THG, Plc. (OTCPK:THGHY) Q4 2021 Earnings Conference Call April 21, 2022 4:00 AM ET
Company Participants
Matthew Moulding – Chief Executive Officer
John Gallemore – Chief Financial Officer
Rachel Horsefield – CEO of THG Beauty
Lucy Gorman – CEO of THG Nutrition
Hannah Pym – MD of Ingenuity Commerce
Adam Knappy – Chief Marketing Officer
Steven Whitehead – Group Commercial Director
Conference Call Participants
Guido Lucarelli – Citi
Charlie Muir-Sands – BNP Paribas Exane
Roland French – Davy
Rob Joyce – Goldman Sachs
Simon Bowler – Numis
Andrew Ross – Barclays
Nick Coulter – Citi
Matthew Moulding
Thank you for joining us this morning for THG’s Financial Year 2021 Results Presentation.
I’m Matthew Moulding, Chief Executive of THG. And with me are John Gallemore, Group Chief Financial Officer; Rachel Horsefield, CEO of THG Beauty; Lucy Gorman, CEO of THG Nutrition; Hannah Pym, MD of Ingenuity Commerce; and Adam Knappy, our Chief Marketing Officer.
2021 marked our first full year as a public company, and I would like to begin by expressing my gratitude to all THG colleagues for their dedication and hard work in helping us achieve such strong growth in the year. We have scaled revenue and expanded our business model well ahead of targets given at the time of our IPO back in September 2020 and are well placed to manage the inflationary pressures and effects of the pandemic on global supply chains, thanks to our investment in automation.
We continue to evolve and operate to the highest standards of corporate governance, and we’re delighted to announce last month that Charles Allen, Lord Allen of Kensington CBE, had joined THG as Independent Nonexec Chair. Charles has extensive board room experience across a range of sectors and chaired many similar large, successful dynamic companies. And as I said in my statement at the time, I’m particularly pleased to have Charles work with me on delivering the group’s ambitious growth plans.
This morning, I will take you through a brief overview of the year before handing over to John, who will talk you through the financials in more detail. The divisional CEOs will then take you through their respective highlights before I will summarize our trading update for the first quarter of financial year 2022 and our expectations and priorities for the full year and beyond. At the end of the presentation, we would be delighted to answer any questions you have.
2021 was a pivotal year for online commerce globally with changes evident right across our business in key markets as consumers and brands increasingly adopt digital ways of engaging. The pandemic has changed the way business is conducted and consumers behave, creating opportunities for us to invest in support of our strategic growth ambitions. We invested across our entire business: in our infrastructure through the completion of our state-of-the-art ICON Technology Campus in Manchester; in our Ingenuity platform by expanding our global distribution network and delivering key functionality; in our global footprint, through the acquisition of Dermstore to accelerate U.S. growth; and most importantly, in our people, where we welcomed around 3,000 employees to the group.
We delivered a record financial performance with group revenue of £2.2 billion, an increase of 38% on 2020 and an almost doubling of group revenues on a 2-year basis. I am incredibly grateful to all THG colleagues for their hard work and dedication in helping us achieve such strong growth in the year. And that growth was broad-based with all divisions delivering organic growth against challenging comparatives.
Our largest division, THG Beauty was up 51% year-on-year, including contributions from our recent acquisitions, Dermstore, Bentley and Cult Beauty. In our Nutrition division, we continue to innovate the brand and product offering in each territory. The delivery of 21% growth in the year was supported by enhanced in-house development and production capabilities through investment in the supply chain, most notably in drinks and bar manufacturing capabilities, as well as bringing in-house flavoring capabilities. Revenue from returning Beauty and Nutrition customers represented around 80% of sales in the financial year with influencer-led digital marketing delivering high return on investment. Our Ingenuity Commerce business continued to perform strongly, with year-on-year revenues up 135% and nearly 100 new sites added to the platform from a growing client base across a range of different verticals.
Group gross margin was broadly stable at 44.7%, and the group delivered adjusted EBITDA of £161 million, which was up 7% on the previous year. We retain a focus on cost discipline whilst maintaining our strategy of investing for growth and continue to benefit from a healthy liquidity position with cash on hand of over £530 million plus an undrawn RCF of £170 million, giving the group available funds of £700 million.
In terms of operational and strategic highlights, we saw strong growth in customers. We expanded our offering in the important U.S. market with the acquisition of Dermstore, the leading U.S. pure-play online prestige and professional skin care business. The U.S.
now represents almost 20% of group revenues, and we remain confident in the opportunity for growth across both Beauty and Nutrition. Finally, our goal as well as being a fast-growing business is to be a great place to work. So we were pleased to be recognized as one of the best companies Top 25 Best Big Companies to work for in 2021.
Given the size of the beauty, wellness and technology markets in which we operate, we see huge opportunities to keep investing for growth. Demand in our high-growth markets remains strong, and we have observed new and existing customer behavior metrics consistent with the pre-pandemic environment such as stable average order values and high customer repeat rates.
THG Beauty, the global #1 pure-play online prestige beauty retailer, has a compelling track record of growth. Likewise, THG Nutrition, the world’s largest online D2C sports nutrition brand, grew its active customers from 6.3 million to 7.2 million around the globe.
Availability, continuity and breadth of range, coupled with our frictionless Ingenuity online retailing environment, are key factors in the high repeat order rates and increased AOVs.
E-commerce remains a winning channel with increased convenience due to enhanced delivery and fulfillment infrastructure, increased product and category range and deeper engagement with brands selling direct to consumer. We are confident in our strategy of putting the consumer first and focusing on top line sales growth.
As a group, we are committed to implementing the highest standards of sustainability throughout our organization and beyond. We recently launched our 2030 Sustainability strategy, THG Planet Earth, which focuses on 3 key priorities which we believe will drive long-term value. These are: protecting climate and nature; strengthening our supply chain and circularity; and empowering people and communities. As a sign of our commitment, we were proud to become a member of the business ambition for 1.5 degrees campaign during 2021 and signed a letter of commitment to set net zero Science Based Targets, which we will be publishing this year in 2022.
We also acquired 2 plastic recycling companies and recycled 20,000 tonnes in 2021, something that is integral to achieving our circularity goals and reducing the use of virgin plastics. We will use our capabilities to help consumers live sustainably and provide solutions to our clients’ sustainability challenges. Through developing our THG Eco proposition, we can support suppliers and partners to deliver their own sustainability goals. And we have already made strong progress by planting more than 830,000 trees in 2021 via our tree selling platform, (more:trees), and establishing a net zero consultancy service supporting suppliers and clients to measure their carbon footprint and set net zero targets.
While we have our sights set on the year 2030 for the majority of our milestone targets, we will do our best to achieve more and work in partnership with others to accelerate the pace of positive change. We are committed to using our global scale and dedication to innovation to act as a force for good. Most recently, our HR teams have worked around the clock to provide physical and mental health support to our Ukrainian colleagues around the world.
And our security teams have helped to safely relocate some of our colleagues and their families who made the difficult decision to leave their homes in Ukraine. We are also continuing to support our Ukrainian colleagues here in the U.K., including assisting those who are making arrangements for their loved ones to join them as soon as they are able to do so.
While the protection and safety of our colleagues has been our top priority, we know that urgent support is needed beyond our immediate network. We have been liaising with national and international partners to determine the best way we can help them provide practical support. To date, £1.2 million in product donations has been made available from our warehouse in Poland to support those affected by the conflict. And we have worked with our local partners and charity organizations to distribute essential items such as food, clothing and hygiene products to the areas in greatest need.
The macro events continue to create a challenging environment, and the executive leadership team have led their talented teams to deliver exceptional results. THG fosters an environment built on the foundations of teamwork, integrity, diligence and excellence. I would like to thank all colleagues for their continued contributions to the group and welcome all new starters to join us in achieving our ambitions.
Our vision remains unchanged. THG Beauty and THG Nutrition are focused on becoming the undisputed digital leaders in their categories. And in THG Ingenuity, we aim to build the leading technology platform for the enterprise market, powering digital transformation for brands globally. The management team with our Board’s full support remain wholly focused on delivering our strategic growth plans in 2022 to drive shareholder value.
I’ll now hand over to John to talk through the financial performance in more detail.
John Gallemore
THG is comprised of 4 key businesses: Beauty, Nutrition; On Demand; and Ingenuity, all of which grew strongly in the year, notwithstanding the challenging comparable period. On a 2-year basis, the group delivered 95% sales growth with organic growth of over 50% over the same period, ahead of medium-term guidance. We have been evolving fast for over a decade, and the last year was no different. We announced the separation of our businesses. And consequently, there will be changes in the way we present the business moving forward.
As Matt highlighted earlier, we are pleased to report a strong financial performance across the group with record levels of revenue, gross profit and EBITDA. Growth has been broad-based across all divisions and key geographies. It’s particularly pleasing to deliver such strong growth in our most mature markets, coupled with accelerating performance in less mature international territories.
Turning to the profit and loss account. We are pleased to report revenue growth of 38% on a constant currency basis, reflecting strong demand in core markets. This is particularly encouraging given tough comparatives, and we delivered over 50% 2-year organic growth in both Beauty and Nutrition. We reported a record gross profit with stable margins despite the ongoing global supply chain challenges, commodity and FX headwinds.
Our direct-to-consumer model enables us to flexibly respond to changing market conditions. Distribution cost decreased 70 basis points year-on-year to 16.9% of sales, reflecting the automation investment in THG’s global fulfillment network and ongoing network localization. In FY ’21, this included investment in THG’s first automated facility in Manchester, which is around 30% more efficient than an equivalent manual warehouse. We also added 6 new warehouse facilities to our network, with the global infrastructure we’ve built helping us to deliver faster for our clients and customers and at a lower cost. Investment in automated facilities helped us manage the widely reported labor wage inflation challenges as our administrative cost rose as a proportion of sales.
We have created thousands of new jobs to deliver and consolidate on the 95% 2-year sales growth that we’ve delivered. And this investment will provide a platform for the next phase of our growth. Operating leverage on payroll cost is expected in the current financial year and beyond.
Adjusted EBITDA rose 7% year-on-year to £161 million. The margin movement principally arose from the short-term dilution impact of the Dermstore acquisition. In addition to FX, commodity costs principally weigh and freight costs. We saw a marked acceleration in the second half of the year. Almost 60% of THG sales are international, which drives foreign currency exposure.
We’re naturally hedged where we can, matching supplier payments to receipts such as on the U.S. dollar. Forward currency contracts are used where the group hasn’t created a natural hedge to manage the risk. This is the case for Japanese yen and other Asian currencies, which have continued to weaken against sterling over the last 24 months. Over the medium term, we have the opportunity to localize supply into Asia, following the road map we’ve successfully completed in both Europe and the U.S.
Cash adjusted items amounted to around £70 million. And then it relates to commission and purpose-bought new fulfillment facilities, including Manchester, Melbourne and New Jersey, as well as the closure of acquired facilities, as well as international final-mile delivery costs, predominantly in Asia where costs remain elevated due to the absence of traditional delivery routes such as commercial flights and the closure of key shipping lanes. Elevated inbound freight costs are absorbed within adjusted EBITDA.
The group has also incurred professional fees associated with the acquisitions completed in the year and restructuring costs out of the separation of our key trading divisions. Ahead of our planned separation, we have considered how the change in shape of the group is reflected in our cash-generating units. Noncash impairments relating to goodwill in some legacy noncore acquisitions have therefore been recognized. There were no impairments identified within Beauty, Nutrition or Ingenuity.
We closed 2021 with a net cash position of £44 million with strong liquidity available through cash on hand of £137 million plus the additional £170 million undrawn revolving credit facility. Cash conversion of the historical period has been around 100% for the direct-to-consumer businesses. Uncertainty in global supply chains has led the group to holding more stock during the year to ensure availability of key products, combined with working capital investment in the material Beauty acquisitions. We expect to see a return to normalized trading during this year for the Beauty and Nutrition divisions with Ingenuity expected to be working capital negative due to the high growth of the commerce element. Key working capital ratios are closely aligned to prior year periods.
Stock days have been historically maintained at circa 120 days, with an elevation towards the end of the year to hedge against supply chain disruption and support the global warehouse expansion in addition to acquisition integrations.
As outlined at the IPO, capital expenditure as a percentage of sales is expected to reduce from elevated levels of over 10% of revenue in recent periods to a target of 5.5% to 6.5% in the medium term. The recent elevation is reflective of the investment in the global fulfillment network while CapEx was slightly lower than forecast, despite the fact that we’ve already delivered an additional 2 million square feet of fulfillment space against our plan of 3.6 million square feet. This has already increased our fulfillment capacity to nearly £14 billion of GMV. The group will generate leverage on CapEx through utilizing this technology across an increasing number of brands and territory websites, with material future capacity in the network now to support medium-term sales guidance.
We ended the year in a net cash position, with cash on hand of over £535 million and additional undrawn facilities of £170 million. This provides an incredibly strong liquidity position for THG to continue to pursue all of our growth ambitions.
I’ll now hand over to our divisional CEOs, who will take you through a deeper dive into our divisional performance.
Rachel Horsefield
THG Beauty is a leading digital-first brand owner retailer and manufacturer in the prestige beauty market. We have a consistent track record of growing at a faster rate than the overall online market. And 12 months ago, we laid out our plans to be globally recognized at the beauty industry’s Digital Strategic, at the center of conversations with both large and cult beauty brands.
In 2021, we continue to accelerate these plans with further investment in the U.K. and the U.S. to complement the continued growth of Lookfantastic, which is the U.K.’s #1 online multi-brand retailer. Revenue growth in the year was over 50%, and we saw positive growth in active customers, average order values and brand partners across our global retail destinations. During the pandemic, we saw accelerated growth as consumers increasingly purchase online and brands invested in their online proposition.
We’re encouraged to see growth in revenue from returning customers together with a growing community of beauty enthusiasts engaging with our app and social media channels.
Lookfantastic has leading awareness and double the conversion ratios of competitors in the U.K. Through our apps, we’ve increased the circulation of our digital magazine, The Highlight, with 30% of customers who received the digital magazine returning and purchasing within 60 days, further evolving our beauty community. In quarter 4, Lookfantastic was invited as one of the first beauty retailers to adopt TikTok Shop. This presents an opportunity to grow our customer base and be at the forefront of new and emerging social commerce technology through a mixture of video links and live streaming with creators and affiliates.
The THG Beauty ecosystem is a unique asset operating in the highly attractive online prestige beauty market. Through our business, we engage with brands not only as a retailer and fellow brand owner, but also as a technology partner that can internationalize brands online through both Lookfantastic and Ingenuity Commerce, supporting them with their digital growth. Furthermore, THG Beauty is both a product developer and manufacturer, and we extended our capabilities last summer through investment in U.S.-based Bentley Laboratories, complementing our U.K. BRCA-grade facilities, Bentley’s expertise in prestige skin care and hair care products enhances our vertically integrated operating model with in-house NPD and production delivered through THG labs across both the U.S. and the U.K.
THG labs has more than 75 third-party clients, and we’re able to leverage the best-in-class production, development and innovation teams to oversee the future development and brand positioning of THG’s own beauty brands. We combine all of this with data insights from THG’s Ingenuity platform to deliver highly targeted new product development across the brand portfolio. We will continue to see the benefit of margin enhancement as we continue to move manufacturing in-house for our own skin and hair care brands, including the most recent addition to our brand family, Perricone MD. This also significantly increases our speed to market when launching new products.
THG Beauty plays in the £100 billion global prestige beauty market and is the digital pure-play leader. The online beauty and skin gas sector, in particular, is growing at pace with emerging brands rapidly gaining share in prestige beauty. We’re well positioned to support emerging brands entering this market. Through product discovery and our beauty box business, we can support both market entry along with international growth using the data insights from our global customer base.
To further strengthen our U.S. proposition in early 2021, we completed the acquisition of Dermstore, cementing our foothold within prestige and professional skin and hair care categories. Through curated expert-driven content and a focused product assortment, Dermstore had already established itself as the skin care authority in the U.S. As part of THG Beauty and following the migration to the Ingenuity platform, we’re now leveraging our brand partnerships and customer insights to further enhance the brand portfolio and also drive growth for our own brands. Through this increased U.S. presence, we have the opportunity to scale our beauty box business, which serves as a customer gateway to drive brand and customer loyalty.
During the year, we also acquired Cult Beauty, which holds a particularly strong heritage in emerging independent brands, which complements Lookfantastic’s broader brand offering. Cult Beauty often a favored partner for indie brands as they act as an incubator for brands that may be constrained by limited marketing and distribution capabilities. It has a content-first approach and merchandising strategy designed to offer customers a curated mix of independent brands alongside the globally recognized ones. Cult Beauty’s distinguished brand portfolio will retain a very clear identity within THG Beauty. In addition to elevating the group’s presence in both the U.K. and U.S. online prestige beauty market, the Cult Beauty and Dermstore acquisitions provide additional revenue channels for THG’s growing portfolio of own brands, including Perricone MD, ESPA, Christophe Robin and Grow Gorgeous. Our Beauty brand strategy is to acquire industry-leading brands and intellectual property typically constrained by store-based retail channels and limited geographic reach.
Last year, we rolled out further localized international sites for our own brands, as we progressed our strategy of aligning them from B2B to D2C channels. Our approach to new own brand managers is sustainability led with ingredients, packaging and production methods all in focus. Our Grow Gorgeous sensitive range is made from recyclable packaging, with over 60% of the plastic used in the new range manufactured from renewable sources.
2022 has started positively with double-digit sales growth on the challenging prior year comparable with a number of high-profile brands partnering with Lookfantastic to launch exciting new products. Average order values are growing, and we served over double the amount of active customers in the first quarter than we did 2 years ago.
2021 marked a pivotal year for the beauty industry and the acceleration of consumer spend into digital channels. As brands now navigate this transition, we remain well placed to drive our ambition to be the global digital partner of choice across the beauty industry.
Lucy Gorman
2021 was an exciting year for THG Nutrition as we expanded our vertical integration to bring in-house key components of our product development and manufacturing while continuing to scale our portfolio of leading digital brands. THG Nutrition comprises a predominantly direct-to-consumer health and wellness brand portfolio. This includes the Myprotein family of brands. In recent years, we have utilized our in-house brand building and product innovation capabilities to continue to expand outside of our core sports nutrition category into a significantly larger addressable market that includes healthy snacking, vegan foods, vitamins and athleisure.
’21 marked another successful year of executing this strategy, with sales growing 21% year-on-year to £660 million, with growth underpinned by continued high repeat purchase rates and new customer acquisition. Product development is a key component of our fully vertically integrated model. We were pleased to welcome Brighter Foods, an award-winning nutrition bar manufacturer, to the group 12 months ago, which has further enhance these capabilities. Powered by Ingenuity and our direct-to-consumer model, Myprotein is able to leverage data insights from our expansive customer base, which directly inform new product development decisions across our brands. These unique data insights, combined with our best-in-class product development capabilities, enable us to serve our customers with innovative and highly targeted new products with a significantly reduced time to market, a true competitive advantage versus competitors that sell through nondirect channels and outsourced product development and production.
Over 200 new SKUs were launched for THG Nutrition brands in ’21, with these products principally developed and manufactured in-house through our network of global facilities. We continue to expand Myprotein internationally through a local-first strategy with vertical integration being key to developing products and flavors that appeal to local trends and tastes. Following recent acquisitions and investments, we have the capabilities to produce powders, bars, vitamins, drinks, flavors and syrups ourselves, accounting for more than 80% of Nutrition product revenue and SKU count, excluding clothing.
In-house product development and manufacturing allows for enhanced margins and reduced development time lines with new product innovation informed by daily demand insights from our active customer base. By running the whole process in-house, the new product development time line is shortened from up to 18 months to less than 9, and we can focus on enhancing the sustainable nature of our products from ingredients to packaging and processes. This category innovation has supported retail listings for Myprotein bars, fruits and snacks in 3 of the U.K.’s largest grocers alongside a successful and growing relationship with the co-op, ensuring a strong presence within the U.K. convenience sector to complement our leading digital offering.
New product development highlights in the year included the development of over 30 flavors at Claremont, our in-house flavor business, and a significantly enhanced ready-to-drink offering through our in-house facility, Berryman’s. This growing ready-to-drink category delivered triple-digit growth for us in the last year. In Q4, less than 6 months after acquisition, we launched our first internally produced nutrition bar following the acquisition of Brighter Foods. The Impact bar has been an immediate hit with our customers and has rapidly become one of our best selling products. THG Ingenuity continues to power the growth of Myprotein through over 50 localized websites that resell the brand directly to our global customer base.
In addition, since 2020, we have enhanced our e-commerce model through the launch of Myprotein apps. Our Myprotein apps have proven highly successful since launch, with 13% of Myprotein online revenue in December ’21 being generated through the app. In addition to becoming a material sales driver, our apps have also led to higher engagement, with a 14% reduction in time between orders versus non-app channels. App users have an average of 7% higher AOV than our website users.
Overall, we are extremely proud of the results delivered by the team in ’21 under some challenging macro conditions. We delivered constant currency sales growth in line with medium-term guidance despite the strong comparative results from 2020. We began in-person events again with our customers and influencers to engage with our growing global community, and we partnered with a number of retailers to support growth in our convenience and on-the-go snacking ranges.
So far, in 2022, we have started the year in a strong position in our core markets with growth across all major territories, including U.K., Asia and the U.S. Apparel continues to be a high-growth category, and we are pleased to deliver encouraging growth across our core Myprotein and Myvegan range. We have grown our active customer base in the first quarter against the prior year with average order values and repeat rates remaining stable. Looking forward, we will continue to invest in infrastructure, supply chain and people across Asia, India and the Middle East to elevate customer experience and to help us achieve the goal of becoming the #1 sports nutrition brand in each of these territories. We also have a jampacked innovation pipeline featuring some of our tastiest bars yet and a world-first vitamin format alongside the continued expansion of in-house capabilities in the snacking and bakery category.
Hannah Pym
The past 12 months have been significant for THG Ingenuity Commerce with revenue growth of over 135% year-on-year and a 2-year growth rate of over 500%. Around 100 new solutions have been launched on the platform across a broad range of sectors and many geographies, including the U.S., Germany, China and Australia. Commerce revenues are highly recurring due to the nature of the long-term contracts with clients, benefiting from access to the technology platform, world-class fulfillment and brand-building expertise.
Nonrecurring revenues represent one-off costs for clients such as the site build fees or strategic consultancy. However, these costs recur every time a new client onboards, so reoccurring in nature for THG.
In the near term, we expect recurring revenues to account for 60% of total commerce revenues as nonrecurring revenue remains elevated due to the growth in new clients and pace of new site launches.
During the fourth quarter, we observed an elevated level of recurring revenue due to the high GMV volumes processed around the peak trading period. Ingenuity is completely unique in that the same technology and operations that drive the growth of our Ingenuity partners also powers the growth and success of our own brands. As a result, any developments enhancements we make to our technology, our operations, digital or data solutions automatically benefits our clients, too.
One of the key reasons clients choose Ingenuity is that we make the complex simple. We work with a growing high-quality portfolio of brands who value a partner with deep expertise in scaling international brands. At the heart of Ingenuity is our global infrastructure network, comprising product development and manufacturing facilities, warehousing and fulfillment sites, data centers and content creation studios. Through these facilities, we’re able to service customers across the world with a constant focus on optimizing efficiencies to get products to consumers quickly and profitably.
As consumers more frequently choose to shop online, e-commerce brands must ensure their warehouse capacity and capabilities can match such demand growth. Not only are higher volumes of orders needing to be processed, but expectations for timely deliveries are also raised, with over half of global buyers today stating that delivery times influence purchase decisions. We are now well progressed through our global rollout program, which will see GMV capacity extended significantly. This future-proofs growth for our own brands and Ingenuity clients whilst ensuring the demands of the peak trading periods can be met comfortably.
As part of the expansion, we have extended our major European hub in Poland, in addition to the opening of a brand-new site in Melbourne, which has reduced delivery time to 3 days from 10 based on shipping goods from the U.K. Our next major automation project will be in our New Jersey warehouse, which will further enhance our customer proposition in addition to benefiting our overall network by reducing cost per unit. Our knowledge and experience in executing large-scale projects helps us scale capacity at pace while significantly delivering sales growth with minimal impact.
In September, we dispatched our first order from our ICON U.K. automated warehouse, combining our proprietary warehouse management software Voyager with auto store technology. The site launch and inventory building was achieved through transferring over 12 million units between our existing U.K. distribution center, in the space of just 5 weeks, a highly ambitious project to complete in time for peak trading. The entire solution and build and commission project was completed in just 5 months from initial access to the building to first order dispatch.
This automated storage and retrieval system has the capability to process 500,000 units a day, simplifying and automating elements of traditional manual processes such as selection, delivery, picking and packing. In addition, through the combination with Voyager and demand planning tools, our operational data scientists have delivered substantial ongoing optimization of the technologies, resulting in meaningful ongoing cost reductions.
As you can see, the grid of 69 ports, 256 robots and 300,000 tows stack 16 high on top of each other. The robots are continuously assigned tasks and will always get the closest task at hand with the shortest route in order to save time and energy. The system is also highly reliable and has led to meaningful reductions in peak costs per unit. The facility now not only serves Lookfantastic, but also a number of Ingenuity clients. And most recently, we consolidated our London Cult Beauty warehouse in just a matter of weeks.
In response to growing demand, we are increasingly identifying opportunities to commercialize Ingenuity’s fulfillment services to new and existing commerce clients and as a stand-alone solution as consumers and brands are increasingly faced with rising shipping and fulfillment costs and shortages of capacity. Necessity has driven our innovation. Solutions developed internally that are now available to clients include Voyager. That’s our proprietary SaaS solution that can integrate to third-party warehouses. One particular use case is a major beverage brand owner who has expanded the capability of its B2B warehouse to now fully service its direct-to-consumer requirements.
This solution can scale with any client as it does within THG, operating a range of facilities from 50,000 through to 850,000 square foot fully automated sites.
Ingenuity fulfillment services operates as a standard 3PL fulfillment solution, but one which accesses our global infrastructure and career network, taking advantage of investments in automation. THG Delivered is our cross-border fully managed delivery service. Upstream, this includes our headless checkout detect. That’s our award-winning proprietary fraud screening tool. And this has access downstream to our fulfillment network and our courier library, including label print, branded delivery communications and fully managed customer service follow-up.
Having established and scaled THG’s own brands, such as Lookfantastic and Myprotein, as well as Ingenuity clients, the group has seen firsthand the warehousing challenges growing brands face today. This experience has enabled THG Ingenuity to create automated warehouse solutions to enhance time and cost efficiencies in e-commerce order fulfillment. Ingenuity recently announced a partnership with leaders in warehouse robotics technology, AutoStore. The solution combines our warehouse management system, Voyager, with AutoStore’s ASRS warehouse grid and robotics order fulfillment technology, bringing together first, that being our fulfillment inventory retrieval system technology, as a solution for e-commerce retailers and global brands.
Warehouse automation is moving at pace. But typically, solutions are capital-intensive, comprising a complex collection of partners consequently slow to execute with high failure rate leaving the brand owner or retailer a solution that they are able to optimize with no ownership from the provider. THG Ingenuity can also work alongside retailers and brands to identify a suitable solution, but more importantly, take ownership from the design through to build, commissioning and subsequent optimization of the solution. We are well positioned to further build our technology and operating ecosystem, supported by our digital brand services.
2022 priorities include expanding partnerships through international growth, fulfillment and manufacturing. Our end-to-end capability brings us closer to our customers and ensure the models capture a greater share of the customer’s digital spend than any other e-commerce platform.
[Audio/Video Presentation]
John Gallemore
Critical to sustaining profitable sales growth is the ability to provide high-quality user experiences to support our customer acquisition and retention strategy. Lucy highlighted earlier the positive customer behavior metrics exhibited by our app users. The customers return quicker to make a repeat purchase and, on average, spend more with us. Apps are a proven way to engage with our global communities across our Nutrition and Beauty division, where tailored content created in-house can be used to support new product launches and brand campaigns.
Whilst the proportion of revenue generated from our app customers continues to grow, more broadly, we have made a lot of progress across our marketing ecosystem, an important component of which is THG Society are established to influence a marketing platform. In September, we opened ICON Studios, housing our creative talent, producing digitally enabled content for THG brands and engineering clients alike. Our state-of-the-art studios enables additional content creation opportunities for our influencers supporting our ambition to become a leader in the influencer marketing space. We finished the year with over 32,000 influencers on the platform, an increase of 68% year-over-year. THG Society also acts as an agency to a growing list of third-party brands, including many retail beauty and fashion partners, connecting them together with relevant creators to produce engaging campaigns.
Brands highly value the opportunity to connect with the right influencer to create commerce-focused content and, importantly, track activity and results. We remain excellently positioned as a technology owner capturing first-party data to have the ability to rapidly react and diversify our marketing investments while continuing to expand into new and disruptive channels. Our continuous focus is to further drive traffic and marketing efficiency for our own brands and to leverage our digital marketing expertise to support the growth of our engineering clients and brand partners alike.
We are pleased to see new Ingenuity marketing technology partners complement our platform offering throughout the year, further enhancing our capabilities to provide customers with rich and engaging digital experiences. Whilst paid media has seen inflationary rises in cost per click and impressions post the pandemic, we’ve been able to navigate through these challenging markets to maintain efficiency by focusing predominantly on digital activity and applying a data-rich approach. We then optimized the key marketing performance indicators, so we’re able to maximize our return on investments.
Alongside society and Precision, THG Media is one of our exciting emerging Ingenuity services driving revenue growth as we further commercialize our in-house creative expertise. Retail Media is about finding the right marketing solution for our brand partners. This could include creating bespoke moments to drive brand awareness, improving conversion or to simply increase brand loyalty on or around the point of purchase with consumers. We’ve successfully grown this revenue channel and expanded the product offering with the launch of sponsored ads on these pages, our own brand digital magazines and app placement opportunities, giving retail brand partners further ways of connecting effectively to their customers.
While THG Media offers a high-margin incremental revenue opportunity, we will continue to broaden and develop our marketing ecosystem for the benefit of our brands and external clients, leveraging our digital brand building expertise and state-of-the-art content creation studios.
Matthew Moulding
The first quarter of 2022 saw encouraging consumer demand levels against the most challenging comparable period of the prior year, coupled with unprecedented inflationary pressures on consumer spending. I am, therefore, delighted to see the group deliver 17% growth during the quarter. Despite difficult macroeconomic factors likely to negatively impact global consumers through 2022, we expect to deliver continued growth across all our divisions in the year ahead and reiterate our full year 2022 revenue guidance of 22% to 25%.
As a reminder, this guidance is before the impact of sales for Russia and the Ukraine, which account for around 1%.
Through our D2C model, we have significant pricing power given our leadership positions in high-repeat, large and defensive markets. And we are consciously mitigating the impact of environmental cost inflation on our consumers through our vertically integrated business model, in particular, through investment in automation. Our ongoing automation, vertical integration and cost-saving actions will help to offset some of the macro pressures, and we remain committed to protecting the integrity of our brands by playing our part in shielding consumers from some of the short-term inflationary pressures.
The investments we have made over the past year in talent, technology and infrastructure provide operational leverage for the group to confidently rebuild towards recently adjusted EBITDA margins of around 9% over the medium term. Our medium-term margin confidence is supported by the transitory nature of a meaningful proportion of the cost inflation pressures. And as we have highlighted today, we are well progressed through our accelerated expansionary investment in our global fulfillment network. Therefore, capital expenditure as a proportion of sales remains on track to reduce to around 6% over the medium term.
So to conclude, at the beginning of 2021, we shared our vision to advance our strategy, supported by investment in talent, infrastructure and targeted M&A. We are incredibly proud to have delivered a record revenue performance for the year with broad-based growth across all divisions. And on a 2-year basis, we have nearly doubled the size of the business. THG has a long history of delivering consistent and profitable growth both organically and through M&A. 2021 was an elevated year for M&A as value-accretive opportunities presented themselves, which enabled the group to accelerate its growth ambitions, particularly in the U.S.
In the medium term, strategic acquisitions will continue to play a role in augmenting these key drivers.
We have a robust balance sheet and strong liquidity, and we are responding to the well-publicized inflationary environment with cost discipline, pricing reviews and targeted investment to further automate the business. We are making long-term strategic decisions for THG as we recognize the enormous opportunity that the structural shift to online e-commerce will bring. As I outlined earlier, our vision has not changed. The investment that we have made in our global manufacturing fulfillment and distribution network provides capacity and capabilities to continue to build leading positions in our core markets across Beauty, Nutrition and Technology. The management team with the Board’s full support remain wholly focused on delivering our strategic growth plans for 2022 and the longer term.
Thank you for joining us this morning. We would now be pleased to answer any questions.
Question-and-Answer Session
Operator
[Operator Instructions] We will take our first question now from Guido Lucarelli from Citi.
Guido Lucarelli
I have three, if I may, all related to the Beauty division. So you seem to have had a good start in the year in Q1, especially if we compare to the last 2 year comps, which were quite high. I was wondering if you could elaborate more on the trends by category, skincare, makeup, fragrances, any difference there? Or any difference in the trend by region? And how does your performance compared to the market, please?
Secondly, on Beauty, I think in the past you spoke about the possibility to separate this business. I was wondering what’s the plan there, if you can share with us any update on this. And lastly, how do you see the long-term strategic distribution for this market? And speaking with particular reference to the e-concession. Are you at all open to the possibility to start selling on any concession basis on your platform?
Rachel Horsefield
Certainly. Yes, I’ll kick off with point one, if I may, and just talk to some of the trends that we’ve been seeing within the beauty category within the first quarter of this year. And you’re very right in observing that the world was a very different place in quarter 1 last year with us being in lockdown. So we have observed some shifts in consumer behavior with regards to the categories that we’re seeing people purchase into.
This year, we’ve definitely seen a return into cosmetics being much stronger for us year-on-year than it was with people being in lockdown. That being said, skincare still remains a very prominent category for us. The regimes that people have built during lockdown don’t seem to have gone away. We’re definitely seeing more of a focus as customers play into more of that fresh skin face minimalistic look makeup approach as they’ve returned to offices and back out into the world this year. And we’ve also seen phenomenal growth continue through the first quarter into our fragrance category, some of this being driven by the new brand partnerships we added to the site at the back end of last year.
That continues to perform very well for us through events like Valentine’s Day, Mother’s Day. We’re seeing encouraging results there.
And I think one of the key things we’d call out here is just the speed at which we’re able to capture data as those consumer needs change as we move through these periods really allows us to adapt and play to our strengths, working with over 1,300 different beauty brands across the globe. We’re very balanced across skincare, hair care, cosmetics, and fragrance. So we’re really able to serve all of those customers’ beauty needs, and we see that reflected in the consistent improvements we continue to see in average order values.
Matthew Moulding
In terms of the second question around our plans around Beauty, obviously, with the appointment of Charles, more recently, myself and Charles has just taken the opportunity of — taken a broader view on the various things that — the opportunities that we have in front of us. So for now, I would wait until the outcome of that. What was the third question?
John Gallemore
Concessions, yes.
Matthew Moulding
Concession.
Rachel Horsefield
Yes. So we work with the majority of our suppliers on — in partnership. So we raised orders on a weekly basis, and we’re holding stock in our warehouses for them. The reason that we do that is it prevents split shipments for the consumer, giving them ease. And our average consumers purchasing on average 4 products across 3 different categories and at least 2 different brands at any one time.
And so being able to receive those products in 1 order not only is more convenient for the customer, but certainly better for the planet, as we focus on our Sustainability strategy. And there are a number of brands that we work with globally, so we see benefits there as well. We’ve been able to hold that stockpile.
Certainly, with the disruption that we’ve seen within supply chains at the start of the year and there are — we can work with brands on concession. But for the majority of our brand partners who are looking to navigate this transition now from bricks and mortar into digital, the challenges they often face how to serve that customer on a direct basis, which is where we’re a key partner in helping them alleviate some of the challenges that they see within that supply chain from that side.
Operator
Our next question comes from Charlie Muir-Sands from BNP Paribas Exane.
Charlie Muir-Sands
I’ve got sort of 3 different topics, if I may, please. The first one on Ingenuity e-commerce, you’ve obviously maintained the year-ahead guidance, £108 million to £112 million, which kind of implies an acceleration, at least in percentage terms, from the growth you reported in Q1, when I see there was also what appears to have been a drop in recurring revenue per site. So can you just talk about the dynamics of that, whether it’s sort of a phasing effect? Or how we should think about the evolution and how much of that is in the bag as it were with respect to contracted revenues already?
Matthew Moulding
The key point to talk about, which I guess you don’t have visibility on what we do is it’s just the quality of our pipeline as we focus on enterprise clients. You will note that at the start of the quarter, did announce that we’ll be embarking on a strategic partnership with us, but there will be more to come in terms of high-scale GMV clients and not just U.K.-based. So what we see is real evidence of a growing enterprise customer base.
I think it’s worth also reflecting on the journey over the last 18 months. So last year, we delivered over £45 million of revenue, which grew 135%. The 2-year growth rate is over 50%. And the full Ingenuity division, which includes other services we provide, such as fulfillment, is now — was just short of £200 million, growing at 43%.
I think in terms of the quality of the pipeline is then reinforced by the number of clients that we now have. So at the end of the quarter, we’ve got 200, which compares to 60 in January ’21 and 140 in September ’21. So the client base has grown by 43% over the past 6 months.
And that’s across a broad range of services that we’re now providing. But it’s worth also reinforcing that in the last year we’ve launched e-commerce propositions in 48 different territories, with 15 more new territories in the build road map.
So we’ve got a very broad international reach. Nearly 80% of the propositions we launched are in the G10 high-demand countries.
Given the complexity of the services we’re providing, our average revenue per client remains over £500,000. But I think a key point to make is the new revenue streams that we’re now opening up to support the core e-commerce proposition. There’s huge untapped potential and strategic partnerships. This is where we work with the payment providers, the marketing tech, to bring those on to the platform. There’s big opportunities there.
But also, we’ve been growing out the digital proposition across not just marketing and trading, but also content solutions. And Adam touched on it in the reel, but remind you that last year, we launched Europe’s largest state-of-the-art content production facility here at the tech center in Manchester. In that facility alone, we introduced 8 new clients in the last quarter, including the world’s most preeminent football star, which just, I think, underlines the quality of that site.
Again, we touched in the show reel that we commissioned over 2 million square feet of additional fulfillment capacity over the past 18 months, including the automated facility in Manchester, which does actually service 190 territories. I think we’re fairly unique. Where we are unique at the moment is in the e-commerce business, and we’ve got substantial surplus capacity in fulfillment, having the capacity to deliver nearly 14 billion of GMV as well as with the automation, our costs are now falling in that area.
So within our facilities, we have 153 clients now taking fulfillment services, most of whom are actually taking the full stack from us. In the first quarter, we commissioned a new fulfillment center in Melbourne, a new one in New Jersey, into which automation will go in the second half of the year. And in the latter half of last year, we commissioned a new site in Dubai as well as supporting the one we’ve got in India. So we’ve got great global reach in our fulfillment capabilities to support our e-commerce clients. And in the last quarter, we moved 11 Ingenuity clients into the new automated solution, delivering savings in excess of 30% across that.
And then in terms of the types of contracts, just to come around to that, so in the first quarter, the average year 1 contract value of new clients delivered was 10% higher than a year ago. We now have 5 of the world’s top 10 largest food and beverage FMCGs in our books, having delivered 2 more in the last quarter. So I think the summary is we’ve got a growing client base. We’ve got growing revenue streams, and we’ve got a great pipeline, which gives us that confidence to deliver the numbers that we guide to this year.
Charlie Muir-Sands
That’s fantastic detail. The second topic I was interested in is a reflection on the margin pressures that you’re obviously flagging, even greater than you perhaps anticipated in January. You — can you just remind us? Because obviously, you do a degree of commodity hedging, forward buying and so forth to give way. At what point does that stop becoming a headwind year-over-year?
And is your assumption based on expecting prices to be dropping through this year or just not going up any further?
Matthew Moulding
Sorry. Yes, I’ll take that. It’s Matt. Look, quite clearly through there was a rapid increase happened probably early in Q4 last year. So it’s then continued to rise as everyone will have seen reported, hitting record levels.
So what I would say is, obviously, as you then get through to the second half of this year, you start to almost annualize that rapid ascend in pricing that happened back then. In terms of what we’re currently seeing, for the first time in over 6 months, the price of our sweet whey protein has fallen in a week. So that has happened at last. We have seen some very strong signals elsewhere in the dairy industry, and we’ve also seen some strong signals in the U.S. as well.
And so it’s just been a bit later that those prices fall and coming to the U.K. That’s a really positive sign.
Obviously, we’d like to see them come down a bit further from here. But the answer to your question is, the second half of the year, you start to annualize that. And with a fair wind, if commodities become a more normalized place, then that will become an incredible tailwind for us.
Charlie Muir-Sands
Great. And my final brief question is, just on the adjusting items charges, I know you flagged that some of the restructuring will continue in the year ahead. But I just wondered, at this stage, how much in total you anticipate those — all of those costs that you eliminate from EBITDA to be in 2022?
Matthew Moulding
[Indiscernible] isn’t it, Matt Rothwell.
Unidentified Company Representative
[indiscernible] about £60 million in — yes, I’d be reducing in aggregate, but not the cash you’re expecting to be broadly comparable. You’ve got the separation costs. Obviously, the separation gives us huge strategic optionality, and that will be a big win for us in the year ahead as a group. We have the continuation of the rollout of the global warehouse operations. Obviously, as John touched on, over halfway through that program now, so that’s substantially getting there and given us huge opportunities with the scale of automation that’s providing.
We then got, obviously, in Asia, you’ve seen further lockdowns. And thus, that final-mile career isn’t yet normalizing. So we just — we’re including in our guidance at the moment on adjusting items that, that carries on for the full year ahead. We’d obviously hope that, if that normalizes sooner, there will be some upside to that, but we’re just maintaining a prudent stance on that for now.
And just to clarify that I get the question, Charlie. It’s all the inbound freight headwinds, those are all taken within adjusted EBITDA. It’s only the final mile or the courier extent that we take as an adjusting item or the inbound freight, which has been a headwind and is starting to abate. That’s it within adjusted EBITDA.
Operator
We’ll go to our next question now from Roland French from Davy.
Roland French
I’ve got 3 questions on my side, if I could. Just firstly, on the EBITDA margin bridge from ’21 into ’22. Can you give us some color around the moving blocks there, i.e., potentially the gross impact away, any distribution movements, pricing efficiencies? I know you’ve called out some automation offsets. And then presumably, there’s some accretion from Ingenuity coming through.
Just I guess help us with that framework.
And then second, just stepping back a bit, just any insights around your views on elasticity as it pertains to the different SKUs and formats in Myprotein in particular, i.e., do you expect consumers to trade more into powdered whey from snacking convenience, RTD, RTE, et cetera? And then in context of Beauty, your views on consumers potentially trading down from prestige. That’s my second question on elasticity on the D2C platform.
And then thirdly, another broad question on Ingenuity. And I guess from the outside looking in into a period that, I guess, scaling that enterprise client list appears closely aligned with the growth in your sales headcount. So maybe that points to more of a consultative sale. So I guess the question is, over the last a couple of months, have you been able to integrate any of the technology that allows your customers to more, I guess, from a kind of automagical self-service perspective, I guess, kind of scale that functions, i.e., scale sales in absence of scaling headcount? And I’ll leave it at that.
Matthew Moulding
Look, I think we’ll start with the elasticity point first to stay with the 2 divisions, if that’s okay.
Lucy Gorman
Yes, of course. So in terms of Nutrition, I think it’s worth adding that we are undoubtedly better positioned than most brands to operate an agile pricing strategy in the face of the inflation being vertically integrated and direct-to-consumer. And we have successfully pushed through a number of price rises over the last 6 months or so. And we do have the ability to react real-time to any data around elasticity on the product and the pricing. And therefore, the pricing level that we’re at now, we’ve seen relatively minimal drop-off in demand.
So that’s extremely encouraging. We have taken the decision to not pass on the full force of the inflation that we’re seeing in whey in an attempt to continue to maintain and grow market share, and we’re obviously sympathetic to consumer, personal situations, economic situations.
I should add that despite the current ongoing macro factors, we’re extremely pleased with the results that we’ve delivered in Q1. The U.K. actually had a record quarter with sales growth of over 20%. So I’d say that in the face of the inflation that the category has proved to be relatively inelastic. In terms of the products driving the growth, we have seen a lot of consumers trade into more entry-level proteins and, I guess, trade out of our things like our pro range certainly.
And given where we sit, minimum spend thresholds for delivery and stuff, there are certain items that where we’re facing challenges that would have previously been basket add-ons, so things like nut batters and flat drops. But other than that, across the board, we’re seeing relatively encouraging growth.
Rachel Horsefield
And then just on Beauty, Roland, to give you some flavor there, as we’ve seen historically, Beauty proves to be a fairly resilient category during times of recession or when there’s pressure on the pound in that consumer’s pocket. That being said, we’re not seeing any shift, any fundamental shifts out premiumization currently through what customers are purchasing on site. That being said, as we look forward, we’re obviously quite well positioned with not only our category mix, but the number of brand partners that we’re operating across to fulfill those beauty consumers’ needs if and as they should change.
Steven Whitehead
Roland, it’s Steve here. I’ll pick up on just how we think about that margin profile and the recovery picture. So set against, of course, that very strong demand, consistent demand picture. And the comments that the team have made around shielding the consumer, we do have that pricing power. What we are focusing in the near term at the expense of near-term profitability on building that customer base because 80% of revenue annually comes from repeating customers. So it’s the right asset to focus on.
But the way we’re very clear in our thought process is there’s no fundamental change to the margin model. This is a 9% to 10% EBITDA medium term business model. And the way we think about that recovery is if you look at the gross margin level, where we are today, everyone’s thought clearly and consistently about the way environment we’ve been in. Matt touched on the futures market in the U.S. several weeks ago, showed that some proxy indices for whey are now falling.
That’s double-digit falls. They are proxy indices in the U.S. That’s now been replicated more recently in European proxy indices, so we’ll see it coming through in our own types of WPC80 or BPI in coming weeks. And that supports our view for the second half of the year.
You’ve then got that momentum in the gross margin being supported by the revenue mix, increasing contribution from Ingenuity, which is at a higher margin. John has touched on the pipeline. Q1 is always a softer period in any kind of tech sales environment. So we see that momentum in gross margin really supporting the second half.
There is a second half weighting to our EBITDA picture. That will, of course, support ’23 and ’24 and operating cost level. You’ve then got to reflect on against that growing demand picture, very consistent. You’ve got a fully invested cost base. So we’re seeing significant operating leverage.
If you think about the thousands of employees, the 3,000-plus employees that have been added in recent financial periods, this cost base is fully invested today and every single month that operating leverage comes through. John has touched on the GMV investable cost base earlier on.
And then the areas where we’ve got non-transitory inflation like labor, obviously, we’re seeing automation. We’ve already locked in those gains. We’re putting more of the business. We heard about Cult going through automation, bringing those benefits. And you can see on a year-on-year basis that fulfillment costs are actually flat, which in this environment is a real testament having locked in those kind of savings already.
So a strong second half will carry very much into a full year ’23 and ’24 and that margin recovery to 9% to 10% EBITDA.
John Gallemore
And then, Roland, just to come back on your final point then. It’s John here, which I think is just questioning the efficiency of the model as it scales with respect to headcount. But I think, to answer that, you’ve got to reflect upon the types of services that we’re providing for clients and the breadth of them. So if you take in the first case the technology that we provide, most of our clients taken out of the box e-commerce solution that is fully vertically integrated into the physical infrastructure, meaning fulfillment and delivery, and that’s highly efficient for us to deliver. There are certain clients who want more of a solutions-driven solution, so we will develop more tech resources to that.
But that, again, brings with it taps of rewards. But I think the area where there is more perhaps labor involved in headcount involved. There are the digital solutions that we provide such as trading marketing content, but that is particularly our IP in that we know how to build digital brands. That is our core expertise, and that’s our true differentiator. So I think that’s sort of that we’re highly proud of.
I think — if you then go downstream into other GMV touch points such as transaction payment fulfillment and final-mile delivery that we manage for the vast majority of our clients, they’re very low touch point. An item of inventory will just fit into a warehouse alongside an [indiscernible] Nutrition and Beauty, and it’s kind of seamless. So there is no additional cost driven by that.
And we’ve got substantial capacity to drive more of those sales. What we’ve spoken about there is more of the enterprise-type clients. Now we are also developing more of an SMB-type offering, which would be seamless for us. And the beauty of that is that the client will get the benefit of access to the technology. It’s a different rate perhaps, but then they will also get access to the fulfillment and delivery network as well.
So I think there are many different types of solutions that we’re providing for clients, some of which do involve results, some of which don’t. But the balance reflected in the EBITDA margins remain very strong, particularly compared to other technology period. Does that capture what you mean?
Roland French
Yes, that’s spot on.
Operator
We’ll go to our next question now from Rob Joyce from Goldman Sachs.
Rob Joyce
Three from me as well, I’m afraid. Just firstly, on the cash side of things. I think can you just confirm that implicit in your leverage target that you expect to burn £200 million or less cash in 2022? Can you tell us when you expect free cash flow to get to the breakeven level?
Second one is just on the 14 billion capacity. It’s number really stood out versus revenue last year of just over 2 billion. I wonder if you could just talk us through the thinking behind that level of capacity and whether we should expect a pretty material falloff in CapEx relatively soon on the back of that.
And then the final one is just on your comments, Matt, in the press release on indicative offers you’ve received. Can you maybe just help us, I mean, understand what sort of parties they’re coming from? Are they for the whole business? And how far are they away from what you would consider fair value?
Steven Whitehead
All right. Look, just for the sake of not bouncing around the room, I’ll try and answer all of those points, but Matt will come in and embarrass me where I’m wrong. On the cash generation, yes, it will — we are expecting it to be below £200 million worth of cash usage this year. That’s — there’s a £200 million CapEx sort of guidance for this year, which then should fall a bit into next year as well. We’re expecting to be cash flow neutral next year at the free cash flow basis.
Obviously, the operating cash flow, we should be very cash generative, but with all of the bits on top. So next year, we should be somewhere neutral with cash generation kicking in at the free cash flow level there afterwards. So that kind of gives you the feel for that.
In terms of the second point on capacity, yes, I think John has touched on it. It gives you an idea in a sense of some of the scale of opportunities that we have in the pipeline for Ingenuity. These contracts taken an awful long time. They do not just pop up when you get them over the line in a month. We have some very significant scale GMV-type contracts that we’re working on.
And at the same time, you need this capacity on a global basis to be able to go into territories and do a very good job of it. So not only for ourselves, but also for other clients. You will see CapEx slightly come down off the back of that. And I think Matt has put some guidance out there to say it’s somewhere around 5% to 6% is where we’d expect sort of CapEx to be in tech is a big — a big element of that remaining CapEx. Just to remind people, our CapEx of, say, £200 million, that’s quite a small CapEx really when you consider the tech development that we do across all these areas.
I think coming to your third point, look, there’s very tight guidelines as to what I’m allowed to say on these things. But I guess what I can say is as follows, that coming into doing the results, we wanted to make sure as a board that we made our position clear and rejected the various parties and, in some instances, multiple bids ahead of coming on to this. So those bids are for the whole of the group. I can say that. And I can’t really go into the detail of the parties, but let me just give some context, I guess, Rob.
We IPO-ed the business 18 months ago at £5 a share, 15x oversubscribed. And as we sit here today, we’ve presented numbers that beat expectations that we set at IPO across every division in every metric. So it is going to be — it shouldn’t be a surprise to anybody that — where we are at those kind of things, and it’s certainly not to the Board that these situations arise.
I can’t tell you to what level these numbers are off. What I can say is what the world has changed out there maybe since 18 months ago. So you got to take that into account. And all I’m particularly focused in the IPO is the best for THG and our stakeholders. And so what we will look at is what environment is the best environment and share register to get the very best for THG.
And that’s a really important point for us. It’s all about the long-term success of this business.
We’re super proud of everything we’ve delivered. And what we want — what we’re very focused on is what is the best environment for this business. And we’ll see what happens in the days, the weeks, the months ahead. And we put our heads down and we carry on and just keep focused on the business. And you can see that in the Q1 numbers.
The Q1 numbers, I believe, against the wider market, are incredibly strong when you compare the global lockdown comps that we have there. And so we just keep focused on that. And the answers will become clear to myself and the Board and everybody in the weeks and whatever ahead.
Rob Joyce
Just quickly, when you say what is the best environment, sorry, I’m sorry if I’m being slow. Are you referring to private or public?
Steven Whitehead
Yes. Look, it’s really hard for me to go a lot further than that really, Robert. Just without me causing some problems. I guess now that there’s been lots of speculation about these things out there. So at least now, there’s a level of awareness of those things, I guess.
Operator
We have a question now from Simon Bowler from Numis.
Simon Bowler
I had a couple just on kind of current year guidance and then one on — a follow-up on the warehousing piece, if it’s okay. Firstly, kind on the current year guidance, the quarters that we’ve seen from you has been kind of pretty impacted in one way or the other by some sort of COVID impact. Can you just give us a sense of what the typical seasonality is in the Beauty and Nutrition businesses? I think kind of around about the midpoint in the first quarter that you just delivered is about 20% of the full year guidance. I’m just wondering how consistent that is that it is that much kind of seasonally lighter as a quarter within your business?
And then third on the forecast agenda. Again, I’m not [indiscernible] daft here. I thought in the statement you’re expecting adjusted EBITDA margins to be broadly kind of flat year-on-year, but in the presentation pointed to 6% and that as kind of compared to what you kind of guided to around about 8% 3 months ago. Can you just clarify exactly where we are looking or where you are guiding to for the year ahead and how that changed over that 3-month period?
And then kind of finally, just to follow up on that kind of 14 billion point, are we — is it the case you’re literally sitting there kind of wearing the cost of 12 billion of empty, underutilized warehouse space at the moment? Or are there further investments that needs to be made to actually unlock that 14 billion as a number?
Matthew Moulding
Thanks, Simon. It’s Matt Moulding here. I’ll take the first two, and then John Gallemore will take the third one on GMV capacity. In terms of seasonality, pretty stable businesses actually. So we don’t see huge seasonality from one quarter to next.
You’re right. And the sort of splits that you’ve seen in the quarter as we reported show roughly what seasonality we do have. No quarter is really below 20% of the full year, but weighting more towards Q4 and peak cyber trading, particularly in the Beauty division, which is more elevated, but no huge difference to what you’d have seen in sort of 2021 there, say, the sort of the acquisition mix. And that’s reflective of the high repeat purchase behavior that we see in our consumers, and we’ve touched on that with sort of 80% repeat purchase in both Beauty and Nutrition.
In terms of the EBITDA margin guidance, the guidance is stable EBITDA cash, so that it implies an EBITDA margin circa 6% in ’22. That’s, as we’ve touched on, protecting the consumer to some extent and taking some of that on our shoulders with the confidence in the long-term EBITDA margin outlook of the business for the reasons Steve touched on earlier in the call that this is a 9% to 10% EBITDA margin business. We’ve talked in the past about how we reinvest sort of ahead of the curve. And the fact that we’ve been doing that in the past gives us the confidence that we can now see some operating leverage come through the business together with the higher Ingenuity Commerce mix that will naturally start accreting through as well.
John Gallemore
Look, — and then in terms of the straight answer to you, yes, we are bearing the cost of that additional capacity in the underlying P&L account. Yes, what we’ve actually done is over the last 2 years, we have deployed 2 million square feet of warehousing space. Now I touched on most of those projects in the earlier narrative in the — we’ve got the facility in Manchester, which were commissioned right at the end of last year. In the first quarter of this year, we’ve moved into much larger facilities in both Melbourne and New Jersey with automation to go into New Jersey in the second half of this year. There was the facility that we commissioned in Dubai in the final quarter of this year, and we’re expanding our existing facility in Poland in the second half of this year.
So that all is where the additional capability comes from. And from those projects have just this group, we get 7 billion of GMV capacity there. But I think the key point to make is despite the fact we’re having to fund that additional capacity and actually the rising cost of the people who work within it, we are delivering flat and falling fulfillment cost because of the automation that we’ve put in. I can’t really underestimate the importance of that automation and how that drives cost down. But we recently I think all the way, we recently moved Cult Beauty from its manual warehouse in London into this automated facility in the past month, and that’s halved the fulfillment cost for that business alone.
So that’s the strength of the cost savings from the automation.
Simon Bowler
Okay. I can’t imagine kind of myself or anyone else has got kind of GMV expectations approaching 14 billion in the next kind of 5, 7 years. Are we hugely missing something in terms of the Ingenuity pipeline or your ambition for acquisitions or whatever that’s going to see you scale into that capacity far quicker than perhaps is being expected?
John Gallemore
I think one of the quick answers there is quite often there are clients at 0.5 billion GMV, multiple billion GMV. So it’s probably just a misunderstanding of maybe some of the scale of the pipeline of clients.
Matthew Moulding
[indiscernible] you call up and see it.
Simon Bowler
Yes, very, very, very happy to do so.
Operator
We’ll go to our next question now from Alex from Bearings.
Unidentified Analyst
Just 2 questions for me. The first one relates to your Q1 ’22 revenue growth of 16%. Can you give us a sense of what percentage of that was organic and then also just to get a sense of price increases, the pricing component within that? Secondly, just in terms of inflation, so it sounds like you’re not fully going to pass that through to consumers. How much of that would you say you’re passing through?
And how does that compare to competitors?
And then the third had just has to do with the working capital guidance. Can you maybe provide some of that for fiscal year ’22, just given the outflow in ’21 and the inflow ’20? Just wanted to get a bit more granularity there. That was all for me.
Matthew Moulding
The working capital first.
Steven Whitehead
Yes. Working cap, we’re expecting to be broadly neutral across this financial year. That reflects some destocking of the higher levels of stock that we saw come into this year. That will sort of make a bit of an H1, H2 imbalance perhaps. But full year, you’d expect that to be broadly neutral on the working capital side.
In terms of the organic, we did deliver organic growth in the first quarter against incredibly tough comparatives, and the 2-year organic remains very strong. So we’re really pleased with the performance we’ve got there. There’s some disclosure on the acquisition contribution in the back end of the prelims, you can see that demonstrated that the acquisitions are delivered in line or marginally ahead of of previous guidance. We’re not going to disclose too much on pricing and volume. I think Lucy and Rachel have touched on that earlier, and there’s devil in the detail there in terms of pack sizes and how the consumer basket interacts.
And that’s where our availability of data really helps us in looking at the consumer behavior and working out how best to manage that and support the customer and manage that within our demand dynamics.
John Gallemore
I think — I mean, just to answer the on organic and M&A, there’s obviously going to be very little M&A to carry forward this year in there. So the Dermstore acquisition completed at the very start of February last year. So you’re only going to be left them with Cult and the Bentley Labs production. So we continue with the same policy, which is we just don’t want to strip that out. You can actually kind of work back from that.
But — and just to remind people why we don’t do that is because, quite often, if we do make some investments, we’re doing it for strategic purposes rather than the revenue within those pieces of M&A.
What we can say is, just to take you back to 2021, is the guidance we give on each piece of M&A of what we expect the sales and contribution to be is pretty much in line with that, and you’ll see that in the release that we made this morning as well. So you can work back reasonably quickly, but we just want to keep that flexibility and just remind you, by the way, that the Dermstore acquisition was completed at the start of February. So that’s annualized.
And you just look with the other 2 pieces thereafter. And then there was a final point, I think on that, what was the other final?
Unidentified Analyst
Pass-through versus peers.
Matthew Moulding
Yes. Look, I think on the inflation point, Ingenuity is obviously scaling quite fast. And despite the increased contribution we get from Ingenuity, then what we’re guiding to here is a stable EBITDA contribution for this year. So what you can see is we’re actually doing a relatively strong piece here in terms of ensuring we support the consumer. We’ve got a really strong demand curve, as you’ve seen in Q1, and we’re keen to sort of double down on that and ensure that we take market share and also we protect the brand integrity.
And so the inflation pass-through, in simple terms, you can look at the extra contribution that’s coming from Ingenuity, and how that’s being reinvested instead of us just reporting an improved position on that.
So that’s broadly one level, and there’s obviously within each individual P&L, they’re doing a level of support, too, but the biggest contributing factor would be you would expect Ingenuity to add through more for us to the direct P&L, but we’re actually using that contribution to maintain a stable position.
Unidentified Analyst
That’s very clear. If I can just briefly follow up. So it sounds like the majority is organic growth. just directionally, is it most of that volume? Or is it price-driven?
And then the price increases that you are putting through directionally, again, are these in line with competition below competition? If you can just give a sense of that, I really appreciate that.
Matthew Moulding
So on the pricing, more generally, it is — we’ve got a really strong vertically integrated model. It’s slightly different by different business area, but take Nutrition as an example. Yes, maintaining a dominant position of pricing stronger than competition is something that we’re maintaining. So it will be different to the competition there as we position — and so it is something that we’re conscious of in terms of the competitive environment, and we’re making sure that we are super competitive in that regard.
Steven Whitehead
Look, also on weight-based products, that’s less than 50% of [indiscernible] the Nutrition example, and it’s the best single area of cost inflation we’ve talked to. So yes, we’ll be passing on less inflation price rises than peers because of the business model. When you think about whey, it’s less than 50% of the product mix. So again, it’s a combination of price rises in certain areas selectively plus volume growth.
John Gallemore
Yes, an important point. There is volume growth in there. It’s not — it’s not just a price-driven in any way.
Operator
I’ll go to our next question now from Andrew Ross from Barclays.
Andrew Ross
Great. I’ve just got 2 more quick ones to squeeze in both on Ingenuity. The first one, in both Q4 last year and Q1 this year, the number of websites launched has been a bit slower in my model. And I guess there was Christmas and peak impacting back in Q4 and seasonally pointing to be lighter in Q1. But can you just be clear, in Q2, should we be expecting the number of websites launched to accelerate back to that kind of 40 to 50 added per quarter?
And then the second question is on SoftBank, and thank you for giving us an update on office store or good stuff that’s going on there. Is there anything else we can call out in terms of how that relationship with SoftBank is evolving from an operational or perhaps financial standpoint?
Matthew Moulding
I mean I think at the same time, as those data points were touched on, we also increased the cost of the client base by 3% from September through to [indiscernible] As I touched on in the narrative, there’s a much broader range of monetizing opportunities that we’re now delivering across a broader range of clients coming for different types of services. But yes, certainly, you will see an increase in the number of websites that we’re launching for clients going forward, yes, which reflects just the quality of the pipeline. The timing of some of the bigger ones is difficult to predict given the scale of some of those opportunities.
Steven Whitehead
And Andrew, briefly pick up on SoftBank. The SoftBank option kicks in once separation is completed. It completes in Q2, but there’s nothing to update on that at this point. It would be something for later in the year and no other updates outside of AutoStore.
Operator
Our final question now comes from Nick Coulter from Citi.
Nick Coulter
A very quick one to close the show, please. And it might be a disclosure too far. But are you able to share what you expect your GMV to be in kind of around billions at the end of this year, please? Just to help us get a sense of the operating leverage opportunity given the potential disparity between a number of websites and the GMV potential.
John Gallemore
So the hard answer to — it’s an incredibly hard answer to give the — and the reason for that is the timing of, a, signing contracts and be then launching them of material scale GMV contracts. Obviously, we give guidance on our own GMV. So if you were to look at the sort of 22% to 25% you can work out from there. That’s probably, I don’t know what £2.7 billion, is it £2.6 billion, something like that, £2.7 billion. Then on top of that, there are a number of accounts that we’ve talked to in the past that have got decent large-scale GMV to them and then whatever the ones to announce.
So it’s not — we’re not trying to be elusive there at all, Nick. It’s just purely — it really is — I’ve been misrepresenting if I just give you a figure on that. But we’ll be able to give more color as on GMV, as contracts land, and we can give you more clarity as the year comes through. But that’s probably it.
Nick Coulter
Or perhaps another way, how many years of runway do you think you’ve got on your current capacity?
John Gallemore
Yes, it’s a fair point then. I’d say, look, I mean, depends what you’re trying to get from your capacity. If you want to do, there are key trading points of the year. So if you look at — you want to really maximize peak trade in such as Black Friday, we will use almost 100% of capacity everywhere in the world for a period of 3, 4 days, right? That’s just what happens in November.
So it doesn’t sit there completely idle for all that year. So there are points in time — we have some key trading around Singles Day. We have some trading points in May as well. So there are points of the year when we really do lean into that capacity. So you will — you do want to have more capacity than you did today.
What I would say is, if we’ve got 3 to 4 years, that’s kind of how we look at the world, we did announce maybe I think this time last year about [indiscernible] 3.5 million square feet more. We’ve already delivered 2 million of that, 2 million square feet more. So you’re probably looking, let’s say, 3 to 4 years of capacity there. And it does take time to get these things running smooth and in the right positions. They don’t just — at scale that is.
So that gives you an idea of probably how we see it. But there are times of the year when we will use 100% capacity.
Operator
As we have no further questions at this time. I would now like to turn the presentation back over to Matthew Moulding for any additional or closing remarks.
Matthew Moulding
Okay. Well, thanks, everybody. It’s been a long one for everyone today, so I won’t do a long wrap-up. Safe to say thank you very much for your time and energy and look forward to updating you in due course. Thank you.
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