Welcome to the THG Q3 trading update Q&A session. If you would like to ask a question, please press star one on your telephone keypad. We are joined this morning by Matthew Moulding, Chief Executive Officer, Damian Sanders, Chief Financial Officer, Steven Whitehead, Group Commercial Director, and Matthew Rothwell, Deputy Group CEO. As another reminder, if you would like to ask a question, please press star one on your telephone keypad.
Good morning, everybody, this is Matthew Moulding here. I think we're gonna go straight into Q&A, but just so as everyone can tell, the voices, et cetera, I will be answering all questions that come forward. That's the plan, but if anybody else is to step in, they will announce themselves and address the questions. So I think we're gonna go straight into Q&A.
Thank you. Ladies and gentlemen, as a reminder, once again, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now take our first question from Andrew Wade at Jefferies. Your line is open. Please go ahead.
We've all seen in the press over the weekend about the potential or the stories about the potential U.S. IPO of the nutrition business. Any update you can give us there? Any sort of strategic update from that perspective you can give us? That's the first one. And then the second one, very interested to read about the Myprotein concept store. Could you give us some your thoughts on what that might mean? I'm guessing there's some sort of a an element from a U.S. physical angle there, but also on the group's broader physical and multi-channel strategy.
Straight into it then, Andy, I mean, both of those are pretty long answers to give to those questions. I think, look, if you were to wind back in terms of the first question around nutrition, IPOs and weekend press, et cetera. I think if you were to wind back to 2011, we... 2021 rather, we made an announcement to make it really clear, we've got three very distinct divisions, each of which are global leaders. And as a result of that, we then went off and spent the balance of 2021 and most of 2022 doing a huge separation exercise, which actually cost us GBP 15 million in which to implement it, to give you an idea of the scale of making these business units to be able to operate completely standalone.
We announced to the market late in 2022 that we completed that work and, and now we start to report on a, on a divisional basis. Clearly, then, since, since then, we continued to do a lot of preparation work for each of those, divisions to make sure that we've got full optionality as to how we take them forward in, in their own funding platforms and, and their own growth platforms. And, and as part of that, naturally, we will ensure that each of our divisions, are, ready, you know, in, in, in terms of U.S. reporting for all markets, really, but obviously, the U.S. being the biggest market, you will want to ensure that your divisions are, are, you know, well prepared to be able to do that, whether that be for listings or whether that be for partnerships, et cetera, et cetera.
So very much a continuation of the strategy that we set out in 2021. The divisions are fully separated, that work is done, and we then, you know, of course, our auditors work with us on an ongoing basis in ensuring that we're U.S. ready for anything we want to do with each of those divisions, not just nutrition, but beauty and ingenuity alike, so that we can, we can capitalize on any partnership opportunities that arise. On your second question, in terms of the concept store based in Manchester, and our broader offline aspirations for the nutrition brand, I think it's worth just taking a step back and on that latter part of offline opportunities.
Clearly, the Myprotein brand, in particular in our nutrition division, has got great appeal for offline channels. And, you know, we could very quickly expand offline by putting our core products in retailers all over the world. And, you know, most retailers are super keen for us to be able to do that. We resist the core aspect of it because, otherwise your margins would become quite challenged in that. You know, we sell direct to consumers.
If we were to then put our core products into all the retail all over the world, you end up with a price disparity in doing so, because, you know, the retailer needs to make a 40%-45% margin, and so as a result, you end up with two different price products and, or you end up with much, much lower margins by doing that. So what we've done instead is, and done this over a large number of years now, is we've steadily been building out our offline presence through developing product lines that work, and are unique for different retail channels.
And so almost all of, but certainly by the end of this year, all the major retailers or grocery channels will probably have some form of presence of Myprotein in their stores, and that'll be typically in bars and snacks, and you've seen us make moves in drinks and things like that. So we curate and develop a range of products across the Myprotein business that doesn't challenge or cause conflict with the core model, but yet it allows our consumers to be able to engage with the brand at scale in all forms of retail channels.
That then has been rolled out across the rest of the world, and more recently, this year, we've made some significant progress across the U.S., some of the major retailers there, where we've curated a range of products to go into U.S. channels... already in Asia and places like that, we've got great success. And then similarly, as part of that, what we're also doing is licensing the brand. We license the brand in certain product categories in Asia, and there's some big brands, some big retailers out there that we do that with.
We've obviously done the Iceland partnership, and what people will see is in, you know, the weeks ahead, the months ahead, there will be, you know, a good number of licensed partnerships that we'll be announcing, where these are categories that we won't want to do ourselves online, because there'll be various reasons for that, product that doesn't work for us online. But it, it's the right way to build the brand out, and it's a great revenue opportunity and a great GMV opportunity. I mean, just in Iceland partnership, that's probably a GBP 40 million-GBP 50 million GMV run rate by the end of this year, you know, which most nutrition brands aren't that big in total, and that's just one small angle.
So you get an idea that, you know, there's hundreds and hundreds of millions of GBP of GMV opportunities, of which we can take a good clip of that for in royalty fees. And so the offline strategy there, it you know, it's progressing well, and we're doing it all the time in careful consideration of how we grow this brand for the long term. We don't want quick wins that then we have to unpick in, you know, a year's time or two years' time as conflicts arise.
In terms of then the store opportunities that we have, sure, we get opportunities all the time brought to us to say, you know, big retailers have got a lot of spare space, that's no secret, they want footfall, and the Myprotein brand has got a very, very strong, avid following. And so when someone like an Iceland does a partnership with us, it's fair to say they see a completely different consumer, you know, piling into their stores than they would otherwise have had before, and that's a good thing all around for everybody involved. Now, you know, we don't just want to go and be a store-in-store and put the brand into partnership with all these different people without really knowing it's gonna be a success and careful consideration.
So the concept store is, before we go into partnership with anyone at all in this kind of way, in the U.K. or internationally, like you say, in the U.S., that we want to make sure that we've got the right concept, and so we're doing that at the moment in Manchester. It is worth saying, Andy, as well, that those partnership opportunities aren't just limited to nutrition. You know, we get very similar conversations in beauty, right? There are... You know, if you look in the U.S., it's quite a common thing across the major players that they will have beauty store-in-stores, you know. So if you were to look at Target and Ulta out there in the U.S., they've done it.
We get similar opportunities as well here, with Lookfantastic or Cult Beauty that we evaluate at the same time. So I hope that should answer both those questions, Andy.
Yeah, very, very thorough. Thanks very much.
Thank you, and we'll move on to our next question from Anubhav at Liberum. Your line is open. Please go ahead.
Hi. I have a couple of questions, please, Matt. Firstly, on the beauty business, I just wanted to ask, you mentioned manufacturing is back in growth, so if you could give a comment on the online e-commerce part of it, is that already back to growth in the third quarter? And what are expectations for it for the fourth quarter? And if you could remind us if there were any particular difficult comps or one-offs last year that would impact performance in the fourth quarter. And then my second one is on Ingenuity. At the start of the year, I think you mentioned a target of adding GBP 1 billion in GMV in the Ingenuity business. How far progressed are you on that, and if you're on track? Thank you.
Sure. I mean, look, I'll answer the Ingenuity one first, because it's the quicker one. Yes, on track, obviously, there are accounts that we don't announce for confidentiality reasons or just requirement to do so. But to give you an idea of how that pipeline and that enterprise model is moving forward, you know, there are a number of clients where the GMV that they would bring alone are almost of that scale. And just one of those is of that scale, never mind the momentum that we've been building through the year on that.
You can also see that, I think there's a statement in the RNS that says, Ingenuity, despite us pulling away from all the small accounts that we decided to do over a year ago when we appointed Vivek, you know, now that's, I think in September, we've got about minus 2% or something like that in September. So that gives you an idea, despite us pulling away all those small accounts, then you've got that kind of the enterprise impact coming back. But GMV, major client wins, you know, the pipeline is really strong there.
And then coming back to your question on beauty, on the manufacturing side, so the manufacturing is in good order now and back to strong profitability as well, which is one of the great things, right? Because as you're allowing orders to be pushed out, whilst there's a global destocking, then you don't have that volume going through your facility. You've got a big fixed cost base, so you go from strong profitability to none in that division. But now that strong profitability is back, we're also on a, you know, we've addressed cost base in there, et cetera. So really pleased with where we are with that.
In terms of the rest of the beauty division, on the retail side, on the brands' performance, I think we mentioned at the half year that our two biggest brands, Perricone and ESPA, have been trading incredibly well. Really, really pleased with the progress on those brands. On the Cult Beauty, the Lookfantastic business, yes, they are in growth, and Cult Beauty has been in growth now for a good period of time, and the rest of the retail businesses has been back in growth. So, really pleased with that. But also what's important there is that's in growth, where we've pulled away from, you know, for the past six, nine, twelve months, we've been pulling away from those orders where they're not making an immediate profitability, where you'd normally take a two-year view.
And yet we're still in growth despite having pulled that back. And relative to the market, that is, you know, a very strong performance. You know, you only need to look at the wider e-commerce and retail landscape, you know, to appreciate that. And then there was one other question, I think, related to beauty, wasn't there? That's it? No. Okay.
Yeah, that, that was related. If you could just comment on what your expectations are for the fourth quarter on the beauty retail side and maybe, if there were any one-off impact last year that would impact, performance in terms of comp? Thank you.
We've seen that last year. Look, last year, we had obviously had the Royal Mail strikes in the UK. So the UK, while it's probably, I don't know, about a third of the group sales more broadly, it over indexes in peak, in the sort of November period. And we obviously had the Royal Mail strikes, which had a knock-on effect, where one or two of the couriers actually fell over as well as the volumes came into them. So there was a really disruptive Q4. Obviously, we're not expecting that to happen again. You know, I understand from even the update I had yesterday, all the courier planning seems to be very robust and super strong. So we should hopefully see some benefit from that this year.
But I wouldn't wanna sort of factor anything in for that. In terms of what you should expect from beauty and nutrition, more generally, you know, look, we're running nutrition to recover our price investment we made, you know, to consumers through the cost of living crisis. So, you know, broadly speaking, we try and run that to a flat basis at the moment, but by seeing a really strong return to margins and profitability, and that's reflected in the fact that you know, Q3 was a record ever profit quarter for nutrition, which shows some payback on what we've done with consumers over the past 12 months. In terms of, you know, beauty, what you should expect there is actually, I think, it'll continue to be in growth.
So we should see some growth in there. To what extent will depend on, you know, how big, you know, the Q4 period is. But the momentum across beauty, as you can see, you know, 5% constant currency growth is like... It is standout in the industry, and that's on a global basis. So, you know, the UK is performing well for us. So I think, look, we're expecting positive momentum to continue, but obviously, you know, November is a key trading period, and we'll see after that.
Thank you.
Thank you. We'll now move on to our next question from Andrew Ross at Barclays. Your line is open. Please go ahead.
Great, morning, everyone. Thanks for taking my questions. I've got two, if that's okay.
Yeah.
First one is to keep going on beauty, which definitely feels like it is improving as you go through Q3 in the core retail business. But I guess some of that is being hindered, at least from a growth perspective of deprioritizing some of the unprofitable sales. Can you give us a sense in terms of what the core Lookfantastic business or Dermstore in the U.S., kind of the core markets growing in beauty right now, in the beauty retail business, to kind of get a sense of the underlying progress in that industry as we lap through the pandemic comps, and various other factors? And then my second question is, to ask about 2024.
I appreciate you're not gonna guide on that now, but when we think about the moving parts of, THG generating cash, next year, maybe you could just kind of run us through a quick reminder as to how you see that as it stands. Are you, you kind of comfortable with that 160-ish EBITDA? And then just remind us of the moving parts beneath that. You've clearly made a comment on CapEx this morning, but helpful just to go through that to make sure we're all clear around that cash generation for next year. Thank you.
Sure. So look, I think in answering your points there, the GBP 160 of EBITDA, quite a pointed one, really. We don't, we don't ever like to answer numbers straight on, but, but, you know, the GBP 160 does, is very reasonable for us for next year, so we are comfortable with that. We're comfortable with the CapEx as well, which, which obviously, as we've made those big investments over the prior three years in infrastructure and investment, which we believe is one of the key differentiating factors as to why we're performing better than the market.
But, you know, as we've completed that, the CapEx now starts to fade away, and you've seen that really from highs of GBP 200 million a year of CapEx to, you know, to now be at a guidance of around GBP 100 million-GBP 110 million. This shows you how that's abated now. So yes, in terms of what you should expect for next year, the numbers you talk about there, Andrew, are right, and very much where that we're comfortable with. And then in terms of the top line, we'd expect to be in growth in doing that. Now, look, what we're most focused on, as we've been consistently saying, is that we've been most focused over the past 12 months of making sure that the balance sheet is strong, that cash generation is strong.
It's worth pointing out that, you know, we've become cash generative 15 months ahead of plan because, you know, over the last 12 months, as I put in my comment, I think, you know, we've generated GBP 5 million free cash flow despite the fact we've made gross CapEx investments of GBP 140 million over that 12-month period. So we'd expect that to be able to roll forward into next year, higher EBITDA, less CapEx... that would be going into there, and returning to some growth at the top line, as well. In terms of then, you know, you talked about beauty and how the core market's performing.
I mean, look, we're very fortunate, in that, you know, nutrition and beauty are very robust categories, relative to some of the other categories that, you know, consumers engage with. It's also worth pointing out, in the US, the dollar rate is actually, you know, the two areas in the group where we've suffered on a constant currency basis, which is all very temporary, is the dollar at the moment. So in beauty, I think we talk about a 5.1% constant currency growth in September alone, which is 1.3 or something like that, percent, or 1.1 on a, on a reported basis. So you've got about 400 basis points impact on beauty on constant currency, and that's because, you know, almost entirely down to the US in reality.
The euro is very stable, but the U.S. and the dollar has impacted in that division, which we've got that momentum to come back the other way as the world normalizes. But the U.K., in particular, remains robust, even in places, you know, where we've been pulling back our orders in Europe as an example. Sure, we're pulling our sales back in Europe as we're seeking more profitability from orders on a first-time basis, but actually, the core performance is robust. So the categories in which we operated in, we're very pleased with, and we're fortunate with. They're very high repeat as well, which also helps relative to other categories. And core markets remain robust. There are some areas where your ...
You would say, you know, Australia's probably a little bit weaker on a beauty basis, but stronger on a nutrition basis. But you know, we're quite a small player over there, and... But that is the wider market, strangely over there. But yet nutrition is going from strength to strength there. So there are some pockets of territories where we know we can do better, but some of it is a little bit market related. But generally speaking, yeah, I mean, the core markets in beauty are in good growth, and the U.K. in beauty is a good market. One final point I would say on beauty as well is, there was a lot of people 18 months ago entering the market. You know, everybody...
We joked about Greggs being possibly the next people to come in to want to enter beauty at one point. Now what you're seeing is a serious pullback of people who've entered this market. You know, I think one of the big US luxury players has just pulled out. Various other people are pulling out of beauty, and that's because to win in beauty, you've got to have large scale, and we've got that. We're one of the largest in the world on the retail platform, and we're hugely well invested. You know, we've got automation all where our beauty and all the core markets is operating from, which means we can operate on a cost base no one else can operate on.
And that's one of the real benefits of the investments we've made. And so other people have tried to enter the market and now pull away, which is, you know, a nice sort of tailwind we'd expect to get the benefit from in 2024 as well.
Thanks, Matt.
Thank you. Once again, as a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. And we'll now move on to our next question from Gary Martin at Davy Group. Your line is open. Please go ahead.
Morning, all. Just a quick couple questions from my side. Just starting with the rebrand launch on THG Nutrition. Are you expecting this disruption that was caused in Q3 to continue into Q4? And could we just get a general update on just the progress and any incremental changes off the back of the rebrand relaunch? I mean, did it move the dial at all in terms of sale or profitability? It'd be good to get some color there. And then just a second one, just on regional sales of THG Nutrition. I'm just conscious that you've semi-covered this already, but would it be possible just to get a more detailed color just on sales by various regions in terms of THG Nutrition? Thanks.
Sure. So pretty much all, we've done a lot on beauty there. So I think it's focused on the nutrition performance there. Around the rebrand, very much as we've expected and anticipated, you get a little bit of disruption in the months that you do the relaunch, purely because your new product development, you've got to do a changeover of your old branding to new branding. Things like, you know, you would launch new products, but you've got to delay those new products, even things like Advent calendars, which are very popular in Myprotein.
We decided that actually, we won't do them this year, and so we're doing some boxes and things instead, but they'll return next year just in terms of making sure we get the timing of the branding right, et cetera. So you get that kind of disruption, but more than happy with that and a performance. You get most of it in the very first month that that happens, which was August, and we're not really noticing much from that on the go forward. And just as a reminder, on, you know, what we're trying to do with nutrition broadly on a constant currency basis is just keep it flat this year. At any time, we could go...
We could, we could press the accelerator to put more sales in and invest some of the margins, but we're, you know, we're delivering record margins, record profitability in that division, and it's just the right time to do that, given that probably, you know, this time last year, we were on, you know, our worst ever margins, our worst ever profitability that we've delivered in nutrition because we were supporting the consumer. And so, so we're, you know, we're just happy to manage that at the moment, the way that it is. Make sure that we get that brand swap over, so there's, you know, you don't wanna be doing your highest sales in the middle of a rebrand. So it's been quite smooth, very pleased with it. I think the engagement with the new branding has been really strong.
We've got some announcements to come, which will further cement the branding. You know, some high-profile stuff that we're doing there. And you know, sales have just continued you know to get better, and we think the premiumization of the brand in terms of its look and feel is well worth it. In terms of territory splits, I think the biggest thing I would say on nutrition that affects it, yes, it's got some dollar, so you get a bit of impact from the dollar, and the U.S. has been decent for nutrition over the past sort of 12 months.
But Asia actually is one of the key areas where the yen, and in particular, as everyone will know, that currency has been, you know, it, it's not been raising interest rates, and so as a result, there's been a fair devaluation of the Japanese yen. But all things considered, you know, demand everywhere is strong. You're just getting some constant currency movement, so we're not trying to, you know, play around with that and try and offset it. We're just very focused on making sure profitability is strong, cash generation is strong, and we continue to, you know, make good progress. The UK, as a territory, remains really good, really good for nutrition, and we're constantly making strides there. Europe, you know, can't complain at all in Europe for nutrition either, you know.
Dutch and all those territories have, you know, different times in your journey with the brand, you'll get different bumps in territories, but Dutch has been good in Europe, and we've got no real complaints there. So I think we're in a good position with nutrition, where we can kinda dictate how we want to push sales or not, and at the moment, we're just happy executing the rebrand and maximizing profitability in the near term.
Excellent. Thanks. That was a good call. I'll pass it on.
Thank you. That's all the time we have for Q&A. I will now hand it back to Matthew for closing remarks. Thank you.
Okay. Well, thanks, everybody. I think you get the impression we're very pleased with how things are in the business and the progress we're making on numerous fronts. Thanks for everybody for their support, and we look forward to updating you on how Q4 has traded as we go into January. Thank you.