THG Plc (THG) Earnings Call Transcript & Summary

[Presentation]

I think that's by saying it's actually the proudest year I've had, and I believe THG has had in our 18, 19 years of trading. Given the environment that we've operated in, I'm really pleased with where we've ended up. And we've got record sales. We've delivered growth over GBP 2.2 billion of sales. Very few businesses managed to deliver growth last year. Naturally, if you'd asked me at the beginning of the year where I would have thought, we would have landed, then it would have been a better position than that. But given all of what's been going on in the world, I'm so pleased with where we are. In terms of the factors that kind of we've had to deal with, one of the biggest things really has been whey pricing, inflation, everyone understands that there's been very big inflation throughout the world. And some of the real highlights for me is the actions that we took during the year. So it's not just the fact that we delivered some growth and against that backdrop. It's how we reacted during that time and how the team has performed and the decision to support our customers in Nutrition reflected not only in the growth that we delivered last year, but also in the start that we've had to 2023, that seems to have really paid off. And we'll see that benefit really come through as now whey price is way below anything that has been in recent years. I think some of the other initiatives that we took on board as well, we're very early on the cost saving initiatives. We started very much at the beginning of the year. Also, the things that we did around the balance sheet as well, we've been really cash generative in that second half. So we delivered GBP 50 million worth of free cash flow. We strengthened the balance sheet by securing a new banking facility as well. And all of those actions combined and we had GBP 640 million worth of cash and available facilities at the end of the year. I mean, look, THG has seen incredible growth. We entered that industry at the very end of 2010 through a small acquisition paid GBP 20 million for a business certainly over about GBP 20 million of revenue. And then if you look at where we are today, well over GBP 1.2 billion worth of sales. We've topped that up with various investments during that time. This time last year, the Nutrition division was probably the worst performing part of THG given the pressures it was under from the dramatic increase in pricing of all commodities. And so it was quite a challenging year for Nutrition. But then as you come into this year, you can see that commodity price fell consistently throughout the second half of last year. And now what we're seeing is this commodity pricing probably somewhere back at the 2019 levels. And so as a result of that, we've got an incredible opportunity that sits in front of us, and we should see some significant rewards off the back of the fact that we made those customer investments and throughout last year about protecting the shielding from a good proportion of that inflation. So I feel really positive about that division. Since we've appointed Vivek as CEO, one of the clear remits he had was we want to be able to land some major contracts at the, what we would call the WALE level. And so as a result of that, we've -- you've seen the transition that we've made away from high volume, smaller accounts really into that major U.S. tech partnership type level. Sure. So through 2021 and 2022, an awful lot of effort went into put in our key divisions as a stand-alone divisions in both a legal sense and trading center, et cetera. It's been a key part of underpinning our cost saving initiatives, the GBP 100 million that we delivered last year and GBP 30 million for this year. And so it's really allowed us to review that cost base of what's really driving the growth and what do we need, what don't we need? And what that then gives us as a result is real optionality by doing this reorganization and completing it, it allows us now to be able to deliver the growth plans and partnerships that we would choose in each and every vertical that we want to do. I'm super pleased with the changes we've made. I think the Board, we've got has got an excellent skill set. We brought Lord Charles on as well, probably about this time last year, who's been a great addition. But then on top of that, we've made couple of changes as well. And not least, we've even strengthened the exec team further by moving one of our non-execs, Damian Sanders, who will be speaking, no doubt shortly and taking people through the financial review. He's been on our Board as a non-exec for 2 years and then he's taken on the financial officer role. And John Gallemore then moved on to the Chief Operations Officer role. So we've got a real strengthened exec team, strengthened Board and non-exec team, and I think the group is far better for it as well. How do I expect the year to pan out? I would think that, obviously, Q1 numbers we presented today, people probably got a sense of the positive momentum as that quarter has evolved and how we finished the quarter in a really good vision. As a result, the group certainly on a continuing basis should be delivering growth and we'll probably exit in the on-demand division, either in Q2 or early in Q3. For the rest of the year, I'd expect that momentum to then steadily build through, not necessarily just suddenly go on ramping up, but I'd expect that the growth and momentum of the business and our competitive advantage will just keep getting stronger as we go through the year. In terms of the margins and how we get back to our 2021 or 2020 margin stack, but very much in play. You will see all the divisions are improving their margins. The operating cost base of the group is probably the leanest and fittest it's been in many years with gross profit margins on the rise and the cost base in a strong position and growth momentum through the year improving. And we're expecting a positive year.

Good morning, and thank you for joining us for our 2022 full year results, which is my first as a CFO. We will be presenting a selection of key business highlights and a summary of performance for 2022 and also for the first quarter of 2023 with other members of the executive team joining us for Q&A later on. As we turn to our revenue performance, the year saw many well-documented macroeconomic factors impacting the markets in which we operate. We are, therefore, pleased with the broad-based growth we have delivered across our core consumer and technology divisions. Particularly so when reflecting on the challenging comparative trading period, where online sales were positively influenced by COVID lockdowns, most inevitably in Q1 2022. We've also been encouraged by demand in a higher pricing environment with strong repeat purchase rates from our loyal customer base continuing at around 80%. Within the U.K., Beauty saw some specific challenges as the year progressed. With the reopening of physical retail, the consumer environment deteriorating on the back of the emerging cost of living crisis. And in the fourth quarter, material disruption in the U.K. Korea network, impacting seasonal gifting. In an inflationary environment, certain international territories within Europe became less rewarding to serve from a profitability perspective. As a result, in the final quarter, we began to pull back investments in lower-margin markets, and this has continued into first quarter of 2023. Within Nutrition, the input cost environment was one of the most challenging we have ever faced. And therefore, delivering revenue growth alongside stable customer KPIs is a very pleasing result, in particular, in our primary U.K. market, where growth was stronger than for the division overall. As we turn to Ingenuity, following the appointment of Vivek in June, we took the decision to reposition the division to focus on higher value and higher-margin enterprise clients. As a result of this pivot, we are seeing softer sales growth as new client wins are offset by the strategic exits of smaller Later in the presentation, I will go into further detail on the strategic review and areas of the business being discontinued. The cost environment in 2022 was highly unusual, with high inflation across most major cost lines, applying pressure on margins. Weight costs, in particular, was significantly elevated, which reduced gross margins in Nutrition as we sought to protect customers and invest in retention and growth for the longer term. Considered price increases have been successfully implemented to partially mitigate the impact of this temporary increase in input costs balanced with consumer price protection. In addition, in line with our strategy, we remain focused on maintaining and ultimately growing our share in key markets. We actively review the pricing of our own brand products on a localized basis, adapting these to reflect the competitive dynamics and local conditions of each market. Distribution costs continue to be well controlled despite inflationary pressure as the global infrastructure and automation we have built helps us deliver more efficiently. Within admin costs, the main increases have been seen within marketing due to significant paid media and cost per click inflation, in addition to payroll costs, particularly during the first half of the year. The full year benefit of the year-on-year headcount reduction following completion of the divisional reorganization will be realized in the current financial year and beyond. Overall, this resulted in a significant decline in EBITDA profitability year-on-year, but significant substantive actions have been taken across the business to both rightsize the cost base and to simplify the business model. I'll speak more on this shortly. Adjusting items continues to reduce in line with guidance. Final mile Asia delivery costs remained elevated in the first half of the year as lockdowns in Asia continued to affect air traffic and key shipping lanes. New warehouse commissioning costs have reduced, and our global warehouse expansion program is now largely complete with substantial capacity for growth. Also of note are the one-off restructuring costs connected to the divisional reorganization. Earlier, I mentioned the noncash impairment charges relating to Beauty and Ingenuity. In all cash-generating units were identified through the divisional reorganization, which has led to the impairment reviews being completed at a more granular level than in prior periods. When combined with the challenging global markets, rising interest rates and other macroeconomic pressures, the group incurred a one-off charge this year in impairing historical goodwill balances in Beauty and Ingenuity. Following the divisional reorganization, THG Ingenuity now recognizes into segment revenue for the provision of technology, operations and digital services to the other THG divisions. We've also taken the opportunity to reposition certain revenue streams in their more relevant division. Presented on screen are the divisional adjusted EBITDA margins for the year and comparative period. We're broadening our reporting to give a more detailed view of the cost base, including the corporate costs, which we anticipate remaining at around 1% of revenue. Later in the presentation, I'll take you through the key drivers for divisional margins rebasing to the historical positions. Typically, we experienced a working capital outflow in the first half of the year, that reverses with peak trading in the second half. This profile was, however, elevated with a significant cash investment in H1 2022, principally from new warehouse launches, which require a one-off investment in stock. CapEx is as anticipated, with the group well advanced on its targets of annual expenditure with guidance for the year ahead unchanged at approximately GBP 135 million. Adjusting items and financing costs were also in line with expectations. We closed the year with cash on hand of over GBP 470 million, and our RCF of GBP 170 million remains undrawn. We have a strong balance sheet and added to our available facilities through the GBP 156 million loan drawn in the fourth quarter. Our term debt is long dated with no covenants whilst the RCF is undrawn. I'm turning to 2023, the easing of inflationary pressures, most notably in weight input prices, provides clear visibility and greater confidence of the margin recovery opportunity that we see ahead. Our average procurement prices in the first quarter of 2023 were meaningfully down on the prior year. And as you can see from the graph, the sweet whey index prices are currently tracking at more normalized levels. We've talked at length about how automation has delivered material efficiencies within our U.K. operations. And we expect the same now in the U.S. where our automation project of the New Jersey facility recent. Our distribution costs as a proportion of sales have reduced continually since 2020. And we anticipate this being a sustainable operating level medium term despite ongoing wage inflation. Whey prices and automation are 2 of the main areas that support our path to enhance profitability alongside the strategic review. And we will come on shortly to talk to additional drivers within our consumer divisions. Following the divisional reorganization, the group commenced the detailed strategic review of operations outside of Beauty, Nutrition and Ingenuity. This has enabled us to look at the business through a more granular lens to assure ourselves that we are focusing our efforts on areas that will deliver optimal returns for our shareholders and accelerates our pathway to positive free cash generation. The areas in focus with the on-demand division and experience in luxury assets previously reported as Other. Given experiences alignment with Beauty, we've reclassified these profitable assets accordingly from the first quarter of 2023. For the assets where we couldn't see a robust path to profitability, a positive free cash flow. We've made the very difficult decision to continue these revenue channels, eliminating losses across the group. As a result of the above action, we've recognized around a GBP 26 million one-off noncash inventory provision within FY 2022 cost of sales. The success of the discontinued areas is expected to be complete by the end of Q3 2023. Our reported EBITDA of GBP 64 million translates to GBP 100 million on a pro forma basis. And I'll now take you through the bridging items. In 2022, we expensed GBP 10 million as cost that was capitalized in previous years, given the change in the accounting standard. There's no cash impact on the group here nor any profit before tax impact. Categories discontinued in 2022 at a GBP 4 million loss. Furthermore, post year-end, we have taken the decision to access THD-on-demand, which incurred EBITDA losses in 2022, which will not repeat. Continuing adjusted EBITDA on a consistent historical basis is therefore GBP 89 million. Finally, the group incurred GBP 9 million of incremental markdown charges that will not repeat as part of reducing stockholding by over GBP 90 million, and GBP 2 million of costs in relation to the pivot in Ingenuity to a larger client portfolio. I'll now walk through our segmental reporting and medium-term guidance for the divisions. Beauty EBITDA margin in 2022 was depressed for a number of reasons outlined earlier. And I'd expect this to be in excess of 6% over the medium term, in line with historical delivery. Specifically, we have scope to enhance international margins through market prioritization and improved buying terms in part through additional synergies from Cult Beauty and Dermstore. We do, however, expect sales growth in 2023 to be tempered in part by this focus on margin accretion. We are also focused on improving our free-to-pay marketing mix, reducing our cost of sale and we anticipate further operational savings as our automated fulfillment scales in the U.S. Whilst we will continue to invest in our customer proposition, with structural tailwinds supporting our market opportunity. Overall, we have a high confidence in rebuilding to historical EBITDA margins. The Nutrition EBITDA margin in 2022 was 77%, in a year where import whey protein commodity prices were at an unprecedented high. As a reminder, whey makes up approximately 50% of the cost of goods in the Nutrition division. We've insulated the customer from the full impact of this commodity inflation and will yield the benefits as the input prices have already started to normalize. This will flow into cost prices throughout 2023. Lower freight prices and more localized infrastructure will drive further margin benefits and return to baseline EBITDA margins in excess of [ 1% ]. Following the divisional reorganization, THG Ingenuity reported revenue now includes intersegment revenue from internal services provided to THG Beauty and THG Nutrition. These internal services comprise access to the technology platform, digital and creative, operations and fulfillment and customer services, amongst other elements. This revenue is eliminated upon consolidation with segment adjusted EBITDA margins presented on a gross basis. Historically, operational services were provided at cost to external clients when bundled with higher-margin technology and digital set as the model has matured, all services are now charged with a margin. term, the extent to which technology services grow ahead of operational and digital services will therefore influence the division's overall margins. Through maturing our margin stack, we are enhancing our overall position. The current margin, therefore, be considered a base that will scale over time as the revenue mix evolves towards technology and as margins are now being charged on all operational services going forward. We anticipate Ingenuity EBITDA margin to scale to around 7.5% over a 5-year time frame through growth in both internal and external revenue and enterprise client expansion. Over this period, it would be reasonable to expect a breakeven cash flow position after CapEx at around GBP 1.25 billion revenue. I'll now turn to our first quarter performance. Core divisional revenue declined by 5.6% during the quarter. Overall, this was in line with management's expectations, considering the particularly challenging comparable period. The continuation of courier strikes disrupting the U.K. market into January, combined with our strategy to de-prioritize sales in certain territories with lower profitability. There's been significant progression at Ingenuity, as we continue to reposition to focus on larger, higher revenue and higher margin clients with high-quality recurring revenues. Our statement this morning lists a number of new client wins and strategic partnerships signed during the quarter. Underlying momentum improved as the quarter progressed, which combined with input cost deflation and the annualized impact of the significant cost actions taken provide a strong base for improved profitability year-on-year, which leads me onto our guidance for full year. We are in good shape to deliver revenue growth across our continuing divisions for the balance of the year. While Q1 sales growth was slower overall in certain areas, much of this was as a result of the proactive decisions we took to focus on more profitable sales. As noted, underlying momentum improved through the quarter. And we anticipate continuing to build as both COVID comps and the impact of U.K. courier strikes have fallen away. The group anticipates a stronger second half with performance supported by continuing solid performance within Nutrition, alongside increasing growth rates in both beauty and Ingenuity. Whilst inflation is easing in core areas such as commodities, the majority of margin benefits will be realized in the second half, as we fully realize the benefits of the significant cost actions taken. Capital expenditure guidance for the full year remains unchanged as we near the conclusion of an accelerated period of investments. Our fulfillment infrastructure is exceptionally well invested, allowing us to continue to drive further efficiencies. Beyond this year, we expect long-term channel shift across our consumer markets to continue, supported by a strong ingenuity pipeline and further endorsement of the proposition. We remain confident of a return to in excess of 9% adjusted EBITDA margins in the medium term, and show progression into 2024 through operating leverage improvements across the fixed infrastructure, including automation. Gross margin recovery as the consumer price protection strategy normalizes and conclusion to the group's strategic review and focus on profitable continuing operations. In closing, I'd like to take this opportunity to reinforce our focus on profitability and positive free cash flow. With a strong balance sheet and category-leading positions within substantial end markets that continue to benefit from long-term structural growth, we have confidence in our ability to deliver long-term value for shareholders. Our divisional CEOs will now take you through a selection of strategic highlights across our business.

In the face of a challenging consumer retail environment, our Beauty business delivered a resilient revenue performance in 2022, with a stable number of active customers year-on-year accompanied by increased order frequency and average order value use. We are constantly looking for ways to evolve our proposition to enhance customer experience and retention. Last year, we launched our Beautyplus loyalty scheme, which has been a huge success so far with nearly 1 million customers subscribing. In addition to driving improved customer engagement and higher spend, the program continually enhances our understanding of our customers, their preferences and their purchasing habits. As Damian commented earlier, returning margins to their historical profile is a key priority. We have intentionally turned our focus to our key strategic markets where we have a localized offering, a leading or rapidly growing position and drive a higher free-to-paid marketing mix. The online beauty market has a number of highly attractive characteristics and is also a large global market, which has consistently grown over time. The market has also historically performed well through times of economic uncertainty with consumers continuing to purchase beauty products they need to maintain their daily beauty and wellness regimes. The breadth of our product range is important in this respect as consumers are increasingly educated through social media on new trends, ingredients and routines relevant for their individual needs. Through our retail destinations, we connect with consumers throughout their beauty life cycles, playing a key role in replenishment, gifting and discovery. We are well positioned within the category to benefit from structural trends due to the nature of our ecosystem. One of these trends is premiumization. This is reflected in the higher growth rate seen in the prestige Beauty market in recent years. Our brand offering is focused very much towards prestige, making us ideally placed as consumers are increasingly aware of more targeted products and ingredients. The expansion of the online channel is another key trend with online growth significantly outpacing traditional channels. In addition, emerging Beauty brands are winning share from larger brands around the world as consumers increasingly relate to brands that express themselves and their values. Finally, consumers are increasingly using our platform and social media channels for discovery and advice. Through our apps, destination sites and influencers, we engage directly with the consumer, providing them with regular recommendations and education. As I touched earlier, our brand offering appeals to a very broad customer demographic, providing resilience in the face of economic pressures. Each demographics purchasing habits and media consumptions differ significantly. And it is vital that we understand and respond to these accordingly with a targeted offering. Our extensive set of in-house marketing capabilities are a key asset here, enabling us to address consumers through the marketing and communication channels of their choice. Our broad assortment of categories also allows customers to move with us as their needs and preferences change over time. This ability to move with customers across our live stages provides us with confidence in our ability to retain customers over the longer term while continuing to acquire new ones. Finally, our ambitions for 2023 are to develop share in our core markets while delivering sustained margin accretion through a strategic focus on higher-margin categories and brands. We have the experience, insights, relationships and authority to continue to be the beauty destination of choice for our consumers and brands alike.

Our Nutrition division comprises a portfolio of global digital first, health and wellness brands, addressing a wide range of performance lifestyle and wellness needs. Over the last 4 years, Nutrition has grown well ahead of the market. Our customer base has expanded, as order values have increased, and their loyalty has remained high, evidenced by the high repeat rates and a growing market share. Whilst growth in 2022 was at a lower rate than in the prior 2 years, we were pleased with the performance overall when considering the comparable period was impacted by a lockdown, and the material inflation we saw across input prices, which Damian touched upon earlier. Measured price increases were implemented during the year, helping to mitigate the material increases in weight input prices, freight costs and foreign exchange rates. Importantly, our core categories continue to perform strongly with around 10% growth year-on-year, which provides us with confidence for the year ahead, as deflation and input costs supports margin progression. Having built Myprotein into a category-leading online over the last decade, we are now leveraging the unrivaled brand equity we have developed for expansion into targeted traditional retail channels. Whilst we will retain our D2C focus, our Life Style and wellness brands are pursuing selective expansion into stores, principally in the U.K., Japan and the U.S. In the U.K., Myprotein holds prominent listings in Asda, Tesco, Iceland and the Co-op. Our protein bars, snacks and drinks and now also stocks in Puregym, the largest gym chain in the U.K. with expansion across further gym group's strategic priority. In Japan, Myprotein products are now sold across a number of retail chains, and we are now recognized as a #1 foreign sports nutrition and protein brand. Finally, in the U.S., Myprotein has recently launched with The Vitamin Shoppe, one of the leading specialty nutrition retailers, as we continue to scale the reach of the brand in the expensive U.S. market. Strategic partnerships are important to our growth as a group, and we were excited to enter into a 5-year partnership with Iceland Foods to launch a wide range of frozen nutritional products. The partnership saw Myprotein products launched in over 1,000 Iceland stores and online from January of this year. The new range was jointly developed by Myprotein and Ireland and provides healthier and more nutrition complete versions of popular meals and snacks, extending our category depth. Partnerships such as this underline the reach of the brand and highlights the significant growth opportunities in licensed brand extensions. There are opportunities to selectively extend into new categories, increase brand touch points and engage consumer in new ways. As a vertically integrated business, we research, develop and manufacture products ourselves, and we are renewal for being the first to the market with new products and formats. In 2021, we acquired Healthy Snap bar manufacturer Brighter Foods, which has now provided a step change in our bar and snack new product development capabilities. Vertical integration enhances our speed to the market with the recently launched Impact Bar, now one of Myprotein's top-selling bars. 2022 also saw the launch of the Whey Forward, an industry-first animal-free whey protein powder, which demonstrates our ability to innovate ahead of the market and launch new product formats that appeal to a wider range of consumers. Our ambition for 2023 are to broaden our wellness focus for wider appeal, build share in emerging markets with fast-growing digital channels and continue to expand our category debt through licensing and innovation.

The environment for digital commerce has been challenging over the last 12 months, with businesses forced to move faster than ever to adapt to supply chain inflation and upgrade redundant technology. All against a backdrop of increasing consumer expectations and pressure to do more with less people. We believe our relevance in this environment is greater than it has ever been. In this kind of market, engagement with our client base has been critical. We engage on multiple levels as a technology provider, as a brand builder and as an operations enabler. We work together for mutual success. Sharing our experience of building brands and continually elevating the customer experience. Our strategic pivot to enterprise clients aligns to our position as both a peer-to-peer e-commerce retailer in our own right and as a service provider to global cross-border commerce operations. The same technology that powers our own brands also drives the growth of our clients' brands. As we took our own e-commerce brands to market, we encountered challenges as we try to scale at pace through restrictive and disproportionately expensive third-party e-commerce solution providers. This inspired us to create and develop ingenuity, positioning ourselves as the complete commerce solution. As a single service provider, we are able to minimize execution risk and also maximize speed to value for our clients, enabled by our 3 core service areas. As we touched on at our interim results, when we began to commercialize Ingenuity, we were using our experience to develop quickly in our core vertical. Whilst our platform is a proven enabler in the beauty, health and wellness categories, we have now established our capabilities and credentials in retail and FMCG, particularly food and beverage, among other fast-growing verticals. As we continue to scale partnerships and strategic alliances, alongside continuous in-house development is imperative to cementing our position as an authority in the digital commerce market. During the first quarter of 2023, we've continued to accelerate enterprise partnerships and developing our suite of propositions. We are maturing and increasingly marketing stand-alone solutions to maximize the addressable market. Meeting individual brand requirements where a complete commerce solution is not immediately required, and opening up our solutions to a new customer base of partners, agencies and consultancies. To accelerate our full potential, we have formed strategic alliances in our key geographies of focus with leading multinational consulting firms, with fulfillment technology partners and major additional specialists. In a market which is demanding speed and agility, we build the best and partner with the best for our own brands, leveraging this for mutual success with our clients. In 2023, we will continue to execute the strategy. Supporting our clients' digital ambitions in addition to accelerating our own platform reach across new audiences.

Yes. Look, so the majority of our sales are overseas. And so our operational focus has been centered on designing a scaled and localized delivery and manufacturing network that allows us to get our products closer to our customers around the globe. This gives us faster delivery. It's a vastly reduced couriers is also managing our carbon footprint, without losing the efficiency benefit of scaled localized fulfillment. I think the strength of the network is the breadth and the capacity. We now have 16 fulfillment centers in the U.K. the U.S., Europe, the Middle East, Southeast Asia and India, supported by 9 manufacturing plants across the same continents. This means our customers are getting localized delivery with a clear impact benefit, our speed and our cost to serve. The returns have been fantastic. We've delivered substantial service improvements to our customers while significantly reducing distribution costs relative to sales since 2020, in addition to new facilities, such as the Super Manchester icon site, we've expanded key homes with a focus on elevating the customer experience while driving continued efficiencies. Just to quantify us from those service improvements, our average order to delivery time has reduced by 30% over the last 2 years for our customers. While our time taken to process an order within our fulfillment centers has reduced by 38% in the same period. At the same time, because of the localized network, we've had a 15% reduction in mouse traveled to deliver more orders. So while delivering these key service metrics, our total variable fulfillment costs have reduced by 120 basis points in the last year, and that's at a time when all costs within warehouses have been heightened through cost inflation. For example, in the Manchester Icon side, the automated side, our average cost per unit to pack and dispatch have reduced by 40% on previously. We continue to invest in our best-in-class in-house production across our Nutrition and Beauty divisions. In Nutrition, we're investing in range capability within existing core sites located in the U.K., Europe and the U.S. This has been supported by more recent acquisitions. This means now that we've got 86% of the food products we sell are manufactured in-house when we've got much more margin retention, but more importantly, faster and better innovation. In October '21, we shipped our first order from our automated U.K. icon site, which fulfills all this partially beauty brands as well as Ingenuity clients. The automation in our New Jersey facility went live at the start of this month, and we can now expect further efficiencies from our U.S. infrastructure, similar to the ones delivered in the U.K. By the end of this year, we expect over 30% of our orders to be fulfilled by automated sites. Ingenuity clients are also able to benefit from an automated solution, therefore, reducing their own fulfillment costs as well as improving service. So earlier this year, we announced our global partnership with AutoStore. Having integrated the AutoStore robotics into our own facilities, we've seen firsthand the benefits the system has delivered for our group. Being a buyer customer and user of this plus other automation systems, it gives us a unique perspective to underpin our partnership with AutoStore. We see it from the customer's perspective. This means we're on the procurement process. the complexities of commissioning the products, and most importantly, the ongoing use and optimization of the solution from a customer's perspective, the addressable market for automation is strangled by a high upfront cost, complex integrations with supporting softwares and a lack of technical capability within customers to optimize these complex solutions. The model we've developed with AutoStore removes the bulk of the upfront cost offsetting it against future operating savings. The dreaded integration complexity to remove the solutions out of the box with unnecessary upstream and downstream functions integrated including order manager, warehouse management systems, control systems and career management. Our solutions optimization team will then work with the client, the duration of the solution to deliver real ongoing savings, which ultimately means the Ingenuity partnership with AutoStore democratizes automation. The architecture and build of infrastructure and platform has been 19 years in the making as we've looked to take our own brands direct to consumers all over the world. So this is now all about our plans learnings through our Ingenuity clients who are looking to build out their own digital transformation project. As we've demonstrated today, the group continues to deliver significant infrastructure development which in turn has supported market share growth to improve low-class service as well as substantial operational savings, capacity in place from medium-term growth ambitions, requiring much lower capital investment in the near term.

Thanks, John. Investments across our operations during a period of accelerated growth has positioned us incredibly well to now double down on our focus on profit enhancement and path to free cash flow. I am exceptionally proud of the team for delivering a strong performance in a challenging market with record revenue underpinned by stable customer behavior metrics, driving long-term market share gains. We have a strong track record of Tribine in difficult environments and have the data, technology and global infrastructure to identify and capitalize on market opportunities as they arise. . Our strategic review objective was to streamline the business to prioritize profitable products and markets. Together with the divisional reorganization, this focus paves the way for further efficiency improvements as we move through the current year. We have today shared broader disclosure than ever before on our segments, and our path to improving profitability into the second half of 2023 and 2024. We remain confident in delivering positive free cash flow in 2024 and our balance sheet remains well capitalized. We maintain our belief that our long-term growth opportunity is driven by structural growth in digital activity at a global level, together with continued product innovation and expansion of new products and verticals. Thank you for joining us and for your ongoing support. We look forward to taking your questions.

Good morning, all. Thank you for joining us today for the group's preliminary results for 2022. We refer to yesterday's announcement regarding the Apollo indicative bid. As you will appreciate, we are unable to make any further comment at this stage. The team and I will be pleased to take any questions on the release more generally today. With me is our CFO, Damian Sanders; COO, John Gallemore; Group Commercial Director, Steven Whitehead; and Deputy CFO, Matt Rothwell.

Our first question today comes from Nicolas Katsapas from BNP Paribas Exane.

I'll start with a question on EBITDA margins for the division. You said that you expect an aspirational 7.5% margin for the Ingenuity division. Could you explain what that means for the commerce part of that? Because we've always understood that it would be accretive to margins overall. Has that changed at all with the way you split the divisions? Then the next question on the divisional split is -- thank you for showing us the Beauty & Nutrition normalized margins, let's say. Would it be safe to assume that most of the difference between those 2 lies in the gross margin?

I'll hand over to Matt Rothwell, who is keen to answer those.

So I'll take the second one and then hand to Steven on the first. On the margins, yes, the bulk of the difference is in the gross margin. And again, our guidance there linked to what you said historically linked into the presentation.

Thanks, Matt. And just picking up on the point regarding Ingenuity. The technology margins indeed remain as accretive as we have identified in the past within the Commerce division. It's worth just perhaps if you get a chance, look at Slide 35 of the presentation here is where you can see where over the last 12 to 24 months, we've really productized the component parts of the platform so that rather than selling an end-to-end solution, we now have the option to sell the individual services. So across technology, you will have those high -- very incremental margins that we talked about previously within commerce. Across operations and digital services, which can also be and are sold on a singular basis. They are lower margin than the technology margins. So depending on the sales mix across the services delivered into the end clients across technology, operations and digital, you'll get a blended margin that is different. And now obviously, on a stand-alone basis, you've got a much more bigger impact across those operations and digital lower-margin areas rather than the very incremental technology margins. Hence, you've got a 2.5% EBITDA margin reported for the stand-alone Ingenuity division, which over the 5-year period, we've obviously guided to a target margin of 7.5% EBITDA, which coupled with the revenue growth, we would also aspire to over that period, takes revenues from GBP 750 million to GBP 1.25 billion. And I think that's an important target there in mind because at that level on a stand-alone basis. The Ingenuity division with the CapEx required to fund it would be free cash flow neutral.

And we'll now move on to a question from Gary Martin of Davy.

Just a quick couple of questions for you. Just the first one, just on your medium-term EBITDA forecast. I think you signify about 9%. I believe the previous commentary was a 9% plus from -- 9% to 10%, is the best way to think about that just labor costs of being the lead point? And then just a second one just on Nutrition. I suppose just -- it would be helpful just to get a bit of color just on regional performance.

Sure. Look, on the first point on the EBITDA, I think it's more just in the smaller detail, nothing has changed. So 9% plus is the way you could look at that. On the second point there in terms of Nutrition and mix, we've seen solid performance across most territories. U.K. remains a robust market for us. Obviously, then, what we're doing with that in terms of the partnerships you've heard about, that's further developing the brand has been primarily focused in the U.K. at the moment. But across Asia, we've got real strength in the brand. And actually, we've been rolling out partnerships there. So you enter into various stores across Asia, you'll probably see some form of Myprotein partnership in quite a few of them. And U.S. is a territory for us that we're gaining great momentum. It's probably the single best growth market at the moment. Obviously been coming from a lower base, but we're starting to scale in that territory. A lot of that has been helped by the investments we've made across the U.S., and we obviously manufacture locally there and develop products to the unique tastes that are in each continent. And so that gives you a broad mix. Europe still remains good for us as well. And we'd expect now that whey pricing has fallen quite dramatically to below levels we've seen for a good few years then we would look at all territories to remain pretty strong. And then the final point, I'd say on Nutrition Territories is India and the Middle East. There are 2 key territories that we're focused on at the moment, and we've seen real progress that we can do in partnership well. So all markets really are very attractive for that sector at the moment. And then how we develop within those markets, as you've heard in the presentation, is something that we're very focused on.

And up next, we have Nikita Fedyuk of Sound Point.

I have a couple of questions. The first one, can you please just specify your EBITDA guidance for 2023?

Matt, do you want to pick it up?

Yes. As outlined in the presentation, adjusted EBITDA expected to be in line with company consensus, given the takeover all you had to remove that from the website, but prior to publishing that was circa GBP 120 million.

GBP 120 million, your EBITDA guidance for 2023, is it right?

That was company consensus, yes.

Okay. But -- and then there was a guidance that 2023 is expected to be cash flow neutral. But if I take GBP 135 million of CapEx and then another GBP 50 million of liabilities, GBP 30 million of interest, I need to get at least GBP [ 215 ] million to be cash neutral.

Yes. So you'll get -- well, go Matt, you can cover it.

Yes. We have an asset disposal that will generate over GBP 40 million of proceeds. If you take the guidance in the presentation, we've seen are very strong -- we expect that margin accretion to come through, reduced capital expenditure of up to GBP 135 million. Cash adjusting items will be considerably lower circa 65% reduction on 2022. That together with the working capital rationalization all supports a clear path to free cash flow neutral in 2023, which then we're very confident will turn positive in FY '24.

Right. Do you have any guidance for the working capital inflow in 2023?

Other than it being positive at this point, no, we -- nothing different to what's in the presentation, and that supports broadly free cash flow neutral.

Right. And then I have a question on the CapEx side. So it's GBP 135 million. The guidance 5.5% to 6.5%. I think that impacts the cash flow. Is there any room to reduce this CapEx is needed, like what's your main term CapEx? And what can be a switch on or switch off in terms of the kind of pension product?

I mean, look, CapEx is CapEx and you can obviously reduce it as you see fit. We're just -- we're very comfortable that GBP 135 million is the right number for the year. Tech would be a large majority of that and we're keen to keep investing in the tech and all the other aspects of the business remain strong and positive. So we'd have no reason to reduce it further. But clearly, with all CapEx, you can you can pull back from that, but that's not something we'd need to do or plan to do.

It's worth just remembering that we are now in a phase where for the medium term going forward, we get to enjoy the operating leverage benefits from the elevated investments made over the last 2 or 3 years. So if you look at that warehousing investment, in particular, over the last 2 or 3 years, it's been substantial CapEx, but with a less than 2-year payback. That now gives us for the medium term, a reduced CapEx requirement as a percentage of sales and we get to enjoy the operating leverage that, that generates and the cash flow benefits that come with it.

Understood. It's more kind of from the downside risk. I understand the core not plan on to test it. But in case that there is a kind of separation requirements to save up some cash to what extent this GBP 135 million number can be cut? What's an absolutely minimum for the maintenance CapEx?

Look, I mean, we don't have any contractual committed massive CapEx, things like in construction or whatever that you would have. So in theory, you can cut almost all of the CapEx. We just would never see that being the need. We had GBP 640 million of cash and available facilities at the end of the year. We've got a strong cash performance in Q1. We'd expect to be cash flow neutral for the year. The last thing we'd be considering doing is cutting CapEx beyond the GBP 135 million, it's eminently sensible.

[Operator Instructions] And our next question comes from Georgios Pilakoutas of Numis.

First one on Beauty. Could you just clarify which region you're kind of deemphasizing. The second one is Nutrition. Given the decline in whey prices, do you think prices could actually decline? Is there enough kind of rationality in the industry to keep prices higher? Just how you think about that kind of following this leading? And then on Ingenuity, just if there's any update that kind of the incremental GBP 1 billion of GMV that was previously mentioned hasn't been mentioned into the presentation. So just an update on that? And then just how should we think about the incremental GBP 150 million of external Ingenuity revenues over the next 5 years? Or what kind of GMV is needed to deliver that?

Yes. So just -- you've got 3 questions there. I'll pick the nutrition one first. So in terms of the strategy with pricing, it's worth just reminding people that the biggest competition to Myprotein as the largest brand in the world in Nutrition is the off-line market. And obviously, the off-line market at the moment is kind of raw materials prices that are probably some around about the pricing of 9 months ago, if not a year ago. So pricing for off-line nutrition products are going to remain high for a period of time, and that's why you've seen inflation on the high street at the levels that you are doing. For ourselves, we've obviously got a much shorter supply chain. So when that pricing was high, we had to absorb it faster than anybody else. So because everything is vertically integrated, you heard John mention earlier, 8% to 6% of nutrition sales, we actually produce in-house. And then we supply direct to consumers. What that means is the pricing for our nutrition, we're very sensitive in the near term to movements either upwards or downwards. And whilst the high street would lag us by probably somewhere 9, 10, 12 months. So as a result, we've been through that pain area last year, as whey pricing falls for the year ahead, and it's obviously, commodities have fallen quite dramatically, will be the first and are the first to see the benefit of that versus the high street. And then that's where our margins are recovering at the rate that they are recovery. We'll then have a decision to make as to whether we want to press further in terms of taking even more global market share. And I would suspect that you will see Myprotein drop in prices, even though that we absorbed a lot of those price rises last year, we'll be able to enhance our margins quite significantly whilst dropping prices at later points in this year. And indeed, we do have a plan in which to do that, and we think that would be quite an aggressive move to be able to get further market share. So that's Myprotein. Talking about Ingenuity, yes, nothing has changed in that regard. We reiterated that the last results. So you just avoid your treating everything every time, but we'd expect to add north of GBP 1 billion worth of GMV this year. Got a very strong pipeline, as you'll have heard just before. I think just to clarify as well, I think it's worth -- I think Numis had a note out this morning stating that the only reason Ingenuity makes money is because of some protein manufacturing businesses that we have in there. That's never been the case. There are no protein or manufacturing businesses in the Ingenuity numbers there. So just to be clear, that Ingenuity point, that there is nothing from the nutrition manufacturing sits in there. And then...

Yes, about on Beauty now?

No, no, it's in Nutrition.

No, it's always been in Nutrition manufacturing piece moves as Bridge provided. And then just as a point of the first question around Beauty regional focus, I would just take you back to the presentation there is no breakdown on that given just the points in principle that we are focused on those sales that are higher margin.

There are no further questions at this time. I would like to hand the call back over for any additional or closing remarks.

Right. Well, thank you very much, everybody. I mean what I would like to do is particularly thank the staff and all the people that have been supportive of THG over the past 12 months. I am truly proud of the performance we've put in and as CEO of the group and is founder of the group, I can safely say to the team that, that's been our best performance we've ever put together. And so appreciative of everybody and all their contribution. With that, we look forward to speaking to people in due course.