THG Plc (THG) Earnings Call Transcript & Summary

Good morning, and welcome to THG Plc's 2021 interim results. We are delighted you could join us today as we reflect on exactly 1 year today since we joined the London Stock Exchange as a public company. A lot has happened over the last 12 months. The theme of today's presentation is scale, capability and collaboration. At THG, we have a passion for driving growth at a global level for our partners, and these themes will be relevant as I'm joined by the executive team, who will share a deeper insight into their divisions. The pandemic continued to impact daily lives during the first half of 2021. And as a global business, we have become accustomed to operating with various degrees of restrictions and reopenings since March 2020. With this in mind, the strong financial performance delivered across the group with record levels of revenue, gross profit and EBITDA is even more meaningful. In terms of our trading statement, you will see that group revenue increased by 44.7% on a constant currency basis with outstanding growth in Beauty of 145.8% in on a 2-year constant currency basis. This includes a contribution from Perricone MD and Dermstore, as we scale our U.S. presence and continue to develop our Prestige own brand portfolio. Growth in our nutrition division of over 30% was supported by our vertically integrated model and expanded in-house innovation capabilities. Our speed to market in developing highly targeted new products in response to emerging trends and needs is continually informed by data insights from our global customer base. Ingenuity Commerce momentum continued with sales growth of over 165% in half 1 and over 500% growth on a 2-year basis, a record number of end-to-end, fully localized and service brand sites launched across 22 territories in the first half, with continued growth in clients across a range of verticals. We closed the half year with cash on hand of over GBP 870 million and net cash of GBP 385 million, making THG well capitalized to advance our strategic investment on a global scale. In terms of our operational and strategic highlights, the recent $1 billion placing in half 1 led by SoftBank provided further capital to accelerate our ambitious growth plans and execute a disciplined M&A strategy. The acquisitions of Dermstore, Bentley Labs and very recently, Cult Beauty were all notable highlights, and we are well on track with our integration plans. Alongside the placing, we announced a financial and trading partnership with SoftBank. We are early in this relationship, but we are pleased to announce that we have already established multiple live commercial partnerships between the SoftBank portfolio and our Ingenuity platform. In April this year, we announced our commitment to invest and roll out an additional 3.6 million square feet of fulfillment and personalization facilities at key locations globally. This not only supports THG's own brand growth plans but also reflects the growth potential within Ingenuity. Our new 1 million square feet ICON campus at Manchester airport, forms part of this infrastructure investment, and we are delighted to welcome colleagues back to the office safely during the last few weeks to a new thriving environment combining Europe's largest creative studios and state-of-the-art automated fulfillment facilities. Today, we also announced our exciting plans to separate and list THG Beauty in 2022. This naturally follows on from the work being undertaken within the group to separate THG Ingenuity and deliver the SoftBank partnership. Our plan to list THG Beauty reflects the continued strong organic growth of the division and its position as the industry's global digital strategic partner. But importantly, a separate listed THG Beauty will better position the business to allow us to accelerate investment across THG Beauty and become a true global leader in what is an incredibly exciting sector. I will now hand over to John Gallemore, Group CFO, who will update you on the first half financial performance.

Thanks, Matt. The first half of this year has been super strong, and we are delighted to report constant currency revenue growth of 44.7% and 95% on a 2-year basis. Growth has been broad-based across all divisions. And we've been encouraged by the reopening of the group's experienced venues in the second quarter, particularly. The Beauty division, in particular, is a key callout with growth of 59% constant currency, and we remain on track with integration strategy for Dermstore, Bentley Labs and our Prestige skincare brand, Perricone MD. Our international footprint continues to expand. And further to the acquisition of Dermstore, U.S. growth has accelerated, now accounting for 19% of group sales, an increase from 13% to the year-end. Adjusted EBITDA was GBP 81.2 million for the 6-month period at a margin of 8.5% of sales. This was marginally below the prior year, primarily as a result of the dilutive contribution of Dermstore as guided to at the time of acquisition. Distribution costs continue to be well controlled despite the increase in order volumes as the global infrastructure we have built helps us deliver more efficiently for our customers and clients. During the first half, we shipped over 20 million orders to 195 portal countries, and we have made substantial investment in the group fulfillment infrastructure with 6 more fulfillment centers in the group network at the end of June against the same time last year. The group's international mix remained strong, supported by our end-to-end fulfillment model, which utilizes an extensive local career network, spanning 115 services, all of which are fully integrated into the Ingenuity platform. The group has built significant additional capacity in its global network to fuel future growth with our current integrations providing optionality for the end customer, enhancing the customer experience through customized communications. However, we are not finished yet the investment into our global infrastructure to serve our growing Ingenuity client base and our own brand growth continues at pace. As we touched on at the full year results, 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 distribution costs reported in adjusting items relate to the cost of commissioning these new sites. The pandemic continues to cause complexities in global distribution, in particular, a significantly reduced number of commercial flights. This has resulted in temporary increased costs of GBP 12.7 million, principally arising from these additional air freight costs of shipping orders to our customers in Asia. This will normalize as passenger air travel returns and our strategy of low class fulfillment centers will remove this dependency in the medium term. Where the group completes acquisitions, it derives value by achieving synergies in the post-acquisition period by restructuring the acquired businesses and integrating them into the group. During this restructuring and integration phase, there are a number of nonrecurring costs incurred by the group, which are classified as adjusting items. These costs include duplicated costs, whilst integration plan is executed, for example, closure of all facilities or offices; nonrecurring costs which do not relate to the underlying trading operations of the group, such as system integration work and validation in addition to personnel changes. Depending on the size and nature of the acquisition and the complexity of integration plan, acquisition restructuring and integration costs can be incurred for up to 12 months post acquisition. Other minor adjusting items relate to several charitable donations as part of the group's pandemic response in addition to legal and professional fees associated with acquisitions. Finally, within finance costs, the group has recognized a charge in relation to the fair value of the SoftBank auction. Just to remind everyone, the option relates to the SoftBank option and collaboration agreement announced on the 10th of May that facilitates the investment of $1.6 billion for a 19.9% equity stake in THG Ingenuity. From an accounting perspective, the option is treated as a derivative and the value held by SoftBank is determined as being in excess of that defined in the agreement. This results in a noncash nonrecurring charge to the difference. Our guidance and operating cash conversion for the full year continues to be around 100% with the working capital outflow in the first half of the year, representing a return to a typical profile. Historically, the group has observed a working capital outflow in the first half that reverses with peak trading in the second half. The half 1 period in 2020 saw an abnormal working capital profile given the marked acceleration in sales in the second quarter as global lockdowns accelerated shift to digital channels. Future CapEx will focus on the Ingenuity platform, whilst the near term seen higher proportional property CapEx expenditure as we build out our global infrastructure at pace in response to demand. We closed the half year in a net cash position with cash on hand of over GBP 1 billion, including undrawn facilities. This provides a strong liquidity position to enable us to continue to invest in a disciplined way for our future growth. As we turn to the outlook, overall trading remains strong, and we're confident in delivering full year 2021 group revenue growth of between 38% and 41% on a constant currency basis. This equates to reported growth of 35% to 38%. Margin guidance remains unchanged as stable adjusted EBITDA margins before taking into consideration the dilutive full year contribution of Dermstore. Capital expenditure guidance for the full year is between 10% to 12% of group revenue. The continued level of expenditure is driven by supporting an acceleration of growth plans to meet the demands of our own brands, Ingenuity clients and reflected investments in acquired assets. We continue to take a highly selective and disciplined approach to M&A with strategic priorities remaining, beauty brands and assets to add capabilities to complement our brand building and digital commerce activities. I will now hand over to our divisional CEOs who will take you through the highlights of their divisions' performance.

The online beauty market is forecasted to grow to over GBP 80 billion by 2024, and we are more than well positioned to capitalize on this growth through our differentiated proposition across destination retail sites, our Prestige own brand portfolio, our innovation and production capabilities, digital sampling and subscription boxes aiding product discovery and all of this being powered through Ingenuity. We're pleased to deliver increasing active customer numbers, growing average order values and over 50% growth in beauty box subscribers over a 2-year period. Supported by our expanding brand portfolio, our broad and inclusive offering reflects consumers' increasing desire for products with high-performance ingredients along with natural and ethical qualities. We further developed our U.S. presence through the acquisition of Dermstore, the leading authority in skin care. The integration plan is firmly on track with replatforming to Ingenuity scheduled to complete ahead of schedule. Since we expanded our Prestige own brand portfolio 12 months ago, Perricone MD has been transformed to a digitally driven direct-to-consumer brand, extending its addressable market and ultimately, its revenue growth potential and margin profile. As a science-led topical skin care brand, its skin care formulations and supplements address a broad range of dermatological needs, supported by extensive clinical and consumer studies. Perricone MD is an important customer of Bentley Labs, our U.S. center of excellence, for new product development and production. During the last 12 months, we've launched 6 new products, including the intensive moisturizing complex, CP plus, the blemish range and a hypoallergenic range. The acquisition of Bentley allows THG to internalize aspects of the production of Perricone and other THG brands and to accelerate the program of new product development for our own brands, along with all this. Perricone MD joined the THG Beauty portfolio of owned brands, which continue to build their own respective D2C following with 8 European and 2 U.S. sites launched so far during 2021. All brands are now available on Dermstore with further expansion to Cult Beauty, our recent addition to the U.K. and Europe retail portfolio, which specializes in emerging and independent brands. This month, we launched a rebrand of Christophe Robin of to further establish the premium hair care brand. and we're committed to further developing our portfolio, optimizing our THG Labs innovation expertise across the U.S. and U.K. through [ HSN ]. THG Labs offers an end-to-end service that runs from product packaging design, development, formulation development, international sourcing, product testing, U.K. and U.S. manufacturing, along with warehousing and distribution. Both [ ANA ] and Bentley have been integral to the building of category-leading brands with over 700 new products launched by Bentley since 2017 with a real specialism in clean beauty. Through our global customer base, we're able to leverage data insight to deliver highly targeted and innovative new product developments, enhancing speed to market and deepening our relationships with global brand houses and independence. It's been an incredibly active year so far for THG Beauty, and we move forward at pace with our ambition to be the fully integrated global digital partner of choice, positioned at the very center of the beauty industry.

The THG Nutrition brand family continued to deliver strong growth in both mature and emerging markets. Sales in the first half reached GBP 328 million, a 30% year-on-year growth rate on a constant currency basis. 7.3 million orders were delivered globally, a 1.4 million increase on the prior year. And we continued to see strong loyalty from our customer base with high repeat rates and low returns. Our ever-growing influencer network helped us in growing our active customer database to 4.5 million as consumers continue to seek healthier lifestyles and consumption broadened across the categories we serve. Our inclusive active wear and lifestyle clothing range was one of the strongest performing categories with over 35% D2C growth. A similar growth trend was observed for our Myvegan brand, and we are increasingly seeing customers shop across the multiple brands in the brand family. Influencers and our branded web apps are a valuable source of content, education and product discovery for consumers with app downloads up over 200% year-on-year. Our 7 million social followers and global community regularly engaged with our brands through our social media channels, such as Instagram and TikTok and our digital magazine. Brand equity is extremely strong in our home market, where we maintain market leader status across all attributes and is growing at pace across continents. With our recent customer insight survey, ranking Myprotein as a brand consumers are engaged with, would recommend and with highly attractive products in 3 of our major markets, being the U.S., Japan and Spain. We are particularly encouraged by the continued strong sales growth in the U.K., notwithstanding the challenging comparable period with this being one of our largest and most mature markets, coupled with over 50% year-on-year sales growth in developing markets, such as India and the Middle East. These territories are supported by our global fulfillment infrastructure, including our India warehouse and an upcoming UAE warehouse, a variety of relevant local payment and courier options and localized websites. Products are developed to suit local trends and tastes, optimizing the flavoring expertise from Claremont Ingredients, which we acquired at the end of 2020. At the same time, we announced the acquisition of David Berrymans, which has since enabled us to begin to unlock the potential within the ready-to-drink category. Not only are these capabilities facilitated development of new products within Myprotein, we have also launched across Myvegan, Myvitamins and Command with plans to expand this across different formats in our own brand, Beauty portfolio. Across all channels, we are delighted to deliver growth of 59% year-on-year in the RTD category. Our future pipeline of new product development across our manufacturing portfolio, including the recently acquired Brighter Foods is testament to our in-house innovation expertise, which is importantly contributing to the acquisition of new customers across a broader category segment. We look forward to sharing more with you in the second half as we continue to extend our category reach across global markets.

Following on from Q1, we are delighted to announce another strong quarter for Ingenuity Commerce, delivering 165% revenue growth for the first half of the year. Through our end-to-end technology and fulfillment platform, we process the equivalent of 2020 gross merchandise value in the first half alone with 50 end-to-end fully localized and service brand sites launched across 22 territories for new and existing clients across a broad range of sectors. To put that into context, at this reporting point in 2020, only 28 branded sites were active across the client base, and we already have a road map confirmed to launch another 70 sites in the second half with over 100 in development for 2022. Notably, over 40% of our client base is opting to internationalize with Ingenuity in addition to their initial master site, a key route to deliver our land-and-expand strategy with clients. We've today announced a number of exciting partnerships with leading brands in their respective markets. The food and beverage category, in particular, has been an area of successful development with over 30 clients due to be live or onboarded by the end of this year, a resounding success from only entering into the category this time last year. Personalization has been a key differentiator in this regard with leading brands, Nestle Quality Street, Mondelez and Coca-Cola, all utilizing our expertise to offer consumers the ability to create a bespoke product. Over 95% of our live clients now utilize our global fulfillment network, and we are scaling through investment in talent and infrastructure to leverage our leading e-commerce technology, partnering with brands looking to grow globally online and at pace. Ingenuity is rapidly diversifying its outreach through global B2B partnerships to access pools of new clients. For example, THG Ingenuity is now partnering with Google and ByteDance amongst others to promote Ingenuity services to their customers, either on an end-to-end, fully served basis or via modular components of the service stack. Clients choose Ingenuity as it eradicates complexity and the need for multipartner relations with capabilities across all elements of technology, operations and digital brand building services. Our modular end-to-end approach is quick to deploy, disruptive on price, fully managed and hence, like touch for clients. The client journey begins at the configuration phase with a focus on 3 key work streams across technology build-out, operational setup and e-commerce performance planning, typically taking 12 weeks to launch. Once the site is live, we work collaboratively with the clients to review performance and optimize the user experience on the real-time data we collect. As the partnership develops, we are constantly evolving the infrastructure with the client benefiting from the continued investment into the platform that we make for our own brands across multiple sectors. Through our land-and-expand strategy, we have supported in the further internationalization of Revolution Beauty and along with BWX driving continued success of the Homebase partnership in a strong sustained conversion rate and use of our new state-of-the-art studios, facilities to produce engaging digital content. We are excited to share more details of our expanding service proposition at our upcoming capital markets event, where we'll touch on our growing advisory and consultancy offering, which provides support to complex market entry. In addition to our developing THG Eco sustainability services, proprietary and unique fulfillment software and platform diversification to serve different needs within the market. [Presentation]

Our in-house capabilities have enabled the group to collect and analyze customer behavior data throughout the pandemic as countries and regions moved in and out of restricted conditions. As a result, we have good confidence in the continuation of our customer behavior metrics in 2021 and beyond, namely consistently strong repeat rates, supported by an increasing proportion of customers acquired by our branded apps. Whilst the pandemic is a one-off crisis, the underlying numerous drivers supporting the continued shift and retention of online customer retail spend have not changed. For example, broader product ranging and availability given our line has no shelf space limitations versus off-line; greater product education with thousands of user-generated professional posts and reviews accessible easily online; and superior convenience and payment options. As a result, returning orders drove 76% of direct-to-consumer sales in the first half of this year, supporting the stickiness of 2020 in historical cohorts. We continue to invest in optimizing our user experience, establishing and deepening our relationship of trust with consumers. As an example, with THG's apps, returning customers revisit and make a purchase quicker versus desktop or mobile users, on average, spend more with us. Through tailored engaging content, consumers are kept up to date with relevant trends and product launches supported by our growing THG society network of influencers, brands and social partners. We'll continue to focus on growing our app ecosystem as we head through 2021. We're well positioned to further build our technology and operating ecosystem supported by our end-to-end digital brand services. This includes our flagship THG studio facilities recently opened, the ICON Campus. Our in-house website, trading digital marketing expertise are highly valued by Ingenuity clients and brand owners alike, coupled with our 270,000 square foot studio facility. We have a thriving creative center, driving digital brand growth on a global platform.

In our first quarter results presentation, we announced our commitment to further invest in 3.6 million square feet of fulfillment and personalization capacity at key locations globally to support our own brands and Ingenuity clients. The additional capacity is being rolled out over the next 3 years, with progress well advanced at Southern Australia, the U.S. and Asia Pacific as well as our expansive ICON campus at Manchester airport. This project will add around 200% incremental capacity over the next 3 years, enabling the group to fulfill over 3 million orders per day with the 2020 peak period being around 1 million per day. Our traditional approach in new warehouse opening is in 3 phases. Phase 1, to partner with a third-party logistics provider or 3PL on a charge-per-pick basis to establish logistics and supply chain. In Phase 2, we entered into lease occupation with responsibility for all headcount and related costs and supported by a full integration onto our proprietary warehouse management system, Voyager. Phase 3 will then be to leverage automation and grow capacity. We are moving towards more automation over the next 2 years with much less reliance on labor, maximizing pick-and-pack efficiencies. We have the ability to retrofit existing size to be more efficient, if required. In addition, incremental beauty and nutrition manufacturing capacity will be added, which will expedite the speed to market for our growing own brands across all key global territories. We are constantly striving to become more efficient as an organization, whilst optimizing the customer experience and minimizing delivery times. Automation is now live across our ICON facility, which will support the peak trading period in quarter 4. In addition to our own infrastructure, we are today announcing the development of first, a single cross-border productized software solution formed through the integration of AutoStore's proprietary automated storage recovery system with headless elements of THG Ingenuity's proprietary infrastructure. Specifically, Voyager, our warehouse management system; THG Delivered, our global courier platform of over 200 couriers; and THG Orbit, our award-winning global customer service platform. There is no comparable products available in the market which addresses all FMCG product categories of or unified distribution and fulfillment solution, providing a single data view to maximize efficiency. The benefits FIR/ST include partnering with the fastest automated storage recovery system solution with over 99.5% uptime, vastly reduced cost per unit, increased implementation speed with the removal of integrated layers, thus reducing integration risks, and greater accountability given it is an end-to-end fulfillment courier and customer services software solution. FIR/ST will connect to all major third-party platforms, bringing these benefits to the entire addressable fulfillment market globally. The FIR/ST solution will underpin THG's global rollout where it will be widely deployed. FIR/ST represents just one of the commercial partnerships established between Ingenuity and the SoftBank Group Corporation portfolio. Current and pipeline collaborations range from end-to-end Ingenuity Commerce contracts to single-service solutions, such as headless components of the Ingenuity stack, marketing, payments, Ingenuity client financing and fulfillment enhancements. As we continue to scale, continued in-house development is imperative to maintaining Ingenuity's position as a leader in the e-commerce technology platform market, together with supporting the long-term international growth of THG's brands. This innovation also benefits our THG Ingenuity customers with the same technological advancements that benefit our brands being deployed across our growing client base. Our recent capability enhancements are focused on improving the user experience, such as concessions in a site; wish list tools, which support customer loyalty and conversion together with subscription and save functionality, which offers customer optionality for regular purchases. To further support the customer journey, improve product imagery and options to compare products side by side are highly valued with a range of payment options, maximizing customer choice and ultimately, conversion rates. Once the order has completed, optimizing delivery efficiently is critical for our Ingenuity clients. And we are pleased to have launched THG Delivered, an end-to-end delivery management solution comprising technology delivery options, carrier management and end-to-end tracking THG Delivered has enabled over 72% of our global client base to be offered delivery as quickly as the next day. Across all global deliveries, THG Delivered has enabled us to reach a global delivery speed average of delivery on the second day. This is achieved while seeing more than 52% of shipments being delivered outside of the U.K. We have taken another step forward in support of our sustainability commitments by introducing a new eco delivery solution, which encourages customers to reduce their carbon footprint. CPG clients, including Nestle Purina, are already optimizing the solution as an expansion to that ingenuity partnership post implementation of this functionality. All this would not be possible without the diverse pipeline of digital tech talent which we are delighted to have grown by over 175 heads during September alone as we welcome our 2021 gradual intake. I'll now hand you back to Matt for his closing remarks.

So thanks to John and the rest of the team for taking you through the various divisions that we have within THG. In summary, we are very pleased to deliver a strong first half performance across all divisions and a very busy 12 months since our IPO. We continue to remain focused on investing in support of our strategic growth ambitions, including across our infrastructure, namely our recently opened ICON Campus and our global distribution network. Investment also continues at pace across our Ingenuity platform as well as each of our trading divisions and most importantly, in our people. We believe THG's long-term growth opportunity is driven by growth in digital activity at a global level, together with product innovation and expansion across new products and verticals. Our Beauty and Nutrition divisions operate in large and expanding total addressable market, each holding leading positions in many territories. To better support the investment plans of our rapidly growing Beauty division, we now plan to move forward with the listing of THG Beauty next year with the business well positioned to become a global leader and brand partner at the center of the industry. The significance of our partnership with SoftBank is supported by the multiple live commercial partnerships announced today, and we are incredibly excited to move towards the market launch of FIR/ST in 2022, which is our unique partnership between THG Ingenuity and AutoStore. We continue to see an acceleration in levels of inquiry from global enterprises looking to leverage the Ingenuity platform. And we believe the global growth opportunity for Ingenuity to be unparalleled. Thank you for joining us today and for your ongoing support. We now look forward to taking your questions.

[Operator Instructions] Your questions today will be answered by Matthew Moulding, CEO and the Executive Team. We will take our first question today from James Grzinic of Jefferies.

Matt, just a couple of quick ones, really. First one, great to see the deepening relationship with SoftBank really fleshed out. Is your thinking still half 1 2022 option exercise in terms of Ingenuity from their side? And secondly, can you perhaps share some more thoughts on the Beauty listing? Would -- for instance, would you be retaining a majority ownership of that listed vehicle?

Yes, sure. So in answer to the SoftBank question, very much on target in terms of the relationship with SoftBank, been incredibly pleased with the contribution they've been able to make to THG to date and the relationship is something that we work on a daily to weekly basis. So very much on target for that in early half 1. And then in terms of the Beauty question, James, just remind me going on the IPO, was it for the...

Majority shareholding.

Sorry, the majority shareholding.

I was wondering whether you would -- yes.

Sorry, James. Yes, the plan very much is we would just be listing a minority stake in the Beauty business. We'll be returning a majority ownership and obviously Ingenuity will be providing all the services, end to end, to the listed entity.

Our next question will come from Rob Joyce of Goldman Sachs.

Just a couple. So firstly, just on the ingenuity partnerships you announced and with SoftBank that you're working on. So I appreciate the detail on the auto store. Would you able to give us a little bit more insight into what you'll be doing with the -- or which of the SoftBank banners you'd be looking to work with and what you'll be specifically doing for them? And then linked to that, I guess, with all this incremental ingenuity contracts and partnerships, does the consensus next year looking for Ingenuity revenues to roughly double? Would these be coming on top of that, do you think? Is there room for Ingenuity to grow a bit further than that? And then the final one, if you could just give us a bit more detail on what you want to go through at the investor event in October, what things you're focusing on and what we should expect to take away from that?

Steve Whitehead here. I'll pick up the first one, maybe the first 2. So on the SoftBank relationship, it's early days. It's super positive. We have daily conversations with either the SoftBank team directly or their portfolio company management teams. And so in a very short space of time, we've covered a lot of ground with them. So there's a range of types of projects. And obviously, within 4 months, the ones, the ones you can get live sooner are the more immediate partnership based where it's their portfolio companies primarily providing services to us where it's augmenting the platform, whether that's with payment options or whether it's with 1-hour delivery services in, in-country to really optimizing, augmenting the platform. The larger end-to-end THG e-commerce the large headless productized elements of the platform where we can provide some quite meaningful services in meaningful contracts to portfolio companies, those projects are more numerous than we had identified before the option was entered into. They've all been progressed very positively, but of a nature and a size that always takes a little time. But we're super happy with that range of deals that are in discussion and it's more than indicated the relationship build that we invested in back in May with those guys. In terms of the impact to the numbers, look, there's a lead time to these things, as I've said. We're part year on some of those smaller projects. Anyway, they're just going live. So the consensus of circa 50 to circa '19, '21 and 22 for commerce revenues is right. We're happy with that. We don't see these as over and above or in addition to and we're not trying to quantify at this time. We'll keep updating on it, but that consensus is correct. And then perhaps on the Capital Markets Day, others may jump in and augment. But principally, the focus around Ingenuity is to really help with the education piece, so that people truly understand that in a digital supply chain environment today, this is a unique end-to-end solution across the technology assets and the real-world assets all being in one place with one supplier to address 50 to 100 fully localized territories plus ultimately every country in the world. But that's a unique solution to a digital supply chain challenge, which ultimately, brand owners and retailers have only had one solution over the last 20-plus years, and that's multiple suppliers just to deliver 1 country, let alone 1 supplier to deliver 50 to 100, which is Ingenuity. So it's much more of a broader piece. We're going to think about a little bit more detail around KPIs to help people understand the division a little further. And then, of course, all of that is building in terms of the detail for FY 2022. We've said in the release that in H1 '22, we will be giving that granular breakdown on divisions between Beauty and Nutrition on a stand-alone basis with the ingenuity contract going through. And then, of course, we'll show ingenuity as a stand-alone. So we're building into that segmental clarity. We're probably -- if that covers everything, Rob, probably...

And then one -- just one more quick technical one maybe. Am I reading it right? The exceptional relating to the Ingenuity option actually suggests that the value of that option has gone up since you signed that agreement. Is that how that works?

It's effectively valuing it like a call option. So you could have a call option, Rob, for any share to buy something at a fixed price, and it's effectively valuing that option from a SoftBank perspective. And therefore, we have that, the corresponding liability in THG's books because they exercise that option, is of great value to them, and we just have the reciprocal in our books.

So you're right, Rob. It's basically the auditors reviewing the data and then saying that they believe that SoftBank have made a profit on the option so far. So the value to them has gone up. We have to [ check ] the corresponding in journal.

Very clear. Yes, exactly. That's why it goes up, liability, your side. Appreciate it.

[Operator Instructions] Our next question comes from Roland French of Davy.

A couple of questions from my side, if I may. Just starting with Ingenuity. There's a reference, I guess, to gross merchandise value within the slide deck. Just wondering if you could clarify what that number is in terms of the shared third-party brands on your Ingenuity platform. Secondly, just on supply chain. I know there's some rhetoric that you're able to mitigate some of the headwinds that you're seeing through the first half, just a general observation through H2 and beyond around, I guess, freight distribution and labor, in particular, I'm sorry, and maybe on the Nutrition side around weigh input costs? And then thirdly, more just one for clarification. I think around 75% or 76% repeat rates across the D2C sites. I'm just checking, is that repeat customers, those customers have ordered more than one time during the period? Or are those customers returning from prior year or prior comparative period, if that makes sense.

So John will do question #1. I'll do question #2, Matt Moulding, and then Adam, our Chief Marketing Officer, will do question #3. So over to you, John.

Sure. We don't reference what specific GMVs although we, as you know from the comments in the past, that it's growing at the rate you would expect given that the acquisition of clients and the expansion of services we're providing the class, but it's not a KPI that we go public kind of [ more ].

In terms of the second point around the well-reported staffing, inflation, logistics pressures, et cetera, that are out there at the moment, look, I think any business, certainly in the U.K. but beyond, we'll be seeing various forms of inflationary pressure, whether that's in the commodity markets or whether that's people or logistics and freight and all those kind of things. And as you touched on there, we do believe we're pretty well positioned for that. We have ingenuity, which continues to increase in contribution, which is a high-margin business that helps to offset some of those costs as they come. We also believe those costs aren't necessarily permanent in any way. We believe the commodity markets will significantly improve over time. It's just been quite a short period where you've seen some rapid rises in all commodities during that period. So we do think against that and the broader inflationary environment, we will be able to navigate that quite well. FX headwinds are pretty material out there, but FX comes and goals. And so just I think on those FX numbers that were out there, maybe 250 basis points impact to sales. To put that in perspective for you, I think it was near 450 basis points in Q2 alone. But we just got some volatility out there, but that could easily just reverse again in a matter of weeks. So these things come and go. But generally speaking, that's how we're looking at the outlook of the inflationary and staff pressures. We are helped as well by the level of automation that we have in our logistics centers, but especially what's coming live. So a lot of the investments we've made of late have been in automation, and we have an AutoStore/Ingenuity facility going live right now so -- and that's obviously very heavily automated.

And to answer the question on the 76%, that's returning customers' orders drove 76% of sales during H1 this year.

Roland, does that answer...

Can I just add the fourth, maybe just top line through the period? The...

Yes.

Yes, sorry, that answers the 3. Just in terms of the M&A contribution, top line through the half?

Yes, sure. Look, the trick is we don't split it out. And just to give real clarity why we don't split it out is because where we've made investments, typically, if it's in nutrition, it's been in manufacturing and product development. And really, that's just all about driving future growth. It is small and immaterial in any event, but that's about driving the range of development across that brand to drive growth for future years. So we'd definitely be wrong to be looking at whatever sales contribution comes from that. And then in terms of -- on the beauty side of things, we always give the numbers on anything we buy. We said this is what we expect the contribution to be and then we leave it from there afterwards. And again, the reason for that is it's the primary focus of our Beauty division is to build out a couple of key verticals, look fantastic. We're trying to build into the global #1 platform. As a result, we then have secondary brands that we put alongside in different territories. So Cult Beauty was post half 1. But you'll see that, that's aiming at the rest of the world in the U.K. and Europe, whereas we don't store earlier this year, which did contribute in the period, that's a U.S.A. focused alongside Lookfantastic. So what would quite typically happen is we may well be looking to move customers from 1 platform or 1 brand on to another as we look at that goal of building Lookfantastic to that dominant position. And so that if we started to split these things out and report on them, it could send mixed messaging at different points in time when we're really clear that that's the goal for the business, and we'll always state what we believe the contribution to be and then give our full year expectations at the same time.

Our next question will come from Paul Rossington of HSBC.

Well done on the numbers today. On beauty, a question. That's an awful lot of M&A activity around the beauty space right now. It's a supply chain that a lot of companies are trying to access. Does that mean that there's going to be more new market entrants into that space? Or is there going to be kind of be a limit on the number of new kind of players coming in because the major brands don't want to distribute through every single channel. And then show, like, what the competitive spectrum looks like there because we have seen a lot of transactions take place, a lot of strategic partnerships announced, et cetera. So that's for beauty.

Yes, sure. Look, the competitive space, I mean, I think forever, beauty has been seen as a very attractive arena through which lots of people would like to operate. And I don't think that will change in the next 10 to 20 years either. I do think it's an incredibly attractive market, great growth dynamics, and it's a truly global market. So I do think it will always be an area that everyone will want to get into. I think the chances of people succeeding in going into the supply chain will be difficult because brand owners are very protective of the brands and getting supply is incredibly difficult. And even at our scale, we have to make M&A to certain -- to fill in certain brand gaps along the way. So you can't announce that you're going to enter the market and then become a global player. That's not how it would work. Although as we would deal we'd love to do more about ourselves and safety the CapEx on the M&A. But I do believe that it will continue to be an interesting sector to everybody. It is worth pointing out though, we've got a very differentiated business model to anybody else as well. Just as a reminder, I mean, I think there's a video that we posted as well, which takes us through the beauty business model in more detail, but that's on the group website. But at one end of the spectrum, we're a product development house, developing products for all the major brand owners plus ourselves. And then through Lookfantastic and the sub-brands, we're one of the biggest retailers of beauty products in the world in the digital sense, covering all different territories. We have a really strong subscription box business as well. So we tap into all the marketing. And then we also own some of our own brands. And then at the same time, we're powering a lot of brands, beauty brands, digital expansion plans into different territories. So we have got a very differentiated relationship with beauty brands than, I believe, most of the people would have. But I do believe it's still a very interesting market and there'll be new entrants wanting to come for the next decade.

Okay. And one extra for me, if I may. On the nutrition side of the equation, you've done the deal or the trial you've announced with ASDA to raise brand awareness of Myprotein in the U.K.. Have you got any plans to do a bit more with Myprotein in the U.S.? It's been a big focus of the beauty operation this year. But where are we on tracking the U.S. market with the nutrition products?

Yes, sure. Look, we've made really good progress in U.S. I think the growth rate is -- in the U.S. is higher than the growth rate which -- for the brand in general. So we're growing faster than we would be as a whole. We continue to obviously leverage with a lot of the things we've done in THG's infrastructure in the U.S., obviously, benefits all parts of the group, not just beauty, but nutrition as well at the same time see significant benefit from when we're opening multiple warehouses across the U.S. and putting in infrastructure. So look, will continue to do that. We'll do it in our way, in a digital sense. We don't tend to put as much money into off-line areas, et cetera, we believe in that influencer-led model. We've also got our own influencer platform, and that's been quite successful for us. And whilst a lot of people are focused around the U.S., it is worth noting that probably the single most exciting territories in the world right now are probably India and the Middle East, but -- in Europe particular, and that is somewhere where Myprotein is very focused right now and see some fantastic results. And I'd probably say that, that's the fastest-growing territory for us at the moment and an area where we're putting significant investment.

Our next question will come from Charlie Muir-Sands of Exane BNP Paribas.

I wonder, first of all, just going back to the proposed listing of THG Beauty. I wonder if you could talk about the rationale for listing as opposed to looking for a strategic partner, which is what you've done with the Ingenuity division. And what is it about separate listing that you think will particularly aid the business? Is it the need for more capital? Or do you think it needs a look through valuation? Or is there something actually sort of operational that can be facilitated through that?

I mean, look, the principal reason behind this is the opportunity in front of us is huge, and we've already deployed significant capital into that sector, but we see an opportunity, especially post COVID, to further accelerate that. That is a really difficult thing to achieve when you consider that it's a solid division within THG. I think, I mean broadly speaking, the feedback I get told obviously, analysts value our Beauty division at maybe 1 to 2x sales in the overall group number. The challenge with that is we can't buy assets at those values. So every time we look at buying things across the beauty sector, when we make a major investment, it's dilutive, potentially dilutive to the group which then, when you've got significant expansion plans and investment plans, it's probably not the appropriate thing to be doing those investments in our current form. So we believe that if we can give the division much more focus and people can get a real appreciation for that, then as we put more and more investments into it and take that dominant position on a global stage, then it'll just be a far better positioned asset and making investments will become far easier than it has been in, say, the last 12 months.

Charlie, Steve here. Maybe if I pick up just on partnership piece, which you asked as well on the optionality. Why is it different than choosing a strategic partner? It's really one and the same thing. You get that clear beauty investor mandate that Matt talked about. This business model is unique in the beauty industry across. It got a right to win as the largest in care reseller online globally, 1, 2 or 3 positions as a brand builder, NPD production, sampling through Glossybox, and a digital-led brand portfolio. It's a unique asset. So then when you put it out there on a clean, clear single Prestige Beauty mandate as a listed entity, that is the clear partner to then be aligned with looking at its options for strategic alliances and agreements with the strategics. At the moment, as a part of THG, it just lacks that clarity. So it's actually an enablement step to exactly that kind of collaboration partnership, which we think is probably going to expedite the development of that business.

Great. And if I could just follow up briefly on a couple of points around guidance, please. You've obviously reiterated the full year revenue guidance. I appreciate you haven't actually given us the M&A contribution for the reasons you just discussed. But it appears that roughly, you're assuming sort of similar organic run rates from Q2 maybe progress into the second half. Is that the right way to be thinking about it? And is there any sort of color you could give around trading so far in Q3? And then on the adjusted EBITDA margin side, you've obviously reiterated this as stable margin pre-dilution. Can you just sort of update us on how much dilution we should now expect? Because I think you said you've integrated that a bit quicker. I think the original math suggested maybe circa 40 basis points dilution year-on-year might be around the right number?

Yes. Look, I think -- sorry, it's Matt Moulding here. I think just to touch on those points and Matt will jump -- Matt Rothwell will jump here where needed. I mean on what we're seeing for the rest of the year in the individual trends, I mean, look, be briefly honest, I think without -- we give quite a lot of disclosure. I know everyone would always like more. We've got a number -- a guidance number out there for the full year. We've got the half year here. And we updated with a small upgrade, I think it was just a matter of weeks ago. So the short answer is that's our guidance, so that's where we genuinely believe that the second half of the year to be. You'll get with nuances in different quarters from time to time depending on your different trading [ commodities ] your different quantum and whatever. But broadly speaking, we feel pretty comfortable on all of our guidance in that regard. In terms of the EBITDA margin, I think what we've said is look, we see stable margins on an FX constant basis more broadly. So if FX goes a different way and start bouncing back, then there will be a contribution from that and so on and so forth. We also have hedging strategies that minimize the impact of that in any way -- in any event. So they're doing store contribution and any potential dilution on that, it's relatively small. Was it 0.4%? Is that about right, Matt? Maybe it is the overall...

The contribution is 0.4% across the full year.

0.3% to 0.4% sort of impact. And then I think we've got in the announcement when we bought it. We'd expect that within sort of 18 months then to be on normal group and be nondilutive anymore. I don't know if that helps, okay? And I know everyone would like to know what today's trade's like, and honestly we have got -- unfortunately we can't do that.

We have confirmed that we do a trading statement for Q3, though, at October, Charlie. So we'll provide more color on that then. And in terms of the acquisition contribution, then the one thing I would point to is if you took what's in our RNS and back solve that out, which you can do, you'd still see that the organic growth is above the top end of our medium-term guidance range of 20% to 25%. So we're pleased with the organic performance across the first half.

And so I think -- just on the comment about FX with respect to margin. Are you saying that current FX is a margin drag beyond that constant FX stable margin gap.

There's always the risk it could be and...

The FX, is that margin...

Yes. Look, there's always a risk. We have hedging strategies to minimize that way of Ingenuity's contribution. I guess if FX starts to move considerably further in either way, then it will be a small contributor or a small dilutive. It just depends on how we see that happening, but we can control FX, but we can't -- arguably, we can't control inflationary pressures, but we have lots of ways in which we do minimize the impact of that through automation, tech stack and Ingenuity and so on and so forth. And then equally, we try and minimize the impact of FX at the same time. It's -- the last quarter was -- slightly lagged here on FX. And then when we look at how currencies have moved, then we see that -- we'd expect that to dissipate anyway unless there's another different reason for things moving.

Yes, certainly not structurally a long-term thing, FX. But as you can see the top line, it's a 280 basis point drag reported growth versus constant currency growth. And that's why we're very pleased with the margin performance in the first half because that's been absorbed through to the bottom line through a combination of hedging and then offset with other savings across the business.

Our last question today will come from Andrew Ross of Barclays.

Great. My first one is just following up on Charlie's question now on the beauty listing. You clearly have lots of investments you want to make into the business. Do you have a sense as to how big the quantum of those might be? Or put another way, how much money you might want to raise as part of the listing into Beauty? Then the second question is on Nutrition, where I think in a statement, you also say options are still open to that division. So could you just give us an update as to what kind of options you're thinking about there and how you're thinking about capital allocation into that business over time?

Thanks, Andrew. Steve Whitehead here. I'll take the first question, and Matt will take the second. And so just in terms of that Beauty listing, the whole purpose, as we've said, is that clear mandate to deliver that Prestige Beauty strategy, a key cornerstone to that. We'll be building out that digital-first portfolio today. We've got 8 brands in the portfolio, which are predominantly digital, truly global. That in itself is a highly differentiated asset. It's D2C in its margin structure. So again, it's highly differentiated. And the opportunity to broadly double that portfolio size is compelling. As the biggest, ultimately, reseller globally in skin care and hair care, we have a mandate across multiple categories to really operate a broad owned brand portfolio. So if we double that portfolio over a 3-, 4-year-time frame, that's going to require significant investment. So the whole purpose for the listing is to create that platform to raise that primary. Beauty brand assets are a 5 to pushing 10x sales revenue multiple asset class. So raising -- we will seek to raise a meaningful amount of primary to really enable THG Beauty to build on that opportunity. If that answers that, Andrew, I'll pass over to Matt.

So then on to the Nutrition business, what are the opportunities for Nutrition. I mean, look, at the moment we announced the SoftBank deal that we laid the path for this kind of progress, because clearly, Ingenuity is going to be servicing each of our divisions and continue to do so. We've got plenty on now for the first half of next year in terms of the things we've already announced. Clearly, though, longer term, we'll be looking to build upon the position that we have within Nutrition, and we'll be looking at partnership potentials and what collaborations there are, which we remain open-minded at this stage as to what they are. But we've got back a lot on the half 1 now.

Cool. Can I just follow up on the third one as well, if I could be cheeky? But on Beauty, in Q2, revenue growth slows, both reported and organic. And I assume a big part of that was because the comp is much tougher, which is logical. But I don't think we actually have the percentage growth numbers from 2020 split by Q1 and Q2. So it's hard for us to analyze kind of what going on, on a 2-year stack. But is there any more color you can give us just about that slowdown in beauty in Q2 kind of trends you're seeing as you lap against like COVID comp? What can you tell us about how it's trading over 2 years just to kind of give comfort on that?

Yes. So I'll hand over to Rachel, CEO of Beauty to answer that, but safe to say, Andrew, that when you're growing in Q1, at an incredible rate, it's -- I'd be surprised if people didn't think it would slightly down in Q2, but for, but over to you, Rachel.

No, of course. Well, as you touched on here as well, it's improve to remember that in Q2 last year, we have started the global lockdown for COVID-19, which did drive significant change in consumer behavior. So in this instance, I would guide to the 2-year trend, which gives a more indicative view of the success that we're seeing, where growth very much remains in line what we saw in Q1, organic growth, just to give you some flavor on that, so excluding acquisitions, remained broadly 90% for the first half. So we're feeling very comfortable on the guidance that we've issued.

This will conclude today's question-and-answer session. I will now hand back to Matthew Moulding for any additional or closing remarks.

Well, thank you, everybody, for taking the time this morning. We've got a good volume of people dial in, very much appreciate you taking the time. And just like to say thank you to all of our many thousands of staff that have -- through very difficult times, have made all this happen for us. So thank you very much, and enjoy the rest of your day.