Thg Regulatory News (THG)

14 September 2023

THG PLC

Interim results for the half-year ended 30 June 2023

Adjusted EBITDA and cash generation ahead of guidance in H1 2023

Full year adjusted EBITDA guidance reiterated

· Continuing[1] adjusted EBITDA of £50.1m (+22.9%), above the top end of guidance (£47m to £50m), at a margin of 5.3% (H1 2022: 4.0%). Adjusted EBITDA guidance unchanged for FY 2023.

· Adjusted EBITDA of £47.1m (+45.7%), inclusive of recently disposed loss-making OnDemand business.

· Successful exit of loss-making discontinued categories and non-core assets generated a one-off non-cash charge of £26.2m[2], increasing the operating loss to £99.5m (H1 2022: £89.2m). Without this charge, operating loss improved by £15.9m YoY.

· Strong LTM[3] cash performance, ahead of guidance. LTM cash outflow[4] of £20.6m is after £163.1m of capex, mainly in THG Ingenuity. This represents a £350m cash performance improvement on the LTM year on year.

· Strong balance sheet with £563m of cash and available facilities.

· Record H1 THG Nutrition revenue of £340.7m (+2.6%), with adjusted EBITDA of £47.1m (+71.9%).

· THG Beauty adjusted EBITDA of £10.6m (H1 2022: £17.7m), impacted by one-off industry de-stocking in manufacturing. Excluding manufacturing THG Beauty adjusted EBITDA was £9.7m (H1 2022: £7.3m). Encouragingly, since the start of August, the Beauty division has returned to growth.

· THG Ingenuity listed in the Gartner's Magic Quadrant™ for Digital Commerce. Continued focus on the Enterprise strategy with new client wins secured (including L'Oréal US prestige brands) and a strengthening pipeline.

· Continued prioritisation on gross margin and adjusted EBITDA margin growth.

· Q3 revenue exit momentum gives us confidence in full year continuing revenue growth of 0% to -5% (H1 2023: -6.1%).

Matthew Moulding, CEO of THG, commented:

"Inflationary pressures provided significant challenges to consumers and businesses alike over the past 18 months. Our strategy of supporting our consumers through 2022, sacrificing margins in the short-term, is bearing fruit. This is reflected in the strong H1 results we've posted today, across adjusted EBITDA and cash.

"The cash performance of the Group has been strong in H1, but also over the last 12 months. Group cash flow performance improved by £350m compared to the previous 12 months, reflecting the completion of our global infrastructure roll-out program, with the Group now achieving significant operating leverage from a well invested, automated, global platform.

"Our Nutrition division delivered a record H1 revenue performance and, with inflationary pressures easing, posted substantially higher EBITDA margins year-on-year as we exited H1. The early results from the Myprotein rebrand are also encouraging as we've taken steps to further enhance the premium nature of the world's No1 online sports nutrition brand. These actions should provide for both increased partnership opportunities and category expansion, supporting our ambition of building Myprotein into a global lifestyle brand.

"Recent progress within our Beauty division has been more encouraging, underpinned by strong performances in the Group's Perricone MD and ESPA brands, as well as across Cult Beauty. Margin improvements have steadily built through H1, as focus shifted to orders that deliver immediate profitability, where we benefit from the economies of scale associated with our local distribution hubs.

"The Beauty division was held back in H1 by short-term global de-stocking impacting manufacturing volumes. The situation has now started to reverse with the Beauty division returning to growth since August, at the same time margin progression continues.

"Finally, Ingenuity's pivot to larger, more complex Enterprise clients is gaining momentum, reflected in some key client wins and a strong pipeline. We were thrilled to be listed in the Gartner's Magic Quadrant™ for Digital Commerce, in recognition of our ability to provide an all-encompassing Direct-to-Consumer journey, cementing Ingenuity as a key partner for Enterprise clients seeking comprehensive commerce excellence."

H1 2023 Group Trading Performance

Half-year 2023 financial highlights

· Group revenue: £969.3m, -9.3% YoY, driven by the strategic exit of non-core divisions and discontinued categories, short-term volume reductions within THG Beauty manufacturing, the previously stated de-emphasis in certain beauty markets and the proactive pivoting of the THG Ingenuity strategy. Total sales in the UK broadly in line with H1 2022 for THG Beauty and THG Nutrition combined (excluding manufacturing).

· THG Beauty: The impact of industry-wide de-stocking has been material within THG Beauty manufacturing, impacting both revenue and profitability given its fixed cost base (a -£9.5m YoY EBITDA impact). Excluding THG Beauty manufacturing, adjusted EBITDA margin improvement was encouraging at +60bps relative to the prior year. As we enter the third quarter, cost saving initiatives predominantly within manufacturing implemented in the first half are supporting profitability improvements.

· THG Nutrition: Following the unwind of a period of unusually high whey commodity prices, THG Nutrition adjusted EBITDA margins improving substantially during the period to 13.8% (+560bps), ahead of medium-term guidance.

· THG Ingenuity: Revenue and adjusted EBITDA performance considered short-term (-14.9%, -80bps respectively), due to planned shift away from lower-value clients, reduction in volumes from internal clients (including the exits of OnDemand and ProBikeKit), and upfront investment in enterprise strategy which has a longer lead time between new contract agreements and the revenue benefits being realised.

· Distribution costs: Reduced 150bps reflecting continued investment in automation (with US launch in the period), and continued focus on driving operational efficiency and cost control.

· Continuing Group adjusted EBITDA: Reflects the improving profitability of THG Nutrition, effective management of costs to offset unprecedent inflationary cost pressures, and exit of loss-making categories and territories.

· Reported Group adjusted EBITDA: Increased YoY to £47.1m (H1 2022: £32.3m), with losses from discontinued categories reducing from £8.5m to £3.1m following the successful execution of the strategic review, determining a simpler, more profitable business for the future.

· Operating loss: £99.5m (vs H1 2022: £89.2m) following decisive management action to dispose of non-core assets and loss-making discontinued categories driving a £26.2m one-off charge.

· Cash adjusted items: Reduced significantly to £5.2m (H1 2022: £22.9m) following a decrease in transportation, delivery and fulfilment costs in relation to Covid-19 of £10.1m.

· Cash generation: Significantly stronger over the last 12 months with a modest outflow of £20.6m, ahead of previously stated guidance. The Group had cash on hand of £392.5m and an undrawn £170m RCF at the period end.

Strategic and operational highlights

· Active customers in THG Beauty (LTM: 8.6m, -10%) and THG Nutrition (LTM: 6.8m, -5%), reflects the strategic decision to deploy marketing investment in more profitable territories.

· App participation continues to build with orders representing 17.0% of Group D2C H1 2023 revenue (H1 2022: 11.4%), strengthening customer engagement and loyalty to our brands.

· Encouraging purchasing behaviour from existing THG Beauty and THG Nutrition customers continues, with stable order frequencies, average order values ("AOV"), and consistently strong repeat purchase rates of over 80%. Momentum has built throughout the half with active customers +5% in Q2 vs Q1 2023. Overall 3-year active customer growth +62% and 29% for THG Beauty and THG Nutrition respectively.

· THG Beauty continues to execute its market prioritisation strategy, whilst delivering UK online premium market share growth of c.4% to c.28% for Lookfantastic[12], supported by record high Trustpilot scores for Lookfantastic and Cult Beauty.

· Following double-digit revenue growth for the two largest brands in H1, THG Beauty's prestige own brand portfolio is set to achieve further international recognition through a global licensing partnership with luxury hotel amenities supplier Vanity Group launching in 2024.

· THG Nutrition continues to expand into adjacent markets through localisation and collaboration with major brands and influencers to amplify brand awareness. Following category expansion within the licensing partnership with Iceland, Myprotein is also set to partner with global confectionary brand Chupa Chups and global spirits brand Southern Comfort to broaden flavour options across the product portfolio.

· THG Ingenuity: Substantial progress has been made on the ongoing strategy to partner with larger, higher value enterprise clients with high-quality recurring revenues, and for the first time, has been recognised in the Gartner Magic Quadrant™ for Digital Commerce.

· New and expanded partnerships agreed year to date include:

o  L'Oréal Group: Powering D2C operations for two of L'Oréal's most prestigious brands; "Shu Uemura Art of Beauty" in the USA and Canada, and "Biotherm" in the USA.

o  L-Fashion Group: USA site launch for the European apparel specialist, launching Rukka Pets in their next global expansion market.

o  Matalan: Following their ecommerce platform migration, Matalan have commissioned a purpose-built environment for rapid production of their ecommerce photography at ICON studios.

o  Asda Stores Ltd: Expanding digital services partnership to provide digital content and performance marketing for their Mobile division in addition to existing food packaging and social media content. As one of their Digital agencies across their Grocery, Money and Mobile divisions, the partnership has more than doubled in scale.

o  Maximo Group: Major sites All Beauty and Fragrance Direct migrated to the Ingenuity platform in Q2. Operational services including fulfilment now activated, with mobile app and subscription programme launching this year.

· As a thought leader for digital commerce, ongoing innovation and platform enhancement is imperative to success. Through in house development of machine learning models, our ability to hyper personalise 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, innovative customer experience and incremental revenue opportunities including the use of Generative AI technology infused directly into the Ingenuity platform.

· The Group executed its plan of business simplification and operations streamlining with the full exit of both OnDemand and ProBikeKit for consideration of c.£4 million.

Outlook and guidance

· Overall sales trends, are gradually improving into the second half, with Q3 continuing revenue anticipated to be marginally ahead of Q2, with a notable step-on in THG Beauty and THG Ingenuity.

· Seeing the benefit of decisive management actions to prioritise profitable sales, and expect continuing revenue performance for the full year of 0% to -5%.

· The Board reiterates its expectation of FY 2023 Group Adjusted EBITDA in line with the company consensus (as dated 29.06.23 and available at Analyst Consensus - The Hut Group (THG)).

· Positive free cash generation expected in H2, resulting in free cash flow breakeven for FY 2023. 

· For FY 2024, operational leverage, incremental cost efficiencies and commodity price improvements will support further margin recovery, underpinning the path to positive free cash flow.

· All other guidance remains unchanged.

Analyst and investor conference call

THG will today host a conference call and webcast for analysts and institutional investors at 9.00am (UK time) via the following links:

To register for the webcast, please use the below link:

https://stream.brrmedia.co.uk/broadcast/64da2315aa74fc619cf74a1e

To ask questions, you must dial in via conference line using the below details:

· Confirmation password: THG Half year Results

· UK dial in: +44 (0) 33 0551 0200

· US dial in: +1 786 697 3501

A playback of the presentation will be available on THG's investor website at www.thg.com/investor-relations later today.

For further information please contact:

ENDS

Notes to editors

THG is a vertically integrated, digital-first consumer brands group, retailing its own brands in beauty and nutrition, plus third-party brands, via its complete digital commerce solution, Ingenuity, to an online and global customer base. THG's business is operated through the following divisions:

THG Beauty: A digital-first brand owner, retailer and manufacturer in the prestige beauty market, with a portfolio of own-brands across skincare, haircare and cosmetics. Through its retail websites, including Lookfantastic, Dermstore, Cult Beauty and the beauty subscription box brand GLOSSYBOX, it is a route to market globally for over 1,300 third-party premium brands. THG Beauty also operates prestige spa and experience venues, in addition to luxury clothing and homeware D2C sites.

THG Nutrition: A group of digital-first Nutrition brands, which includes the world's largest online sports nutrition brand Myprotein and its family of brands (Myvegan, Myvitamins, MP Activewear and MyPRO), with a vertically-integrated business model supported by global THG production facilities.

THG Ingenuity: Ingenuity provides a complete digital commerce solution for consumer brand owners across its three pillars of technology, digital marketing and operations. Being part of the THG group, Ingenuity is uniquely placed to bring relevant, practical and international expertise in every area of commerce.

Cautionary Statement

Certain statements included within this announcement may constitute "forward-looking statements" in respect of the group's operations, performance, prospects and/or financial condition. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words and words of similar meaning as "anticipates", "aims", "due", "could", "may", "will", "should", "expects", "believes", "intends", "plans", "potential", "targets", "goal" or "estimates". By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. No responsibility or obligation is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Nothing in this announcement should be construed as a profit forecast. This announcement does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares or other securities in the Company, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares or other securities of the Company. Past performance cannot be relied upon as a guide to future performance and persons needing advice should consult an independent financial adviser. Statements in this announcement reflect the knowledge and information available at the time of its preparation.

THG PLC

Interim results for the half-year ending 30 June 2023

Chief Financial Officer Review

We have made good progress in the first half of 2023 delivering improved profitability (EBITDA) supported by our programme of cost savings and strong cash control. These included the disposal of loss-making categories, following the successful execution of our strategic review. Rationalisation of capex alongside improved working capital and lower cash adjusting items have resulted in a free cash outflow of £20.6m for the 12 months to 30 June 2023 (vs. £271.5m outflow in H1 2022), which is ahead of both management expectations and previous market guidance.

Operating loss increased to £99.5m (vs H1 2022: £89.2m), this was a result of positive management actions taken in the period being the disposal of non-core assets and loss-making discontinued categories which generated a £26.2m one-off charge.

 CONSOLIDATED INCOME STATEMENT

STATUTORY RESULTS

Revenue

Group revenue decreased by 9.3% to £969.3m in the first half (H1 2022: £1,069.2m). This performance is a result of:

- A continuing uncertain macroeconomic environment;

- The Group exiting non-profitable categories and territories. Revenue generated from the discontinued categories has declined by £38.7m to £18.7m in H1 2023 compared to H1 2022;

- THG Beauty have consciously prioritised higher-margin sales leading to a decline in revenue where we have actively de-emphasised less-profitable markets;

- A one-time destocking across the beauty sector has led to a decline in revenue of THG Beauty manufacturing (reported within THG Beauty); and

- THG Ingenuity continues with its pre-announced strategic re-positioning which commenced in Q3 2022, focusing on higher value and higher margin clients which provide improved quality recurring revenue over the mid-long term. The short-term impact is a reduction in revenue as the re-positioning is executed.

THG Nutrition grew +2.6%, driven by the annualisation of prior year price increases in the first half.

Excluding the impact of the discontinued categories and THG Beauty manufacturing performance the decrease period-on-period would reduce to 4.8% which we view as a credible performance given the aforementioned pressures on the consumer as reflected in other online peers performances.

Whilst the effect of the above is a decline in revenue, the Group is pleased to report an improvement in both gross profit margin and Adjusted EBITDA metrics which, together with cash, have been a key management focus.

Detailed analysis is included within the segmental section later in this report.

Gross profit

Adjusted gross profit was £424.2m (H1 2022: £452.9m) equating to an adjusted gross profit margin of 43.8% (H1 2022: 42.4%), an improvement of 140bps compared to H1 2022. 

Gross profit on a statutory basis totalled £407.4m (H1 2022: £442.5m) also delivering an increased margin of 42.0% (H1 2022: 41.4%).

The cost environment in H1 has continued to be challenging with high levels of inflation. Despite this, an improved margin has been delivered from successful implementation of cost-reduction initiatives. In addition, the Group saw a substantially better margin within THG Nutrition, reflecting the partial unwind in the whey commodity price. In late 2021 and throughout 2022, THG chose to partially insulate the consumer from these increases as a long-term customer investment strategy.

In THG Beauty - online retail (principally Look Fantastic, Cult Beauty and Dermstore) saw gross margin expansion as a result of the de-prioritisation of lower margin sales and subtle tweaks to promotional strategy geographically.

Operating expenses

Pleasingly distribution costs on a statutory basis further reduced as a percentage of sales by 260bps compared to H1 2022, culminating in a cost of £156.2m (H1 2022: £199.9m), which is 16.1% (H1 2022: 18.7%) of revenue. Statutory distribution costs include one off adjusted items of £3.7m, which has substantially reduced from the £13.4m reported in H1 2022. 

As expected, in line with the reopening of air channels and the impacts of the pandemic lessening, the costs relating to incremental delivery fees in respect of Covid-19 have significantly decreased, totalling just £1.2m compared to £11.3m in H1 2022.

Adjusted distribution costs of £143.7m (H1 2022: £174.2m) were 14.8% (H1 2022: 16.3%) of revenue. This 150bps underlying improvement was driven by the Group's continued focus on network optimisation and the expanded usage of warehouse automation which have more than compensated for high levels of labour inflation in the market. This included the launch of the Group's second Autostore facility in North America in H1.

As a result of the Group's cost-reduction programme, a reduction in headcount of over 2,500 heads from the start of 2022 has been delivered through technology investment, automation and simplification of operations within its core divisions across THG Beauty, THG Nutrition and THG Ingenuity. This benefit continues to annualise throughout the year, benefitting both distribution costs and administrative costs.

Administrative costs on a statutory basis totalled £335.5m (H1 2022: £331.8m). A decrease from the reduction in the acquisitions - restructuring and integration costs of £5.7m, and the restructuring costs of the strategic review in H1 2023 of £1.9m was offset by the increase in the share based payment charge of £7.9m (H1 2022: £0.6m) and the one off non-cash loss on disposal of discontinued categories of £4.0m (H1 2022: £nil).

Adjusted administrative costs as a percentage of revenue totalled 24.1% of revenue (H1 2022: 23.0%).

Within administrative costs, the main increases have been seen within marketing due to intentional spend in certain areas and general inflation in paid channels. Greater app participation has partially mitigated rising marketing costs, with customers acquired at lower costs through this channel typically ordering more frequently, with higher AOV's due to regular engagement.

Other operating expense of £15.1m (H1 2022: £nil) relates to the loss on disposal of the planned sale of three non-core freehold assets in H1. These three disposals of assets no longer required by the Group generated cash proceeds of £52.0m.

Adjusted EBITDA and Adjusted EBITDA (continuing)

Adjusted EBITDA saw a strong improvement to £47.1m from £32.3m in H1 2022. This represents a margin of 4.9% (H1 2022: 3.0%), an improvement of 190bps, with the margin improvements delivered through the Group's cost-reduction programme and the exit of loss-making categories and territories.

This is an encouraging result against a tough macroeconomic backdrop with the cost base of the business fundamentally stronger and well positioned for operating leverage when consumer spending pressures abate.

Discontinued categories

On 17 January 2023, the Group confirmed its intention to simplify and streamline its operations, undertaking a strategic review of loss-making categories and territories within the THG OnDemand division. In July 2023, the trade and assets of THG OnDemand have been sold to a Newco led by the OnDemand management team. The Newco will continue to be a client of Ingenuity, with the provision of technology, operational and digital services.

In addition, specialist provider of cycling equipment 'ProBikeKit' was sold to Frasers Group PLC in Q2 2023. The combined consideration receivable through both transactions was c. £4 million.

The discontinued categories contributed £18.7m (H1 2022: £57.4m) of revenue and an adjusted EBITDA loss of £3.1m (H1 2022: loss of £8.5m).

We note the exit doesn't meet the criteria under IFRS 5: Discontinued operations, as these categories and territories are not a major component of the Group as defined by the accounting standard. However, to provide further information on the ongoing revenue and Adjusted EBITDA of the Group these have been presented separately.

Depreciation and amortisation

Total depreciation and amortisation costs were £45.9m and £61.3m respectively (H1 2022: £45.7m and £52.3m). Included within amortisation is £25.5m relating to acquired intangibles (H1 2022: £25.4m).

Depreciation remained consistent as a result of the previous investment made across the network.

Amortisation increased following the continued investment in our proprietary technology platform during the period, as expected, more projects moved from work-in-progress to live in the period generating an increased amortisation charge. This investment is focused on the technology to support both internal and external customers and ensures that we continually enhance the functionality and capability of the platform.

Operating loss

Operating loss before adjusted items totals £83.1m (H1 2022: £66.3m). This loss was a result of the challenging macroeconomic environment combined with the above mentioned factors. The actions taken to exit loss-making categories and territories and a return to consumer spending are expected to reduce this loss position in the medium-term.

The Group incurred an operating loss in the period of £99.5m (H1 2022: £89.2m). This is primarily driven by one-off costs incurred during the first half, loss on disposal of loss-making discontinued categories totalling £11.1m (H1 2022: £nil) and share-based payment charges of £7.9m (H1 2022: £0.6m). In addition the other operating expense of £15.1m (H1 2022: £nil) relating to the non-cash loss on disposal following the sale of non-core freehold assets will not recur in future years.

Finance costs net of finance income

Finance costs net of finance income have increased to £33.6m (H1 2022: £19.0m) driven principally by higher interest rates, which have been caused by higher market rates and an increase in group leverage. Alongside drawing of the additional £156.0m facility in H2 2022 with no comparison in the previous half.

Loss before tax and tax rate

Reported loss before tax was £133.0m (H1 2022: £108.2m). The effective tax rate is -0.1% (H1 2022: 1.7%), based on a total tax charge of £0.1m (H1 2022: tax credit £1.8m). The effective tax rate differs from the average statutory rate of 23.5%. This is primarily due to a movement in deferred tax not recognised (-18.6%), and expenses not deductible (-5.1%). The non-deductible expenses principally comprise of the share-based payments charge and non-qualifying depreciation.

At 30 June 2023, the total net deferred tax liability is £71.7m (H1 2022: £70.7m). The deferred tax liability in respect of intangible assets recognised on consolidation was £142.4m (H1 2022: £141.6m). The deferred tax asset in respect of tax losses recognised was £51.5m (H1 2022: £54.8m). There were £74.4m of unrecognised deferred tax assets in respect of tax losses at the balance sheet date (H1 2022: £32.0m). This non-recognition has an impact on the income statement tax charge, and this is one of the primary reasons for the effective tax rate being below the statutory rate.

Earnings per share

Loss per share was (£0.10) per share (H1 2022: £(0.09) per share). 

Cashflow

Six month free cash flow totals an outflow of £78.7m (H1 2022: £271.5m) and £20.6m for the last twelve months (LTM). The AGM Trading statement released in June 2023 guided to a c£40m outflow for LTM, therefore we are pleased to report that we are ahead of this guidance by c£20m.

The total cash outflow for the period was £81.2m (H1 2022: £271.2m) with a cash inflow for the LTM of £126.9m reflecting the new senior secured facility that was drawn in October 2022.

There was a seasonal outflow from working capital movements totalling £60.8m (H1 2022: outflow £156.9m) primarily driven by a reduction of the group's payables , which typically relates to the peak trading period at the end of 2022. The key driver to this was general tighter working capital controls, particularly reducing stock holding with no impact on availability following a period of investment in the global fulfilment network roll out.

Total cash adjusting items has declined significantly to £5.3m from £27.3m in H1 2022. The loss on discontinued categories in H1 2023 is non-cash. The cash reduction has been driven by lower transportation, delivery and fulfilment cash costs in relation to Covid-19 from £11.3m to £1.2m with air channels reopening in Asia. Also acquisition costs decreased from £6.2m to less than £1m.

There has been a reduction in the cash spend on the purchase of property, plant and equipment in H1 2023, as the fitout of our current distribution network is largely complete. This investment continued to deliver efficiencies and a benefit reflected in lower distribution costs. Continued investment within intangible assets, mainly the Ingenuity platform continues at a similar rate to H1 2022 totalling £43.3m (H1 2022: £39.3m).

During H1 2023, management executed the planned sale of three non-core freehold assets that were no longer required by the Group. The sales proceeds generated a £52.0m cash inflow.

The Group ended the period with cash and cash equivalents of £392.5m (H1 2022: £265.7m, 31 December 2022: £473.8m).

Segmental Summary

Overview

THG Beauty [16]

Mainly reflecting the change in strategy to reduce low-margin sales, THG Beauty sales declined 10.4% to £538.7m. THG Beauty delivered Adjusted EBITDA of £10.6m (H1 2022: £17.7m) with a margin of 2.0% (H1 2022: 2.9%), being a 90bps reduction on H1 2022. The reduction in margin is entirely driven by the lower sales within THG Beauty manufacturing, resulting from a one-time destocking across the Beauty industry. The Adjusted EBITDA in THG Beauty manufacturing has declined by £9.5m compared to H1 2022. Excluding this result, Adjusted EBITDA margin would have improved by 60bps. We expect this destocking activity to be short-term in nature, and anticipate a return to previously achieved margins in the medium-term.

Our prestige online retailing and THG owned-brands continue to perform strongly, despite the challenging backdrop, benefitting from the growth within the prestige beauty market alongside the continued trend of digital channel shift and THG Ingenuity platform services. 

AOV's continue to increase totalling £62 per basket for 2023 (H1 2022: £61), arising from a focus on customer loyalty (with the launch of LF Beauty+) and continued investment to drive increased customer engagement in both third party and THG own brands.

 THG Nutrition

THG Nutrition sales grew 2.6% in the period to £340.7m, driven by the annualisation of prior year price increases in the first half resulting from commodity inflation, despite THG partially insulating the consumer from some of this impact. AOV's totalled £50 (H1 2022: £48). Emerging regions of Australia and Middle East continue to be in double-digit growth.

THG Nutrition delivered an Adjusted EBITDA of £47.1m (H1 2022: £27.4m) with a margin of 13.8% (H1 2022: 8.2%), being a 560bps increase reflecting the unwind of a period of unusually high whey commodity prices which we expect to continue throughout 2023. The Group continues to invest in its customer proposition through partnerships and retail outlets and gyms as part of its demand generation strategy.

Adjusted EBITDA margin is marginally above the medium-term guidance level previously communicated.

THG Ingenuity

THG Ingenuity revenue from external customers decreased by 9.3% to £71.2m (H1 2022: £78.5m). Strategic re-positioning commenced in Q3 2022, focusing on higher value and higher margin clients which provide improved quality recurring revenue principally through, Software-as-a-Service licence fees, monthly brand building fees, infrastructure service fees, revenue share, translation and creative services.

Following an intentional phase of investment in headcount and expertise to deliver the re-positioned strategy, new enterprise client wins have been secured and onboarding is progressing. Due to this pivot in strategy, as expected, THG Ingenuity delivered an Adjusted EBITDA of £3.4m with a margin of 1.0% (H1 2022: £6.8m with a margin of 1.8%), being a 80bps reduction compared to the prior half. 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 Groups 5-year aspirational target.

Internal revenue of £248.8m (H1 2022: £297.3m) relates to services provided to the wider THG Group including platform fees, customer services, fraud detection services, THG Studios, fulfilment, postage and marketing services. This revenue is eliminated on consolidation. Internal revenue declined due to the wider Group exiting loss-making categories and territories along with lower group-wide sales, this in turn generated lower volumes for THG Ingenuity.

Central costs

Central costs relate primarily to the PLC Board remuneration, professional services fees, group finance, M&A, risk (insurance) and governance costs that are not recharged to the divisions as they principally relate to the operations of the PLC holding company. The costs reduced vs H1 2022 as the Group cost saving initiatives continue to flow into the results, more than offsetting increased investment in governance through new Board appointments and record high levels of macro-inflation in the economy.

Discontinued categories

At the year end, certain loss-making categories and territories primarily within THG OnDemand were placed under strategic review. On 17 January 2023, the Group confirmed its intention to simplify and streamline its operations, undertaking a strategic review of loss-making categories and territories within the THG OnDemand division. In July 2023, the trade and assets of THG OnDemand have been sold to a Newco led by the OnDemand management team. The Newco will continue to be a client of Ingenuity, with the provision of technology, operational and digital services.

In addition, specialist provider of cycling equipment 'ProBikeKit' was sold to Frasers Group PLC in Q2 2023. The combined consideration receivable through both transactions is c. £4 million, with the majority relating to OnDemand sale in July 2023 therefore not included within the H1 2023 cash at 30 June 2023.

The exit doesn't meet the criteria under IFRS 5: Discontinued operations, as these categories and territories are not a major component of the Group as defined by the accounting standard. However, to provide further information on the ongoing revenue and Adjusted EBITDA of the Group these have been presented separately. The discontinued categories contributed £18.7m of revenue and an Adjusted EBITDA loss of £3.1m in H1 2023.

Adjusted items

In order to understand the underlying performance of the Group, certain costs included within cost of sales, distribution, administrative and finance costs have been classified as adjusted items. All material classes of adjusted items reduced period-on-period.

The largest cost included within adjusted items is the non-cash loss on discontinued categories £11.1m in respect of the exit of discontinued categories.

For full details on each category of adjusted item see note 3 to the financial statements.

Balance sheet

Cash and cash equivalents and net cash before lease liabilities

The Group's balance sheet remains robust closing the period with cash balances of £392.5m, £126.8m up on H1 2022 (H1 2022: £265.7m). The €600m Term Loan B matures in December 2026 and the incremental £156m facility matures in Q4 2025. The Group revolving credit facility of £170m remains undrawn and has not been drawn post IPO.

Net debt before lease liabilities and adjusted for the impact of hedging was £268.3m (H1 2022: £225.6m, 31 December 2022: £180.6m).

The increase in net debt period-on-period is driven by seasonal working capital cash outflow of £60.8m and the net cash investment in property, plant and equipment, leases and intangible assets in the period totalling £72.1m less proceeds of £52.0m. With free cash outflow of (£20.6m) in the last 12 months.

Non-current assets

Property, plant and equipment totalled £298.6m (H1 2022: £359.3m, 31 December 2022: £360.0m). Intangible assets totalled £1,224.9m (H1 2022: £1,557.3m, 31 December 2022: £1,275.8m). The movement in the period was driven by continued investment in the THG Ingenuity platform following new client wins within Ingenuity Commerce and continued investment in the Group's global warehouse expansion programme which is now nearing completion. These were offset by the sale of the non-core freehold assets along with depreciation and amortisation charges incurred.

Going concern

The Group remains in a strong cash position with cash and cash equivalents totalling £392.5m (H1 2022: £265.7m). As noted above, this is ahead of previous management guidance with a free cash outflow of only £20.6m in the 12 months ended 30 June 2023. Net debt before lease liabilities at this date totalled £268.3m (H1 2022: £225.6m). At 30 June 2023, the Group had a total of £170m in undrawn facilities.

In making their assessment of going concern, the Directors reviewed financial projections until 30 September 2024. Stress test scenarios were modelled to take into account severe but plausible impacts of a combination of the principal risks occurring simultaneously, as well as a reverse stress test.

In response to the ongoing uncertainty in the macroeconomic market, high inflation and global recessions, Management modelled stress tests across multiple scenarios. These included adjusting for a reduction in revenue across all divisions, impacting both direct to consumer and business to business markets, along with an increase in cost base across key inputs, with the focus being on commodity prices. The results of stress testing demonstrated that the combination of mitigating actions available including existing cash resources, level of discretionary spend, working capital optimisation and ability to utilise the RCF were sufficient for the Group to withstand such impacts.

A reverse stress test was modelled to identify the point at which liquidity is exhausted. The model would have to see a significant decline in revenue and margins compared with the stress test set out above. Such a scenario, and the sequence of events which could lead to it, is considered to be remote.

For these reasons, the Directors continue to adopt the going concern basis in preparing these condensed interim financial statements.

Responsibility statement of the directors in respect of the condensed interim financial statements

We confirm that to the best of our knowledge:

· the condensed set of financial statements for the half year ended 30 June 2023 has been prepared in accordance with UK adopted IAS 34 Interim Financial Reporting;

· the interim management report includes a fair review of the information required by:

o  DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the 2023 financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

o  DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Matthew Moulding Damian Sanders

Chief Executive Officer Chief Financial Officer

13 September 2023 13 September 2023

Interim condensed consolidated statement of comprehensive income for the six months ended 30 June 2023

Interim condensed consolidated statement of financial position as at 30 June 2023

Interim condensed consolidated statement of changes in equity for the six months ended 30 June 2023

Interim condensed consolidated statement of cash flows for the six months ended 30 June 2023

Notes to the interim condensed consolidated financial statements

1. Basis of preparation

a. General information

THG PLC (company number 06539496) is a public company limited by shares and incorporated in England and Wales. It has a standard listing on the London Stock Exchange and is the holding company of the Group. The address of its registered office is Icon 1 7-9, Sunbank Lane, Ringway Altrincham, Manchester, WA15 0AF. The Company is the parent and the ultimate parent of the Group, the financial statements comprises the results of the Company and its subsidiaries ("the Group").

The interim condensed consolidated financial statements of the Group for the six months ending 30 June 2023 were authorised for issue in accordance with a resolution of the directors on 13 September 2023.

The annual financial statements for the year ended 31 December 2023 of the Group will be prepared in accordance with UK adopted IFRSs.

b. Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2023 have been prepared in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority. The financial statements have been prepared on the historical cost basis, except for derivatives which are held at fair value. The Directors consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements of the Group.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2022. As disclosed in note 1a, the annual financial statements of the Group will be prepared in accordance with UK adopted IFRSs. 

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2022, except for the adoption of new standards effective as of 1 January 2023. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

Several amendments apply for the first time in 2023, but do not have an impact on the interim condensed consolidated financial statements of the Group.

The IASB has adopted amendments exempting entities from accounting for deferred taxes arising from Pillar Two legislation and these have now been endorsed by the UK Endorsement Board (UKEB). THG PLC will apply the mandatory temporary exception from recognising and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes. The Pillar Two rules are expected to apply from January 2024, at which time THG PLC is expected to fall within scope. To date, THG PLC does not materially operate in low tax jurisdictions and will continue to monitor application of the rules and the potential impact on the Group.

Total H1 2022 revenue has been restated by £7.6m being a reclassification correction which had overstated revenue and cost of sales. This relates only to the THG Beauty segment. The position reflects the full year reported revenue figure to 31 December 2022. Refer to note 2, segmental reporting and revenue.

Going concern

The Group remains in a strong cash position with cash and cash equivalents totalling £392.5m (H1 2022: £265.7m, 31 December 2022 £473.8m). Net debt before lease liabilities at this date totalled £268.3m (H1 2022: net debt before lease liabilities £225.6m, 31 December 2022: £180.6m). At 30 June 2023, the Group had a total of £170m in undrawn facilities.

In making their assessment of going concern, the Directors reviewed financial projections until 30 September 2024. Stress test scenarios were modelled to take into account severe but plausible impacts of a combination of the principal risks occurring including reducing divisional sales and gross profit margins to levels significantly below historic actuals and current budgets. A reverse stress test was also separately modelled. The results of stress testing demonstrated that the combination of mitigating actions available including existing cash resources, level of discretionary spend and ability to utilise the RCF were sufficient for the Group to withstand such impacts. For these reasons, the Directors continue to adopt the going concern basis in preparing these condensed interim financial statements.

c. Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, management is required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. In preparing these interim financial statements, the significant judgements made by management in applying the Group's accounting policies and key sources of estimation uncertainty were the same as those applied to the Group's annual consolidated financial statements for the year ended 31 December 2022.

2. Segmental reporting and revenue

The Group's activities were divided into the following segments: THG Beauty, THG Nutrition, THG Ingenuity, Discontinued categories (primarily THG OnDemand) and Central PLC costs.

The results of each division are reported to the Board of Directors and are treated as reportable operating segments. The following table describes the main activities for each reportable operating segment:

Central costs relate primarily to the PLC Board remuneration, professional services fees, group finance, M&A, risk (insurance) and governance costs that are not recharged to the divisions as they principally relate to the operations of the PLC holding company.

The CODM is the executive Board of directors, who makes the key operating decisions for the business. The CODM receives daily financial information at the combined Group level, along with monthly information at a divisional level and uses this information to allocate resources, make operating decisions and monitor the performance of each of the divisions.

The measure of the Group's performance used by THG's management team is Adjusted EBITDA comprising operating loss less interest, tax, depreciation, amortisation, shared-based payments and adjusted items. This is reconciled to the nearest IFRS measure (loss before tax) in the below table.