THG PLC

LSE:THG

Earnings Call Analysis

Strong Earnings with Robust Margin Growth

The company demonstrated a solid half-year performance in 2023, emphasizing reduced inflationary pressures and steady margin growth in its Beauty and Nutrition divisions. Notably, the Beauty division is seeing growth with key brands and is poised for improved margins. Pivoting towards enterprise clients with Ingenuity, the company's tech platform, has shown resilience despite sales reduction. The firm achieved a substantial free cash flow improvement of around £193 million, with an outflow of only £20 million over the past 12 months. Significant partnerships, like with L'Oreal to power D2C for luxury brands, signify the company's market strength. For FY2024, the guidance remains unchanged with an outlook for neutral to positive free cash flow, ignoring one-off impacts and considering continual investments.

Strategic Client Acquisitions and Expanding Market Presence

The company has announced significant new client wins, with a notable partnership with L'Oreal to power direct-to-consumer operations for two of its luxury brands in North America, leveraging the company’s expertise in beauty and the full capabilities of Ingenuity's commerce solutions. Additionally, the company has expanded its relationship with ASDA, doubling the scope of services provided and further penetrating client accounts to increase 'share of customer wallet' in e-commerce.

Innovation and Technology: A Cornerstone for Growth

A dynamic team of over 800 technology specialists is the driving force behind the company’s continuous innovation, delivering enhancements that optimize customer experiences using machine learning and AI. The integration of generative AI technology into their platform exemplifies their commitment to innovation, which was recognized in their inclusion in the Gartner Magic Quadrant for Digital Commerce.

Increased Efficiency Through Automation and Customer Satisfaction

Investments in global fulfillment and the activation of automation in the New Jersey warehouse have led to speedier delivery times and improved customer satisfaction as internal metrics demonstrate a 20% improvement year-on-year. Additionally, the use of AI and machine learning has optimized operations and reduced customer contact rates, aligning with the strategy to improve service while reducing costs.

Financial Performance and Market Challenges

Despite macroeconomic impacts, the company reports a solid financial performance in core consumer and technology divisions, aided by a strategic shift away from less profitable markets. This has resulted in increased online retail profitability, stable customer KPIs, and an 80% repeat purchase rate. There was a temporary sales slowdown due to the strategic exit of lower-margin partnerships, but a notable improvement in procurement costs and distribution efficiency was achieved.

Cost Optimization and Adjusted EBITDA

The company's right-sized cost base and business model simplification are reflected in the continuing adjusted EBITDA of over £50 million, driven by technology investments and operational simplifications. Marketing costs have increased due to inflation, but efficiencies and higher-value customer acquisitions through the app have partially offset these costs. Adjusting items saw a reduction, as did cash adjusting items, from £23 million in 2022 to £5 million.

Divisional Performance and Growth Outlook

The Beauty division has consciously reduced sales in low-margin territories in favor of profitability, and anticipates a medium-term EBITDA margin of over 6%. Nutrition has seen strong revenue and adjusted EBITDA margin growth, with strategies in place to benefit from more normalized commodity prices. Ingenuity, refocusing on larger, more valuable clients, expects to see an acceleration in software revenue, aligning with sector trends and contributing to the aspiration of positive free cash flow generation.

Commitment to Sustainable Profitable Growth

The company is dedicated to achieving sustainable profitable growth by prioritizing high-margin markets. This entails strategic decisions that may impact short-term sales but establish a stronger foundation for future stability and shareholder returns.

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the THG's 2023 Interim Results Presentation. We will start with the presentation followed by a Q&A session. [Operator Instructions]. But first, let's begin the presentation.

[Matthew Moulding, CEO & Director]

Good morning, and thank you for joining us today as we announce the group's half year results for 2023. In April, we talked in depth about our strategy in supporting consumers through the cost-of-living crisis, absorbing much of the inflationary pressures during 2022 and limiting price increases across our Beauty and Nutrition divisions. The short-term margin impact from this strategy was mitigated through the delivery of £100 million of cost savings in 2022, with further savings identified and delivered in H1 this year.

We are pleased to report that this strategy is bearing fruit throughout 2023 to date. Inflationary pressures have been consistently easing during 2023 and are set to ease further still. This has led to steady margin growth through 2023, while our Beauty and Nutrition divisions continue to build market share in key markets. The group is well on track in rebuilding margins back to historical levels with a stronger and leaner cost base further compounding our competitive advantage.

I'm also delighted to say that our Beauty division has returned to growth since August with particular strength across our largest owned brands, Perricone MD and ESPA as well as in our Cult Beauty business. The Beauty division as a whole, is well positioned for strong margin recovery as we progress through half 2.

Our strategy of pivoting Ingenuity away from mass market clients towards larger enterprise clients is also paying dividends. EBITDA from external clients was broadly flat in half 1, despite reducing sales by 10% through the repositioning. The principal reason overall Ingenuity EBITDA was lower in half 1 was due to a reduction in spend from internal clients, namely our Beauty and Nutrition divisions as those divisions looked for efficiencies to support their consumers. In addition, we were thrilled to be listed recently in the 2023 Gartner Magic Quadrant for Digital Commerce for the first time with Ingenuity being recognized for its completeness of vision and ability to execute.

Turning to cash. The group's half 1 free cash flow performance was especially pleasing, delivering £193 million improvement versus half 1 last year. Free cash flow performance over the past 12 months now sits at around £20 million outflow, which is a massive year-on-year improvement of £350 million. The £20 million outflow is after the group made CapEx investments of around £160 million, mainly into technology and infrastructure within Ingenuity.

The group maintains a strong balance sheet with over £560 million of cash and facilities available to the group at the end of half 1 with peak trading ahead. I'm delighted that THG is making such solid progress on executing our strategy of building a leading digital-first consumer brands group powered by our own technology and global fulfillment operations. I'll now take you through some divisional strategic highlights before handing over to Damian for a deeper dive into our financial performance.

Starting with our largest division, Beauty. During half 1, we focused on maximizing orders, delivering immediate returns, pulling away from near-term loss-making customer acquisition. This typically involved reducing sales to territories furthest away from our global distribution hubs given the higher cost of serving these orders in addition to first-order acquisition costs. This led to us reducing volumes within some parts of Europe and Asia, while maximizing our competitive actions across core markets.

The success of this strategy is reflected in more new customers shopping with us in the second quarter and an improving sales trend throughout the half with the division as a whole returning to growth in mid-Q3.

As a division, we continue to see encouraging purchase behavior with order frequency stepping up and average order values increasing year-on-year. Our active customer base remains highly engaged. More than 7 million people have now downloaded the Lookfantastic or Cult Beauty app with our loyalty program, LF Beauty Plus+ now boasting over 1.2 million members in the first year since launch. As we continue to focus on key strategic markets where we have a localized offering, emerging markets such as the Middle East and North Africa have delivered both revenue and customer growth.

THG Beauty prides itself on being able to provide customers with an expansive premium beauty offering, and it's that brand and category expansion that will act as a key driver in long-term customer growth. In the first half, we launched many new brands across our retail platform, including KVD Beauty on Lookfantastic, the Outset on Cult Beauty and Sarah Chapman on Dermstore, reflecting the evolution of our brand partnerships. And looking in-house, our own brand portfolio performed strongly in half 1 with our 2 largest brands, Perricone MD and ESPA delivering double-digit growth.

Our own Prestige brand portfolio is set to achieve further international recognition through a global licensing agreement with luxury hotel amenity supplier, Vanity Group launching in 2024. Many of the world's finest hotels will be featuring our hair care and body care brands throughout their global portfolio.

Finally, we were proud to launch our Can't (Re)Touch This campaign with Cult Beauty championing, authenticity and ensuring diversity and inclusivity sits at the forefront of our branding.

Our Nutrition division centered around our own brand portfolio, including MyProtein, continues to rebuild margins rapidly. The strategy of MyProtein supporting its customers through the cost-of-living crisis in 2022 and early 2023 is paying dividends with near-record margins now being delivered. The active customer base and order frequency remained stable year-on-year, whilst average order values increased, indicating healthy customer stickiness in a higher pricing environment.

The success of our apps continues at pace with almost 7 million global downloads since launch in early 2020. The app is becoming an incredibly powerful channel, driving strong first-party data advantages and helping to maximize marketing spend efficiency.

Profitable global expansion continues at pace, and we are really pleased to be accelerating our ambitions in Australia and the Middle East, in particular. As we've highlighted before, strategic partnerships are important to our growth as a group, and we were excited to enter a 5-year partnership with Iceland Foods earlier this year, launching a bespoke range of frozen products in over 1,000 Iceland stores as well as online.

We are well progressed in launching several of the offline partnerships focusing on new categories, which don't naturally lend themselves to online sales. We have successfully expanded MyProtein's category breadth throughout product innovation as well as building out collaborations with many major global brands. These include brands such as Vimto, Jelly Belly and soon to launch Chupa Chups. Partnerships such as this underlined a huge global appeal and reach of MyProtein and highlight the significant growth opportunities in licensed brand extensions.

They offer opportunities to selectively extend into new categories, increase brand touch points and engage consumers in new ways as well as partnerships, we continue rapidly to expand MyProtein brand equity through targeted traditional retail channels. We have launched in many new global markets since 2020 and rapidly grown our doors presence to around 20,000 grocers, supermarkets and specialist stores.

A door's presence maximizes brand visibility to new customers, a vital tool in D2C acquisition. In the U.K., MyProtein holds prominent listings in all the major grocers and our protein bars, snacks and drinks are strategically placed in the largest gyms in the U.K. and Europe with marketplaces, another key channel for visibility through selected SKUs.

[Presentation]

[Matthew Moulding, CEO & Director]

Recently, we have undertaken a global rebrand further elevating MyProtein as a global lifestyle brand, materially enhancing the future growth opportunity. This is supported by the large and growing markets in which we operate, underpinned with significant localized infrastructure now present in all key markets. Our flagship brand is built on high-quality products across multiple formats with a global reach, and we will continue to break down barriers and make health inclusive.

In terms of Ingenuity, in June last year, we appointed Vivek Ganotra as CEO, and he was given the task of repositioning the division to focus on higher value and higher-margin enterprise customers. This pivot came at the cost of initially softer sales due to a naturally longer onboarding cycle of larger, more complex enterprise clients. While the quicker process of strategically exiting smaller clients led to a top line reduction of around 10% in half 1, EBITDA from external clients remained broadly flat year-on-year. As enterprise sales momentum quickens, this pivot will ultimately lead to a more profitable business. Through this strategy, we are targeting Ingenuity being self-funded within a 5-year time frame. We remain confident in this strategic shift as customer conversations increasingly center around the experience [indiscernible] of integrating complex composable solutions, which require heavy lifting from systems integrators or large in-house development teams.

Gartner, a leading research firm, have observed a notable uptick towards end-to-end platforms such as Ingenuity, which enable customers to benefit from prebuilt applications alongside operational and marketing support. Our growth strategy, therefore, remains focused on: one, new customer growth within Beauty, FMCG, food and beverage and retail categories where we believe we have a clear right to win. Two, expanded share of commerce spend from existing clients. And three, deployment of new products and solutions across fulfillment, fraud detection and digital media and content. Our pipeline is high quality and building strongly, reflecting the strength of our proposition, which continues to be endorsed by our existing clients deploying more of their digital spend through Ingenuity.

Today, we announced the selection of key client wins, 1 of which is with L'Oreal, the world's beauty leader. We have entered into an agreement with L'Oreal, which will see Ingenuity power D2C for 2 of L'Oreal's luxury division brands in the U.S.A. and Canada, further bolstering our presence in this market. L'Oreal will take advantage of Ingenuity's complete commerce solution of technology, operations and marketing services alongside some of our core platform features built first and foremost for beauty brands, including sampling, loyalty and subscriptions. This is the kind of meaningful client win that Ingenuity can land by virtue of our expanded infrastructure capability, expertise in major markets and notably in the beauty space.

Turning to our existing relationships as there is a real success story, which demonstrates the strength of our customer partnerships. Over the past year, we have doubled the scope of our services from food packaging to social media, digital content and performance marketing services. We are now supporting new parts of the ASDA business, including ASDA Money, where we will manage their social media and more recently ASDA Mobile, where Ingenuity has been appointed to handle all of its digital creative services. Again, this just shows how once we are embedded with a client, we can grow our share of customer wallet in respect to their e-commerce spend.

Our technology underpins the success of both our own brands and our customers' digital businesses. As a thought leader for digital commerce, ongoing platform enhancement is imperative to success. We have a dynamic team of over 800 technology specialists obsessed with continuous innovation, implementing thousands of platform enhancements annually, delivering optimization, security and protection to our customers through in-house development of machine learning models, our ability to hyperpersonalize how we segment customers and tailor their site experience is constantly evolving.

As a first-party data collector across a broad set of sectors and locales, Ingenuity is uniquely positioned to deliver AI solutions to drive cost efficiencies, create innovative customer experiences and develop incremental revenue opportunities including the use of generative AI technology infused directly into the Ingenuity platform. This relentless innovation, along with the depth and breadth of our commerce applications, global operational infrastructure and digital marketing services is what was evaluated when Ingenuity was listed for the first time in the Gartner Magic Quadrant for Digital Commerce. Over the last 3 years, we have spoken at length on our strategy to build out a global fulfillment network, localizing our operational and distribution hubs in key markets.

This phase of expansionary investment was concluded with the activation of automation in our New Jersey warehouse in the U.S. in April. Across all our distribution centers, our checkout to delivery speed is half a day quicker year-on-year as we focus on efforts in continuing to enhance the customer proposition so customers receive their products as soon as possible. We provide even greater flexibility through extended next-day delivery cutoffs in the U.K., substantially ahead of many of our peers. Our internal measure of sentiment, THGX, combines public trust pilot scores with customer satisfaction KPIs, and I am delighted that these sit at record highs with an over 20% improvement year-on-year.

Customer contact rates continue to reduce year-on-year and consistently performed at record lows in Q2 2023, through optimizing more straightforward tasks through machine learning, we have delivered cost savings in addition to accelerated customer contact response times. These tasks include, for example, the use of smart templates for consistency of customer service response and automated fraud detection.

The use of AI and machine learning is an opportunity to augment customer service colleague's focus on to more value-add areas, enabling us to do more with existing resource more effectively and quicker. Our agility, combined with our use of data, allows us to continue to look across all aspects of our operations to optimize service in a cost-efficient way. In turn, aiding customer retention and elevating lifetime values, ultimately supporting our own brands and Ingenuity clients in winning more customers.

[Damian Sanders, CFO & Director]

Good morning, and thank you for joining us for our 2023 interim results. As Matt has presented the selection of key strategic business highlights, I'll be focusing on financial performance for the first half of the year and the outlook for the remainder of the year.

As we now turn to our revenue performance. The early part of the year continue to see many well-documented macroeconomic factors impacting the markets in which we operate. We are, therefore, very pleased with the performance we've delivered across our core consumer and technology divisions alongside the strategic exits of non-core divisions and discontinued categories. On lower, better quality sales, we've been encouraged by demand normalizing post-COVID lockdowns in a higher pricing environment with strong repeat purchase rates from our loyal customer base continuing at above 80%.

Beauty saw some specific challenges, notably within beauty manufacturing due to the impact of industry-wide destocking. In an inflationary environment, certain international territories became less justifiable to serve from a commercial perspective. As a result, in the final quarter of 2022, we began to pull back investment in lower margin markets, and this has continued into the first half of 2023. Whilst not exiting any territory specifically, the consequence of this strategy has been a near-term reduction in sales, but to the benefit of online retail profitability as the period has progressed.

Within Nutrition, the input cost environment in 2022 was one of the most challenging we've ever faced. And therefore, maintaining revenue growth in the first half, alongside stable customer KPIs is an outstanding result. Ingenuity continues to make substantial progress on its strategy to partner with larger, higher value and higher-margin clients with high-quality recurring revenues. As expected, the strategic exit of lower-margin partnerships has resulted in a temporary revenue shift as pipeline conversion for new larger enterprise clients is typically longer. This is alongside lower volumes from our internal Beauty and Nutrition clients. Later in the presentation, I'll go into further detail on the progress of our strategic review and areas of the business, which have been discontinued.

From a gross margin perspective, our average procurement prices during 2023 have been meaningfully down on the prior year. And as you can see from the graph, the sweet whey index are currently tracking at more normalized levels. Distribution costs continue to reduce as a percentage of revenue as the global infrastructure and automation we've built enables us to deliver more efficiently with a lower level of headcount.

Implementing automation in our warehouse in New Jersey has accelerated the operational efficiencies, further improving our U.S. proposition and significantly improving our dispatch-to-delivery speeds. In short, getting our products to our customers much quicker.

Significant substantive actions have been taken across the business to both rightsize the cost base and to simplify the business model. We are seeing this come through strongly in continuing adjusted EBITDA of over £50 million. As a result of the cost reduction program, a reduction in headcount has been delivered through technology investments, automation and the simplification of operations. This benefit continues to annualize throughout the year across both distribution and admin costs.

Within admin costs, the main increases have been experienced within marketing due to general inflation in paid channels. Greater app participation has partially mitigated rising marketing costs with customers acquired through this channel typically ordering more frequently with higher average order values due to regular engagements.

Adjusting items have reduced in the period, with cash adjusting items substantially reducing to just £5 million from £23 million in 2022. Operating losses increased by £11 million this half, solely driven by management's decisive actions to dispose of non-core freehold assets and the exists of loss-making discontinued categories. Together, these generated a one-off noncash cost of £26.1 million.

For the year ending 2022, we broadened 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. I'll now walk through our segmental reporting for the divisions.

As discussed earlier, Beauty revenue in the first half mainly reflects the strategy to reduce low-margin sales in specific territories. We have scope to enhance international margins through market prioritization. However, to reiterate, this is at the expense of sales growth during the year as we focus on sustainable profitable growth medium term.

The sales decline was also partly due to the economic backdrop. However, we are seeing sequential quarterly improvements. Beauty EBITDA margin was significantly impacted due to lower manufacturing sales resulting from the well-documented one-off destocking across the beauty industry. As a management team, we have taken decisive actions to rightsize operations to reflect current demand, mainly through driving operational efficiencies such as reviewing shift patterns in our manufacturing facilities.

Excluding this result, adjusted EBITDA margin would have improved by 60 basis points relative to the comparable period. As we enter the third quarter, cost saving initiatives implemented in the first half are supporting profitability improvements, and we strongly remain of the view that the volume reductions experienced are short term in nature. Together, these factors support our expectations for the Beauty margin to be in excess of 6% over the medium term, which is in line with historical delivery.

Our Nutrition division had a very strong half, delivering both an increase in revenue and adjusted EBITDA margin. Sales growth was delivered largely through pricing with emerging regions such as Australia and the Middle East in double-digit growth. Adjusted EBITDA margins increased substantially, reflecting the unwind of a period of unusually high whey commodity prices. Whilst overall sales trends are fluctuating month-on-month, the same factors that benefited margins in the first half remain into the second. There's been significant progress within Ingenuity as we continue to reposition to focus on larger, higher-revenue and higher-margin clients with high-quality recurring revenues. This pivot initially came at the cost of softer sales, as Matt described earlier.

Following a more subdued level in 2022, where the pace of growth was half that of 2021. Tech analysts anticipate software revenue to accelerate this year. This sector trend is reflected in the quality of our pipeline and our existing clients spending more with us. Following a deliberate phase of investment, in headcount and expertise to deliver the repositioned strategy, I'm pleased to say that new enterprise client wins have been secured and onboarding is progressing well.

Internally, Ingenuity revenue declined in the period, predominantly due to the wider group exiting loss-making categories and territories along with lower group-wide sales. Due to the combination of the pivot in strategy, upfront investments and lower group-wide volumes, as expected, adjusted EBITDA and margin was back on the prior period.

Looking forward, there continues to be a strategic exit of smaller accounts, which will continue throughout 2023. As revenue scales and the revenue mix evolves, towards the technology product offering, we anticipate margins will increase towards the group's 5-year aspirational targets. In H2 2022, the group commenced a 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 ensure ourselves that we are focusing our efforts on areas that will deliver optimal returns for our shareholders, and accelerates our journey to positive free cash flow generation.

For the assets where we couldn't see a robust path to profitability and positive free cash flow, we made the difficult, but necessary decision to discontinue these revenue channels, eliminating losses across the group. The exits of these loss-making categories has led to cash proceeds of around £4 million. In July 2023, we sold the trading assets at THG OnDemand. These exits and the pullback of investment in lower-margin markets mentioned earlier, generated a one-off loss on disposal of £11 million, recognized in the first half within adjusted items. The full exits of the discontinued areas is expected to be complete by the end of this month.

Seasonally, 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 in the prior year 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 program of expenditure with guidance for the year unchanged at approximately £135 million. Our global warehouse expansion program is now largely complete with substantial capacity for growth. Adjusting items and financing costs were also in line with expectations. We have a strong balance sheet and closed the period with cash and available facilities of over £560 million. As a reminder, our TLB is long-dated and the RCF remains undrawn. As we move towards the final quarter of the year, we have clearer visibility and greater confidence of the margin recovery opportunity in addition to the key drivers for divisional sales returning to growth.

Overall, sales trends are gradually improving into the second half. With Q3 continuing revenue anticipated to be marginally ahead of Q2 before a return to growth in the final quarter. Decisive management actions to prioritize profitable sales is expected to result in continuing revenue growth for the full year of between 0% to minus 5%. That said, we expect margin wins to continue. And therefore, positively, we are reiterating our expectations to deliver adjusted EBITDA for the full year in line with company consensus. Improving profitability into the second half of 2023 and again into 2024 from automation efficiencies and return to sales growth will be balanced with a proportion of cost savings, reinvested in demand generation and offsetting general inflationary pressures.

For FY 2024, operational leverage and margin recovery supported by commodity prices underpin the path to positive free cash flow. Beyond this year, as I described in April, we expect long-term channel shift across our consumer markets to continue, supported by a strong Ingenuity pipeline and further endorsement of the proposition.

In closing, I'd like to take this opportunity to reinforce our continued focus on profitable sales across our 3 divisions, where the market opportunity for long-term growth remains significant.

[Matthew Moulding, CEO & Director]

Measuring and managing the impact our business and operations have globally is critical for our future success and sustainable growth. There is a lot of progress still to be made on our sustainability strategy and importantly, how we can influence best practice for our clients and throughout our supply chain.

[Presentation]

[Matthew Moulding, CEO & Director]

Before we summarize the key points of today's release, let's take a moment to reflect on the shape of our business versus the one we brought to market almost exactly 3 years ago.

We have scaled both our Beauty and Nutrition divisions meaningfully with growth in revenue, active customers, orders and average order values. Whilst we have seen a pullback in adjusted EBITDA, rebuilding towards historical margins is our expectation with distribution costs already very stable following investment in automation and rationalization across our business, helping to mitigate inflationary pressures in certain areas of the cost base. For the last 12 months to June, our cash outflow was around £20 million. And over the next 12 to 18 months, normalized capital expenditure, lower adjusting items and EBITDA accretion underpin the building blocks to positive free cash flow. We are well capitalized and substantially invested with a simpler business from which we continue to scale selectively whilst retaining strategic balance sheet optionality.

Today, we have emphasized our clear focus and progress on growing profitability and cash generation over near-term sales growth against a challenging global consumer spending backdrop. We have already captured the margin rebuild within THG Nutrition, and the rebrand provides a strong foundation to access the next level of exciting growth.

The return to growth of our Beauty division since August is huge progress. This strong market share performance is testament to the actions taken by the team in supporting consumers through the cost-of-living crisis. The margin rebuild within Beauty is well advanced and steadily returning to historical levels. This is further supported within our Beauty manufacturing division, where management took decisive action to address the cost base while supporting brand partners in their global destocking plans.

We are confident of a strong recovery in manufacturing through half 2 and into 2024. And finally, the repositioning of Ingenuity is nearing completion with new contract wins delivered and strategic alliances signed. Our strongest-ever enterprise pipeline alongside Gartner recognition provides us with increasing momentum. Other strategic milestones this year have included the successful exit of the OnDemand division through a management buyout and the completion of the global fulfillment expansion reinvestment, underpinning additional capacity for efficiency improvements and operating leverage. And this is all whilst delivering free cash generation ahead of guidance and maintaining a strong balance sheet.

In closing, we remain confident that our long-term growth opportunity is supported by structural growth in digital activity at a global level, together with continued product and tech innovation. Thank you for joining us today. We look forward to taking your questions.

[Operator]

[Operator Instructions]. Our first question today comes from Nicolas Katsapas from BNP Paribas Exane.

[Nicolas Katsapas, BNP Paribas Exane]

I just had a couple on Nutrition fees. Especially, could you walk us through the decision making behind your rebranding of MyProtein and what were the precise intended benefits or the expectations you have from that rebranding? And over what time frame could we expect to see those benefits?

And then also on Nutrition, my second question is just around margins. So you've over shot your medium-term guidance in this first half or EBITDA margins in Nutrition. Could you lay out what your expectations are in the near term? Should we expect higher margins now in Nutrition to persist? Or are you going to reinvest in price and then that possibly will reduce margins over the next 18 months? Yes, that would be really helpful.

[Matthew Moulding, CEO & Director]

Nicolas, it's Matthew Moulding here. It will be me that answers unless you hear otherwise from someone introducing themselves, but so I'll pick up those 2 points. In terms of the rebranding of MyProtein. It's just a constant evolution of the brand. We did this maybe 5 years ago, where we moved the brand on, and it's worth just reminding people what we're seeking to achieve here with MyProtein. We're very serious about it not just being the world's #1 sports nutrition brand. This is about building a true lifestyle brand across all territories. And so we're always premiumizing the proposition for it and making it more attractive so that when we move into other markets and other categories that we get real traction in doing so. And you can see that as we've moved into bars and snacks and drinks and various other categories, so it's really around building that desirability, the premium nature to the product and moving it along all the time really.

So you should expect to see much more progress on that as well because at the moment, yes, there's a lot of rebranding that's out there, but the full extent of the rebrand is not visible to everybody yet. So we're quite excited about that piece.

In terms of the margin side of it, then that's true, right? So we guided you to a -- I think it was around 12%, 13%, something like that. And we've come in at 14%, 15% margins. And that's after it paying its Ingenuity fees in that regard. Look, we've over delivered on the EBITDA performance against our guidance and any consensus, and so it's clear that that's come out of the Nutrition division. But we've been managing that Nutrition division quite carefully in terms of, yes, we've delivered some growth, and then we've delivered very strong margins at the same time. But prior to that, we have made some significant investments around vertical integration in the division. So we bought into drinks manufacturing, bars manufacturing, flavoring businesses, all with the intention of being able to build a much higher margin stack for the long term.

And the reality is we've seen the benefit of that alongside the commodity pricing coming back to a much more normalized level from the peaks that we saw last year. So it's fair to say that the margin stack is fully intended to be at these kind of levels. I do think in the past, we have guided to a normalized position here of being about 15% EBITDA margins for this business. And we will be bringing prices down across Nutrition because we have got this market-leading position and an aggressive pricing policy. But we're doing that as well as supported by the vertical integration, which we've made, so the margin stacks are just much more normalized at these levels.

[Operator]

And I'm moving on to our next questioner, which is Andrew Ross from Barclays.

[Andrew Ross, Barclays Bank]

Great, I've got 2 if that's okay. First one is to ask you about growth. And I guess, as we come out of this year, would you expect to be growing the business on a continuing basis in Q4? And as you start to think about next year? And maybe help us understand the drivers you have to get this business back to good growth, whilst also continued to improve EBITDA and free cash flow? Would help just understand how you're thinking about that and the levers that you have?

And then the second question is, I guess, a structural one around some of parts. Now that the legal separation is complete, and the Nutrition business is rebuilding extremely well. Just kind of wondering how you're thinking about strategic actions to that division specifically. I guess anything you can kind of share around how you see the portfolio and what you're thinking would be quite helpful.

[Matthew Moulding, CEO & Director]

So the question in terms of growth. I mean, it's fair to say I'm [indiscernible] in growth. So -- and I think in the detail of the RNS, we try and break that down for people, but it just takes a bit of -- because there's a lot of divisions and moving parts in our group. So yes, in answer to 2024, Andrew, we are expecting the group to be in growth in all 3 divisions to be driving that growth at the same time.

Beauty has returned to growth, as we said in the RNS as a whole division, the Manufacturing division, which was a drag on it as we've supported the brands in their destocking plants, that's back in growth and actually on a much lower cost base as well. So we're expecting to see Beauty being in a specially strong performer on the go forward. And then you've obviously got the momentum and progress we've had in Nutrition, certainly at the bottom line and then ingenuity coming into next year as well. Having made that pivot, we should have much less churn of those smaller accounts.

So yes, we are expecting 2024 to be in growth. We're expecting Q4 to be in growth to the other question that you asked there as well. Coming to the strategic position that you talk about in terms of our divisions. We obviously did all of the work a very hefty project. I think we spent about £8 million in restructuring, all in the fees, the legal work and the replumbing that you have to do in your systems, to get all of our divisions into a separate state that they're in today. And actually, that also helped us to exit on demand to the management buyout at the same time.

Now look, that work is done and we sit there always considering what's the right options for THG. You would only need to go back to even last year, all of the bid approaches that we've had towards the group obviously recognize the intrinsic value of the separate divisions versus, say, the market cap today, that was reflected in -- we've had bids for various divisions, Nutrition in particular, just being the simplest one is something that we've had people step forward and bids at in the end of last year and this year as well.

But we just -- we've got a very strong balance sheet. We know what we're doing. We've got a very, very clear focus. We'll always maintain our strategic optionality. Nothing is for sale. We're not selling anything. But what -- we're obviously looking at partnerships and how we grow each of our divisions and drive them forward. So we're only ever focused on what's best for THG, what's best for our stakeholders and the individual divisions, we continue to invest through our own balance sheet in there if other strategic options come that will benefit us then, of course, we'll go forward and do that.

And we have already stated in the past that sure there may be a time when in the not-too-distant future where one of our divisions is better served on a separate listing where we would look to grow that division further as a majority-owned business from THG. So all of those options are on the table. If we had something to say on it, we'd obviously put an RNS out there immediately. We haven't got anything to say on it at the moment, but obviously, we're not short of people stepping forward with ideas.

[Operator]

And of next, we have Marcus Diebel from JPMorgan with our next question. Please go ahead.

[Marcus Diebel, JPMorgan Chase & Co.]

Just one question on THG Ingenuity. The revenue decline has been at least partly explained with we're obviously focusing on higher margin. Clients accepting more loss-making categories. At the same time, your EBITDA margins are still down compared to last year. Is that the scale effect of being bigger? Or could you maybe explain this a little bit in more detail? It's not entirely clear to me.

[Matthew Moulding, CEO & Director]

So which division are you talking about there? Sorry. Ingenuity. Yes, yes, -- so I understand that. So just to be clear, the group's EBITDA margins are obviously opened and Nutrition's are up hugely. So it is the Ingenuity when you're talking about. So it's real simple in that regard. If you look at the third-party business, all the external clients, the big names and the rest of it that you would hear about actually EBITDA profit is flat. And what that means is EBITDA margins are up because sales -- on external sales we've churned our smaller accounts. You're taking revenue where it takes a lot longer to onboard the higher margins, more complex accounts. So actually, EBITDA margins in Ingenuity are up as well.

The actual reason that the group showing that the Ingenuity group has shown as EBITDA margins being down is actually the internal spend. So the likes of Myprotein look fantastic in the other parts of the group that spend with Ingenuity as we've obviously been driving cost savings throughout the group, we've delivered some huge cost savings, which have contributed to our EBITDA profitability improvements.

As a result of that, obviously, Ingenuity is one of those providers. So it's been better for the group. So the group's EBITDA margins have gone up. But on the internal spend aspect, Ingenuity has suffered to a degree, the benefit of the other divisions. But actually, EBITDA margins in Ingenuity with external clients is higher.

[Marcus Diebel, JPMorgan Chase & Co.]

Okay. Okay. Did you disclose this somewhere or couldn't find it.

[Matthew Moulding, CEO & Director]

I think -- well, I put something on my LinkedIn about 10 minutes ago.

[Marcus Diebel, JPMorgan Chase & Co.]

Okay.

[Matthew Moulding, CEO & Director]

But no, it is in the video, the reason being -- if anyone who watched the video, it was certainly in the video, and I think it's in the RNS as well. It's in the RNS...

[Matt Rothwell, Deputy Group CFO]

If you want to pick up with the IR team after the call. We're happy to run you through that.

[Operator]

And now we move to Anubhav Malhotra from Liberum.

[Anubhav Malhotra, Liberum]

I have a couple of questions. Firstly, on Nutrition division. Can I just ask you have had a lot of wins in terms of retail clients and Nutrition. So how big are the retail sales at the moment as a percentage of your total Nutrition sales? And how should we think about the contribution to EBITDA margin from that business? Is it at the moment at a low scale and a lower contribution to overall EBITDA? Or is it around the group average?

And then the second question is on the Beauty business. You talked about improvements in the retail media proposition that you offer to the Beauty brands. How big is that proposition in terms of sales? And what sort of ambitions do you have for that business? And any clues around the profitability of the business? And if that is a part of your plans of getting to that 6% EBITDA margin expiration for the Beauty division?

[Matthew Moulding, CEO & Director]

Okay. So if I've heard that correct then, the -- we talked about the retail sales in Myprotein are we in particular and how important that is to the brand, et cetera. I mean, look, I have a very simplistic view on the retail aspect of the business. We've got a super powerful D2C platform where we have millions and millions of people shopping all over the world engaging with our apps in our ecosystem.

So I look at off-line sales in a slightly different way, which is it's a fantastic brand marketing and reaches a different consumer, maybe that hasn't come across the brand before. And so I don't see that is suddenly becoming 50%, 60% of our revenue. Taking a step back, I'm sure a major CPG would see it that way because it wouldn't take much to put Myprotein into all of the major retailers in the world, and you could explode the sales of the business overnight. But we're DTC focused and believe there's real long-term value in keeping it online to a vast majority.

So the kind of things you've seen in retail, we've done licensing deals all over the world. We've done one in the U.K. with Iceland on Frozen Foods, which has gone well. But that's -- we don't recognize the sales on that naturally. We just get a royalty on that. And out of -- I don't mind saying really, it's not going to move THG's needle at a profitability level. It's probably going to make £1 million plus £2 million a year, those kind of things that you do there. But what it does do is it just makes the brand a little bit more exciting in certain areas and gives people different touch points.

And actually, it's transformative quite often for the retailer that we're working with because Myprotein, in particular, has got a real army of fans that will walk into stores to get the product if they can because they want it there and now. So look, in the U.S., we're with Costco now, there's a product volume there, The Vitamin Shoppe and all those things, where U.S. actually, as an off-line model is way more important, right?

So if we want to seriously scale in the U.S., we do need a slightly different approach there where we are going to need to have more off-line sales. And you will see that in there. We will recognize the sales on that, that will be quite profitable as well because off-line sales don't have all of the marketing and all the complexity with it. So it is by territory, but it will never be whilst I'm driving it. I don't want to see it becoming an offline brand in the majority.

But we're doing things all over the world. Japan, we've had some great success in Japan with license in the brand, and you'll see much more of that in other territories too. Then you asked about beauty and on the what...

Retail media wasn't -- in the importance of retail media in Beauty. So what you -- by that what you mean is, is where we're providing ad services, is it to the Beauty business? Is that correct?

[Anubhav Malhotra, Liberum]

Yes. Correct.

[Matthew Moulding, CEO & Director]

Look, I mean it's super powerful, right? And this is where the Ingenuity team have really delivered for Beauty. Everybody knows that Amazon is the biggest advertising giant in the world right now. I think the last time we checked, they do $30 billion a year of ad revenue that goes through that platform. And so as a result of that, you can imagine that's 90-odd percent contribution when they do that.

So for our sales in Beauty as well, what we're seeing is as we do sponsored ads and all of the advertising that brands can now do our look fantastic Core Beauty, Dermstore, et cetera, they're seeing phenomenal success. And so for ourselves, the best way of looking that would be, I think we're around -- we're looking at a run rate of around maybe £10 million for this year, give or take, might be a little bit less than that at the moment of which that's almost pure contribution, right, because we're selling ad space on our platform.

But that's scaling super fast. I think last year, it would have just been a couple of million, maybe £3 million, something like that. £4 million wasn't not massive. So you've seen that step open. And what we're always doing there is we've got huge potential to open up more real estate on the website. You've got to do it through the tech and be very careful about how you do it. And so you don't break things. But yes, I mean that's a real contributing factor. And I do think it's super important for any reseller to be able to offer brands the ability to push their products to consumers across your retail estate.

So it will -- in terms of that comment, you say around the 6% EBITDA margin it will be a key contributing factor because once you get to £20 million of ad revenue on, say, £1.2 billion of sales, you're already moving that what is at about 1.5%, 1.7% EBITDA margin just on that alone. But let's not forget that Beauty manufacturing is a huge contributor as well when that's back to normal as it is now. So those 2 factors combined should see Beauty's EBITDA margins very much normalized.

[Operator]

And next, we have Adi Arya from HPS.

[Adi Arya, HPS]

Can you hear me, okay?

[Matthew Moulding, CEO & Director]

You're fine, yes, very clear.

[Adi Arya, HPS]

I think maybe just taking a step back, it's obviously clear that you've got some initiatives going in terms of disposing of loss-making operations and Nutrition is doing well, slightly offset by Beauty and due to the -- if you could firstly help me understand, I think your CapEx falls into 2 big buckets over the last, call it, 3 to 4 years. One is in production facilities; two, support capacity growth of all your brands and also your partners through Ingenuity. But then also, you've got a very -- half of your CapEx every year is on intangible assets, which I think relates to Ingenuity. But if anything, Ingenuity, I think, reached its peak in '21 and has been declining, even after you strip out the kind of noncore and contracts you're trying to exit. So could you help me firstly understand how you spend over kind of to £600 million to £700 million of CapEx without any obvious EBITDA benefit from Ingenuity and kind of other growth.

And then my second question is, I think your peak margin was in '19 and '20, around 10%. And you're seeing this input costs normalize, but even on kind of H1 margins you're at 5%. It suggests that you're structurally at a lower margin. And honestly, it's tough to see how you reach a 15% adjusted EBITDA margin. And finally, even in the -- and relating to that margin, even in the years where you did generate kind of high single digits, you had kind of quite a lot of exceptional costs being added back to that related to the structuring COVID and adding a professional fee. So I guess, yes, the first question, just can you really explain where the growth will come from on all that CapEx you spend? And then secondly, the real margin of the business still seems to be quite low. How are you actually going to drive profitability, please?

[Matthew Moulding, CEO & Director]

Sure. So in terms of CapEx, I'm not sure where the £600 million comes from. But your point in terms of what we're doing each year in Ingenuity. So I think you've probably got about £100 million of intangible type CapEx across Ingenuity, which is basically around web development and tech and expansion, et cetera. Now it's also worth taking a step back and seeing of any other business out there of any scale that's digital facing, is anyone spending less CapEx than us. Now I don't think there's many, if any.

And then you've got to ask the question, do any of them actually own their technology stack. And I think the answer would be none. And so as a result, I think the one thing I'm actually super proud -- I'm glad you've raised it actually is the incredible level of efficiency of our tech spend in terms of what we deliver as well. I mean it's an incredible return relative to anybody else. If you were to pick -- I don't like calling companies out. So -- but everyone knows what the peer set is U.K. and U.S. and go and have a look at their tech spend relative to us and then consider the level of onboarding of clients with complexity that we do. Just look at the Matalan complexity that happened in there. The fact that we onboarded all Beauty within a short matter of weeks, which is big GMVs that would typically for many people, be 12 months to 3-year projects, and yet we chew through these through that tech team.

So I'm super proud of that tech spend. But then that comes to the question that you say around, well, where's the deliverability going to come then from that tech spend. So put that quite simply. I mean for Ingenuity itself, the pivot is really clear, right? So if you're going to make that level of tech spend that we do, then what we want to do is we want to get a proper ROI on it. And for us to go into Shopify, BigCommerce territory, where there's very high churn of accounts and you've got to take long-term views, initial losses on some of those accounts. Then that's one model.

But where we've seen great success and where we believe there's a huge gap in the market where -- which is recognized as well by the Gartner Magic Quadrant as well is for someone that does way more complex end-to-end solutions. And so that's why we've been pivoting the business to that. And that's why you've seen the EBITDA margin progression come through for Ingenuity as despite the falling sales of it's churn in those smaller accounts.

So -- and what you're doing is if you do a more complex transaction, you're likely to have that contract for 10, 20, 30 years versus doing things that -- working with brands that might be successful for 2 years, 3 years and then less successful. So that's why we make those investments more generally and why we see a return.

Coming back to the wider question around your margin stacks where you've been, what about your exceptionals. So you're right. We've been high single digits for a decade, I guess, if not close to 10%. Then you point to the fact, well, you've had some exceptionals in there as well. So are those exceptionals really should they are the exceptional? And have you just always been a lower EBITDA margin business.

The best example I can give you of that is say Myprotein, which if you were to look at Myprotein during what was its peak trading during COVID, it had we have to charter claims to keep that business trading when all planes were grounded to Asia. So we just have big jumbo jets taking products into Asia. Now that was costing millions of pounds a month of exceptional costs above and beyond what our normal fulfillment was. If you now look forward to where we are with that business, it's making the same, if not more EBITDA margin than gross profit margin on those same sales.

But actually, we don't use private jets anymore. We don't need to cargo planes because there's a normalized -- and actually, our freight costs are the same, if not lower than where they were pre-COVID. And that's why I if you look at where all those exceptional costs out, the vast majority during that period actually sat with Myprotein. And the very reason they are exceptional is that they're not there today.

You then got to take into account as well what we've done as a group. We've bought and expanded in vertical integration. We have opened distribution centers all over the world and we've bought into the Beauty model and changed businesses around, which creates costs, right? And our job as a management team is to say, here's a bunch of costs we're going to incur as a result of doing this. They will be gone when it's complete. And people will see that as it comes through on to the EBITDA margin. So what you're now seeing is in our results, there are practically no exceptionals that are in there. The only exceptionals we've had at the half year of £5 million, which is tiny relative to the changes we've put the group through in the first half of the year.

And yet the EBITDA margin is still -- is operating right back, it's starting to come wrap backup and it's well upon last year, where we had way more exceptionals than that. And so when you see the second half performance, you'll see again the EBITDA margin improve. So when we go into 2024, it will be a much more normalized EBITDA margin, but the exceptionals will be gone. Unless we -- unless there's a new COVID and we need to start chartering cargo planes all over the world again. But then you might argue, well, that's not exceptional anymore. Cargo is -- COVID here every year and we're going to be locked down forever.

So that's why the EBITDA margins, we've got total confidence. But -- and then you look at the tech spend, the CapEx spend we make is a tiny fraction of any of our peers I mean it's just -- I'm super proud of that. And I think the finance team, the CTO are pretty heroic in terms of what they deliver on that budget.

[Adi Arya, HPS]

Understood. And maybe if I could just have one follow-up there. Clearly, I think it makes sense that you feel that such a heavy spend on Ingenuity and kind of scaling your capabilities is efficient. And I can see that point of view, as you set yourself up for growth and agreed, you kept -- it was an investment in Myprotein brand to charter those planes. And similarly, you've grown the Beauty division. But if you look at kind of the amount of cash you're burning, which is fine because you have kind of -- you're well capitalized in terms of the capital you have to invest.

I guess all I'm saying is when do you think -- is it fair to say that you're viewing this as a kind of a 20-year horizon in terms of really getting that benefit? Because for example, you've got state-of-the-art facilities. And in the U.K., you probably have distribution centers capable of supporting a much greater level of activity than currently. So are you able to quantify the level of utilization of your asset base that you're using right now versus where you actually think it could be because -- that's one of the ways I would be able to understand that your EBITDA is lower relative to the amount you've invested. So if you could talk about that kind of utilization, that would be helpful.

[Matthew Moulding, CEO & Director]

Yes, sure. So you're absolutely right. We've got huge capacity across the entire network, partly driven by the robotics that we have. We -- in Q1 this year, we opened up the robotics in New Jersey as well. So the -- what you're seeing with that is even though we've got hugely more capacity than we've ever had capable of delivering multiple times the scale of the group today, our cost to serve is fall in fast and it's at its lowest level probably since we were doing CDs and DVDs 10, 15 years ago.

So -- and that actually ties into your exceptional cost point as well, which is, when you're up in all these facilities, et cetera, we do incur exceptional costs. And then people say, "Well, actually, those exceptional costs are bringing your cost to serve down". If you were to look at our historic cost to serve, take off the exceptional costs, we are still now running at the new facilities with huge capacity at a far cheaper cost to serve than at any point that we've had even when you take exceptional costs historically above it. So -- and that's despite the fact we've got multiple times capacity in the group to be able to onboard. And that's why when someone like all Beauty come to you and say, can you help us, we can do it in a matter of weeks end-to-end rather than years because it's just slots in. And then the benefit of that is it then starts to bring our cost to serve down even further because we've just got excess capacity.

But that excess capacity, when you come to peak trading, like Black Friday week and all those kind of things, it runs at 100%, if not 150%, right, because we can't get everything out to the door on day one. And so there are times of the year where the capacity, but it's only small times of the year, is full. But I mean, the daily capacity, we've got huge, huge capacity available to do it, but it's incredibly efficient as a result of the investment we've made. And so that's why we sit there going, those investments have been well worth doing.

The final point that's missing as well is not only of all that capacity we've got, but we serve customers now far faster all over the world than we've ever done because we've got that global distribution network. We're doing it cheaper and faster than freight in all over the world than we would have done. So that investment that we've had, the ROI on it is delivering now. It's not a 20-year view. It's not a 10-year view or a 5-year view. It's a today view where it's every day. And it's in these numbers as well for anyone that wants to take a look, there's a slide in there that will show you distribution costs, as an example, the size of these presentations, there's a slide in for everything. But maybe it's worth having a look at that.

[Steven Whitehead, Group Commercial Director]

I mean we can call those numbers up...

[Matthew Moulding, CEO & Director]

You see Steve Whitehead speaking by the way.

[Steven Whitehead, Group Commercial Director]

It's a 280 basis points improvement on fulfillment costs over the 3 years since being implemented the warehouse rollout program with automation. So that's 280 basis points on a £2 billion plus business, which when you look at investing £100 million to £200 million in that roll out that then drives a really efficient payback period, which is delivered to consumers today, as Matt said, but gives a 2-year payback on the spend that we're looking at.

[Matthew Moulding, CEO & Director]

And this is Matthew Moulding just wrapping this point up. You mentioned the line in their same cash burn which is obviously not something that I can relate to because I think the one thing we've just shown is cash performance is super strong at the group. You talk about our well capital as we are. We're beyond well-capitalized. We're -- in terms of the cash performance of the business, there is no cash burn. We delivered £50 million of free cash flow in half 2 last year.

In our seasonal outflow this year, we had a £70 million outflow, which we would always have an outflow. But over the 12 months, so that gives us net £20 million with peak to come our free cash flow period to come. So we don't -- it wouldn't correlate to me on that, and that is a £350 million improvement on the prior 12 months once all the investments had ended.

[Adi Arya, HPS]

Understood. I mean maybe finally, before I jump back in the queue, just to kind of clarify on my cash flow point. You referenced the free cash flow of £50 million generated in H2 last year. I agree with that because you have the net working capital inflow. But if you just take £100 million EBITDA, which is kind of your target adjusted EBITDA, which is your target, I know your CapEx is -- you're investing for growth, basically you would say coming of the £60 million for maintenance of all your facilities that leaves you £40 million. And then before you even get into interest taxes and anything else, your lease costs are about £15 million.

So that's kind of where I'm getting at in terms of asking about the scale you need to really utilize those facilities and have EBITDA at a level that's kind of positive free cash flow generating. If you take just as I said £100 million EBITDA, you even call it, £50 million to £60 million of CapEx on a maintenance level that leaves you £50 million, that's your leases and then you've got £30 million to £40 million of interest based on where the rates are and that's before kind of taxes in any capital swings. Would you agree with that?

[Matthew Moulding, CEO & Director]

No. So the £100 million of EBITDA is not a number that -- and I don't know where you've got that from. So I don't think that's in any of the consensus numbers or anything we've guided to...

[Adi Arya, HPS]

I mean just that EBITDA in 2022 and the consensus is maybe £120 million of adjusted EBITDA. You've got £47 million adjusted EBITDA in H1. And if I annualize that, it gets to about £100 million , but call it, £100 million, £110 million, whichever just the point. My point is just squaring the line but your cash flow seems quite tight when you take your adjusted EBITDA figures.

[Matthew Moulding, CEO & Director]

What you mean cash flow tight rather?

[Adi Arya, HPS]

So if you -- would you agree that you generated -- you're reporting £47 million of adjusted EBITDA in H1 '23?

[Matthew Moulding, CEO & Director]

Yes, I do.

[Adi Arya, HPS]

And then if you annualize that, let's say, and maybe give a credit some Christmas trading at, call it £100 million to £110 million of adjusted EBITDA to 2023.

[Matthew Moulding, CEO & Director]

That's not a number that I recognize. But it was the cash flow point. I mean just picking up on your cash flow point right. We're all aware what consensus would be, which isn't the £100 million you were referring to. But coming back to your point, that you turn around and say, well, what about -- how do you end up with not being free cash outflow, say, £50 million or £100 million or whatever, whatever you're pointing to.

Obviously, when we've made our investments in open to all the distribution centers over the world, we fill those warehouses with stock, right, everywhere. As a result, it takes a period of normalization. You don't need stock in every warehouse all over the world to that extent, but you can't part fill a warehouse. Otherwise, the service breaks and you end up still freighting products all over the world by fulfilling some orders locally. So that's why when we look back over the last couple of years, we filled all of our new distribution centers to be able to properly serve customers then as those warehouses settle and they operate to a normal level, what happens is all of that stock then runs down to a normal level. But you end up building your stock up hugely, invest in that capital and then that stock comes back, turns back into cash for you as that comes back in.

And that's what you see in -- you'll see stock reductions all over the group. That you've seen year-on-year, probably about £100 million on last year. The finance guys can always correct me -- on separate analyst for you there, but constantly improving, and we still got stock that we can -- that will be coming out of that. The EBITDA progression in the business just continues, right? So the -- and the EBITDA is cash. So yes, you've got growth in EBITDA. You've got -- you can -- you've then got your interest that you pay off at your rents but that's why we had £50 million of free cash flow last year, minus £70 million in the first half because it's seasonal outflow, you'll have a positive free cash flow again. And hence, that's why you're broadly free cash flow now and you will be, if not positive next year as well included.

So obviously, we'd be expecting EBITDA growth to come back quite considerably next year as well, which I think is in consensus. So that's why there's nobody in this room here would correlate to that nor would any of the -- any of the other guys...

[Damian Sanders, CFO & Director]

Matt, can I just add. It's Damian Sanders. And in terms of the annualizing of the EBITDA points, Clearly, we've already talked this morning about the impact of Beauty manufacturing, and that will significantly come back. So it's not just the case of extrapolating. And the point about Christmas, clearly, peak is our big -- is the big seasonal impact for us. And as Matt has said, we always have a cash inflow in the second half because of working capital because we've done the investments in the infrastructure and the warehouse. We actually -- we've been able to, as Matt said, now reduce the stock levels. We can reduce it further, but the important point that I would make is that availability will not be negatively infected.

In fact, because of the efficiencies that we have in many respects, availability is better. So we can actually -- we do have levers where we can further reduce working capital. We know that EBITDA is coming back, and therefore, we are very confident about the neutral free cash flow for this year and then positive beyond.

[Operator]

And I'm moving on to Paul Rossington from HSBC.

[Paul Rossington, HSBC]

Can you hear me?

[Unidentified Company Representative]

We got you loud and clear.

[Paul Rossington, HSBC]

Just a couple of quick ones, actually. Just in terms of competition, on the Beauty side, has the Sephora launch in the U.K. kind of meant for more meaningfully competitive environment in this particular market. I don't know if that's been a factor or not, if you could comment.

[Matthew Moulding, CEO & Director]

Look, there's plenty of competition across Beauty all over the world. I don't think it would be fair for me to say Sephora has had an impact on our business as of yet. Our U.K. performance is super strong within Beauty. The actual Beauty numbers that if you did the territory breakdown, the only reason there's a drag on the U.K. is because the Beauty manufacturing site that delivers for a lot of brands, manufacturers and developed products.

Actually, the Core Beauty performance if you look fantastic of Core Beauty is really strong across the U.K. So it wouldn't be fair for me to say that. But obviously, Sephora is a high-quality player across the world. It's also -- I think if you looked at the capacity landscape, it's quite interesting to see if you were to look 2 years ago or 3 years ago, everybody, every man and his dog was getting into beauty because he thought it was going to be an easy win for them. Based on recent announcements, you'll see a lot of people have pulled out of the Beauty as they've tried to do it. And so you look at -- I think far fetch with the most recent to pull out of it themselves the biggest luxury platform online, and they're pulled away from it.

So actually, I do think a lot of the investment has really put us on a strong competitive footing because Beauty is a relatively low AOV category at sort of like £45 per order, let's say, can be £50 dependent on the time of the year.

But -- so as a result, automation is key, and we're fully automated. You look at the U.K. with the robots. You look at the U.S., the cost that we have to serve. That's a really, really strong competitive advantage that we have just in the operating nature of the business. And so many people that have tried to enter this have come in and those operating costs mean it can't be a profitable category for them because it takes some investment to get there. So actually, I think the competitive landscape has moved in our favor.

[Paul Rossington, HSBC]

Thanks for the color. Just on Ingenuity as well. Clearly, there's another quite large established online in the market that's talking about expanding into nonfood fulfillment contracts as well. Are you bumping heads with Ocado at all in that regard? I don't know if you're able to comment or are they in the same kind of tenders that you're looking at? Or is that an area of competitive threat?

[Matthew Moulding, CEO & Director]

I think I could be honest and say we've never once come up against Ocado. But again, the tech space has got plenty of players in there, right? So the key people we would come up against week after week will be sales force, let's say, and, to a lesser degree, depending on the scale, you might have Shopify Plus that are in there at the moment. But as a U.K. tech champion. I wish Ocado all the best thing. It would be great to see them break through as well between as we -- maybe we can have a global impact, but we haven't come up against them yet.

[Paul Rossington, HSBC]

Great. And the last one is just I think you talked about -- you mentioned it seems like a while ago now, balance sheet strategic flexibility or optionality. Does that -- are we to take it that you are kind of still in the market to acquire complementary or strategic assets? Or is it the case that perhaps post a period of quite significant M&A since IPO that kind of you're kind of pausing for the time being. I'm just wondering where your view is on that right now under what circumstances would you start to acquire other assets or not?

[Matthew Moulding, CEO & Director]

Look, it's -- we're obviously always mindful of opportunities in the marketplace. You'll have seen we did the City AM thing, which was tiny, right? But we're always in the market, understanding et cetera. It depends on you -- what you wouldn't do is deploy capital from your own business to buy an asset at a higher multiple realistically unless there were some incredible synergies in doing so. So we're always mindful of that in terms of balance sheet optionality.

Look, we have super strong balance sheet optionality. As I touched on earlier, we -- just Myprotein alone, we get bids that are multiples of our market cap in times gone back just for that brand, but we're just not interested, right? We don't -- in that regard. That said, if we could find something that came along at the right kind of valuation, of course, we would look at it, we'd look to do a deal or a transaction if it was there. We've got the flexibility to do so. We've got the balance sheet strength to do so if we so chose to do.

But given where your own personal market CapEx doesn't make a lot of sense for me personally at the moment to be doing too much in that space. And given the last 12, 18 months of inflation, the challenges that are out in the wider world, et cetera, there's been a real focus on sorting your own business to the very best of its stability and making sure it's in super good so that when the market does at itself, out there, then we are first out of the [indiscernible] and in pole position if we do want to do some strategic stuff. So that's been our focus for now.

[Operator]

And our final question for today comes from Andrew Wade of Jefferies.

[Andrew Wade, Jefferies]

Just a couple from me. Almost everything has been asked already. So just on the Beauty side, first of all, the return growth in August, obviously pretty encouraging. Could you talk through what's changed there to drive that? Could you don't annualize the sort of step back in marketing until Q4, that would be my first -- and then second one, at the [indiscernible] getting back to that -- you noted encouraging early results from the rebrand. Any more color you can give us on that?

[Matthew Moulding, CEO & Director]

Sure. I mean, look, the key thing is actually, we started to focus on more profitable orders probably from last Easter, really, but we really started to drive it harder and hard as we went through 2022. So what that meant was we were looking at making sure that orders were profitable on first order and that would directly linked to where products were being distributed from. So if you were to look at places like Europe and Asia, which typically have to travel further from -- even though we've got a huge facility in Poland, for Europe, the further away you are, the more expensive it is to serve different territories.

So what we've done is just make sure profitability is on a first time basis rather than looking at a second order, third order kind of principal. There's an element of that does annualize, but then at the same time, there's also an element of where you -- as a result of doing that, you fight harder in those territories where you are. You have got a competitive advantage, and they are more profitable. And so we have been doing that, and we are taking share. We know that for a fact in all those kind of areas that we just talked about. Someone asked about the U.K. market a little moment ago as well.

And so I think we're just taking market share. Those territories are -- they're like the U.K. and other places we're doing particularly well where we're serving closer to our distribution facilities and that's driving us back into growth. The final one is obviously the manufacturing business at the same time. That's now back in growth, which has been a bit of a drag as well because it is a sizable manufacturing business dealing across the beauty industry.

Second question was on Myprotein. Encouraging results on the rebrand. Look, I mean, the encouraging results are born out of how trade is every single day, right? And the profitability, the margins and the rest of it. That's how we see it. Obviously, there's been good customer feedback. We feel very good about it. It's been -- we've been underway for 18 months. These things don't just come about lots of customer testing and the like. So we just feel very good about it and it's translating quite well into products and design and all of those things. So far so good. But it is really early, right, in terms of that. But we certainly wouldn't expect it to be a negative.

[Operator]

Thank you. That concludes today's Q&A session. So I'd like to hand the call back over to you for any additional or closing remarks.

[Matthew Moulding, CEO & Director]

Okay. Well, thanks again, everybody, for taking my time to listen to us. And hopefully, next time in a few weeks' time, we'll have some other good updates for you and just continue cracking on. Thank you.