THG Plc (THG) Earnings Call Transcript & Summary

Good morning, and thank you for joining us as we take you through our full year results for 2023. Our Chief Financial Officer, Damian Sanders, will shortly take you through the financial performance for the group followed by our executive team, Lucy Gorman, Neil Mistry and Alistair Crane, who will provide an operational and strategic overview of their businesses. 2023 was a year of material operational progress and execution for THG. We continue to grow our category-leading global brands through digital transformation, innovation and impactful partnerships. It was certainly not without its headwinds, but the group responded positively and emerged stronger. Following the challenging global environment in 2022, we repositioned our 3 businesses to focus on margin recovery and return to sustainable revenue growth. Overall, the performance was highly encouraging. And although we have more work to do in 2024, I am confident we have the right people, capabilities and expertise to make further progress. To begin with, we delivered GBP 2 billion of revenue, reflecting our efforts in executing our strategic review as we repositioned several loss-making areas across the group. This created improved momentum heading into 2024, most notably within our largest business, THG Beauty. Overall, we expect to return to group revenue growth progressively throughout the year. Notable margin improvements were made in part driven by the group's excellent operational performance. Distribution costs were lower as a percentage of revenue through an optimized fulfillment network consisting of increased automation and a best-in-class delivery offering. Operational leverage also supported improvements in profitability delivering continued adjusted EBITDA of GBP 120 million, ahead of our guidance in January. This was a group record EBITDA performance after cash adjusting items ahead of record set during COVID, and we anticipate further progress towards our medium-term target during 2024, in line with historical performance. In line with our guidance, strong growth in group profitability along with improved inventory efficiency led to the group delivering GBP 170 million of operating positive cash flow in the year. This strong operating cash performance allowed the group to continue to make GBP 120 million of CapEx investments in the year, principally into the U.K. while still delivering overall free cash flow breakeven for the year, Past years of significant investment, building out global infrastructure and automation means our CapEx in future years will remain at comparatively more modest levels even as the group returns to significant revenue growth. With the support of our long-term banking partners, we extended our revolving credit facility until May 2026. Even though we haven't used this facility since IPO 3.5 years ago, it affords us continued significant financial flexibility during uncertain geopolitical times. Finally, before I hand over to Damian, I'd like to reiterate my thanks to the management team, the Board and our colleagues across the group for all their efforts and hard work during last year.

Thank you, Matt, and to all of you for joining us on the call today. I'll now take you through the financial performance of the group and our individual business level, updating you on revenue, profitability and cash flow. Much like the previous year, 2023 presented challenges for all businesses within the markets in which we operate. Nevertheless, we remain very pleased with how the group has responded, delivering substantial progress against the targets we communicated at the outset of the year. We repositioned Beauty to materially improve profitability with the business exiting the year in constant currency growth and making a strong start to the current year. In Nutrition, we set out to achieve a return on the significant investments that we made in margin during 2022, subsequently achieving an EBITDA margin in excess of our medium-term guidance. Ingenuity continued to execute its strategic pivot towards higher-margin clients, with new client wins and expanded partnerships accelerating monthly recurring revenue throughout the year. Following our strategic review, we successfully executed our plan to reposition or exit loss-making categories, which contributed to the overall decrease in full year group revenue. The U.K. continues to be an important market for us. However, our international sales remain a large majority of 54% of the group total. I will now take you through a more granular review of the P&L. I'm pleased to report that there have been improvements both in gross margin and adjusted EBITDA margin, which, together with cash generation have been central to management focus throughout the year. We delivered a gross profit margin that was better aligned with historical norms. This was against an inflationary backdrop combined with notable currency headwinds. Distribution costs were a standout performance for the group, with this underlying improvement being driven by the group's continued focus on network optimization. We increased our use of robotics and automated solutions, which more than offset the remaining high levels of labor inflation in the market. The simplification of operations across our 3 businesses has also driven a reduction in headcount, further delivering benefits to both distribution and administration costs. One of the main components of admin costs is marketing, where we have a diverse approach to optimizing a range of channels. While structurally marketing costs have been subject to inflation in recent years, we've continued to invest in our loyalty and retention strategies whilst greater app participation has slightly offset this increase through improved customer purchase behavior, the overall net impact of marketing spend has increased. With the expectation that our brand investment will deliver returns over a prolonged period. Continuing adjusted EBITDA saw a strong year-on-year improvement with margin of 210 basis points to 6.1%. This was primarily delivered through the group's profit enhancement program and the exits of loss-making categories and territories. This is an encouraging result against a tough macroeconomic backdrop with the cost base of the business fundamentally stronger. We are well positioned for further operating leverage when consumer spending pressures abate. Group operating loss has also seen substantial improvement. I'll now take you through our largest business, THG Beauty. We consciously prioritized high-margin sales and focused efforts in our key territories, the U.K. and U.S. with profitability improving by over 30%, despite the well-flagged headwinds in manufacturing experienced predominantly in H1. Overall, this was underpinned by better quality sales driving gross margin accretion. THG Beauty ended the year with strong momentum, delivering overall sales growth on a constant currency basis, driven by particularly encouraging performances from Cult Beauty and our flagship owned brands, most notably Perricone MD and ESPA. As one of our key markets, we were especially pleased to see growth of over 9% in the U.K. in Q4, positioning the business well for the year ahead. Turning to our Nutrition business and through our focus on recovering the margin investment we made in the prior year, we've delivered a significantly improved adjusted EBITDA margin of 13.5%, ahead of medium-term guidance of at least 12%. This margin recovery gives us the opportunity to further invest in both demand generation and the customer proposition. The improvements in margin also reflects in part the annualization of exceptionally high whey commodity prices in the prior year, offsetting FX movements, notably the Japanese yen. Currency fluctuations particularly impacted both revenue and margin in Myprotein's second biggest market, i.e., Japan. As outlined in the Q4 trading statement, we've introduced the concept of total brand sales, reflective of the strategies undertaken across the business in 2023. We've expanded our royalty model with carefully chosen partners in key territories. Targeted offline Myprotein deals were launched in our 2 largest markets, in the U.K. with major grocer Iceland and in Japan with a leading distributor Itochu. These off-line partnerships have increased customer touch points and broadened the brand appeal of Myprotein, with further partnerships and category expansion planned in 2024. Finally, on to our third business Ingenuity, the repositioning of this business began at the end of 2022 and is focused on higher-value, higher-margin clients. Although the more complex sales cycles have actually been longer than anticipated, this pivot has driven an improving quality and an accelerated level of monthly recurring revenue throughout 2023. Following intentional investments in expertise to deliver this strategy, we are pleased on how the pipeline has strengthened, and new clients have been onboarded, with the expectation that the repositioning will be fully embedded in the first half of 2024. As revenue scales and the mix evolves towards Ingenuity's technology offering, we remain confident that margins will progress towards our longer-term target of 7.5%, supported by the internal revenue benefit from both the Beauty and Nutrition businesses returning to growth during 2024. In line with the intention to simplify and streamline operations outlined in January last year, we have executed our strategic view of loss-making categories and territories, resulting in the exiting of our THG OnDemand division, ProBikeKit business and additional small legacy brands within Beauty and Nutrition. This year, the group achieved its target of free cash flow breakeven for 2023. This was reflective of a cash inflow from operating activities, driven by increased adjusted EBITDA, lower adjusting items and a well-controlled working capital cycle. Cash adjusting items are also substantially lower with the group's balance sheet and liquidity remaining robust, closing the period with circa GBP 600 million of cash and available facilities. In March this year, we confirmed the extension of our revolving credit facility to May 2026, affording the group continued financial flexibility and the ability to capitalize on growth opportunities. The extension aligns with the group focus on cash generation and reducing gross debt with continued positive momentum into the current year, providing confidence in further de-gearing. Looking ahead now to the next 12 months. We remain confident in a return to revenue growth across the group, with a general progression in revenue growth expected through the year. The actions that we took as a business in 2023 provided a solid foundation from which further margin recovery should continue to build. We grew profitability expected to pick up later in the year. For Beauty, the absence of the industry-wide destocking that we saw in the first half of last year will drive further margin recovery as our retail business continues to perform well, aided by our strategy toward higher-margin sales. As mentioned earlier, FX movements, most notably in the yen have impacted performance within our Nutrition business. This continued to worsen throughout 2023 and into Q1 '24, local manufacturing will also launch in H2 in Japan and India, helping to alleviate some of this FX headwind in addition to comps easing after H1. Whey prices did rise as we enter 2024, but have actually fallen back again over recent weeks. Notwithstanding this, we remain confident that our already strong margin progression will enable us to balance normalizing input costs and demand generation, driving growth throughout the year and maintaining our medium-term profitability margin target of at least 12% for Nutrition. Operating cash flow will remain strong. And as mentioned earlier, we will continue to leverage CapEx investment to drive our competitive advantage, albeit at lower levels than previous years. Moving into positive cash generation in the second half of the year and beyond will reflect the group's stronger profitability, improved operational efficiencies, lighter CapEx and lower cash adjusting items. In reiterating our medium-term targets, we are confident in our ability to achieve sustainable growth and return to historical margins both collectively as a group and within our individual businesses. I will now pass over to our executive team to take you through an operational review of their businesses and progress against their strategic priorities.

As the leading digital strategic player in Prestige Beauty, we have a prominent unique position within the global industry as a retailer, brand owner and manufacturer committed to best-in-class curation, innovative product development and first-class service for our valued customers. Our ultimate aim is to become the global digital partner of choice across the industry using our position as the world's largest online pure-play retailer to connect consumers to over 1,300 brands. A distinct point of differentiation versus other beauty retailers comes from our owned portfolio of Prestige Beauty brands underpinned by market-leading new product development and in-house manufacturing capabilities providing us with 2 strong engines to drive margin growth as our mix evolves. We have established digital leadership positions in key markets, including the U.K. and U.S. and through our proposition has significantly increased retail touch points and broadened our exposure in experience and hospitality destinations for our brands. As we entered 2023, we committed to a strategy that's focused on enhancing profitability across the business, leading to the deemphasis of certain geographies, this is now bearing fruit as seen in the margin improvements that Damian spoke of earlier and the return to growth seen in the fourth quarter. Within our owned brand portfolio, flagship skincare brands, ESPA and Perricone MD have shown throughout the year, delivering combined double-digit growth. They are also leading the way in partnership collaborations for the business, further building on their expertise in the wellness and derma skin categories by expanding their reach into the travel retail market. In 2023, we saw resilience and robust category dynamics, notably in the continued strengthening of fragrance driven by new brands launching across our retail site. Brand launches across all categories have been crucial in further enhancing our Prestige Beauty offering across the year. As we move on to our customer health, the success of our strategy to prioritize profitable sales can be seen in the margin performance. However, the headline rate of growth and movement in customer KPIs should also be viewed in this context. The decline in active customer numbers slowed every quarter during the year and purchase behavior remained encouraging. Order frequency and AOV both stepped up year-on-year and returning customer sales were maintained above 80%. The continued strength of our digital offering has been demonstrated through increased app participation and double-digit growth in new app users throughout the year. Notably, in the U.K., where a particularly encouraging performance was delivered. Our commitment to best-in-class service continues to be recognized by our customers, record satisfaction and confidence scores were achieved this year as our investment in the customer proposition remains in focus. We continue to connect on a deeper level with our customers through our loyalty programs. These increasingly personalized interactions, enhance engagement and drive retention, which can be seen in improved purchase behavior from a higher-quality customer base. We are always looking for ways to evolve our digital-first owned-brand portfolio. And in December, we strengthened our proposition with the acquisition of U.S. Prestige Beauty brand Biossance. This technology-led brand is set to unlock further value and audience reach across one of our key markets, the U.S. We will use our expertise and capabilities to leverage the brand's strong awareness and presence in offline beauty retailers to further drive growth in our key U.K. and U.S. markets. Having reiterated our performance against our strategic priorities, we now look ahead to build on the positive momentum from last year. The focus remains on long-term sustainable growth and margin rebuild in our core markets, the U.K. and U.S. This will come from further growing our retail share and maintaining digital leadership, maximizing the value behind our retail offerings, owned-brand proposition and manufacturing capabilities. We are extremely well positioned to return to historical profitability levels through targeted curation, building out our higher-margin retail media proposition and growing our Beauty community, we firmly remain as the beauty partner of choice for leading retail brands. Progress made across the business this year is encouraging, particularly considering the persistent disruption we have been in the market. We are confident that our business remains resilient and prime to build upon its success and progress towards its medium-term targets.

This past year has been a huge step forward for our Nutrition business, and we've recently celebrated 20 years of the world's leading online sports nutrition brand, Myprotein. We are a premium sports nutrition brand, which has scaled by entering new geographies and multiple high-growth categories beyond our sports nutrition heritage, supported by vertically integrated manufacturing capabilities, which fire our speed to market. We are committed to breaking down barriers of the fitness industry, empowering everyone to lead healthier, more active lives. Our approach to meeting the health and wellness needs of our global customer base reflects our commitment to delivering high-quality products, a best-in-class on-site experience and delivery service, whilst localizing products to reflect different tastes, trends and formats. We launched a global rebrand in the second half of the year introducing a new logo and redesigned packaging. The new Mycon has already gained significant recognition and awareness amongst the health and wellness industry, each decision made on the rebrand has been centered around the customer. And our role in championing inclusivity and accessibility with ambitions to become a key player outside of nutrition and alongside the world's most iconic lifestyle brand. The Mycon allows us to explore new and innovative ways of connecting with a broader wellness customer while deepening our relationship with our existing loyal base. A key part of the development of our trading strategy over the last 12 months has been our carefully created licensing partnerships. These partnerships have unlocked incredible value through brand awareness, reaffirming Myprotein as one of the leading authorities in the market at the forefront of innovation as trends and customer needs evolve. In the U.K., we have delivered further retail penetration across over 2,000 stores through partnership launches, and you can now find Myprotein products on shelves in every major U.K. grocer. It is this expertise in entering new channels that has driven the brand to become the fastest-growing sports nutrition brand in the U.K. retail market, further demonstrating our ability to scale, innovate and diversify and ultimately tap into new audiences. Taking a step back, we have delivered double-digit CAGR sales growth since 2019 and massively expanded our product range. Our customer base remains highly engaged with repeat purchase rates consistently above 80% in key markets such as the U.K. We have been encouraged by growth in active customer numbers demonstrating continued resilience and stickiness. An increase in Trustpilot scores also reflects our focus on the overall customer experience. It is important to keep in mind that our active customer base now spans beyond D2C, through the thousands of retail touch points and the activations of new and existing customers offline. A key factor driving cost-efficient sales has been our mobile apps which has seen a 32% increase in new users across 2023, with app sales now accounting for over 17% of D2C sales. There still remains significant upside here with app customers exhibiting more favorable purchasing dynamics in the form of higher average order values and order frequency. We are well progressed in further enhancing our apps to build more bespoke elements such as personalization uncurated content feeds. Moving to off-line retail now, where partnerships further increase customer touch points, either through licensing or retail B2B. We have further enhanced the margin potential of the business by expanding our royalty model with carefully chosen partners in key territories, targeting off-line licensing deals were launched in our largest markets, and we are extensively involved with all aspects of the development of products being ranged. Revenue from products sold in the licensing arrangements scaled rapidly to over GBP 36 million from single-digit million the prior year. Under these arrangements, our licensing partners record the revenue from products sold with THG Nutrition receiving a royalty payment. It has been a year since the launch of our partnership with Iceland and has proven to be one of Myprotein's biggest successes today, highlighting the scale of opportunity that we have further licensing partners, both within the U.K. and internationally. Physical retail acts as an important complementary lever to growth with online retail still being at the core of the business at around 85% of revenues. Myprotein is currently the fastest-growing sports nutrition brand in the U.K. retail market, having recently launched in Sainsburys and ASDA, alongside extending our distribution with existing partners. This demonstrates the wide appeal of the Myprotein brand and the leading awareness that it has in the U.K. market. As we look forward, our aims for this year are to maintain our margins at target levels, whilst balancing commodity costs and demand generation. After a 2-year process, local manufacturing will launch in both Japan and India, improving delivery times and the development of local product ranges. Local manufacturing in Japan will also largely eliminate future risks from the yen FX volatility and reverse the impact of prolonged yen weakness on EBITDA. Innovation remains front of mind, and we'll be dialing up targeted NPD through the year, considering the insights from our performance and wellness consumer. Retail category expansion will continue to drive customers to the brand as we address with wider consumption occasion in partnerships with major brands, together with our influencers and 10 million strong social network, our partnerships with Williams F1 and with the endurance-based fitness brand Hyrox, provide an international platform to enhance the brand awareness and future growth of the Myprotein community.

I'm delighted to join Matt and the THG team in the role of Chairman at Ingenuity. Having spent my first couple of months with clients, key stakeholders and partners, I have got a strong sense of the market opportunity and where we can play to our strengths and core capabilities, using our experience in building category-leading digital brands, we offer e-commerce solutions for brand owners and retailers to grow globally. Our focused categories of FMCG, beauty and retail continue to benefit from market tailwinds, and we are doubling down our efforts in the geographies where our physical infrastructure is present, namely U.K., the U.S. and Australia. So what did we learn during the past 18 months as we refocused our strategy towards multiservice higher-margin clients, a shifting labor market, higher for longer interest rates, slower consumer spending and increased cost of advertising represented ongoing pressures for retailers across many markets. At the same time, digital innovation continued its far-reaching impact with new standard set for customer experience. Demonstrably, operators that provide cheaper, faster and better service will win out. Our advantage as a brand owner is that we can work with clients to shape their digital strategy, offering an individual or full-stack service as they require. This typically leads to partners doing more business with us over multiple years and multiple services with our monthly recurring revenue increasing year-on-year as a direct result. As Damian recapped on earlier, we took some decisions around cost and investment to position us towards our target margins and subsequently extended our global footprint in the U.S., winning new customer contracts and building on the ground teams. Our investment introduced further automation and AI into our platform developed entirely by our in-house technology team. This resulted in an improvement to the customer experience whilst guaranteeing greater operational resilience for the future. In July, we entered into the disruptive media space with the acquisition of CityAM. We have already started to elevate the brand's resources in order to reach new audiences complemented by our own successful content creation CDOs and digital media expertise. Finally, and for the first time, THG Ingenuity was recognized in the influential Gartner Magic Quadrant for digital commerce, acknowledging our completeness of vision and ability to execute. This year has been a great example of how we have not only entered into new partnerships, but also how we have maximized value on our existing client relationships, through additional revenue touch points and supporting new market entry. The technology that we use to power our clients' brands is the same technology that we use to power our own brands. This demonstrates the confidence that we have in our capabilities and highlights our commitment to continuous innovation with our clients' needs front of mind. Our marketing capabilities are designed to build and grow brands on a global scale, by designing and delivering fully integrated creative solutions, we are able to drive growth in audiences through elevated brand awareness. Our relationships with both ASDA and Disney are testament to how our marketing solutions deliver impactful campaigns and content, and we have increased our scope of work to multiple services across categories, channels and territories. In the U.S., we are driving new audience reach for the world's beauty leader, L'Oreal, powering direct-to-consumer operations for 2 of its most prestigious brands. We are also deploying our own full-scale commerce solution to support the U.S. expansion of one of India's largest branded fashion and retail companies, leveraging our investment in fulfillment capabilities. Earlier this year, we announced a 3-year partnership with leading U.K. wellness retailer, Holland & Barrett to become the main e-commerce operational partner in the U.K. and Ireland. We will support their rapidly scaling digital business and e-commerce ambitions through our fulfillment and courier management services. Our investment in Gen AI has helped to overcome structurally higher cost pressures and streamline operational processes whilst automation and fulfillment has increased efficiency, throughput and accelerated speed of delivery to the end customer. The data speaks for itself as we improve the checkout to delivery experience with the customer always front of mind. Through our expertise in building D2C brands, developing technology and implementing operational solutions, we have unique perspectives and insights to share. Our strategic priorities for the business remain focused on increasing the value from our existing customer base and investing in long-term customer growth across our primary verticals of FMCG, beauty and retail, also scaling our presence within our target markets of the U.K., Australia and the U.S. while building technology and delivering partnerships that create indirect revenue channels and extend our delivery capacity to help us scale, and critically, continuing innovation on the platform. These components are the key building blocks to our goal of Ingenuity becoming self-funding whilst continuing to invest strategically and progress our technology road map.

Today, we have shared the progress made across our 3 businesses in support of their individual and group EBITDA margin targets. We have exceeded our guidance set in January, and our efforts on cash preservation and higher margin sales have been rewarded with net leverage substantially lower year-on-year. 12 months ago, we talked how investments across our operations network during a period of accelerated growth have positioned us incredibly well to double down on our focus on profit enhancement and path to free cash flow. Substantial progress has been made, and we have further streamlined areas of our business where we have exited loss-making categories. Turning to our businesses. And as an authority in beauty, we continue to attract, retain and develop our customer relationships. Our proposition is constantly being refined and elevated on new technology and best-in-class delivery service, which further enhances the customer experience. Myprotein has evolved beyond sports and performance to broader health and wellness categories expanding its addressable market and catering for increased consumption occasions. Pivotal to this strategy has been creating ranges with prominent partners in distribution, grocery and chilled goods. Expanding the reach of the brand into off-line channels and in turn, building awareness and engagement. Our proprietary technology and operations platform, THG Ingenuity, is a multiyear development story with our fulfillment and operational solutions business now winning clients in its own right, as the business accelerates the returns on investments in distribution capacity. In the year to come, we expect further efficiencies in our distribution costs, our return to sales growth supporting continued margin progression and operating cash flow. We anticipate long-term channel shift across our consumer markets to continue supported by a track record of consistently taking share and a global expanding high repeat customer base. Thank you for joining us and for your ongoing support, and we now look forward to taking your questions.

[Operator Instructions] Now our first question comes from James Lockyer from Peel Hunt.

Three questions from me, please. It's great to see some of the proof points of your land and expand strategy in the RNS. Can you just remind us of what you were previously providing to Coca-Cola and Disney? And what are you providing now? And then on Holland & Barrett, I believe that's just operations where they were previously doing it in-house. Why just operations and what would trigger them to take more services from you? The second question is on the CapEx guidance. Of the GBP 100 million to GBP 110 million guidance that you put in there, can I take questions of 2 ways. Firstly, how much would you think of that is maintenance CapEx versus growth? And then what's the split between PPE versus R&D cap dev? And then third one, on Ingenuity's cash costs, just wondering how much of that is hosting. I'd imagine as you scale your client base, hosting would scale as well. So good to understand how much of that is paying public cloud providers like AWS versus your own data centers?

Okay. Look, I'll take the very last point of that question. And then I've got the rest of the senior team here with me or a selection of them. And John is our resident operations expert. So I'll throw quite a few of those questions to him, and then maybe Matt or Damian want to jump in as well on some of the finance questions that we've got there. The simple thing for me to answer comes back to the hosting side. We actually have our hosting in-house, and it's one of our capabilities. So our spend externally with the likes of AWS, et cetera, is zero or incredibly close to zero. There may be some tiny services for some reason that we use. But actually, it's very much in-house and the capability we've built throughout the years. I'll hand over to John just to talk about Holland & Barrett, the other points there for you.

Look, I don't want to speak too much Holland & Barrett. But I think what they've recognized is, firstly, the level of service that we provide in terms of fulfillment, particularly in the U.K. and Ireland, where we are taking our services. And in terms of the starts, as evidenced by our delivery times, our customer feedback. It's a world-class service but more importantly, reducing costs, and that's reflecting the investment in automation. I think in terms of their position, they were looking at having to make decisions from -- a lot in manual operation. And if Keith kind of emphasize that the level of wage inflation in fulfillment centers have been so dramatic over the last 3 years. There's a high wage inflation. We've already made the decisions to automate. We've seen the benefits of that automation through not just cost, but also the service that we provide. So I think that decision just reflects that. In terms of Disney, it's a totally different service there. They're one of our clients in the studio. So what they've now done is roll out a more global photography service, previously was just localized, been recognized as a service, and they've now globalized that service. And with respect to Coca-Cola, we power the U.K. D2C both through e-commerce and through delivery, what they're now doing with is rolling out more product development through that channel.

CapEx, do you want to talk about CapEx?

James, in terms of CapEx and Matt, feel free to add anything that you see appropriate. Basically, we're guiding -- the coming year, we're guiding to between GBP 100 million and GBP 110 million. It was probably GBP 125 million, GBP 130 million in the year just gone prior to that. It was much higher because we had a new -- a several-year investment in the infrastructure and the warehouse facilities around the globe. So that investment now is largely complete. So going back to your question, James, in terms of the GBP 100 million to GBP 110 million, I think that, that's what we anticipate to be spending annually going forward because the infrastructure investment has been made. Of that GBP 100 million to GBP 110 million, probably GBP 60 million of that is the annual investment t in the platform, and that will continue. So you might want to call that maintenance, but it is very much additive and adding additional facilities, et cetera. The other element of the PPE is probably -- so that's the intangible element. The tangible element is probably about GBP 40 million. A number of that is maintenance. But I think the important thing to mention is that as well as the infrastructure part of that is the automation that we've invested in both in ICON here in Manchester and also the Autostore investment in New Jersey. And you can see the benefit of that spend on the savings that we're making on fulfillment and distribution, which have reduced 260 basis points in the year. So some of our spend going forward will be to continue to invest in the automation because that's where we're getting a very good ROI and a capital repayment of probably 2 years.

And the rough -- just to add to that, I think the rough math that are worth applying here is the tech spend equates to 60%, 65% of our CapEx every year. And then if you look at the Beauty and the Nutrition divisions, you'd be talking that that's the balance split broadly equally and where that CapEx kicks in for them is they do an awful lot of manufacturing in-house and product development, et cetera. And so it's around putting automation into production lines and vitamin production, bar production for nutrition, et cetera, but that's a broad split. What we would then do is, I think, in terms of how we handle that on the balance sheet, I understand Damian and Matt, that's probably all of our CapEx will sit within Ingenuity essentially. And that's why...

Absolutely. Very small amounts in Beauty & Nutrition.

Anubhav Malhotra from Liberum.

I've got a couple of questions, if you don't mind. Firstly, on Ingenuity and mainly around Ingenuity e-commerce business. Can you give us an idea on how the cost base of the business has developed over the last 12 to 15 months with the change in strategy, have you needed to hire more people or different kinds of people to accelerate the strategy in other markets, especially the U.S. and Australia? And how should we look in that regard in terms of the profitability improvement that you have seen in the business. So as the cost base gone up and the revenue has gone up from external clients which is leading to better profitability? Or is there more return from that cost base to come in future years? And then secondly, on Beauty manufacturing, just give us an idea on what capacity is available still in that business? And how do you foresee that business growing in the future? Or would you be using more of that capacity for your internal brands that you manufacture?

Look, I think Steve wants to answer the first question. And maybe with Lucy here, you can answer the Beauty question here.

Just picking up on Ingenuity e-commerce. So the cost base has developed in line with the sales strategy, which just to recap the prior 2 years, maybe 3 years, we've pivoted from a broader client base, both across SME and enterprise purely focusing on enterprise-only client base. That pivot was very much executed and brought to a point in conclusion towards the end of last year. And you see that in the MRR stats for last year, that monthly recurring revenue in a range between 6% and nearing 15% growth, where into dominant enterprise clients has monthly recurring revenues and [ averaging ] stable and growing revenue growth rate. So that pivot worked and kind of completed it in the last year. In line with that, we've brought in a new sales strategy with Alistair Crane leading in his new appointment as Chair of the division, whereby it's a much more focused sales strategy of our core end-to-end product into enterprise clients or breaking it back into a couple of structured products, whether it be the front end head list or the back-end fulfillment's only solution, but the latter in particular, having a shorter sales cycle. So we hope to really shorten that sales cycle with that product focus. So that meant we can have a leaner operating structure in the sales team, taking few and more focused products to market into a smaller, more defined enterprise client base. That then has led to what we perceive no change in guidance for '24 with Ingenuity where we expect, yes, there's that MRR sales growth. So we expect that top line growth to continue. But we are expecting, I think consensus looking for a doubling or more of profitability in that division. And in part, that's driven by the sales growth, but also that leaner cost base.

Just with regards to your question on manufacturing. So in terms of capacity, we did a brilliant job last year of reducing the cost base just given some of the headwinds that the manufacturing division faced. Despite that, we're still probably operating at around kind of 40% to 50% capacity, and that's purely based on shift patterns. So across both sites, we operate 2 shifts, 5 days a week currently. So without significant investment, we could look to double. Our own brands are roughly about 20% to 25% of volume and we'd expect that to broadly continue. And then there's various projects ongoing in terms of automation across both sites. So significant headroom in capacity, however, operating on a relatively lean cost base.

Our next question comes from Joseph McNamara from Citi.

I have 3. The first is on Beauty margins, which I guess is already above 5% in the second half versus medium-term ambition of 6%. I guess, could you talk through any key considerations into 2024? And then also, could you touch on how big the Retail Media business is within Beauty and where this could maybe get to over time? The second was on distribution cost efficiencies. Could you provide any stats perhaps on what proportion of the business is being filled through automated warehouses now versus where this has been maybe in recent years? And then lastly, in January, you talked about confidence in all divisions returning to growth in 2024, I just wanted to check whether this is still a case to keep on Nutrition?

Look, so I'll do the last question and I think then we'll break up the other points there, the beauty side and distribution. I know John will be wanting to answer there. In terms of all divisions returning to growth, Yes, we would expect that. I think if you were to take a step back and look at where we were this time last year, there was a lot of questions around Beauty in terms of the progress we're making there and the decisions we've made and yet that division now we're seeing really good and strong growth probably the best growth we've seen there in a couple of years. So I think if you then look at Ingenuity, Ingenuity is already back in growth and then looking at Nutrition, you've got the yen in Japan which has been an impact. But putting that to one side, we've got the major brand overhaul that we started in half 2, which creates product availability challenges because one of the things that we do there is instead of throwing away or basically crushing old branded stock. We've carefully sold that through, which does create product availability challenges, but it's just a [ neat ] less exceptionals, better way of handing that brand over to the new brand. We should get that back to full availability of all new branded, we would hope during Q2 as well, which will have quite a material impact and then it's on the new branded but it's also worth then coming back and say, well, what else outside of the online space, you have seen through Neil on the video that the progress he is making in the offline space where you don't have those brand challenges in terms of product availability because they're taking a new brand at all points in time. You're seeing really strong progress coming there. And then the final point is obviously on the licensing side of the business. It's really elevated the brand, and we're super pleased with the repositioning with some of the brand, and that's just further accelerating the licensing opportunities that we've got with the brand. In terms of the overall brand sales, that we have with Myprotein, that's strong. And whether we're taking a license fee on that or whether we're taking the full 100% revenue arguably is less important. The overall brand is in a really strong position and should have a really good year. But going back to the point, yes, all 3 divisions, we would expect to have a growth year with them, albeit there'll be some pullback in the very near term just around the nutrition with the rebranding, but we're very confident in where that goes from here. John, Distribution.

Yes, [ distribution ] cost. Well, I'll answer the specific question, but then just probably a little bit more color when we do so. So the question was what proportion of one is going through automation. Well, last year, it was high 30s percent. The year before, it was high 20s percent. And this year, we'd expect it to be around the 50%, but that probably doesn't capture the true picture. Distribution costs are made up of warehousing and final mile delivery. Final mile delivery actually is 50% more than the warehousing costs. So the fact we're putting more through automation is great. But then within that, I think probably what's more important is the continued optimization of that automation. So if we were to just put automation in that cost with stats, our costs would continue to rise because we can't engineer our all labor costs. So what we've always got to do is continue to optimize the existing automation. You get the benefit of putting more product through it, but the greater benefit is by getting that product through it to lower cost and faster so we can deliver better service. But then the other element of the cost is the final mile delivery, and that's 50% more than the warehousing costs, right? So the key point there is we've now got 13 fulfillment centers in key markets globally. And from those key fulfillment centers, we've got a fairly sophisticated courier management system where we've got over 250 couriers we can pick and choose from. So we've got competitive tension in most local markets, which means that we can choose on service and cost and deliver both. So we improved costs in both areas. And that's a consequence of being closer to our customers globally through the fulfillment center network, but having the optionality with the couriers to choose, so we're always optimizing it. Does that help? .

Yes. That's pretty much.

Question on Beauty margins. So we're very encouraged by the progress that we saw last year and again into this year with regards to that medium target of 6%, I guess, a few key drivers there. So increased participation from both manufacturing and brands over the next 2 to 3 years, both of which are higher margin. But equally, we do expect to see best margins in our retail business with the continued focus on those core territories. With regards to Retail Media, we have a relatively sophisticated retail media program, low to mid-single-digit contribution, but we see quite significant headroom in terms of an opportunity for us to increase the income there from our partners.

Our next question comes from Andrew Wade from Jefferies.

A couple of questions from me, one on Ingenuity and one on the Nutrition side of things. On Ingenuity, great to hear from Alistair Crane in the video there. What is he bringing to the role? And what do you think is the key elements of that, that are going to drive sort of an acceleration in those new client wins? So that would be the first one on Ingenuity. And then secondly, on Nutrition EBITDA margin. Obviously, a great recovery during the year, very strong performance there. But you are running a little bit ahead of your medium-term guidance on that. So just interested how you're viewing that? Do you see it as a little bit of wiggle room in case whey prices move or potential to reinvest? Just interested as to how you see that. So those are my 2.

Sure. Look, so Ingenuity and [ Dow ] and then the Nutrition margins and we're growing. I mean, look, taking the nutrition point, sure, look, I mean, that's back at the kind of levels for last year that we've been trading at in years before the volatility that you will see in Nutrition. So medium term, sure there's a bit of wiggle room in there. Equally, how do those mix of sales develop when you're doing off-line sales, you'll get a higher EBITDA margin typically and then license sales, you probably get slightly less. So it really just depends how those channels play out over time. And if licensing a particular success, that might be a slightly impact on that margin. But generally speaking, yes, that's the kind of level that we'd be expecting, whether it's 100 basis points more or whatever. What you will see, though, is we've never seen volatility in whey pricing particularly like we have done over the last 12, 18 months, and we've been doing this a long time. So it has been a factor of whether it's COVID, war, inflation and all those kind of factors that have kicked in. We do expect that to be a much more stable market over time. And we've seen the market coming back down quite considerably in recent weeks as well. So we think, under a normal stable world, depending on the mix, that's broadly about the right position to be, but there could be some wiggle room for it being a bit better, but it's just a sensible level to be at. In terms of Al Crane, what does he bring to Ingenuity, I mean, look, very fortunate to have Al. He is sufficiently young in the sense that he's got an awful lot of hunger about. But actually, it wasn't in my saying, he looks quite a bit older than he actually is, which is probably the stressful life he's had running tech businesses. He's founded 2 tech businesses and exited them. He's got a third tech business, and he's very good at this. And so he is the perfect combination for us to be able to come in and give us 2 days a week to be able to bring real sales and closing focus. And that's what I really see him bringing is that experience around sales cycles, how he wants to structure teams, et cetera. Now he's also bringing a gentleman who will be joining on the 1st of June, which we'll announce that in due course when appropriate. But look, it's exciting to see what Al is going to be bringing to the table. But I think across the piece, he will be very well respected as well across the CPGs and the rest of our customer group.

And our next question comes from John Stevenson from Peel Hunt.

I've got 3 questions as well, please. So starting off with Nutrition, just looking at the U.S. Can you talk about the physical expansion into the U.S., how many doors you're in now versus how many you think you need to be in to be driving brand awareness and penetration and how important licensing is going to be in the U.S. to sort of reach that U.S. customer? Second question, I don't know if you can comment on sort of marketing spend as a percent of revenue for Beauty & Nutrition, how that's developing and how you think about the line versus performance marketing and that sort of customer acquisition cost? And then finally, on the rebrand. I don't know if you're seeing any change in sort of D2C demographics yet. And if you can talk about how you're engaging or trying to engage with the new demographic beyond, obviously, the proliferation of products and going physical?

Many to remind me to come back to a few of your questions here or the team will, I think, look, starting with the U.S. the opportunity, the licensing and the rest. I mean, look, we are -- we've actually been operating in the U.S. for a long time. We've got real good infrastructure. And after years of losses in the U.S., we've actually got into a really good position at the moment as well, where you've got a breakeven base to be able to build from there. And so that's a great position to be in, given it's a D2C business out there, and you've got that infrastructure already laid down. But what we're learning over time is the big geography countries, you do need an offline presence. And so that's what we've been working on quite ferociously over the last couple of years, especially for places like the U.S., even Australia. And so for the U.S., we've now started to land some key accounts there. I think GNC is one where we put some products in even vitamin shop for some of the products there and then more recently on Costco and we've got further expansion coming through there as well. And as ever, as we found in the U.K. and other territories once you start to put a couple of products in, you then deliver, deliver, deliver and you expand your base beyond. And so we see real opportunity in terms of building that out and becoming quite a scale player. And we have got good heritage out there now in terms of what we've delivered. In terms of the licensing side, I think being briefly honest, you've got to have bigger brand presence to meet licensing working given territories. So in places like Asia, license is a massive opportunity, right? Because Myprotein is a huge brand. You go into Japan. It's just a huge brand. U.K. naturally real licensing opportunity even across Europe. But when you go to America, we're still relatively small scale for the scale of the country, it's the single biggest market in the world. So as we build our brand presence through offline as well as the D2C growing then that's where we will see more licensing opportunities to come. I would expect that at the moment, it will be the other way where we're licensing other people's brands in the U.S. to partner with us before then, it goes the other way back, and that's probably a 24-month project, I'd say.

That final point, John, is we have licensed in the Disney Marvel license. So we are the official sports nutrition provider for Disney Marvel and that range is also part of that penetration to the U.S. through leveraging off the Disney and Marvel franchise in that territory as well as globally.

And then you touched on some of the off-line spend. Look, I wouldn't want to think, even though all the marketers in the group had a meeting yesterday where they're always pushing me to do more offline marketing. That's not our core strength, and it's not something that we intend. That said, obviously, we've done things around the nutrition space at the moment with the rebrand, and that's been very selective in terms of we're launching a new brand. We want to get maximum awareness. So we're going in for a partnership in which to do that in F1 with -- to get that brand across the world in U.S. is a target market for that brand awareness there. That team that we've done a partnership with has got a U.S. driver. And we're seeing really good response to the rebrand and to the off-line spend that we've done. But to be clear, that's not going to become a core part of our model that we're going out given an awful lot of offline marketing. In Beauty, there's a slightly different way to do that offline marketing. And even though yesterday's meeting was Lucy trying to push me for some budget and an increased budget on offline, the better way for us to do that brand awareness in my own opinion is if we were to partner with major retailers and store-in-store type concepts is something that we're likely to do more of, especially given the strength of our brands in beauty and the scale of those brands. We think that, that's a good way of doing off-line marketing and working and helping our brands in the process as well. What was the other questions, John?

I mean I don't know if you can talk actually on what sort of percent of marketing spend is on Beauty, Nutrition at the moment. But yes, the final question was just on the rebrand in terms of where you're seeing any change in sort of D2C demographics yet. I guess it's pretty early, but in terms of how you're sort of engaging with the wider market.

No. So look, I don't think I should have brought [indiscernible] actually, I don't think really we could say we're seeing any changes to the demographic. I'm not seeing that in any of the meetings that I have every day with the teams, et cetera. I think what we are seeing is a real positive reaction to the branding and the desire for partnerships with our brand. And so we're being selective about how those partnerships are and it's really important that what we don't do is just partner because we know we can partner with so many people. We don't want to just get those partnerships wrong because that would be very damaging to the brand. And so we're seeing a great reaction. It's -- I'm super pleased with the position of where Myprotein is and that rebrand, I think, just elevates it fantastically well, but it is too early to say if we tap it into a different demographic online. And being brutally honest, it's not the #1 priority per se. It's about elevating the brand and then the hero effect of that in so many different ways will benefit, and that might bring additional customer groups with it, et cetera, et cetera, but it will increase the value of the brand.

Can I just add to that? John, in terms of -- the overall rebrand for Myprotein. And what I would say, and Matt has touched on this anyway is that in terms of alongside the rebranding, we're doing a lot of work around brand awareness and all of the partnerships. And we've been launching the Jimmy's coffees. There's pancakes to come. There's actually dairy products, i.e., we're extending the product range and the brand awareness because a lot of these products will be in retail outlets, et cetera. So it's all about the overall brand -- rebranding but also all of the things that we're doing in all the grocers across the whole range, which all ties together, and is having a very positive impact. And we'll reach new demographics and new audiences because of -- it's in the line of sight as people go about their daily lives. .

So if you're asking -- if your question was, what's the percentage of off-line marketing relative to your marketing budget. But if that was the point, I think we spent, let's say, GBP 250 million a year on marketing, you're talking if GBP 5 million, GBP 6 million, GBP 7 million kind of level on off-line marketing, of which, actually, you can see where the vast majority of that will be in the biggest partnership we've got.

That's the all time we have for today's questions. Thank you, everyone. And with this, I'd like to hand the call back over to Matthew Moulding, CEO for any additional or closing remarks.

Okay. Well, thank you very much, everybody. We are pleased. I've done a Linked-In post just to thank everybody in terms of the effort that's gone into last year. We are pleased with the results, and we look forward to updating you on Q1 in the next couple of weeks as well. Thank you very much.

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.