Earnings call: THG cites progress amid challenges, plans for demerger

In a recent earnings call, Matthew Moulding, CEO of The Hut Group (THG), presented a mixed picture of the company's performance in the first half of the year. Despite significant progress in the Beauty and Ingenuity divisions, THG's Nutrition division experienced a revenue decline due to a rebranding initiative and foreign exchange losses, particularly from the Japanese yen.

The company plans to scale local manufacturing to mitigate FX risks. Moulding expressed confidence in the company's long-term outlook, citing upcoming growth opportunities and a planned demerger of the Ingenuity business. He also addressed the challenges of a high-interest environment and the company's strategies to improve margins and cash flow.

Key Takeaways

THG's Beauty and Ingenuity divisions show significant progress.Nutrition division revenue dropped by 7.5% in H1 due to rebranding and FX losses.Local manufacturing initiatives aim to reduce FX risks, particularly from the volatile Japanese yen.Company anticipates meeting consensus forecasts at the lower end, with a focus on strong free cash generation.A demerger of the Ingenuity business is planned, with extensive preparatory work completed.Moulding projects over GBP 80 million in free cash flow for 2023 and emphasizes the potential of Ingenuity as a standalone entity.The company expects a cash outflow of approximately GBP 150 million for Ingenuity over the next three years until it becomes free cash flow positive.New agreements in the Nutrition division, including a partnership with Müller, are expected to enhance market share and GMV.

Company Outlook

THG remains within consensus forecasts, albeit at the lower end.Positive GMV growth trend noted for September, with expectations of a strong second half driven by sales events.

Bearish Highlights

FX losses over GBP 5 million, mainly linked to the volatile Japanese yen.Nutrition division faced a temporary decline in average selling prices and a 7.5% revenue drop.

Bullish Highlights

Significant progress in the Beauty and Ingenuity divisions.Optimism about returning to growth in the Nutrition division following the rebrand.Ingenuity as a standalone entity has prospects for significant revenue and EBITDA growth.

Misses

Challenges faced in a high-interest environment, leading to significant depreciation charges and reported losses.Increased net debt is considered transitory.

Q&A highlights

Localized sourcing is beneficial regardless of FX timing.Existing service agreements for Ingenuity will remain largely unchanged post-demerger.The company is addressing rising whey prices while maintaining strong free cash generation.



Matthew Moulding, CEO of The Hut Group (ticker: THG), detailed the company's performance and future strategies during the earnings call. Despite facing challenges, THG has made strides in its Beauty and Ingenuity divisions and is working to mitigate the impact of foreign exchange losses on its Nutrition division. The company is optimistic about the future, with plans to improve cash flow and margins, and a demerger of the Ingenuity business on the horizon. Moulding's leadership remains focused on navigating current challenges and capitalizing on growth opportunities, with a commitment to delivering strong results for stakeholders.

Full transcript - None (THGHY) Q2 2024:



Matthew Moulding: Good morning, everybody, and thank you for joining us this morning for our interim results. We're going to do things slightly different today than the previous presentations that we've done. We've kept away from doing a walk-through on a video of our presentation. Instead, what we've done, we've put the presentation online earlier, along with the detailed RNS. And then with a lot going on in the group at the moment, we think that a lengthier Q&A section will probably provide more value for everybody. In terms of the H1 itself, I think what I would say is it's been a solid half in general, but the makeup of that half has been somewhat a bit different than maybe we would have anticipated 6 months or 12 months ago. Following the business model changes that we've made through 2022 and 2023, the Beauty and Ingenuity divisions have delivered record performances, so we're really pleased with the progress that we've made through those business model changes. And we see good momentum there as well coming into the second half and there afterwards, so that's been a particularly pleasing performance. We've also got more contract wins, with great positivity feeding through in terms of the Ingenuity progress, so again, that's been solid. We've faced some headwinds in the Nutrition division. Probably the biggest factor that you'll note in there has been through FX. We've taken in excess of GBP5 million worth of profit hit from FX, principally around the Asia and the well-documented volatility in the Japanese yen. I think one of the things to note from there is, whilst that volatility is still there today, as we look forwards to 2025, it's probably the first time now for a few years that we've been able to look forward to 2025 -- or the year ahead with some form of positivity around the FX there. So, we're pleased with the direction of travel there, but that has been a frustration for us. And one of the things that we've been able to do to handle that FX is we've launched our own manufacturing. So, in the sense of being able to manufacture within territory. So that will steadily now start to build to scale, and that does reduce our reliance and impact from FX volatility in the region. It's certainly done that across Europe and the U.S. and other territories where we've done that through the years. And that's why we don't particularly ever note any volatility in those regions. I think the other area to really bring to everyone's attention is obviously the rebrand. It's been a major rebrand, probably the most -- well, certainly the most complex brand rebrand we've ever done. The last time we did a rebrand, for Myprotein, was in 2018. To give you some idea of the complexity: You're probably looking at thousands and thousands of product lines across different countries in the world, in different distribution centers, which compared back to 2018 would have been a fraction of that. And so, this has really stepped up the complexity. When you do, do a rebrand. Obviously, what we've chosen to do is we've chosen to limit that disruption to our online business. And if you look at the growth that we're seeing in the off-line piece of the Nutrition business, that's been particularly strong, minimal disruption there. And our average selling prices going into the off-line markets are actually in growth, but as we have pushed through the brand changes, we've done that to our -- allowing our own customers to be able to partake in the discounts that you have to put in place to be able to drive through those product changes. Now as a result, if you were to look back at 2018, at the last rebrand, we took our growth backwards from 24%, I think it was, in 2017 down to 6% in 2018 when we took that rebrand on. And then as we move forward into 2019, that growth then reaccelerated to 20%. Before then, we have the explosive growth that you would have seen through the COVID period, et cetera. So, the key thing that pulls back that growth when we did that rebrand in 2018 is the average selling prices as you implement discounts across the websites to transition the brand from old to new. And that's very similar to what you've seen in this year and in the first half of this year, where average selling prices across the website have been down around -- on a constant currency basis, around 12%. And that's pulled back the revenue in that Nutrition division to about 7.5%, I think it is, that we reported for half 1, but what I'm pleased to say is obviously that rebrand is now largely behind us. We started that rebrand in September last year, so we start to comp those numbers. And actually, for September this year, as we've stated in the RNS, we're expecting a return to growth for Myprotein, which given the extensive changes we've put that business through, that's been somewhat of a relief. I don't mind saying that. The summer itself, it never seemed like it was ever ending, but finally it feels like we've come through with the progress there. I think, in terms of the output from the rebrand, just to remind people why we've done this. We've done this to be able to attack a significantly bigger off-line market which we've never really addressed in the past. And through the listings that you've seen of the brand and some of the licensing deals we've done most recently, the Müller and Myprotein partnership together, you can see some real success there. And you're seeing really, really strong growth. So, in half 1, I would have -- I think the number would end in excess of 40% growth in our online retail sales; and so, we're seeing great success. And that strategy should pay off for us as we then start to grow that segment quite considerably. I think a few other things just to touch on from the half 1, touching on the outlook. So, we stated in there that we'd expect to be within consensus, albeit at the lower end of consensus. And just to remind people: that we took a GBP5 million-plus FX hit just from the -- in Asia with the Japanese yen in the first half, and that volatility is -- still lingers for us for this year, so naturally we'd expect that to be a key factor. There's not a lot we can do with FX particularly other than localized, which is something we've been working on for the last couple of years, but hopefully, that will become a good tailwind for us next year and then we can put all that behind us. I think other things to note. Obviously, we're very aware that there's been a spike in the whey pricing in the markets, at the moment, on the commodity side of things. We've got a good history of how to navigate that. For those that have been involved or a stakeholder in THG through 2022, you will see that we stood firm on providing and helping our customers with support through the cost-of-living crisis. And we really dug deep in there, and then the following year, we delivered record profitability ever in the Nutrition division as that was rewarded. So, we've got a good plan of attack in terms of how we do that. And we'll respond in the market, depending on how that volatility sits, but we don't expect that to be a long-term volatility in any event. So obviously worth noting that. I think the other things to note is obviously around things like the balance sheet. So, you'll see an increase in the net debt at the half year, which is transitory, a few items in there. The underlying free cash generation of the business is actually stronger than the prior year. In the prior year, we had some freehold disposals of GBP55 million. And then also, in these last 12 months, we've made GBP20 million worth of acquisitions. All of that said, what we'll -- what we're expecting is -- well, we had some VAT balances that are set to unwind by the end of this quarter, which is material. And that comes back our way. Also, the mix in our creditors, where Nutrition creditors are worth double the creditor days: So, from a working cap perspective, as you pull back from your Nutrition division, you'll see less working capital benefit temporarily. Now as we return to growth, that reverses, so that's quite a material point. And then I think the final point I would say is naturally the CapEx is continually reducing. So, we'd expect a materially lower CapEx in the second half and also through to next year, so lots of positives for us there in terms of the outlook in terms of that performance, but clearly, there's plenty of work to do for us to make sure we're on a really strong footing for 2025. I think some other things that we've got in the update today which would be obviously of key interest to people. We have the step-up that we've been waiting for the FCA to finalize the rules and the guidance there, so that's now there. And clearly, we'll be making the step-up in due course, and if there's any Q&A on that, I'm sure Damian can help with that. And then at the same time, we've outlined our work that we're doing on the Ingenuity demerger. So, I'd expect it's naturally quite a few questions. And I know the team have been speaking with the analysts this morning and running them through that. I think, look, taking a step back: We have three very sizable businesses, two of which are very cash-generative, highly profitable businesses. And then we have the Ingenuity business, which is an infrastructure play, where we invest our surplus cash into Ingenuity to build an asset for the future, maybe something you might see similar to when Sky was building out its network and Sky dishes across or many other infrastructure players that people would know about. What's clear for us is that -- in an environment of high interest rates, that cash-generative businesses are valued quite different than businesses that are doing an infrastructure play. We've had extensive discussions now with shareholders over the past year. And what is clear is, I think, we're all aligned that having an infrastructure business as part of the group is probably, as a listed business, something that shareholders would prefer to see more value in other uses of capital than building that asset. So obviously we are super passionate about that asset and see incredible value and opportunity with it, and so that's something that we've been exploring in great detail. We've obviously done a lot of work over the summer on this project, and before. We've now received all the necessary tax clearances from HMRC to be able to go forwards and do this. We obviously did extensive separation work across the group in -- throughout 2021 and 2022, on an GBP8 million project to basically rewire the group's operating system so they can operate independently. That's all been successfully done. And so that's something that the Board and stakeholders are looking at in terms of the right steps in which we should look at potentially doing that demerger. So I think -- said there will be -- obviously be quite a bit of questions, so rather than me just keep going on around any of those points and trying to guess what the Q&A is, we'll probably leave that for the next section, but just to give everyone a few moments to make any notes and come back with any further thoughts, what we've now got is a brief business video just touching on some of those points from H1, touching on the rebrand and things like that. And then we'll move into Q&A and go in much more detail. [Presentation]

Operator: [Operator Instructions]. Today's first question is coming from Wayne Brown calling from Liberum. Please go ahead.

Wayne Brown: A lot to get through, so I'll keep my questions brief. I think I've got three, maybe four, if may be a bit bold. On Nutrition, I know that the rebranding from an operational perspective, and the product, looks great, et cetera, but clearly -- if you can just run through what's gone slightly wrong with the guidance that was given. Is it the fact that there were elements of the actual rebranding and getting through the old product that didn't go according to plan? Or just explain where the disconnects happened on that front. And then if I may take them maybe all upfront. And then on Japanese yen, that has moved 10%, I think, in the last three months, positively, so just curious if the impact of that is going to be seen in H2 this year or next year. And I don't want to sound glum but -- or negative, but could the timing of opening the facility then just be the wrong timing? And how should we be thinking about that in the numbers? And then on Ingenuity and separating that out. I think that's clearly, our view, very interesting and exciting and should get people focused on some of the parts in due course but just curious on two fronts on that. What could happen that would -- what could happen that the split does not happen? So, what are the risks in this actually not occurring? And then maybe you could just speak about the cash attractions that -- what could look like in the RemainCo if you could ring-fence and fund Ingenuity. Thank you.

Matthew Moulding: So, Wayne, I'll tell you it's -- this is probably useful for everybody really. Maybe the best thing we could do is actually just go one question at a time. So, ask as many as you want, but -- because I'll forget them all. But I think, the first question, sorry, Wayne, was the one around what's potentially gone wrong with the rebrand on the Myprotein business. I mean look. I think you do a rebrand when your momentum is good, right? That's got to be the golden rule. Now you wouldn't ever go into a major overhaul rebrand into headwinds. So, to wind back to when we took the decision to doing it: These things take an awful lot of planning and an awful lot of work, so to get to this point of a rebrand, probably behind the scenes there's been 18 months’ worth of work going on to get to that position. And then you make the decision and then you go. And you've got to order all your producting and you start to do all your campaigns. So, once you make that decision, you make that decision and you go. So, we did that in -- September is when products started to feed through on to the website, so that decision would have been taken much earlier in the year as we start to do that. Now the momentum. You'll recall, for Myprotein, last year was really strong, record profitability; incredible performance; probably generated GBP90 million, thereabouts, of profitability; with free cash flow of that and some potentially -- getting into the detail, but -- so you make that decision then when you've got the right momentum. That would always be the right time to do the rebrand. Now the kind of things that have changed since then obviously has been that the wider market has been a bit more challenging through the currency movements. You wouldn't have wanted to lean into that. There's been a secondary bounce in some of the commodity pricing, whether that's a dead cat bounce or whatever. You've seen some of that, so you've got those kinds of factors that feed into it. What will always be the case is -- you're sat there with over GBP100 million worth of stock, let's say, when you go into a rebrand, so you're not -- some of that will be in raw materials. Most of it will be in finished goods. What you're not going to do is sensibly go out and job that stock out to then start again with new brand. Also, it will be almost impossible to do because you have so many product lines, et cetera, so you've got to decide on your channel in which you're going to manage that. So, we've managed that through directly to our customers. And that then means that your website looks messy because you've got -- it'd be basically like walking into a car showroom and having an old Audi model alongside new Audi models. And it never gives the best feel and experience, et cetera. And it's quite difficult for the marketeers in terms of how they're doing their channels. And so, you make that decision. That's always going to affect your average selling prices, as it did in 2018, but doing that leaning into the FX market, where you've got that hit in the -- out there with that explosive volatility, if you -- I think, anyone who puts up the GBP to the Japan yen graph now, you'll just see how horrendous that has been through the first half, but not just the first half now, this has been for 3 years, 4 years in the making. Every year, it's been getting worse. And we all know the reasons, for those that follow currencies, know the reasons as to why. They look to be unwinding now, which then kind of leads on, I think, Wayne, to another point that you said is they -- "Have you done this too late now in terms of your localized sourcing?" Localized sourcing can never be too late. Now what we've not done in this territory is we've not gone and spent a lot of CapEx building our own manufacturing unit. Sure, in the places like the U.S. and huge facility in Europe, huge in the U.K., et cetera, we've done that, but as our first entry point into anything ever, we do it through third parties. And so, we've done it in India and we've now done it in Japan. We've got a third party that we -- the big players out there, and they help us do the manufacturing and so on and so forth. And it's nascent and it starts to grow. And that's how you handle it, so it's not too little, too late for that. And actually, we'll be sat there punching the sky once that currency continues to come back. As you've seen the 10% movement we've seen of late, that -- this time last year, though -- it's broadly flat right now, but there was a big dip that happened as well. And then it went back up, so what we sat there knowing is, all things being equal, this is a really nice tailwind for us for next year. I think, the other questions that you had on there, there was the Ingenuity stuff. What else did I miss on the rebrand? Was there something else there, Wayne?

Wayne Brown: No. I think -- No. You didn't miss anything. You answered that well. I think the -- just the last question, in two parts, was on the Ingenuity. Why could the split not happen? So what risks are there that we should think about? And then just looking at the cash attractions that would remain in RemainCo if you ring-fence and fund Ingenuity separately.

Matthew Moulding: Sure, yes, sure. Look. The cash attraction point kind of follows on to the next point, which is both of those businesses are highly cash generative with minimal CapEx, so as a result, you can sit there and that -- we -- our stakeholders, ourselves now having got 4 years, 5 years’ experience in the markets, we recognize that that's very attractive for being listed, to have those assets generating that cash and being able to do dividends and share buybacks, et cetera instead of diverting those funds into technology and infrastructure which then builds a new business model. And so, I think those cash attractions are really clear. Obviously, if you -- I mean, if you were to take a step back, the rough math would have been free cash flow of the RemainCo would have probably been somewhere in the order of GBP80 million-plus in the prior year, in 2023, versus, for those that follow up the detail of our numbers -- I think we had a free cash flow of about minus GBP13 million, so what that then means is, well, Ingenuity was about minus GBP97 million, 90s, something like that, so to give you that minus GBP13 million. So, you're putting that money into Ingenuity to build that asset. So, if you've had that -- if you then take a step back and say, "How are those businesses performing?" Well, in 2023, we had Nutrition performing and Beauty and Ingenuity undergoing their business model changes, so if you were to think, well, Nutrition should be firing for next year and there's no reason why we'd expect Beauty not to be firing, then the core RemainCo business should be performing incredibly well, which means that you've got a very cash-generative business. Because for the past 3 years, there's always been something in one of the divisions that we've been overhauling, so as a result then, the attractiveness is pretty clear for all to be there and what that could then mean for the market. And you've got two very strong stand-out assets that people can start to focus on. Then what you've got is Ingenuity. You're probably not far off, as a stand-alone business, $1 billion of revenue in a profitable business in -- at EBITDA level but with significant depreciation charges and various other things, which I know is not -- in a high-interest environment not the most ideal scenario to be in because you get these huge depreciation charges and you end up with big reported losses and things like that. And so, taking that away. Having a $1 billion type revenue business, strong positive EBITDA growth, great trajectory but requiring cash investment to do that, that is something that, having spoken to our stakeholders, we've got a strong view that actually there's a lot of support for that as a stand-alone business. And it's actually the combination that's posing the biggest challenge. And so, look: We can never say with certainty that anything is going to happen, right? That's for sure. Otherwise, we'd be announcing categorically we've done it today. What I can say is that's a very strong level of feedback we've had from our stakeholders, from -- internally from us running the business. And our passion for Ingenuity is better today than it's ever been, reflected in more contract wins, et cetera. We just want to make sure each of our divisions, as we announced in 2021, have got the right platform in which to build to do that, to go on and fulfill their potential.

Wayne Brown: Okay. Thank you, very much. Just -- and any views on -- as to why the merger might not take place? Or is that getting into territory that you're not comfortable in discussing?

Matthew Moulding: Look, Wayne. I can't really get into too much on that, but what I would say is, look, we obviously -- if just to take a step back. If Ingenuity is not in THG, as a very large-scale business -- we've probably got about 4,000 staff in that business with that $1 billion of revenue and strong EBITDA performance. It's fair to say, as it can have its own banking and funding and finance facilities -- have quite a substantial scale. And then on top of that, it's obviously an attractive asset in that sector, to some considerable degree, so it's not like we're exiting something in any way, shape or form. This is all really going to be around making sure that our current stakeholders can partake. That's an important point. What we -- one thing that's -- probably isn't entirely clear is we won't be forcing anybody to not be part of Ingenuity should we go down this route. This is something that all stakeholders will be able to partake in and because it's got its ability to be able to go on its own way and to do that very successfully. So, look. There's no reason logically as to why something would stand in the way of this. We know that from a stakeholder perspective, that there will be support there for it. We know that it can stand alone on its own feet, with a good banking package behind it, et cetera, but until these things ever happen, there's always a risk.

Operator: Our next question today will be coming from Monique Pollard of Citi. Please go ahead.

Monique Pollard: Good morning, everyone. Three questions for me as well, if I can, please. The first question is just on the guidance. So, the EBITDA guidance, we're talking about the low end of the range. And it seems to me, to get to that low end of the range, you need about a 12% adjusted EBITDA margin for Nutrition in the second half of the year. I'm just wondering if that's the right way to think about it and whether that's reasonable just given the commentary that sort of it's in September now that we're sort of exiting and getting back to growth in that Nutrition segment.

Matthew Moulding: Yes, sure. So, look. I think the other points to put into that as well is going to be how the other businesses are performing as well. So, the -- sure, I think, just on a straight-line basis, the 12% is probably the accurate basis in which to look at it. And in the off-line business, we deliver that and more. The -- what I wouldn't rule out as well is some of the strong performances we might see in other parts. I think it's fair to say that both Ingenuity and Beauty have outperformed in the first half beyond anyone's expectations externally. And there's no reason why we -- that could not -- might not be the case as well for the second half. I mean look. And key trading is ahead, so we can't be certain with anything. And we also, quite rightly, Molly, will react to however the market is because we do -- I know, too -- much to the frustrations of many people, we always take long-term decision-making. And we're passionate about that, so when there are these moments of volatility, we'll go away and we'll figure out what's the right thing for the business. And if that meant that we didn't deliver 12% in Nutrition for that period, then we would do that and for the right reasons. Now we would hope that there are positives elsewhere in the group that would offset that. I mean, as an example, though, there are things that provide us with various tailwinds into the second half, products that Myprotein hasn't been able to have on-site because of the rebrand. Even basic things like the advent calendar wasn't there last year, and that's going to be launched any day. And these are nice accretive things. In terms of the Beauty side of things. Sure, it's been a tougher half 1 for Nutrition, but with Beauty, we've now come into half 2, launched the advent calendars. And that's a big revenue driver for that division, and those have gone incredibly well as we've come into the second half. And we'd expect to sell out of those very, very soon. And so, there are aspects everywhere, but I think those maths are broadly correct, Molly, in terms of what you've said. And equally, though, we wouldn't hesitate on taking the right decisions. And if that meant that we don't do 12% in that division, we won't do it, right? And -- but what that will mean, as we've proved in previous years, is that Nutrition will have an even stronger period next year because we'll have done the right things for that business.

Monique Pollard: Understood. The second question I had was just on Beauty. Was wondering if you could give us any sense of the trends that you've seen across the different segments. So, your two biggest segments, skin care and hair care, but also the smaller segments, the fragrance and cosmetics; and if you could call out anything that has led to that sort of deceleration that we saw in the Beauty performance in the second quarter versus the first quarter, please.

Matthew Moulding: Yes, sure. So, the -- I think, just to talk about the various categories. If you take OLAPLEX out of the hair care sector, actually that's really strong, but OLAPLEX has been -- you may recall, had a really strong couple of years and then have suffered a few knock-backs. And so those guys have faded away a bit, but the rest of that category is really strong. Skincare remains really solid for ourselves as well. I think fragrance continues to get stronger and stronger for us, and even in cosmetics. Cosmetics is -- especially for Cult Beauty, is going incredibly well, so I think it's fair to say that, as a sector, it's alive and kicking and going really well. We've put fragrance into one of the advent calendars. So, for Cult Beauty, it has two advent calendars. They look very similar, but one has got fragrance in, which is a hazmat product, so it can't go on planes, so only the U.K. got to choose that this year. So, you could choose between that and a different one that didn't have the fragrance in. The fragrance advent calendar sold out within the first week, which is like just wild and ridiculous really. The other one is about to sell out as well, so just -- but there was limited volumes, obviously, that we put in place. So that gives you an idea of how that market is shifting. I think premium beauty is doing incredibly well. And I'd be surprised if the wider beauty market isn't similarly doing very well. I think, in terms of why did -- Q2 maybe be a little bit slower than Q1 for Beauty, it's really just in the rounding’s. There's a lot that we're doing around profitability focus. And so, you'll have seen a stronger second quarter profitability for Beauty than the first quarter. If you recall some of those business model changes: We've pulled back from servicing less-profitable customers and orders that are further away from DC centers, so that was a lot of the change that we put through the business. We remain very focused on continuing to do that irrespective of how that might affect the top line, but I think what you'll see is, especially in -- so far, the start to peak for Beauty has been strong. I don't think there's any getting away as well from the fact that there's been channel shift go the other way of since COVID. So, when the other channel shift online. I think the High Street has seen some significant wins going the other way, since the reopening after COVID, that online players have had to battle with. My guess would be that, that channel shift is starting to move back the other way now. And maybe that's starting to be evidenced a bit as well, but there's nothing in that Q2 slightly softer top line that would have been supported by a much stronger bottom line that came through there.

Monique Pollard: That's very clear. Thank you. And then the final question was just whether you were able to quantify in any way the potential positive buying flows from the transfer to equity share category on the stock exchange.

Steven Whitehead: Monique, a few different numbers from different bankers, but isn't it always [indiscernible]? Probably 60 million-plus, if you look at the direct index funds and then those that will shadow or track those index funds. So that's 60 million shares, with an estimated caveat for that number.

Monique Pollard: Thank you, very much.

Operator: Our next question today will be coming from Charlie Rothbarth of HSBC. Please go ahead.

Charlie Rothbarth: I just wanted to ask you a quick question about what the -- appreciate you haven't given the granular detail in the release, but what would make up the balance sheet for Ingenuity? And what would have to sit there from RemainCo to support it?

Matthew Moulding: So, there's kind of like -- obviously we're well advised on this in terms of the process and the likes. There would be a circular that we would distribute which has got the full breakdown of the different balance sheets and how that would look, so there's not really a great detail that we can provide ahead of that. It'd be remiss of us to do that. Instead, what we can do is point to sort of the cash positions and -- of each business area. Now what I can say is, on our first estimates of -- ahead of a circular, it's probably safe to assume for -- and this is public information, as I'm told as well, within quite a few analyst reports, but we'd anticipate about GBP150 million worth of cash outflow in Ingenuity, to the point at which it turns free cash flow positive, which is about 3 years out. And so -- which is dramatically down from the investments which have gone into it, as I talked before, I think, in 2023, in the 90s of cash investment. That's the cash outflow, free cash flow that it used up. So, if you think from the 1st of January, it's probably, 3 years, GBP150 million of outflow. So that's probably the most pertinent number, I think, to be able to give to you. The actual breakdown of what the balance sheet say of which assets and all the rest of it would go into a circular, but -- and then how we would fund that GBP150 million, clearly, as a strong-EBITDA business, there would be an element of facility going to it. And then there'll be other funds that would go into it as well.

Operator: We'll now move to John Stevenson of Peel Hunt. Please go ahead. Your line is open.

John Stevenson: Thanks. Good morning, guys. Yes, another demerger question. I guess, are there any implications for the future service agreements and margin structures that are required to deliver sort of successful demerger relative to the current agreements that the businesses have got with Ingenuity at the moment? Essentially, I suppose, does the pricing structure need to change on an ongoing basis? And the second question, just on Nutrition, obviously a raft of new agreements in place this year both in terms of the retail partners and licensed income. Can you put a sort of number on annualized GMV you'll have in place by the year-end?

Matthew Moulding: Sure. So, on the Ingenuity service agreement. We already have one in place actually from the separation work that we did. It's a proper stand-alone arm's length which is -- which has actually been through another review as part of its legal contractual terms, so there's not anticipated to be any differences, any changes to that other than the standard reviews that are in place. And so that work has all been done. And pleased with that. So, then coming on to the second question, in terms of the various agreements we've got. So, look. The GMV we -- on the Müller agreement, for example. That only went live in -- a week ago, I think, so that's going to be some while before we get the GMV value from those kinds of contracts kicking off, but obviously, we'd expect that to take a decent part of the market share, which then hopefully gets to roll out into more international markets and so on and so forth. But we are expecting considerable success there. I think where we were -- I think -- I don't know if it was in the RNS, but if the sales for the half 1 for Nutrition were back 7.5% -- from memory, it was about the GMV improvement talking about a 6-point-something, 6.4...

Unidentified Company Representative: 6.8...

Matthew Moulding: 6.8, there we are. So that gives you an idea there of that positive GMV. We obviously expect that to scale quite considerably from here on, but what is certain is -- again is we're in GMV growth in September all day long. And I'd expect that for the rest of the year, so yes, we are expecting the brand to get further and further reach. And we've got other exciting partnerships in the pipeline as well.

John Stevenson: Okay, brilliant. Actually, while I'm on the mic, can I ask just one more, on Beauty? Obviously, margins are already back at 6%. And I guess, when we look at the business, retail media is only going to grow from here. The mix of prestige brands, I guess, only grows from here, so what's your view in terms of medium-term margins?

Matthew Moulding: Look. I think it's definitely got the potential, right? So, one of the things we've done is quite an extensive cost-saving exercise throughout THG. And getting that operating leverage to feed through is where the real next level of upside is, so if we can get all of our divisions now working together -- to take a step back: In 2021, all three divisions are firing. 2022, all three are going through a business model overhaul and reacting to the new world. 2023, we have one of those businesses firing, in Nutrition. And then we have two now; and then, hopefully, for the third, for next year, so all three. Now during, throughout that period, we have undergone extensive cost-saving exercises and really to make sure that we can get that operating leverage to feed through, so it's not just the case of Beauty. It will be Nutrition as well. When -- we saw that great operating leverage in Nutrition last year. We expect that to be the norm and potentially better. Beauty, hopefully, with that operating leverage too, that starts to feed through and give us that potential for -- to go on for another target level there afterwards. I wouldn't put a number on it today, but what I would say is what's getting missed, I guess, quite easily in our numbers is the success we've had in the fulfillment line. I mean, the fulfillment line, if -- anyone that takes a look at it, all of that automation, the robots, we've actually got -- tomorrow, AutoStore are doing their Investor Day here on our campus to showcase, but across all of our distribution and fulfillment job, that's got to have been the best performance from that team in any aspect of THG. The savings are incredible. Now that actually delivers serious operating leverage because, I think, if you were just to look year-on-year -- I haven't got the number in front of me, but I wouldn't be surprised if it's 150 basis points lower. On a GBP2 billion revenue business, that's a cracking number. And then you keep doing that. They are the kind of things that, if you keep eking more and more out of that line, that should feed through to the operating leverage of every division.

Operator: Ladies and gentlemen, that will conclude today's question-and-answer session. I turn the call back over to Mr. Matthew Moulding for any additional or closing remarks. Thank you.

Matthew Moulding: Okay, well, look. Thank you, everybody. I think, in terms of that half 1, that I can speak on behalf of the team. It's been a pretty brutal exercising, putting the business through change and adapting. And I think I'd just like to say thank you to the wider team that have really put the effort and energy. And it's not been the easiest of periods in which to go and make all that happen. And I'm just delighted in various aspects of the progress that we've made but also very much aware there's plenty for us to do for the going forward as well and for the rest of the year and into next year. I'd also just like to thank all the stakeholders who've supported us in taking long-term views and making the changes to the business models as we see and -- see fit and choose to do. And our confidence is that we are going to be able to repay that with some outstanding numbers to come in the future. So, thank you.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Source: Investing.com