeks would be to the quarter. And so it's not a full quarter of Dermstore. So it probably isn't as high as you have suggested there, but it's a reasonable contributor.

[Operator Instructions] Our next question is from Simon Bowler from Numis.

I got a question on a couple of divisions, just around the margin structure. Can you kind of give some latest thoughts on how you're thinking about the margin structure within the commerce part of the business? Are there opportunities to invest into pricing, whatever it may look like to kind of further growth there? And then also the OnDemand part of the business is obviously a very fast-growing area for yourselves. And if you can just kind of remind, I guess, on how you think about the margin structure in that part of the business as well? And then the second area was just to touch on the commerce part of the business where you've kind of noted that you're happy with the shape of consensus for the year ahead. How could we think about that as being kind of split between kind of set up kind of number carrying fees you're charging your clients versus the kind of recurring element of it?

Got it. I'll let John do the commerce piece, but I'll just cover the broader commentary on our margin structure for the various divisions, including OnDemand. I mean, look, across the divisions, we tend to have a broadly stable view that across each of the divisions, our margin structure will be stable. We have been progressing our margin. If you looked at last year, gross margins have been steadily trending positively. We guide to sort of stable position in that regard. And then in respect to the OnDemand Division, in particular, you've got to remember, I guess, that this came from the original entertainment division, which was typically a very low-margin business at times as well as sort of a 20% gross profit margin and now that's progressing right the way through and edging forward all the time, probably towards 40% and then over time beyond. So we do see that division, especially around personalization, the additional margin benefits you get from that. The licensing deals that it does that is very accretive. We expect the trend of that over a period of time to marginally step forward. It's not massively meaningful to the group's overall direction based on, say, GBP 100 million of sales for last year on GBP 1.6 billion of sales. But as it scales up, they will become more important. But that's a trajectory for the OnDemand Division. John, do you want to cover here.

Yes, sure. In terms of -- it's the split between settlement and recurring fees, Simon, right? So look, I think it's probably just worth reminding everybody that despite the fact that we're a very functionally-rich global enterprise platform with price settlement fee is much more comparable to a localized, more simple type of platform. So we're hugely disruptive in that respect. In essence, we're kind of investing in the longer-term relationships rather than trying to grab cash up from. And in the long-term relationships, we tend to fall back on the revenue share. So I think those long-term relationships, again are reflected in some of the relationships we've just announced [indiscernible] both being 10-year contracts. So in essence, the setup fees are modest on the platform. But in addition, a lot of the times that we're launching are accelerating digitalization and globalizing. So we're often taking brands that don't have presence in territories. So we're focused very much on building up those brands. So in terms of revenue shares in the early years, it can be fairly small. So I think the answer there is a lot of the revenue is to settlement fees, but a lot of that is invested in building long-term revenue share relationships over the longer term of those relationships. So I think maybe one exception to that is the recent case for the Homebase, which has substantial GMV and that's kind of a departure from those past relationships. So I think the simple answer is, Simon, the majority of the revenue is settled for the moment as we work on building the revenue share, the annuity that comes with it.

And then I think just to answer the question around the pricing piece, I think, touched upon it in the presentation. I think what we feel is there's a real opportunity to sort of modulize the services in time. So addressing specific skills that if the client does not wish to take full end-to-end stack. So looking in isolation our warehouse management system, looking at our checkout, looking at our fraud services, as they become headless in time. And so that stackable nature of the pricing and is quite advantageous.

Our next question is from James Grzinic from Jefferies.

I have 2 quick ones. Firstly, perhaps, can you update us on the length of contracts for these new Ingenuity contract payments? Do they tend to be tools of a longer-dated nature, as it's been the case in the past? And secondly, curious to hear a reaction from Beauty brands and how the perception towards you as a distribution partner in the U.S. may be changing since Dermstore deal? I mean any color on that will be very interesting.

James, look just in terms of the length of contract points, I would suggest that some of the more material contracts we've got at a 10-year level to the Homebase, [indiscernible] I've just spoken about they're all 10-year contracts. I think kind of the standard vanilla type contract would be a 3-year deal. But then the more material ones moving up to 10 years. And in many instances, we start on a 3-year basis, then we can roll it forward.

Covering churn, John?

Yes. I mean, we've got 90 clients at the moment. I think we churned 3 last year. So it's minimal. We haven't churned any this year, albeit with 3 months in. So churn isn't really an issue today. And some of the reasons we've described I don't think there's a better platform out there in terms of price and functionality. And in terms of those turns I've described, they haven't gone to different platforms. They've just, I guess, come to the conclusion that the digital proposition they had just wasn't working for them. So we haven't lost any accounts or different platforms.

And then just to touch James on the brand relationships with the acquisition of Dermstore and how it's been perceived. And I think it's fair to say it's been quite well received by our existing brand partners within the market. The website further expands our business out into the U.S.A., and the majority of brands that were already listed with Dermstore are existing partners of ours. So we're very excited, having seen encouraging growth already through Dermstore on what the Ingenuity technology will bring to this website and to replicate the success that they've seen with us on a more global level as well. So a very encouraging start to begin with.

Our next question is from Aneesha Sherman from Bernstein.

I have 2, if I may. One is on the growth of the Beauty business. Can you give a bit more color to us on how the Beauty business has developed in markets that are locked down versus markets where physical retail has been open? Are you seeing a huge variance between those types of markets underneath that average? And then my second question is on Ingenuity Commerce. Of the 31 clients that you've added in the quarter, can you comment on roughly how much are brand-new clients versus continued growth amongst existing multi-brands, some of your CPG clients, adding new businesses or brands to THG?

Yes. Certainly, on the growth of Beauty that we've seen in lockdown versus non-lockdown territories. So probably worth noting through quarter 1, the only territory where we've seen full lockdown has been within the U.K. market, where retail has been fully closed. So it was a global Beauty business, we've been able to observe and take learnings from the trends that we've seen as retails reopened in other parts of the globe. And so as we transition through those periods, the number of territories have moved in and out of lockdowns. I think fundamentally, the underlying trends that we've seen as part of that is just the continued shift into e-commerce penetration for our customers as a preferred method to shop. And that's a trend that we will continue to capitalize on as we move through the rest of the year.

And then just to answer your question around the 31 client wins. All of those are new. The way that we look at client as a new label or new business. And then we have a metric around brands. And we don't typically disclose brands that brands covers multiple brands within 1 global CPG. And actually outside of that 31, there's a really strong pipeline of organic growth and project buildings or new territories, new services. So it's great to see on top of that 31, a really strong pipeline across our existing clients.

And one other innovation actually there is, particularly if this is relevant in the food and beverage industry, we've got 1 particular client, a well-known drink manufacturer and distributor. And we're actually bringing together different brands to build a combined proposition. So for example, we could put an alcoholic drink with a soft drink, with a snack to different clients are coming together on the 1 platform, which is really interesting as well.

And can I ask a quick follow-up. So in the cases where you do expand into multiple brands of the same client, do you count that as new client growth? Or are you counting that as almost a like-for-like or existing organic growth?

So we classify it differently as organic growth. So the way that we have organized ourselves, I think the true scale is that we touched upon it earlier. We've got a very focused, dedicated new business development team that are going out into the market, looking for new clients. And then we've built a very developed client servicing structure, which is obviously focused on servicing the needs of that client and delivering the performance, but also as John mentioned, looking at innovation opportunities of how we can start to diversify those clients, develop those stacks and really build the proposition for the long term. So that's kind of managed separately with the client services team as an additional revenue stream.

And the way we do that, we can introduce the personalization OnDemand services, we can introduce Eco and then we can put different bondholders together. This is a whole range of different opportunities where we can develop the digital strategies of these brand owners.

Before I hand back to Matthew for any closing comments, just 1 more prompt. [Operator Instructions] There's a follow-up question from Charlie Muir-Sands at BNB Paribas.

Apologies, I might be being slow, but just go back to the definition of what is a new client. If you -- just hypothetically, I know you don't want to necessarily name everybody, but if you started with a new brand within existing clients, such as, let's say, Nestlé. Would that new brand be 1 of your 31 new clients?

I wouldn't. So an existing client -- if you got a new brand with existing client, that's an organic growth. So we think of new brands as just an entirely new relationship, okay? And it's a complete segregation in term -- in the way we deal with those 2 types of growth opportunities.

We have another question from Paul Rossington from HSBC.

Sorry, 1 last follow-up for me. Can you just say whether the increase in your M&A budget and the increased number of opportunities you're seeing? Are you also seeing that you are having to be more competitive on price of those acquisitions? Is that in any part why the M&A budget has gone up as well?

So the M&A budget is not going up for that reason, no. I mean, all assets are valued different at different points in time. It's purely just from a sense of opportunity that we believe could be out in the market for some exciting accretive potential. And that's the only basis rather than it being a more price competitive market.

That was our last question on today's call. So I'll hand over to Matthew for any closing comments.

Okay. Well, listen, thanks, everybody, for taking the time today. I know it's been a long call, so I'm not going to give you a long-winded wrap up. I guess there's something to leave everybody with is, it's been an outstanding first quarter. Super pleased with the way that has panned out. Obviously, pleased with the momentum that we came into the quarter from last year. I think it's a testimony to the team, the dedication across the world during COVID that we've been able to deliver on this. And we really see some great opportunities going forward. I know that some people would like us to be upgrading our numbers on a constant basis. But right now where we are, we just delivered a fantastic quarter. We've got 3 more quarters ahead, and we believe the opportunities are really strong there, underpinned by Ingenuity's fantastic growth. So there's plenty of time left in the year for us to be thinking about those things. But I don't think we could be in any better shape. So thank you for all of your time today. And I'm sure if there's any further questions, you can follow up with the team, and we'll get back to everybody on anything you need. Thanks very much.

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.