Welcome to the Boohoo Group conference call. Throughout the call, all participants will be in listen mode only, and afterwards there'll be a question and answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present John Lyttle, CEO. Please go ahead with your meeting.
Good morning, everyone, and thank you for joining our call this morning. Joining me on this call are Neil Catto, CFO, Carol Kane, Executive Director, and Tom Kershaw, Sustainability Director. On the 8th of July, the Boohoo Group board announced it was undertaking an independent review of its U.K. supply chain, to be led by Alison Levitt, QC. The review is now complete and was delivered to the board yesterday, the 24th of September. Our publication of the report in full this morning demonstrates our commitment to increased transparency and communication, particularly around sustainability matters and our supply chain going forward. We also remain committed to manufacturing in Leicester and recognize the group's influence and opportunity to drive change in the U.K. textile industry.
The document is published in full on our website, and you'll have seen that we issued an RNS this morning which summarizes Ms. Levitt's recommendations and sets out the actions we plan to take in response to these. The group intends to implement Ms. Levitt's recommendations in full. Our call this morning provides me with the opportunity to personally address the findings of the report and to answer any initial questions. We are due to announce the group's half-year results for the six months ended 31st of August, next Wednesday, the 30th of September. This will be an extended presentation to cover the group's sustainability strategy in more detail, alongside the publication of its financial results.
I look forward to conversations with our shareholders over the coming weeks, which will provide an opportunity to discuss the report in more detail and steps that we are taking to drive long-lasting change that all stakeholders in the Boohoo Group will benefit from. The group is founded on the principles of test and repeat. This allows us to react to the latest trends and bring them to market to customers quickly, with little stock risk and markdown or wastage. We are very confident that we can successfully embed all of the independent review's recommendations without impacting this model, and do not anticipate any change to guidance. This has been a very thorough review, and I would like to start by thanking Ms. Levitt and her team for their hard work and the speed with which they delivered the report.
I'd also like to thank our internal team and our external suppliers, who have worked tirelessly over the last few months, and for their positivity and commitment to the group through a period of intense scrutiny. The review has identified failings in the Leicester supply chain and makes recommendations for improvements to Boohoo's corporate governance, compliance, and monitoring processes. It does, however, recognize that the group has already taken positive steps towards remedying problems in its Leicester supply chain, which has been stepped up nearly a year ago, well before the recent publicity. However, with the benefit of hindsight, the board recognizes that it should have acted faster to advance these steps. Our announcement sets out further detail around our planned actions, and we will also provide further color with our half-year results next week.
The most significant actions we're announcing today as a group are substantial enhancements to the board's corporate governance and oversight through one, supply chain compliance will become a mandatory item on every board meeting agenda with immediate effect, a new Risk Committee on the board reporting into which is a new Supply Chain Committee headed up by our recently appointed Responsible Sourcing Director, who joins us from a major global apparel retailer. We are close to appointing a highly experienced and respected individual to provide independent oversight of the implementation of our change agenda. In addition to this, we have pre-existing plans to announce a further two non-executive directors, and we hope to update you soon on our progress. We plan to strengthen our purchasing and buying practices, including strengthening the sourcing team through further experienced hires and implementing a new set of purchasing principles.
We will increase the level of transparency of our supply chain through consolidation of our approved supply list. A smaller number of larger, more efficient, and well-managed suppliers should result in increased productivity, better quality control and compliance, and reduce further wastage, and through the extension of our independent audit program across the rest of the U.K. and global supply chain. Completing our audit process across Tier 1 and Tier 2 suppliers in the U.K., after which we will publish a list of our suppliers and update this annually. We have also set out a number of planned initiatives to support the Leicester manufacturing industry and its workers, which include the launch of a state-of-the-art manufacturing facility in Leicester.
We have never been vertically integrated, and the plan is not to move to being so, but this facility will enable us to demonstrate best practice in manufacturing and act as an educational facility to nurture new talent in the U.K. textile industry. We will continue to work more closely and collaboratively with suppliers, and we recognize our responsibility towards them. We are setting up a Garment and Textile Community Trust and plan on working alongside statutory and civil partners in the region. I'm incredibly proud to be the CEO of the Boohoo Group, and I like to think of today as a turning point for the group. I have absolute confidence in our ability to deliver on our plans. The influence the Boohoo Group has on the U.K. textile industry could not be clearer.
There is a lot of change, but we're in a unique position to be a real driving force behind positive change and to be a tremendous force for good. I have absolute confidence in our ability to get this right and in a manner that will allow for many stakeholders who will benefit. Our customers can take reassurance that our suppliers have been treated fairly. Our employees will feel greater pride in working for the group. Our shareholders will have greater confidence in the board's oversight, and our investment will benefit the Leicester region and U.K. manufacturing industry as a whole. Within the report's conclusion, it is confident that the necessary adaptations that we are committed to making should involve a relatively easily achieved realignment of our priorities and governance systems, which we as a board do take encouragement from as we move forward.
Thank you all for listening, and I'll now open up the line for Q&A.
Thank you. If you wish to ask an audio question, please do so by pressing zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Again, it's zero one on your telephone keypad if you wish to ask an audio question. There'll be a brief pause while we wait for questions to be registered. Our first question comes from Anne Critchlow from Société Générale. Please go ahead with your question. Anne, please go ahead with your question.
Sorry. Good morning. Thanks for taking my questions. I've got two. So the first is what percentage of products you envisage coming from the Leicester region and from the U.K. in the future? And then the second question is about the manufacturing JV that you intend to set up. What are the financial implications of that? And if it's successful, is it something that you could foresee extending in the future? I mean, do you think that manufacturing would become central to the business model in the future? Can you envisage that?
So just to take the question on manufacturing in the U.K. and our soon-to-be-opened facility, we do think this will be a great benefit to the business, from a speed point of view. Obviously, supporting U.K. manufacturing and jobs in the current climate is a real positive also. Can I see us adding to this in the future? Perhaps, but obviously, we would like to get the first operation up and running, which we believe at this stage, hopefully, will be in the early part of 2021. Your other question regarding mix of U.K. product, I've stated many times previously, as the group expands and requires further capacity, particularly around garment type and fabric, it won't be suitable for the U.K. to manufacture. And I give examples there.
For example, denim, you know, it's not a natural source to manufacture in the U.K., and there are other types also. Equally, for example, the brands we have, taken in the last sort of 12 months, Karen Millen, Coast, Oasis, and Warehouse, pretty much 99.9% of their supply chain comes from overseas, and we don't see an immediate change to that in the future. So while U.K. manufacturer is circa 40% today, I do envisage that mix will reduce as we go forward and we continue to grow in the next couple of years.
Okay. Thank you.
In terms of your second question, Anne, on the financial implications of the manufacturing JV, those are included in the envelope of the £10 million investment that we outlined, which is included in all the financial guidance going forward. Now, that £10 million is a mixture of CapEx and OpEx, and it will fall into two financial years, this current financial year and the next financial year.
Thank you.
Thank you. Our next question comes from Aneesha Sherman from Bernstein. Please go ahead with your question.
Hi, good morning. I have two questions, please. The first is, in the report, there seem to be some conflicting views on how much responsibility the buyers have into making sure they are picking vetted suppliers. Are you going to fundamentally change the way that the buyers place their orders and put more of an onus on them to make sure they're picking suppliers that have been vetted? And my second question is, in the U.K. specifically, sorry, can you hear me? In the U.K. specifically, will your supply chain cost increase even though overall for the chain you don't expect it to have a financial impact on your P&L? Thank you.
So I'll address the question on the buyers. I spoke this morning about our recent appointment of our new Responsible Sourcing Director and obviously the team in our sourcing. And one of their key responsibilities going forward will be effectively to set up and run the hubs of manufacturers in the different countries by which we operate. So effectively, from the buyer's point of view, who are today very focused on the fashion, effectively creating a menu that the buyers will use for the factories that they will work with. So the sourcing and compliance team will run the factories from an operational point of view, compliance point of view, and then the buyers obviously doing their piece around buying and product.
Equally, however, we have taken on board the findings of the report, and certainly we will be instigating a new training program across all of our buyers and across all of our brands, to teach the buyers effectively in with regards to the running of factories, costing of garments, etc. And on the overall cost increase in the U.K., we've stated quite clearly today that we're very confident that there shouldn't be an implication for our financial guidance going forward. And the way we see this is that we're going through a very detailed process with all the suppliers in the U.K.. We really want to stress that we want to give every supplier the chance to meet the required standards. But we also recognize that some may not be willing or able to make that change.
I think the report states as well that there's likely to be a consolidation in the U.K., but not so much in volume terms, but definitely in supply number of supplier terms. What we then think is that the growth in the business is coming as it is doing at the moment from more overseas sourcing. Overall, in the picture is that we're gonna get some areas where costs may increase and some areas where we may get cost savings. The key priority is to maintain our model and the lead times, which we are also very confident about. Overall, there's not an overall cost increase going forward, which is why we're maintaining the guidance. Obviously, we've outlined the GBP 10 million investment, which I've just spoken about, which is included in all of our financial guidance.
Okay. Thank you.
Thank you. Our next question comes from Georgina Johanan from JP Morgan. Please go ahead with your question.
Morning, guys. Thanks for taking my questions. Three from me, please. The first one, and I apologize if you lay this out somewhere, but just on the GBP 10 million investment, could you perhaps just give a bit more detail on sort of the, the larger buckets of that investment? 'Cause I do understand that, that you guys have a sort of fairly detailed breakdown in-internally of how that's gonna be spent. The second question would be sort of initial view of how much consolidation we might see in the U.K. supplier base, so kind of a, a rough number where you expect that to land.
And then the third one was, was just around your auditing process, particularly in the U.K.. I understand that you've sort of chosen to build an audit process that's different to some others in the U.K., which is the, the Fast Forward approach. Could you just perhaps explain why, why you didn't choose to be part of that and, and why you've gone down a different route, please? Thank you.
Just on the GBP 10 million, I think the call today is very much about the independent review. So I don't wanna talk any more about the GBP 10 million than we have done yet. And obviously, we've got our half-year results next week. So I wanna be very clear that this this call got to focus on the independent review. And then over over to Michelle.
I'll take the consolidation one. So, yes, will there be consolidation? Absolutely. Have we got a target specific on that at the moment? No, it's really gonna come around compliance. We've got an extensive audit program that is being worked through with our manufacturers in the U.K. at the moment. So, you know, it's really gonna be subject to that, but we're, we are clear there will be consolidation.
And, on the audit program itself, I guess in February, what we decided to do was to take control of that program by appointing a dedicated third party with sufficient resource to do a piece of work, over a period of time of 12 months to audit all our suppliers and, importantly, their subcontractors that they work with. So the initial process was to take control, do that program, and then the output of that program will be that we will look at alternative models. And we're in conversation with Fast Forward. That's something that we recognize as a key initiative. So I think the more to come on that once we conclude our initial program.
Thank you very much. Super clear. Thank you.
Thank you. Our next question comes from Ben Hunt from Investec. Please go ahead with your question.
Morning, can you, can you hear me?
Yes.
Hi. So I just wanted to push a little bit more on Georgina's question on the consolidation target. I think you've previously said that 40% of the Tier 1, the 80% of the output in the U.K.. I mean, can you give us some details to how radically that is likely to be cut to, or if it will at all, or maybe a little bit more detail on where you see that going?
There'll be some movement in the Tier 1, but I think really where we'll see, the movement will be in the Tier 2. So the subcontractors as such, as we run through the compliance program with these guys. So not, you know, in a summary, I'd say, you know, some movement in Tier 1, but most of the movement will come in the Tier 2.
Okay. All right.
Thank you. Our next question comes from Simon Irwin from Credit Suisse. Please go ahead with your question.
Morning, everyone. First, obviously, the focus of this report was entirely on the U.K. and Leicester. What confidence can you give us that similar issues don't exist elsewhere in the world? Second, given that the Ethical Trading Initiative, we're not interested in participating in the Levitt report, will you be engaging a lot more with the various NGOs that most of your peers have signed up to and engage with, but you generally don't? And are you going to be publishing a dedicated sustainability report?
So with regard to our global supply chain, and again, we have stated before that the piece of work we're carrying out currently in the U.K., with regard to the extended audit and compliance program, that we're using the U.K. as a model effectively, for the rest of the world. And in the next couple of weeks, that program actually rolls out globally. So we want to have one standard, no matter where in the world we are making our product.
Yeah. And I'll take the question on the sustainability report and NGOs. So on the 8th of July, we committed to publishing our sustainability report at the end of this financial year, so April 2021. On engagement with NGOs, I think historically that's a fair position that you arrived at, but we've made progress on that over the last year. We are a signatory to the Slave-Free Alliance, and we've engaged consistently with the Slave-Free Alliance both during this process and prior to that.
And the recent recruits that we've brought into the sustainability team come from a background of engagement with NGOs, and that's something that we're absolutely committed to delivering going forward. During the process of this review, we've engaged with the GLAA, and I'm very aware that there are lots of conversations across other brands and retailers around the Leicester position, and we're very, very committed to being, you know, a big part of that conversation as we move forward.
Okay. Thanks. And just finally, this obviously leaves your business increasingly reliant on air freight. I mean, how much do you think air freight will represent of total volumes, on the buying side going forward? So are you comfortable with that?
I think when you talk about air freight, obviously that's an assumption around Asia in terms of where we take in product from there. And again, we even today have quite a balanced program around some of the more basic product where we ship by sea, but obviously the more fashionable product that we take by air. But equally, if you look at Europe, and if I highlight, for example, Turkey as an example, you know, a fast truck from Turkey with 2 drivers is approximately 5 days. So pretty quick also in terms of it. So there's a balance depending on the geography, and the type of product that we are taking.
Okay. Thank you.
Thank you. Our next question comes from Wayne Brown from Liberum. Please go ahead with your question.
Morning. Thanks for taking my question. Can you remind us if there are any other investigations which are going on concurrently or will happen in the future, be that government-led or by the, rumored by the National Crime Agency, etc.? And if that is the case, are there any areas in this independent review which didn't necessarily conclude anything, with finality that would still give you, from a risk perspective, concern that could rear its ugly head in a government review or other investigations? Thanks.
I think on that, we, you know, Alison Levitt, Ms. Levitt's produced a very substantial report which covers a lot of areas. So I think we've got confidence that the findings of Ms. Levitt's reports are incredibly detailed. In respect of other, sort of government-led, investigations, we've not been involved in anything. We're aware that the GLAA are working in the Leicester area, and we're committed to engaging with them on that. So, I think that's the sort of the extent of our sort of direct awareness.
Okay. Thank you.
Thank you. Our next question comes from Adam Cochrane from Citi. Please go ahead with your question.
Hi. Good morning, guys. Congratulations for publishing the full report and the suppliers list. I think that's really good. In terms of my questions, the first one is, how do you go about actually supporting the suppliers in terms of them making improvements? Do you give them one strike and out, two strikes and out? Do they get 30 days, 90 days? How on the ground are you going to go about actually giving them the opportunity to improve before your consolidation process?
Secondly, can you just give a bit of clarity on your statement around the independent oversight for the change agenda? Is that somebody who is working for Boohoo or somebody who's external that you're appointing to oversee it? I couldn't quite work out how that sentence. Are they independent, truly independent or not? Then the third one is at the board level. You've sat there and talked about how easy these things are to fix with no financial cost. At any board meeting, have you sat there and worked out why this hadn't been done sooner? Thank you.
So I'll take the three questions there. I'll take the change agenda point first. So, we are looking to appoint an independent individual, most likely working alongside a, let's say, a management consultancy company. And they really sort of giving the transparency and the independence around the change agenda that we have outlined this morning. So we're not at a point to announce the individual or the company yet, but we hope to do that quite soon, in terms of where we are. So hopefully that clarifies that point. With regard to the supporting suppliers through the process, it's you're familiar with an audit agenda. It's not just about a one-time visit. So, you know, the initial visit will be kind of in advance communicated and communicated with regards to what the audit will be requiring.
The audit then on the first visit is clearly unannounced. From that audit visit, there will be a level and a series of recommendations around, let's say, potentially things that warrant right on the day and that need to be put in place. Alongside those requirements, there will be a timeframe that the independent audit company will consider a reasonable time to put right the changes. Again, a follow-up visit will then happen and maybe even a third one to ensure they're in place. If by any chance the issue or issues identified on the initial audit are to take a longer period, that will be specified.
But equally, if we find something that we feel, and I say we, the audit company feels, you know, cannot be fixed, or the manufacturer needs a third-party input to help them with that, we'll work through that. So it's, you know, in summary, look, the manufacturer is given reasonable time to put right anything that the auditor may find.
Is that a different approach from when you announced this process at the start? You said you'd got rid of a couple of the suppliers straight away. Is this a different approach from what you took previously?
I think in terms of the start of this process, the answer is no. And, you know, if a supplier is suspended, that will mean that, look, we just didn't feel they could or didn't have the right attitude to put in place the changes that were required.
In terms of at the board level, this sounds relatively quick, and easier than I think I was expecting the process to take. Have you sat there and looked through these responses and said, "We really should have done that sooner"?
It's Neil here. I don't think we should underplay this. There's a lot of effort going into looking at our governance structures. And while the report says, I think that these should be relatively easily implemented, I think there's a lot of work to go into this, and we recognize that. So I don't want to trivialize it. And I think it's fair to say at board level, there's been a lot of soul searching, as you can imagine. We only got this report in this form yesterday, and we published it straight away. And so there'll obviously continue to be more soul searching, but that will result in tangible improvements in the way we're stepping up governance, both in the supply chain and every aspect of the business. I suppose that's what I'd say about that, and we're going to be transparent about those improvements as well.
Okay. Thank you.
Thank you. Our next question comes from Michael Benedict from Berenberg. Please go ahead with your question.
Morning, all. Yeah, just a quick one from me. Do you think the actions you're taking can help the U.K. textile manufacturing industry grow? And I guess if other retailers are able to start using U.K. manufacturing, does it in any way diminish Boohoo's competitive advantage?
We're very positive about manufacture in the U.K.. We see a great opportunity for Boohoo. You know, the reason for opening up our own manufacturing facility in Leicester, I think, supports that point. In terms of the opportunity for other retailers, you know, I think that's really a win for the other retailers, effectively. We're very confident about our opportunity and about the growth. And equally, you know, around creating jobs. You know, Boohoo is a U.K. business. It was founded just over 13 years ago. You know, we've grown a great business. We employ thousands of people directly in the U.K., and we'd like to continue that growth.
We've taken some brands back from administration in the last 12 months, so Karen Millen, Coast, Oasis, and Warehouse that perhaps may not have existed today. We've maintained hundreds of jobs in those businesses. So we're, we're very confident about the U.K. and the U.K. as a textile and a fashion origin.
Great. Thank you.
Thank you. This now completes the time that we have for today. I will now hand back to the speakers for any of the remarks.
We just thank everybody for joining the call this morning. And again, you know, the full publication of the report, I think, is a clear marker of our transparency and the job that we want to do going ahead. So look forward to speaking to you all again in the next couple of weeks. Thank you. Bye-bye.
Thank you. This now concludes our conference call. Thank you all for attending. We now disconnect your lines.