THG : Annual Report 2022 Presentation

Annual

Report

A M B I T I O N	2022
C O L L A B O R A T I O N
L E A D E R S H I P

D E C I S I V E N E S S

I N N O V A T I O N

Annual Report 2022

Contents

Strategic Review		Governance Report
Chair's Introduction	Page 3	Governance Report	Page 105
Chief Executive Officer's Review	Page 5	Audit Committee Report	Page 123
Company Overview	Page 8	Risk Committee Report	Page 130
Our Business Model	Page 13	Nomination Committee Report	Page 133
THG Beauty	Page 21	Related Party Committee Report	Page 138
THG Nutrition and Wellness	Page 26	Sustainability Committee Report	Page 141
THG Ingenuity	Page 32	Directors' Remuneration Report	Page 144
Chief Financial Officer Review	Page 37	Financial Statements
Section 172 Statement	Page 47	Page 159
Stakeholder Engagement
Non-Financial Information Statement	Page 55
Sustainability	Page 57
Task Force on Climate-related	Page 79
Financial Disclosures

Highlights

Revenue					Adjusted EBITDA
2022				£2,239.2m	2022				£64.1m
2021				£2,179.9m	2021				£161.3m
2020				£1,613.6m	2020				£150.8m

Adjusted EBITDA margin		Reported operating loss
2022				2.9%	2022				£495.6m
2021				7.4%	2021				£137.5m
2020				9.3%	2020				£481.8m

Risk Management	Page 83
Directors' Report	Page 97

Strategic progress

•	THG Ingenuity gaining momentum following the pivot to
	focus on higher value and ultimately higher margin contracts
•	Successful completion of the divisional reorganisation
	with cost savings and efficiencies implemented in FY 2022

Financial performance

•	Record sales of £2.2 billion
•	Significant investment in price strategy impacting
	gross margins to support long-term customer retention

"With a strong balance sheet and category leading positions within substantial end markets that continue to benefit from long-term structural growth, we have confidence in our ability to deliver long-term value for shareholders.

•	Simplification of the Group leading to a strategic review
	of loss-making categories and territories, underpinning
	FY 2023 profitability improvements
•	Strategic partnerships and alliances entered into across
	THG Beauty, THG Nutrition and THG Ingenuity

• Lower level of profitability due to challenging

macroeconomic environment and significant

cost inflation across major cost lines

• New £156 million term loan further strengthened the

balance sheet with c. £640 million of cash and available

facilities at year end

Matthew Moulding

Chief Executive Officer

Our entrepreneurial culture is prevalent across the organisation, with our people rising to the challenges presented to them during the year with resilience and tenacity, with high-performing, diverse teams being central to our ongoing success."

Click here to watch our review of the year

THG Awards

#1 CIO in the UK	Contact Centre Support	Most Exciting	10th in Top Customer	Winner in the
(Joanna Drake)	Team of the Year	Partnership	Service Experience,	Shopping App
CIO UK 100 Awards	(Silver) (Group)	(Hotel Chocolat X Myp)	Non-Grocery Retail	Campaign category
	Call Centre Management	European Specialist	(Lookfantastic)	App Growth Awards 2022
	Sports Nutrition Alliance	KPMG Customer
	Association Awards
			Experience 2022

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Annual Report 2022

Chair's

introduction

Charles Allen,

Lord Allen of

Kensington CBE

Independent

Non-Executive Chair

Introduction

Welcome to our 2022 Annual Report. Having been appointed just over a year ago, I am delighted to have had the opportunity to get to know the business over that period and remain highly impressed with the talent and culture which is evident throughout the organisation.

The past year has been marked by a number of external challenges - from Covid-19 and its various impacts still lingering in certain territories, to rising inflation and the war in Ukraine. And whilst these external factors have impacted consumer confidence and added inflationary pressures to our cost base, the management team have worked hard to mitigate their effects, pivoting to focus on cash generation, strengthening the balance sheet, reducing costs and, in turn, delivering a robust set of financial results.

More than that, though, these past 12 months have been one of change and development for THG. I joined the Group as Chair with a clear mandate: to strengthen the governance and with Matt Moulding, the Group CEO, review and refine the Group's strategy. We have refreshed THG's Board and with Matt, developed the management team. There is still more to do but we've made significant progress as I will set out below.

Board composition and management

We continued to strengthen our Board composition during 2022, seeking to enhance the skills, experience, knowledge and diversity and were pleased to welcome Dean Moore and Gillian Kent as independent NEDs in September 2022, both of whom bring significant experience and insight from their previous industry roles. Following a review of THG's leadership needs, we announced two changes to the Executive Leadership Team at the beginning of 2023 - the appointment of Damian Sanders, former independent NED and chair of the Audit Committee, to CFO and the appointment of John Gallemore, the incumbent CFO, to COO.

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During 2022 we also saw Dominic Murphy, Tiffany Hall, Zillah Byng-Thorne and Dr Andreas Hansson step down from the Board and I, together with my other Board members, would like to thank them all for their valuable contributions during their tenures with THG. Further information on the Board changes which took place during 2022 can be found within the Governance Report and the Nomination Committee Report.

Organisational development

In July 2022 we announced the legal completion

of the internal separation of our key trading Divisions, an important landmark in the continued development of the Group and a significant undertaking that was completed on track and on time. The Board believes that this separation provides material optionality and flexibility for our key trading Divisions to enter into future strategic partnerships, generating value accretion for all shareholders. As you will see from our published accounts for FY22, the separation allows us to report on a divisional basis (with comparative figures for FY21 provided also), adding a new level of transparency to our financial reporting, and providing the opportunity to demonstrate the true value of our three world-class businesses: THG Beauty,

THG Nutrition and THG Ingenuity.

People and diversity

Our values, culture and people have, collectively, allowed

us to make substantial progress against our strategic priorities. The Senior Management team has demonstrated its experience and keen ability to drive progress, and I have been pleased to see the impressive work undertaken across all our operating Divisions, as they grow and expand their respective customer and client propositions.

Our ambitions to drive sustainable, profitable growth and long- term value creation are supported by a dedicated and diverse workforce. Retaining and developing talent is a key priority for THG and we empower our colleagues to make a difference.

During 2022 we set out to add a fifth Company 'value' - alongside Leadership, Innovation, Decisiveness and Ambition

• and were incredibly pleased with the level of engagement from our global colleagues who overwhelmingly suggested Collaboration as the value most reflective of their THG experience. This selection is testament to the central place that collaboration plays in the culture of THG, from how we view our relationships with each other as colleagues, to the partnerships we form with our clients to drive mutual success.

Stakeholder engagement

As Chair I have been fortunate to spend time with many of our shareholders, particularly consulting on their views when the Board was appraising the bid approaches received during the first half of 2022. As we announced to the market at the time, the Board was unanimous that the offers were unacceptable and significantly undervalued the Company. I have listened to Shareholder feedback and have begun to implement positive changes to our engagement and communications strategy which will continue over the course of 2023.

Continued strategic delivery

Against all this, we have continued to execute our strategy successfully and have done so whilst continuing to invest in our future growth, rolling out fulfilment and manufacturing infrastructure around the globe, ensuring we are well- placed in our key territories to meet the growth demands both of our own-brands and of our Ingenuity clients.

Our Divisions have established meaningful positions in their respective markets and we continue to refine their strategic focus, ensuring they are well-tuned for continued delivery for all stakeholders. THG Beauty and THG Nutrition remain relevant to a global consumer base who are living longer, more digitally connected lives than ever before.

Following a change of leadership, THG Beauty is exiting certain geographies, simplifying the offer and focusing on higher margin products. THG Nutrition has undertaken a strategic reframing, further diversifying from its traditional protein-based product focus and broadening its offering to deliver for the entire 'wellness' market.

This is all powered by our technology and physical infrastructure platform, THG Ingenuity, which continues to deliver for our stakeholders - whether they be customers, consumers, clients or strategic partners - working with them to support and deliver their digital commerce journeys. Throughout the year it has gained momentum as its strategic pivot to focus on higher value and higher margin contracts has begun to bear fruit. Following

a detailed review of each of our divisions we have reduced the headcount and attracted and retained the best talent.

Sustainability

As a business we are committed to driving environmental and societal change, both through our own operations and as a key partner for our stakeholder groups. This is driven by our 2030 Sustainability Strategy, 'THG x Planet Earth', which details our goals and targets as we pledge to use our global scale, world-class talent and dedication to innovation to act as a force for good.

In 2021 we invested in building our recycling capabilities, and during 2022 we broadened the services we provide to our Ingenuity clients through THG Eco. When it comes to

sustainable development, we understand that real impact requires collaborative, coordinated and collective action between businesses, the public sector and individuals. THG Eco, part of THG Ingenuity, supports our clients, partners and suppliers in navigating the changing environment and demonstrating to their own suppliers and employees their sustainability commitments.

Looking ahead

2022 saw THG - together with almost all businesses - face inflationary challenges from a range of sources, from the cost of raw materials, to labour, to operational fulfilment and energy. In both facing, and trying to mitigate these challenges, we have kept a firm focus on what sits at

the heart of THG: the customer; and, in recognising the pressures faced by consumers globally, we made the decision not to pass on the full extent of inflationary cost increases to our customers. We believe that this strategy will secure customer loyalty, retain customers within the THG ecosystem and in turn deliver market share growth in key territories over the longer-term.

Looking to the current financial year, I believe our category leadership positions, our culture of innovation, our dynamic Senior Management team, our well-invested global footprint and our robust balance sheet will, collectively, ensure we are well placed to deliver further growth and capitalise on strategic opportunities at the appropriate time. All with the ultimate goal of delivering shareholder value.

The Group's intention to apply for a Premium Listing remains and we are well prepared internally to progress upon completion of the FCA's ongoing review of the current listing regime.

This past year has been one of change and development for THG, and I am enthused by the prospects that lie ahead for us as we further progress our strategic priorities in 2023.

Further information can be found within:

Chief Financial Officer Review

See page 37

Section 172 Statement Stakeholder Engagement See page 47

Sustainability

See page 57

Governance Report

See page 105

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Annual Report 2022

Chief Executive

Officer's Review

of online participation. For example, the UK online share of total retail sales has increased by more than 25% over the last three years - now accounting for around 25% of total retail sales.

Our key categories are supported by favourable dynamics, such as high repeat-purchase rates, stable average order values and very low return rates. This presents THG with opportunities to grow within existing markets, and in

revenue growth and cost efficiencies by reducing previously-outsourced operations. The investments made in nutrition innovation and production facilities have allowed us to accelerate our speed to market, as we continue to expand our range across categories and markets.

Financial performance

Matthew Moulding

Executive Director

and Chief Executive Officer

Dear Shareholder

2022 was unquestionably the most challenging global environment we've seen since founding THG nearly 20 years ago. An extraordinary backdrop of runaway inflation, rapidly rising interest rates, and major geopolitical events created significant macroeconomic and consumer uncertainty. I'm incredibly proud of how THG and the team responded to these challenges. For me, there is no doubt that 2022 was our best performance to date, even given the reduction in profitability year-on-year.

THG almost doubled in size during the global pandemic, capitalising on an unprecedented movement of consumers to online retail. As consumer behaviour has normalised, the Group not only held onto the growth achieved during the pandemic but went on to grow further during 2022. This growth in market share, delivered in the most trying of circumstances, is testament to the quality and dedication of our people.

From the start of 2022, the Group and divisions alike undertook decisive action to adapt their business models to a very different market landscape, while maintaining revenue growth in the process.

• Our Beauty and Nutrition divisions committed to shielding consumers from what we believe to be exceptional, short-term inflationary pressures. These actions temporarily reduced gross margins and profitability year-on-year, with the long-term benefits to brand integrity underpinning stronger customer loyalty and financial reward.
• After a careful and lengthy search, Vivek Ganotra joined as CEO of THG Ingenuity in June and was tasked with repositioning the division away from smaller, high-volume clients, to focus resources on our growing base of valuable, large scale, enterprise clients.

• The previous 48 months have seen significant expansion of our global fulfilment and manufacturing infrastructure, with each facility requiring a full depth of stock holding to become fully operational - which is now rationalising as evidenced through the working capital inflow in the year. This strategy has driven an improved service for consumers in international territories.
• In July 2022, we announced the completion of the divisional reorganisation, increasing strategic optionality for the future. The divisional reorganisation has also yielded improved visibility of costs, enabling savings to be made from reducing duplication and greater focus. The project was very comprehensive, and we are well on our way towards broadening our financial reporting to better reflect the divisional performance.
• Group headcount reduced by almost 2,000 people during the year, largely achieved through the careful management of attrition as well as maintaining strong cost discipline and the roll-out of logistics automation.
• To strengthen our liquidity, we agreed a new £156 million banking facility, resulting in the Group having over £640 million of cash and facilities at the year-end. Net debt of £181 million was better than guidance of c.£200 million.
• The Group's Board also underwent some changes, with the appointment of Lord Charles Allen as Non-
  Executive Chairman, and the subsequent appointment of two Independent Non-Executive Directors.

We see the Group being well progressed to deliver positive free cash flow on a rolling 12 month basis through FY 2024, via ongoing project delivery efficiencies including driving working capital improvements, while not compromising our ability to meet growing demand and deliver top-line revenue growth.

Market outlook

Our Beauty and Nutrition divisions operate in large, resilient and expanding total addressable markets,

with each holding prominent positions in many territories. There are long-term trends driving category growth in our core markets (premium beauty, health and wellness), where we have the infrastructure and capabilities to serve following investment in our fulfilment and distribution network.

Both our core consumer markets continued to grow through the previous global financial crisis, and over the last decade benefitted from the exceptional growth

targeted new markets where we will be able to rapidly scale up our presence.

Customer proposition

One of our greatest assets is our global customer base of over 16 million THG Beauty and THG Nutrition active customers. Our apps have been downloaded over 10 million times from a standing start in January 2020 with our first- party data advantage a core strength in our model, allowing us to hold direct relationships with our consumers.

The insights gained from these customers informs our daily decision making, and we are investing in growing this network of passionate, engaged beauty and wellness enthusiasts - firmly positioning us as the market leader in this space.

We are constantly striving to become more efficient as an organisation, while optimising the customer experience and minimising delivery times. Through our brands, we have reimagined how we think about beauty and nutrition - and how this integrates into our daily lives as we increasingly look to improve our overall health and wellbeing.

Divisional highlights

I'm pleased with the progress achieved within Ingenuity as we pivot towards a longer-term view for sustainable profitability, supporting major UK and international retailers across a wide range of categories, further supported by our expanding network of partners and strategic alliances.

THG Beauty is now firmly established as one of the leading pure-play online retailers globally delivering over £1.2 billion of revenue. We have set a pathway to rebuild margins in our largest division through a focus on profitable territories, efficient marketing channels and improved localised procurement.

THG Nutrition witnessed one of its most challenging periods in recent times and consequently I'm delighted that we delivered revenue and market share growth across many key territories, in addition to expanding our category reach with new and innovative partners. Our customer base has remained stable, notwithstanding a higher-pricing environment and physical stores reopening, supporting the defensive position of our brand.

Following the strategic investments made through acquisitions during 2021, we have continued at pace with our integration plans, prioritised customer retention,

Group revenue increased by 4.1% during the year across core divisions (THG Beauty, THG Nutrition and THG Ingenuity), including a contribution from acquisitions within THG Beauty. A credible result considering the major events that have impacted the global economy, and compared to the prior year where the pandemic continued to impact access to traditional retail channels resulting in a tough comparable period.

The cost environment in 2022 has been unusual, with high inflation across most cost lines and foreign exchange headwinds applying pressure to margins. Whey costs were unusually elevated which has compressed gross margins in THG Nutrition as we have sought to protect customers and invest in retention and growth for the longer term.

We have been encouraged by demand in a higher-pricing environment, with strong repeat purchase rates from our loyal customer base of above 80%.

This strategy has driven an improved service for consumers in international territories. As we approach completion of this fulfilment network investment, we are well positioned in major territories to meet the growth demands of our own-brands and our Ingenuity clients. We continue to move towards increased automation in our major hubs, driving distribution cost efficiencies for the Group to help offset inflation.

Whilst we have reported a significant non-cash impairment charge relating to Beauty and Ingenuity, this is a one-

off item relating to a combination of rising interest rates leading to a higher discount rate, combined with other macroeconomic pressures resulting in an impairment of historic goodwill balances.

Core commodity prices used within our Nutrition division have already seen significant deflation since their record highs in 2022, giving us confidence in our ability to rebuild divisional margins to previous levels. In addition, we have taken measures to further improve profitability by exiting certain loss-making categories which are discussed

in more detail in the CFO report.

Our strong liquidity position following the cash inflow in the second half of the year, including the new £156 million banking facility, means we are well positioned for further operational and strategic progress, notwithstanding the continued macroeconomic uncertainty.

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Annual Report 2022

People and purpose

As THG evolves, we recognise that we must review our purpose, vision, and values to ensure they align with our strategy and reflect who we are, what we do, and why we exist. Our purpose and vision reflect the diversity in our business model and the impact we can drive through our innovation and digital expertise. Based on our success building THG Beauty and THG Nutrition into category leaders, we remain committed to reinventing how brands connect to consumers globally and supporting them to be best-in-class at building, growing and accelerating brands.

In 2022, we submitted our emissions reduction targets to the Science Based Targets initiative (SBTi) for validation - this is an important step towards our goal to achieve net zero

by 2040. We also source 63% of the electricity used in our operations from renewable sources and we are on track to reach 100% by 2025. We have continued to make good progress across the people and communities pillar of our THG x Planet Earth Sustainability strategy and are proud that we have 45% female and 26% ethnic minority representation within our Graduate and Apprenticeship schemes, against a target of achieving 50% and 20% respectively by 2025.

Our people are the heartbeat of THG, and I was exceptionally pleased to reward some of our loyal and talented colleagues with share awards during the year totalling c.£19m across 33.9 million shares, in addition to a number of promotions as we continue to invest in and develop digital talent.

Finally, I'm particularly proud of THG's contribution

to the communities in which we operated during 2022,

in terms of both taxes and charitable efforts. In the 18th year since founding THG, the Group made a record global tax contribution of £153.4m, up from £123.4m in 2021.

The contribution in 2022, from starting THG less than 18 years earlier, shows the importance of start-ups to the UK economy.

Outlook

With the completion of the divisional reorganisation, and decisive cost reduction action undertaken, the Group enters 2023 with improving momentum to achieve substantial margin expansion. Earnings recovery is supported by continued operating leverage, reducing consumer price protection, and the full-year effect of operating efficiencies and cost savings arising from

the divisional reorganisation.

Our vertically integrated model enhances our ability to react to periods of economic uncertainty, and the profit improvement initiatives undertaken as part of the strategic review give us added confidence in driving margin recovery in 2023 and beyond.

We are well capitalised to advance our strategy of building a strong, sustainable global platform supporting THG brands and Ingenuity clients, and we have outlined

our core levers for driving margin accretion and positive free cash flow over the near-term.

We remain confident that our business is underpinned by strong investment and strategic growth plans which will drive long-term value for our shareholders.

Our purpose and vision

As THG evolves, we recognise that we must review our purpose, vision, and values to ensure that they align with our strategy and reflect who we are, what we do, and why we exist.

We identified three things as enablers to our impact: digital transformation, innovation, and expertise.

Through Ingenuity, digital transformation creates value for our stakeholders as it improves efficiency, enhances the customer experience, and increases agility. Our innovative and entrepreneurial mindset allows us to develop new products, enter new markets, and find solutions to challenging problems.

Finally, we take pride in being experts in what we do and use our expertise to make bold decisions and deliver bigger and better outcomes for our stakeholders.

Our previous purpose - to reinvent how brands connect digitally to consumers - remains true and is encompassed in our new purpose; we reinvent how brands connect digitally to consumers through digital transformation, innovation, and expertise.

Our purpose is to

make an impact through digital transformation, innovation, and expertise.

Making an impact is what we do; it's why we exist. We strive to make an impact for our people, our customers, our Ingenuity clients, our suppliers and partners, our shareholders, and our communities.

Our vision is to create

and grow category-leading brands on a global scale.

Our simplified vision - to create and grow category- leading brands on a global scale - encompasses all areas of the Group and defines our ambitions for the future.

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