Good morning, everyone, and welcome to Global Fashion Group's Q2 2025 Results Presentation. I'm Christoph Barchewitz, CEO of GFG , and I'm joined today by our CFO, Helen Hickman. I will start the group highlights for Q2 and then cover our regional results and key developments. Helen will then take us through the group results and our outlook. After that, we'll open up the call for Q&A. We've had a successful quarter in the first half of the year, maintaining our top line and improving our profitability, positioning GFG to deliver sustainable future growth. We continue to stabilize NMV, driven by robust double-digit growth within Latin America and strong momentum in ANZ, offset by continued top-line declines in SEA. Our top line has been supported by improving customer trends across the group, with continued active customer growth in ANZ in the second quarter.
Churn rates have improved across all our regions, and in LATAM and ANZ, new and reactivated customers exceeded churn for the period. Gross margin expansion has continued, primarily supported by retail margin improvements as a result of inventory management and increased marketplace participation. The combination of gross margin growth and continued cost control measures has delivered significant savings, resulting in a material uptick in adjusted EBITDA margin for the quarter. We delivered a normalized free cash flow break-even quarter and ended the period with a strong cash balance of EUR 151 million performer cash. In the quarter, we delivered net merchandise value of EUR 249 million, decreasing by 0.4% year-over-year on a constant currency basis. Continued efficiency in inventory management led to a fresher assortment, lower retail discount rates, resulting in a stronger retail margin.
This, combined with a strong marketplace performance, drove a 2.9 percentage point increase in gross margin to reach 47.7%. Our adjusted EBITDA margin improved by 3.9 percentage points to positive 1.8%, our highest ever Q2 margin, benefiting largely from the gross margin uplift and ongoing cost efficiency program. We ended Q2 with 7.4 million active customers, down 2.5% year-on-year, marking our fifth consecutive quarter of slowing decline, assisted by the growth in our largest market, ANZ. These customers placed 4.1 million orders at an average order frequency of 2.3x . Next, we have our segment results and business updates. We remain firmly focused on executing our strategic priorities with discipline, and we're making good progress across all of them. Our priorities are to provide a best-in-class customer experience, being the preferred partner for brands and operating in a way that is positive for both people and the planet.
With that in mind, let's review each region's performance and key achievements in advancing our strategy. You may recall we shared this chart in our full year results back in March. It depicts the ratio of new and reactivated customers over churned customers since before the COVID period. As a result of ongoing initiatives to retain active customers, reactivate past customers, and attract new customers, our overall trends continue to improve, with our customer replacement rate now close to 100%. Notably, both LATAM and ANZ increased their overall customers in the period, whilst SEA continued to fall. This has been achieved whilst maintaining marketing spend, as we remain focused on attracting and reactivating high-value customers and further integrating our marketing and CRM capabilities. While the trend in SEA continues to be challenging, we're confident in our plans to reverse the decline and return the region to growth.
Looking first at LATAM, Q2 performance demonstrated sustained positive momentum on the top line, with a 10.2% year-on-year increase, marking the fourth consecutive quarter of NMV growth in the region, with both Brazil and Colombia experiencing double-digit growth. Strong retail execution delivered 1.2 percentage points of gross margin improvement year-on-year to 46.7%. In H1, LATAM's adjusted EBITDA margin improved by 5.3 percentage points year-on-year to - 1.9%. This improvement was primarily a result of continued actions on fixed costs and a better retail margin. The decline in active customers slowed to - 0.3% in Q2, marking the sixth consecutive quarter of an improved trend. This was supported by better customer retention and replacement rate. Next, let's turn to some specific examples of how we have improved performance in LATAM. We continue to improve our customer KPIs.
New and reactivated customers exceeded churn, which was down in the period due to our focused marketing and commercial efforts to retain and re-engage customers. During this period, we trialed a new CRM communication tool aimed at engaging target customers who downloaded our app within the past week but had not yet signed in. This initiative focused on boosting first-order conversion rates, resulting in more than a 20% increase in conversion in both Brazil and Colombia. Our LATAM team has achieved a 15% increase in H1 NMV across our 10 biggest brands. This success was driven by creating collaborative business plans with our largest brand partners, setting shared goals, and executing targeted actions to ensure optimal stock availability in our fulfillment center. We have employed AI to produce marketing campaigns pioneered during our Valentine's Day event in June.
This hybrid approach, using human creativity and AI capabilities, delivered significant gains in our ability to create campaigns at speed, in addition to significantly reducing production costs. Now moving on to SEA. SEA top line remains challenged due to heightened competition across markets, with NMV down 22.5% in Q2 year-on-year, partially impacted by the earlier timing of Ramadan, which fell fully in Q1 in 2025. While the top line declined, gross margin advanced 4.5 percentage points, largely supported by a mixed shift to marketplace and platform services and actions to manage excess H stock. SEA continues to focus on strengthening its overall market position, and a number of actions have been taken to turn around performance.
These actions include a transition to a purely functional- led management team structure across our five markets, the removal of non-core categories and long-tail marketplace assortment, a move towards a more focused and curated offering in our core categories, and company-wide cost reductions. As a result of our strong gross margin improvements and robust cost actions, we have delivered a significant increase in adjusted EBITDA during a period of declining volumes. In Q2, we delivered a 13% reduction year-over-year in our total cost base. This was largely driven by a series of cost reduction initiatives and, to a lesser degree, the volume-driven impact on our cost base, partially offset by inflation. As a result, at the end of Q2, headcount in the region was 22% lower year-on-year.
As part of our plan, we have sharpened our fashion and lifestyle offering by supporting our largest brand partners across retail and marketplace, and focused on our core categories: apparel, footwear, accessories, and sportswear. As part of this process, we are removing SKUs in non-essential categories and the long tail. The turnaround in SEA is well underway, and I am pleased to share the appointment of our new CEO for the region. Felipe Garcia Alvarez brings over 20 years of experience in fashion and consumer industries, having held fashion e-commerce leadership roles at several major e-commerce organizations. We are confident that his expertise, leadership, and vision will be instrumental as we drive our strategic plan to position the business for long-term success. We remain committed to improving SEA's performance and continue to look for opportunities to drive efficiencies whilst improving the customer proposition in the region.
With our proven track record of successfully transforming our LATAM business, we are confident in our ability to deliver improved results and achieve profitable growth in SEA. Now looking at ANZ. In ANZ, Q2 NMV increased 5.8% year-on-year, driven by high participation in the Vogue and Mother's Day campaigns, enhanced delivery offerings in key cities, and the growing strength of our overall platform proposition. Growth in higher margin categories and the optimization of our aged stock resulted in retail margin improvements that contributed to a 3.5 percentage point increase in overall gross margin, reaching 48% in both the quarter and the first half. In addition to a gross margin improvement, our continued cost efficiency program drove year-on-year strengthening in our adjusted EBITDA margin, with a 3.7 percentage point increase to 3.2% margin for the first half.
Another key highlight in the region has been the 4.3% increase in active customers in Q2. This reflects the strong appeal of THE ICONIC's unrivaled retail and marketplace brand portfolio and our ongoing operational improvements. The continued success of the "Got You Looking" master brand campaign has also boosted its momentum by increasing customer engagement and awareness. In ANZ, we have continued to deliver operational improvements. Building on the success of our OWMS implementation, we have expanded delivery capabilities across key urban centers, including reducing delivery times for free standard delivery in Melbourne to one to two days, positioning THE ICONIC as one of the fastest e-commerce retailers delivering to Melbourne. We have expanded our parcel locker capabilities, now offering customers an express delivery option. Our order ship to parcel lockers have grown by 40% year-on-year, demonstrating the strong customer demand for flexible and faster delivery solutions.
The region has delivered some excellent campaigns in collaboration with some of our largest brands. Highlights include our OutRun Your Delivery collaboration with Nike and Speedo's Run and Plunge campaign, both of which have driven increased customer engagement with The Iconic and our partner brands. For example, the Nike campaign attracted over 1,000 observers and participants, generating nearly 500,000 organic social impressions. We are differentiating ourselves in the ANZ market by becoming an enabler to the fashion industry, leveraging our scale, fashion credentials, and marketplace platform services. Our Fulfill Buy capabilities are making a big difference for New Balance, who moved their highest volume SKUs to Fulfill Buy THE ICONIC in March to accelerate their growth, with the rest of the range utilizing dropship. This allows THE ICONIC customer to receive all purchases of items from our warehouse in one parcel, in a timeframe that suits them.
As a result, New Balance experienced a 26% increase in conversion on the FBI assortment. Returns are also simplified. Products come directly back to THE ICONIC , and we're able to get them back on the shelf quickly, reducing costs for the brand. Typically, about half of these return products are sold within a week. The New Balance story is a great example of how our platform strategy is strengthening our leading market position and resulting in a continued increase in marketplace share during the period. GFG continues to advance its platform strategy, with marketplace comprising 40% of NMV in H1 2025, up 1.1 percentage points year-on-year. While the present increase is only moderate, we're still making progress as new brand partners are onboarded and set to scale with our suite of services.
Our target remains to increase to around 45%, whilst ensuring we optimize our customer experience and deliver value to our brand partners. Our share of items fulfilled by GFG and cross-docking has increased by 2.2 percentage points to 38% of marketplace items shipped. Fulfilled by GFG delivers an enhanced customer experience at scale to our fulfillment operations, while also contributing incremental gross margin to GFG . Platform services represent 3% of revenue. We continue to advance offerings in this space to grow this revenue stream toward the 5% target. I'll now hand it over to Helen for the group results and outlook.
Thank you, Christoph. Now let's move on to our group KPIs. The rate of active customer decline has continued to slow, with a 2.5% year-on-year decrease in Q2. As mentioned previously, we're seeing stronger customer trends in both ANZ and LATAM, with new and reactivated customers exceeding churn in the quarter. Order frequency remains stable compared to quarter one, 2.3x , but declined marginally versus last year. Before going into the detail of our financial metrics, I'd like to take a moment to explain the impact of recent FX movements on our financial KPIs. For the first half of the year, we've experienced FX devaluations in our key markets, notably a 13% devaluation in the Brazilian Real and a 5% devaluation in the Australian Dollar against the Euro.
As a result, our reported NMV has been negatively impacted by EUR 30 million in half one, and our adjusted EBITDA to a lesser extent by EUR 0.4 million. To mitigate the impact of FX and highlight the operational performance of our business, all growth rates presented are on an FX neutral basis. In the second quarter, NMV was relatively stable with a small 0.4% decline, with marketplace share of group NMV increasing to 39%. In half one, we saw NMV growth on a constant currency basis of 0.4% year-on-year to EUR 476 million, the first half-one growth we have delivered since 2022. During both quarter two and half one, orders declined by 2.1%, mainly due to reduced traffic. However, this was partially offset by improved conversion rates. Notably, the rate of order decline has continued to slow from the 16% decline experienced during half one last year.
Average order value grew 1.8% year-on-year in Q2 on a constant currency basis, largely driven by price inflation and a favorable category mix shift. Due to the devaluation of the Brazilian Real and the Australian Dollar against the Euro, our AOV is down in absolute Euro terms versus the prior period. Now looking at revenue and margins. In Q2, whilst revenue declined 1.2% on a constant currency basis and 0.3% in the first half, gross margin increased 2.9 percentage points year-on-year to 47.7% in quarter two. This improvement was driven by retail margin expansion through a healthier inventory profile with reduced discounting and lower aged stock levels, along with an increased share of marketplace and platform services. Adjusted EBITDA margin also had a significant uplift, improving by 3.9 percentage points year-on-year to reach 1.8%, our first positive second quarter on a like-for-like basis.
This development is the result of our continued focus on enhancing gross margin and disciplined cost management across the group. As we move forward, we remain focused on maintaining these improvements and delivering further progress towards our goal of achieving sustainable profitability. Moving on to costs, our commitment to continued cost efficiency resulted in a EUR 26 million cost reduction year-over-year in half one 2025. This is a 7.8% decrease on a constant currency basis. The majority of the reduction was due to cost and efficiency initiatives. The OWMS system integration in ANZ is delivering significant operational benefits. Additionally, further cost reductions were achieved through targeted actions, primarily from headcount reductions, relocating headcount to lower cost regions, and marketing efficiencies. Regional FX devaluations contributed to approximately 1/3 of the absolute cost base reduction.
These efficiencies have helped offset top-line pressures and improved our overall profitability, whilst allowing us to continue to invest in projects that support our long-term growth. We continue to maintain a healthy inventory provision with a key focus on reducing aged stock. The proportion of aged inventory, that being stock held for more than 180 days, improved to 15% compared to 20% a year ago. As we return to top-line growth, we'll start to invest further into inventory to support the increased sales. We remain committed to manage this in an efficient way by carefully monitoring sales rerates and inventory days current. Thanks to our efforts to improve our inventory management, we've successfully reduced our inventory days to a healthy level over the last three years. I'd now like to turn our focus onto cash. In the quarter, we broke even on normalized free cash flow.
Whilst this was a similar performance to that seen last year, the composition was different. In Q2 2025, the cash flow was driven by adjusted EBITDA profitability of EUR 3 million, rather than significant one-off working capital gains, which we saw last year. This makes our cash delivery more robust and sustainable going forward. Our level of leases remained broadly flat year-on-year at EUR 4 million, and whilst lower than last year, we delivered further working capital gains of EUR 6 million in the period. Our total CapEx reduced significantly to EUR 3 million in the quarter, down year-on-year as we annualize the elevated CapEx investment in 2024, driven by the OWMS system project. Our 2025 investment is mainly focused on internal technology developments. In the first half of the year, our normalized free cash flow was a EUR 62 million alpha.
We closed the quarter with a strong liquidity position, with EUR 151 million of pro forma cash and EUR 97 million of net pro forma cash as at the end of June. Our net pro forma cash position, which excludes our outstanding convertible bond liability and other smaller loans, has remained broadly flat since quarter one. This follows a EUR 7 million discounted bond repurchase during the quarter. We now have EUR 47.6 million of convertible bond liability outstanding and have canceled EUR 257 million of the repurchased bonds. We remain open to opportunities for further buybacks whilst considering our overall cash need. Before we open the floor to questions, I'd like to reconfirm our full year guidance for 2025 as outlined in March. We have made strong progress in the first half of the year with positive customer and top-line trends, continued gross margin progression, and incremental cost savings driving further adjusted EBITDA improvements.
It's important to note that the second half of 2025 lacks ANZ and LATAM's improving performance in late 2024, creating tougher comparators. The second half historically accounts for more than 50% of NMV in the year, and while there remains some volatility and uncertainty, we remain confident in our guidance for full year NMV year-on-year growth of between -5% and +5% on a constant currency basis. We expect to see year-on-year adjusted EBITDA improvements in half two, carrying on the momentum that we've seen in half one. This puts us on track to deliver our full year guidance and adjusted EBITDA break-even for 2025. Our direction on leases and working capital inflow has not changed since the start of the year. We're revising our CapEx indication from circa EUR 20 million to circa EUR 15 million, primarily due to the timing of our regional investments.
The combination of these factors sets us up well to reach our longer-term ambition of achieving positive normalized free cash flow. We'll now open the call to your questions. If you'd like to submit a written question, please click on the speech bubble at the bottom of the screen. Thank you.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We'll pause for a brief moment. Thank you. We'll now take our first question from Anne Critchlow of Berenberg. Please go ahead.
Thank you. Good morning, everyone, and thank you for the presentation. I have a number of questions, so I'll ask them one by one. Starting with the timeline for Southeast Asia turnaround, it's great to see LATAM and ANZ improving further. Just wondering when we might expect Southeast Asia turnaround. Is this a kind of multi-year project? Related to that, as you're cutting the long tail of brands, as you mentioned in the presentation, do you think that will impact sales trends? We're still likely to see a decline but could be accompanied by improving profit. Thank you.
Thanks, Ann. I would say we're probably somewhere in the first quarter or third of the overall turnaround. It's obviously very hard to predict in terms of when do we see what you're probably looking for, which is a positive NMV trend or return to growth, which is ultimately very much our objective. In this initial phase, we are very much focused on laying the foundations for that, resetting the cost base, which we've largely done, and also making sure that any revenue or NMV streams that are non-core or not profitable are basically removed, which does have a negative impact on the top line. It is not very sizable, so you shouldn't think about this as most of this decline is driven by things in terms of categories or assortment or markets that we are no longer focusing on.
It is a contributor to this and will probably take us until Q2 or so next year to fully lap that. That I think is important to keep in mind. We do think that we are on a path for consistent improvement in profitability and gross margin overall over the next couple of quarters. The more tricky question is how can we go from the - 18 in the first half? I think you're aware of the Raya or Ramadan calendar shifting from Q2 to Q1. I think you shouldn't read too much into the Q1, Q2 sequential. It's pretty similar, high single digit ultimately if you normalize for that for the full first half. Our objective is certainly to bring the level of decline down gradually over the next few quarters and then eventually move into positive territory.
We will do this with a very strong focus on profitability and a very disciplined approach around both inventory. Rather be on the low end of intake and very conservative around this and a very conservative approach to marketing spend as long as we're not seeing the customer flywheel move in the right direction. We are not going to prop up NMV with unhealthy marketing spend. I hope that's helpful in addressing this one.
That's very helpful. Thank you. Moving on to the Fulfill Buy proposition, thank you for those extra details in the presentation. Could you talk a little bit about differences in Fulfill Buy between the regions and to what extent you can transfer, you know, the success in Fulfill Buy at THE ICONIC into LATAM and Southeast Asia?
Yeah, sure. We actually, Australia has been the last market to launch Fulfill Buy. We are now having Fulfill Buy services in all of our four markets, our major countries alive, so Brazil, Australia, and also across Southeast Asia. It is basically the same business model everywhere and works very, very similarly. What we're also doing, and I think New Balance is a good example for that, is looking at hybrid approaches where part of the assortment is sitting in the Fulfill Buy. Another part may come from drop shipment, or in some cases we also have brands where part of the assortment is sitting in the retail business, and then we're complementing that with either size refills.
If it's out of stock in a size in retail, it gets replenished from a marketplace, or the longer tail of the assortment that we don't want to buy in retail sits on the marketplace. We're really mixing this to optimize ultimately availability, stock efficiency for both the brand partner and for us. The one call out where there is a difference is that in Southeast Asia, we also operate the Fulfill Buy services for sales on brand.com as well as on other platforms. We really offer what we call a single stock solution of all inventory for the online channel sitting in one warehouse managed by us. H&M is a good example as one of our partners in Southeast Asia who are operating in this model with us across most of the markets there.
Great. Thank you for that. Just thinking back to one of the comments you made in the last quarter that you might rely a little bit more on marketplace to meet any sort of additional customer demand and be a little bit more conservative on inventory within retail. Are you still sort of continuing on that trend, and do you think that's an ongoing trend to continue reducing your core inventories within retail, relying a bit more on marketplace?
Thank you. Hi, it's Helen here. Good morning. Overall, you'll have seen a constant gradual increase in our marketplace share. It's about a little all NMV. As Christoph mentioned in his presentation, whilst in the quarter we're at 39%, our overall target model is closer to 45%. Based on that, we are looking at how we will increase our marketplace share. Obviously, we need to make sure that that is done in alignment with the assortment that our customers want and also how it works best also for our brand partners. As we return out of a period of decline and into growth, we will then obviously also want to start investing, but cautiously a little bit more back into inventory to be able to support that retail growth. Very much a blend, and we're not stepping away from that sort of NMV participation increasing slightly to closer to 45%.
Okay, great. Thank you. Perhaps you could talk a little bit about how the trend was through Q2. I think you know April was perhaps a bit softer than Q1. You mentioned the shift of Ramadan as well. If you could comment a bit on the exit rate, please, and maybe current trading if you're able to.
Yes, definitely. Obviously, there's always differences within months and also within months within regions, depending on some of the seasonality. You know we have Valentine's Day in the summer, or in our summer in Brazil as an example, but that's not the case across our other regions. Overall, I think, and especially then you mentioned sort of current trade, we're broadly seeing a similar trend across current trend versus that that we've reported. The inter-month volatility isn't significant or concerning. The sort of trend around growth in our two largest markets, and then obviously still the double-digit decline that we've been seeing in SEA, is currently still prevailing.
Thank you very much. Yeah, great. Thank you. On the subject of tariffs, could you talk a bit about the developments you've seen across consumers, your competitors, and suppliers? Any shifts there? For example, are you seeing lower consumer confidence due to tariffs or increased competition in the market, or better or worse terms from suppliers? Anything to comment on, please?
Yeah, thanks, Ann. We've obviously been following this very closely. I think it's quite hard to tell what the actual impact is in our markets. We haven't seen any dramatic impact on the supply side, which initially was our concern. There's obviously continued news flow about this and changes all the time. Certainly, Brazil was some of the headlines there. It's definitely not a confidence boost to the economy there. However, I think I would describe it more broadly as a sentiment of broader concern about what's happening in the world, tariffs being one aspect of that, but just the other geopolitics headline, conflicts, political instability, all those types of things, in addition to consumers certainly not feeling great around some of the interest rate environments and inflation, et cetera.
I would say tariffs probably don't make it to the very top of the consumer mind in most of our markets. It's more a broader sense of this is definitely not a period of very positive and strong, but it's more shades of negative, I would say, from a consumer sentiment that we've not had for quite some time.
Thank you. That's helpful. In Australia and New Zealand, where you seem to be taking market share and have very strong NMV growth of 5.8%, do you have a sense of the online apparel background market growth in this region, just as the context?
Yeah, we think we're probably a little bit ahead of the overall market, but not that much. We think the market growth is somewhere in the low to mid-single digits as well. We definitely have the aspiration to be taking share and especially to do that in the mid to higher- premium segment of the market. There's obviously a very big value or high volume unbranded segment in the market as well that has seen a lot of volatility, especially from the cross-border online players in Australia. We're obviously quite a bit away from that with our price positioning. In that segment, we don't really follow that that much in terms of the trends there. In our segment, we think we're positioned well and probably taking a bit of share.
Okay, thank you. You alluded there to maybe Shein and Temu. What have you seen from them in terms of marketing in your territories? Any big changes?
We have seen from them as well as TikTok Shop, where in some markets a more recent entrant than the other two, continued very intense competition. Also, the general merchandise platforms, MercadoLibre in LATAM and Shopee, continue to compete very aggressively. I think the main area where we see an impact, because ultimately the proposition towards the customer, the types of customers we're going after, et cetera, is quite distinct. Where we do see a bit of impact is where there is overlapping assortment with some of these platforms, which is obviously less so with a Temu or a Shein, more so with the general merchandisers. What they often do is subsidize that very strongly and basically give no commissions or even basically negative commissions. That has an impact in our price competitiveness.
We follow that sometimes, but not all the time, depending on the specific situation with what brand it is, what product it is.
Thank you very much. Okay, moving on to the gross margin, please, and profitability. I wonder if you could spit out the main drivers of gross margin increase in terms of sort of quantifying the impacts there that you touched on. Also, perhaps talk a little bit about the outlook and whether aged stock, for example, aged stock reduction, can continue to drive gross margin increase.
Yes, Ann, definitely. If we sort of take the quarter two gross margin uplift of 2.9%, I'd think of it as sort of the two main buckets. Retail margins are probably driving about half of that improvement. As a result of things like, as you say, our aged inventory, but also a better focus on the quality and the timeliness of our assortment, the increase in platform services and marketplace participation is then driving the majority of the rest of that increase. Going forward, we continue to improve, or we continue to focus on improving our gross margins. I would say probably at a slightly more moderated level than we've seen in the first half of this year. We continue to do work around aged inventory. We continue to do work around the quality of our assortment.
As we start to sort of lap some of those more significant activities that we've done, I'd expect to see improvements, but more moderated into the second half.
Thank you very much. That's really helpful. On marketing, I was very interested about what you said regarding AI-driven marketing in your presentation and how that can reduce costs. Could you talk a little bit more about that and how it works? Also, you know the outlook for perhaps marketing cost to sales, given the use of this AI in marketing?
Yeah, it's a very exciting development for sure. There's huge opportunities, but there's also obviously some risks around this as customer behaviors shift. You know, discovery moves mainly away from search engine into ChatGPT and the likes and all of that. The specific example we used here in the presentation was very much around the imagery and the marketing campaign creation, which for us is a huge part of the business. Obviously, that always comes with a cost in terms of preparation, photography, video, editing, design, etc. The more we can do that with AI in terms of actually creating the imagery, but also automating a lot of the process flows around this, it has two effects. It just drives the cost on a per campaign basis down. At the same time, because of that cost going down, we can do smaller campaigns and more targeted campaigns.
If you think about it, we may have only done two or three campaigns for a big sales event in the past. We could now do 20 and probably overall still at a lower cost of production to all of that and without building up a huge organization around it. I think what it does, it helps us to become more segmented in how we speak to different parts of our customer base and thereby increase the relevancy. Instead of trying to do a campaign that tries to speak to 1/3 or 1/2 of all of our customer base, we may have campaigns that are really only aiming at 10% or 20% or even less of our customer base. This is one aspect where automation and AI and the capabilities around that can really change it.
I think where we're also seeing a lot of opportunities is just in the automation and AI use around all of our marketing channels, CRM in particular, but also when it comes to how we think about which products we're using for performance marketing and really all the learning behind and the optimization behind that. Obviously, there's a long history of the marketing tech stack that is trying to do many of those things, but I think the incremental capabilities, some of which we've started deploying well ahead of the general public looking at generative AI, more from the side of machine learning and all those types of things. There's a lot here. Another area I would highlight is certainly product description and those types of things, and also on the search side where our search is becoming a lot smarter. I'll give you one example.
If you type in a brand that we do not carry, we can now, because we're using external data, basically understand what that brand is in terms of the types of product and give the customer similar products to that brand. That's just using potentially whatever the website or the web shop of that brand that we do not carry to then find a similar product. I think that's very exciting for the customer when you may have a certain product in mind, you think you were looking for this brand, but you then receive recommendations of similar products. In this broader discovery marketing area, there's a huge amount of opportunities. Many things that we're doing are experimental, they're early stage, and we're learning as we go, but we feel very well positioned to be in the top quartile of players in this space.
Brilliant. Thank you. Really interesting. Could we move on to operating cost savings? You're still achieving these in Q2, but I'm just wondering how we should factor those in into the second half and maybe beyond into 2026. Should we be relying more perhaps on top-line growth and leverage for margin improvement?
We've still got a program of cost efficiencies and cost savings. We're definitely focused on our cost base for the balance of the year. Actually, it's now perhaps a little bit more embedded in our DNA in the way in which we're really challenging all costs and efficiencies. I would expect continued savings into the second half. Some of that will be through just natural initiatives, for example, headcount reductions that we've done in the first half. Obviously, we'll then see that continue into the second half. Also, where we've got efficiencies, things like fulfillment efficiencies through things like OWMS. Our second half is a much higher volume half. As a result, we'll be getting proportionately high efficiencies coming through there. Definitely think about a continued focus around cost. As we've mentioned, our top-line, there is volatility out there.
We very much really want to be able to protect the top-line volatility by focusing on efficient and well-managed costs.
Okay, great. Thank you. That's helpful.
Thank you. Once again, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. For questions via webcast, you can submit your questions by clicking on the ask a question button. Thank you. We'll now move on to our next question from Russell Pointon of Edison. Your line is open. Please go ahead.
Morning, Christoph. Morning, Helen. Thanks for the update. I have a couple of questions on Southeast Asia, if that's okay. First of all, I appreciate you've been reducing SKUs, and that affects the revenue growth. I was wondering if you could talk about are there other more encouraging signs on the new products and brands that you've been introducing?
Good morning.
From a customer reception and sales perspective.
Good morning, Russell. Thank you. Yeah, there are definitely some encouraging signs. I think what is very important here is that we, you know, the SKUs and the brands that we are removing from the assortment are really what I would consider the very long tail and the fringes. They accounted for a small single-digit percentage of sales in the last 12 months or so. What we're doing on this, on the more positive side, is that this is really driving focus both from the team, but also in terms of just how the traffic moves towards our larger brands. We have a fantastic set of brand partnerships, you know, across sports, women's, men's apparel. We also have a pretty good off-price category in luxury. That is, there is a very strong assortment.
I would more say it was maybe a little bit buried under just too many SKUs and the discoverability for the customer, therefore, a bit impaired. That's what we're really focusing on, driving the traffic and the attention and the marketing effort towards especially our top 30 or so brands that really make the best bulk of the business and have much further room to grow when we look at the level of reach and scale we have. We have roughly 2 million active customers. There is a lot of scale, actually. I think we also believe we can drive wallet share. I think the other thing that we're doing here, which I think is a very positive, is we have a, what we call ZALORA VIP program geared towards membership and loyalty.
There's some opportunities to really optimize that and make sure that our highest value customers really are part of that program. We're pushing that as a strong priority because within that customer base, we obviously have the usual distribution of, you know, a top 10 or top 25% of customers being a very, very large driver of the overall business. Really focusing on the needs of those customers is a big priority. We made some good focus in that.
Okay, that's great. Thank you. Just ahead of the new CEO arriving in September, I appreciate you've been quite busy, Christoph, with two jobs. Have any initiatives been put on hold ahead of his arrival in September, or has progress been a bit slow anywhere?
I would say not at all. If anything, the opposite. Generally, my approach to this and working very closely with the team there, and we have an excellent leadership team in the region, has been to say, let's do all the hard and really difficult choices as quickly as possible and move on from that, and prepare for this next chapter under a new CEO. Certainly, my objective is to not leave behind unresolved issues for him, but rather lay the foundations for what's next. I think we've had a similar situation two years ago in LATAM, and I think that has worked very well.
We're applying some of that template of how we also make sure that the handover in leadership is not creating a moment of change in direction or ambiguity, but rather really keep on running hard at improving the customer experience and working closely with our brand partners. One thing in particular that I'm excited about for Felipe arriving is that he will be based in Kuala Lumpur, and he will have an opportunity to really engage with not only our team, but also our brand partners in the region very deeply. With someone with his background, very commercial background, he will make that a big priority in really unlocking further opportunities with our biggest partners.
Okay, the focus will be more on moving forward in terms of, you know, introducing brands, categories, rather than just actually making the organization, putting the organization into a better place.
Absolutely. It's not so much, I would say, introducing new brands. We have a great assortment. It's more about working with the brands, having very clear joint business plans, very clear strategy around how we optimize the assortment. The feedback I definitely get from engaging with the brands more deeply in the region in the last six months is that the brands are very keen for us to succeed. They do see a very important role for us as a business in the region as the only multi-brand fashion platform that only sells authentic product in a fashion-only environment. That is what they want us to do. That's perfectly in line with our group strategy, and that's where we're focusing.
Okay, thanks. My final question, I mean, amongst the countries in Southeast Asia, was the performance relatively uniform, or were some countries much better than others?
It's not like there's a huge divergence. The four out of the five countries that really matter are Philippines, Indonesia, Malaysia, and Singapore. Hong Kong is much smaller. That is less of a focus for us, but it's obviously an affluent, quite attractive market. We really believe we need to succeed across these markets. They have all their unique complexities, opportunities, but also challenges. We are deeply local with deeply local setup and deeply local teams in each of the markets. I think that's ultimately our strength, and we need to play to that strength while making also sure that we ensure that we are not reinventing the wheel between different markets, but using a somewhat consistent playbook and way of operating across each of the markets. That's one of the reasons why we moved to a purely functional leadership structure.
Okay, that's great. Thanks, Christoph.
We will now take our next question, a follow-up from Anne Critchlow of Berenberg. Please go ahead.
Hello, thanks for taking my questions. I've just got two more follow-ups, please. To follow up on the Southeast Asia questions there, can we just sort of talk a little bit about how the online apparel market is performing in Southeast Asia? I'm just trying to get an idea of whether you're gaining market share or losing market share in a recognized, probably quite a difficult market.
Yeah, I think it's somewhat hard to get really reliable data, but I think it's fair to assume that if we are down 18%, we're losing share. If we take a longer-term horizon, broadly speaking, and go back all the way to 2019, our business is a pretty similar size to where we were in 2019. The market has roughly doubled. If you take a long-term view over that period, we've lost a lot of share. The main difference since then, I would say, is that the brand.coms have really developed. We've obviously enabled some of that as well, and we have a quite sizable enablement business, platform services businesses, as you know, as well. We are obviously capitalizing on some of our brand partners succeeding in their own dot-coms.
I think the brand partners also see the brand.coms and us as a multi-brand as very complementary and should actually feed off each other's online efforts. That's, I think, what we're focused on and kind of thinking strongly across all brands to make sure that we're really maximizing that opportunity. Going forward, our ambition is certainly to stop the share loss and eventually get back to a position of growing with or slightly ahead of the market.
Thank you. Finally, I wonder if you could give your thoughts on the outlook for free cash flow. Clearly, the sales trajectory will have an impact here. I'm just wondering what your timeline will be for becoming sustainably free cash flow positive in terms of the controllables and your planning.
Yeah, thanks, Ann. We look at it in sort of two distinct phases. Our first goal is very much around becoming adjusted EBITDA break-even and then positive. We've made huge progress on that, as you've seen in the first half, and it aligns with our guidance for the year to actually achieve this milestone. Normalized free cash flow will follow thereafter, but we're not currently providing specific timings around that just because of the number of variables in our market, especially around our top line. What we are doing is very much trying to protect our P&L and our other cash items with regards to that volatility. If you think about the first half, actually, year on year, we've had a similar cash profile in quarter two.
The makeup of that has been driven by profitability and lower CapEx rather than relying on or delivering that position through working capital benefits. Whilst they are great and actually working capital management is a very strong focus for us, the nature of those obviously are one-time. As we move forward, we're focusing around adjusted EBITDA break-even, then becoming profitable, and actually how then we grow that profit in a strong way through both top line, but also the focus on cost, but also how we then manage those costs below. Continuing very focused investments around CapEx, managing our working capital, and minimizing our leases where we can.
Super helpful. Thank you, Helen.
We have no further questions in the queue. Handing over to Chris MacDonald for webcast questions.
We have a number of webcast questions. The first one comes from Christian Bock. Where is the financial improvement, and what will be the new future vision for real growth on markets?
Thanks, Chris. That question I think follows on very nicely from Ann's last question. As I mentioned, our financial strategy, and to keep it short, is around our profitability. To achieve break-even, adjusted EBITDA, and then to become free cash flow positive. All of that then is in the constraints of the markets that we're operating in, but ultimately returning all of our markets to growth.
I have another question on the line from Dan Curtis. Is ANZ on a standalone basis cash flow positive? How much of the acceleration in conversion in LATAM and ANZ is attributed to paid marketing? What is the strategic reasoning for keeping Southeast Asia and not just focusing on ANZ and Brazil?
Yeah, thanks for the question. I'll take that one. I think we've disclosed with the full year results that ANZ was cash flow positive already back in 2024. As you can see from the half results, we're making further progress on profitability. I think that's a good read across that also for full year this year. We obviously expect ANZ to be in positive territory. In terms of the second part of the question around paid marketing, in the end, the conversion rate is an output of a huge number of factors. A huge part of our traffic is coming organically, some coming from paid marketing. There isn't a big shift in any of that that somehow can be attributed to the conversion rate improvement. What we generally see is when we're very disciplined on the marketing side, acquire high-quality traffic from the right channels with the right customers.
When we're very strong in our CRM and campaign efforts and have a strong proposition from an assortment side, that's when we get to the best performance around conversion. In periods of weak consumer sentiment, conversion always goes down. There's also just a macro perspective where people may continue to browse, wish list, add to cart, but may not check out or wait for discounts on products they would like, etc., and become more discerning in that way. Last part of the question in terms of reasoning for keeping SEA and not just focusing on ANZ and Brazil, we're very committed to all of our regions. I think we highlighted also last year with full year results that while we're not happy with the performance in Southeast Asia, especially with the top-line decline, we had a near break-even cash flow situation there.
We're obviously continuing to be focused on managing the business with very limited cash investment. From that perspective, I think this is a worthwhile effort to turn around the performance, very confident that we're able to do that and put the business in a position where it is creating value not only for the customers and partners, but also for the shareholders.
We have a final question from Julius Krieg. The numbers have improved significantly, especially in terms of cost reduction and cost control. Given this progress, why hasn't the guidance been adjusted? Are the next two quarters still that uncertain?
Thanks, Chris. We're pleased with the strong start that we've made in half one. I'm very much focused to continue that in the balance of the year. We're not changing our guidance at this time, especially given some of the sort of global market uncertainty that we face. Also, our second half of the year is our biggest year, and there are a lot of seasonal events which are highly competitive. We need to remain, or we want to remain, cautious around those as we come into the second half.
We'd like to hand the call back to the operator. Thank you for joining us today. Please let us know if you have any further questions by contacting investors@globalfashiongroup.com.