Earnings Call: H1 2019

Apr 10, 2019

Good morning and welcome. I hope you're enjoying our ASOS Design video and you'll all be compelled to write about animal print when you go back to base. Anyway, good morning and welcome. Thank you for attending our results presentation for the 6 months to the 28th February 2019. And also welcome to all those joining us live on the webcast, a recording of which, of course, will be on the website later on this morning. So let's go through the H1 highlights. It's certainly been a challenging 6 months for us and one of the most challenging we've seen in many years. Economic uncertainties undermined consumer confidence. And during the period, we saw exceptional levels of discounting and promotional activity, particularly during Q1. Our performance was undoubtedly also impacted by the large scale of transformation projects we were undertaking across the business. H1 PBT was €4,000,000 after €24,000,000 of temporary transition costs. The quantum of this change also led us to a number of actions that are compromising our customer proposition, notably in newness, also in pricing, but also with engagement with our customers. In essence, we didn't put our best foot forward. You'll see in the statement this morning, we've detailed the wide ranging review we've undertaken and to best engage with our customers, and we've already begun corrective actions. This will restore the strength of the ATIS proposition and will lead to a much stronger H2 performance. Correspondingly, we've left full year guidance FY 2019 unchanged. We're also coming to the end of the current phase of significant investment. In terms of big projects, I'm pleased to confirm that the completion of Eurohub Automation is coming in the next few weeks, at which point a significant inefficiency drag falls away. Notwithstanding the unexpected start, Atlanta is now back and stabilized, and we will continue with the development with our development plans to reengage with our U. S. Customers. These material supply chain investments will significantly improve our capability, our customer experience and our productivity. And these benefits are ahead of us and we're all now ready in a great position to capture them. We have a strong, efficient and localized operations now in 3 major markets: the U. K, Europe and U. S, with over €4,000,000,000 of net sales capacity positioning us well as we set our sights on the next stage of our growth. In terms of liquidity, we're in a comfortable position. Net debt of €50,000,000 by the year end will well be well within our facilities. And as this current investment phase draws to a close, we still anticipate this to be the only year of free cash outflow and anticipating CapEx next year circa €150,000,000 Over the last 3 years, we've financed over €500,000,000 of investment in future capability for ASOS, and we've done this with our own funds. We can and we will continue to do so. The addressable market for ASOS in the global online 20 something fashion market continues to grow. The power of our fashion brand and the reach of our platform and the enhanced infrastructure and technology we've now built gives us confidence in our ability to capture that. So turning to consumer KPIs. There's clear evidence here pointing to areas we should and could have done better. And we've correspondingly disappointed ourselves in the first half. Firstly, taking a step back from the numbers on the screen, what we've seen is a softness in organic thank you, Craig. I'll do that again. Firstly, taking a step back from the numbers on the screen, what we've seen is a softness in organic customer acquisition and in traffic over the last 6 months. There's a number of contributing factors here that I'll draw out later in the presentation, and it does vary by territory. In the U. K. First, our U. K. Sales growth held up at 16%, and it does demonstrate a continued market share gain in what has been a pretty soft and competitive market. On a consumer level, we're seeing significantly improved demand from our existing customers, with order growth of 20% from only a 4% increase in traffic and frequency up 11%. Active customer growth is still strong at 13%, but traffic is a key issue was a key issue for us. Our organic acquisition was much slower in H1, particularly in the younger demographic. Our average basket reduced margin over the period, largely driven by ASP, which is the promotional activity in the Q1 and to a lesser extent a continued trend of customers buying into lower priced brands. Actually, our Iconson basket was up marginally over the period. Growth in the EU segment was held back by weak demand in France and Germany. France and Germany account for 60% of this segment. The EU sales grew at 15%. France and Germany together was plus 11% with the rest of Europe growing at 22%. Our performance in France and Germany has been affected by the overall softer market over there, but also a number of decisions we took that had a disproportionate impact on our demand. The Rest of World segment, pleasingly however, remained robust. With the completion of the next stage of Eurohub around the corner, this will provide us with loads of fuel for further investment in price, proposition and also lower our overall operating cost. Transition costs will now have now started to fall away. To give you an example of the underlying efficiency we're expecting from the Eurohub, We're expecting a 3x improvement in picking. Picking is around 35% of our cost base. We'll deploy those benefits delivery propositions. We're actually targeting next day delivery with a midnight cutoff to 25 German cities over the coming months. In Netherlands and Sweden, where we launched our local language sites last year, both have had active customer growth of 50%. Business increased by 30% and orders were up around 50% too. We're planning to launch a similar enhancement for our customers in Denmark and Poland later this calendar year. Within the U. S, we talked a lot about the U. S. On the Q2 conference call. So you'll know the largest drag in this segment was the initial problems we faced when the Atlantis warehouse went live. This was an unexpected surge in demand following the web to warehouse cutover. And I'll again talk more shortly about the U. S. Shortly. But I will mention here, we're seeing some encouraging green shoots, but and we know we've got a long way to go in the U. S. Notwithstanding the warehouse bump, we did see some underlying and an encouraging consumer dynamics, giving us an inkling of what's possible and is ahead of us. For example, during the initial cutover, conversion increased by 1 percentage points. Finally on Rest of World, our Russian customers responded most significantly to improved trading stance in Q2 following our Black Friday hiccup. Active customers grew by 50% and app installs were up 78% year on year. Moving to the U. S. So in the U. S. Market, the opportunity for ASOS ahead of us is simply huge, and some of our recent experience has given us greater confidence in that. The U. S. Clothing market was worth nearly €400,000,000,000 last year with online representing around €80,000,000,000 Online penetration is currently 21% in the U. S. And climbing quickly, with market forecast that this will be close to 29% within the next 4 years. There are almost 70,000,000 20 to 34 year old girls and boys in the U. S, of which we're confident a sizable number of fashion loving and potential customers for ASOS. In the U. S, we already have 2,600,000 active customers and we've grown our business to around $400,000,000 already. And this has been done without deploying significant capital or in infrastructure or in technology. Atlanta and our clustering technology signals a key change in that and will start the next phase of our growth in the U. S. Some of you might have heard me talk about our plans and technology clustering in the U. S. Before. Let me just set out what it means. In essence, we're using our technology to geotarget our customers and provide the best possible localized product content in social media. Up to now, we've treated the U. S. As one country, offering customers from New York to LA and Chicago to Texas the same experience, the same content and the same delivery propositions. Yet there are 4 time zones, 9 climatic regions across 50 states with dramatically different cultures, interests and expectations. We would never offer a uniform experience to our European customers in France, in Italy, in Spain or Germany. Our clustering technology will address this. We're offering initially up to 6 localized web experiences, mobile and website, and which will be dependent and served up depending on your time zone, ZIP code and climatic conditions. Our clustering tech will be deployed in May. And from there on, we will begin to significantly enhance our delivery propositions. We're targeting next day delivery to Atlanta first, New York, LA, San Francisco and Austin in Texas. Our ASOS design product has always over indexed in the U. S. It was around 50% of the mix in the first half and we're now focusing on building out our 3rd party platform 3rd party branded product too. The spike in U. S. Demand we saw in early February when we switched over the warehouse showed us the benefit of building a locally relevant stock pool with great availability. In the U. S, we now have Nike, New Balance, Polo Ralph Lauren for our U. S. Customers with many more locally relevant brands to come. As I said earlier, customer acquisitions our customer acquisition strategy will be based around acquiring fashion loving loyal customers through a more targeted direct influencer This is a 6 month program awareness activity driven by influencer activations at top music festivals across the U. S, including an exclusive retail sponsorship of the Life is Beautiful Festival in Las Vegas. Moving on to sales growth. We grew total sales in the half by 14%. In today's trading environment, it's not to be sniffed at. However, we entered the year expecting over 20%. November is a key month for us in half 1 and for us in e commerce generally. Overall market demand in this month was soft and we saw and observed an extremely aggressive promotional stance from not only our fellow e commerce players, but also more traditional high street brands. In actual fact, I think the dramatic shift from these players to either catch demand, clear excess stocks through unseasonably warm weather or just to stimulate sales was the biggest impact in our performance. Our promotional stance during Black Friday in hindsight at 20% didn't look quite as compelling for our customers. We also didn't offer the Black Friday promotion to our Russian or Australian customers, which was a trading error and we lost an opportunity to enhance our customer acquisition. At the time the guidance reset in December, this was our narrative and key diagnosis. But standing back from that, we've had a real closer look at our offer during the period. We've concluded that ASOS simply didn't look or feel as great as we normally do. For example, our presentation of certain categories looked a little bit vanilla and less exciting, less engaging, less inspirational and certainly not the ASOS customers normally expect. Within our product, our rate of newness had slowed particularly within the ASOS design and our natural traffic growth had stepped back significantly. Also, some of the reasons behind that was substantial tech and website design changes we deployed earlier in the year. We worked hard over Q2 correcting these errors and thankfully we're seeing green shoots to performance reacceleration from the changes we've made. Q2 saw reacceleration in the rest of world category, a continued strong U. K. And a more stable EU growth, but a weaker U. S. Growth profile. This was solely down to the Atlanta warehouse change. The U. S. Performance during the 1st 3 days quite simply blew our estimates of demand. We were forced to take corrective action. Atlanta is now stabilized and we're working hard on the next stage of our growth. On to gross margin. In H1, this was down 60 basis points at the retail level and 50 at the group level. I'll walk you through the bridge at the bottom first of all and then walk you through the main movements in the regions. You can see we had a small FX tailwind year on year and small improvements in the buying margin that the teams have worked through. These savings were invested in improvements in sourcing and improvements in sustainable fibers into the ASOS Design product. This is a key strand of our ASOS Fashion with Integrity program. ASOS Design now has 80% of the cotton that goes into the products, which is sustainably sourced And we're targeting 100% by 2020. We also have around 5% of the fibers used in ASOS Design come from recycled materials and we're actively looking to increase this mix. An example of where we've done this is during the period, we've developed an ASOS Design swimmer range, which is designed and manufactured using recycled fibers from fishing nets. Offsetting this was an increase in the branded sales mix, adverse country mix largely driven by slower growth in the U. S. And incremental freight and duty as we start to import into Atlanta. Right, just quickly going down the territories. U. K. Margin was down 120 basis points in the half, which saw a good recovery Q2. Key movements were the branded mix and promotional activity largely in Q1. Within EU, the margin was up 190 basis points, driven by reduced mark down activities, delayed the timing of the France Endurance and German sales and slightly reduced clearance debt accordingly and some of the price increases that we through the European market accordingly. Within the U. S, the margin was back 40 basis points as we began to incur incremental duty and freight costs from importing stock in Atlanta warehouse. Finally, looking at rest of world, which is back 250 basis points year on year, this was largely due to increased markdown of promotion. And also in Australia, we absorbed the Australian sales tax for our customers. Our full year retail guidance remains 150 basis points down, which covers the mostly increase of drag from the U. S. Freight and duty, but also gives us flexibility to invest greater in price for our European customers. On to operating costs. Total operating costs as a percent of sales increased 170 basis points over the period, including €24,000,000 of temporary transition costs, which mostly fell in the warehouse cost line. As a result of the lower growth trajectory this year, we've taken a very good look at our cost base and are streamlining our headcount over a number of functions accordingly. On a line by line basis now, distribution costs. Distribution costs were 20 basis points higher. This is mainly due to customers choosing faster delivery options. We expect to see this percentage to fall to sales this percentage of sales fall in the second half as we start fulfilling greater increase of orders from the U. S. Warehouse. To give you indication of the size of the benefit we see, U. S. Distribution costs should move from over 22% of sales to 10% to 15% over the medium term. In warehousing, this is the biggest part of operating cost increase year on year. This is mainly due to transition costs in Atlanta and Eurohub. Stripping these transition costs out, warehouse costs would have been 9.3% of sales, correspondingly stripping out of last year would be 8.9%, so an underlying move of 40 basis points. We're expecting significantly lower amounts of transition costs in the second half as Eurohub goes live and the Atlanta transition is behind us. In terms of payroll, this improved by 10 basis points and we adjusted headcount accordingly, as I mentioned. We expect further streamlining in H2. Marketing broadly flat year on year, but we expect to increase in H2. Other costs, this includes payment processing fees, group legal fees, group travel, tech costs and of course, renting rates where we pay them. The main driver of the increase here has been on our technology. Depreciation, we guided some time now. Depreciation will be on an upward trajectory. H1 increased by 30 basis points around 2.5% of sales and we expect to be close to 3% for the full year. On to CapEx. The headline here is we are through the peak of our heavy investment phase. CapEx guidance for the current year is maintained at €200,000,000 and we're expecting to reduce it next year FY 2020 to around €150,000,000 The investments we're making both across warehousing and tech will improve has improved our capability, the ability to enhance customer experience and of course our productivity. We will have even stronger, more efficient and better localized operations within all of our key markets. As usual, the left hand chart shows how we've deployed the $103,000,000 of CapEx during the period That's been our case across major projects. On the right hand side, we're giving some additional categorization, which I hope is helpful, splitting our CapEx by lights on, efficiency, growth and transformation CapEx. Within transformation, we refer to the transformation project as a 3 year program of major infrastructure and technology that provide a marked step change in our operating capacity. Projects in this program include TGR, our Truly Global Retail, which is new buying and merchandising systems investments in the Eurohub automation and mechanization and building our Atlanta warehouse and of course, the expansion of the ASOS head offices. These projects are setting us up for the next stage of our growth and by their very nature, we won't expect them to repeat in the medium term. I'll talk to you a bit more about the benefits flowing from the warehouse investment shortly, but a bit more color on our TGR, Truly Global Retail Systems. At the conclusion of this program, we would have invested around €80,000,000 in this capability. We'll have a complete replatform of all the buying and merchandising systems and many, many more. It's an absolute necessary investment for a growth business with multiple and global warehouses that deliver a whole host of benefits across the business. For example, small benefit here, is improve our sourcing lead times, allowing buyers to place orders at the point of contact with the supplier. It will also allow us to trade our product from multiple warehouses in multiple currencies on a localized basis. Investment in our growth CapEx covers customer facing tech developments, which we'll also touch on more on the tech slide, but also includes warehousing, office costs allow us to grow in our existing facilities. Efficiency, this is investment in driving productivity or cost savings across the business, for example, improvements to the warehouse systems, but also the outbound carrier management system and returns processing software. Finally, lights on CapEx is investment that we know we need to make just to support the ongoing business. It isn't targeting specific growth or efficiency. It's just stuff to keep things moving forward. On to cash. We closed the year we closed the half with net debt of just under €38,000,000 a reduction of €86,000,000 since August 2018, mainly driven by CapEx. Shortly for the half year, we successfully renegotiated our banking facilities and the group now has in place 220,000,000 of facilities until the end of August 2019. This then falls back to €150,000,000 and is committed to May 2021. This will provide more than sufficient financial flexibility during this period of heavy investment. As previously stated, we're expecting FY to be the only year of negative free cash flow and net debt position at the end of the year around €50,000,000 We expect to return to free cash flow positive in FY 2020 and each year thereafter. So moving to a summary of the areas of focus. As I said earlier in Q2, we had a good look at ourselves and a good look at ASOS through customers' eyes. And we simply didn't look or feel as good as we normally do or should do. And we've taken those actions accordingly. The areas of focus I've set out are on that slide and I'll take you through some more detail going forward. First of all, evolving our presentation. This is a key consistent pillar of our playbook and really important for fashion retail. It's about engaging and inspiring our customers through our presentation. And we've always been leaders of that. This is some of the these are 3 images here, same product, reshot, restyled and we've seen dramatic uplifts that you can see below. The sales uplift and customer engagement has also been dramatic. And it's a bit more of the ASOS presentation our customers expect from us. There's just a selection there, but I can assure you we've done many, many more and we've had equally compelling reactions. We've also had some amazing reactions on new younger trends such as neon, animal print and safari. For those who don't know, Safari is just an iteration of animal print. ASOS product, ASOS Design. As a reminder, ASOS Design is only available at ASOS. When we get it right, it's exciting, inspirational, great value and increasingly sustainably sourced. It's one of the largest brands on the planet never to have a store. And this year, we expect revenues to pass 1,000,000,000 euros ASOS Design is 36% of the total sales mix currently. If you add in sales from the other ASOS brands like Collusion and Venture Brands, all which are all internally generated brands, the overall ASOS Design number is around 38%. A key area of focus on ASOS Design is to profile it like other brands on-site on our apps. You should have seen a noticeable difference with the presentation if you've been following us recently. And the ASOS Design campaign launched in February was one of those moments to reposition it. During H1, the pace of our newness in ASOS Design and the WIP was behind what our customers normally expect and we suffered some poor reactions accordingly, particularly in ASOS Design Menswear. One of the key features of ASOS Design is that we can respond quickly here because on average we have much shorter lead times. We've replanned the newness, we're enhancing the width and we're looking to deliver more consistent level of newness and demand and choice for our customers. In France and June, we've also taken some price investment on a number of the ASOS design lines. We've done this ahead of the Eurohub benefit release and we're expecting to do more in the second half. A key change in our product offering ASOS Design was the presentation of ASOS Design, which has been pulled together as key trends, key collections with a more compelling look. Utility, neon and safari and animal print I've seen all great uplifts by taking this approach and we're doing the same treatment for many more collections. I'd just like to call out Collusion. Collusion has been one of the most successful brands ever launched at ASOS. We launched it in October last year. It sold over 1,500,000 units since then, has established itself firmly as a top 10 brand with full price sell through above the group average. Within the U. K, it's also the most searched term most searched for brand term for our customers. We're expecting it to achieve around 55,000,000 sales this year. And it's a brand that was created for the younger generation or Generation Z using collaborators to work directly with our ASOS design team. And it'd be reaching a size where it's becoming a business in its own right. ASOS 4,005 was launched last year as part of our Activewear refresh, and we're now annualizing those sales and it's growing to over 100%. 3rd party brands. We continue to review and update our branded portfolio to ensure it remains exciting, relevant and engaging. Over the half, we've exited more brands than we normally do. We've exited over 280 brands and had 190 new ones, and it's a lot higher than normal because we just thought some of these brands weren't resonating with our 20 7 customers the way they should. And we're onboarding a newer mix of smaller, fresher up and coming brands alongside some more established brands such as And Other Stories. Globally, our face and body category continues to grow strongly at 47% year on year. Last year, we did £60,000,000 in sales and we're expecting it and it's on from a standing start and we're expecting to deliver over £100,000,000 this year. We launched 31 new face and body brands in the half, 4 of these from the Estee Lauder range and we now have around 14 brands from the overall Estee Lauder range. Outlets, which is our off price promotion, is going well and offers customers compelling choice of brands at great value. We're also very proud of our marketplace platform, which offers 700 boutiques globally and around 160,000 different products, largely small vintage brands. We're planning to make far more of this going forward. On marketing, we shouldn't lose sight of the fact we have a great brand and some pretty impressive awareness and engagement stats. However, we've seen low organic customer acquisitions and softer traffic than we'd hoped for in the year or in the half year. Part of this was due to our pullback in promotional marketing toward the back end of year, and we felt the impact in the first half greater than we anticipated. And we've also seen a reduction in awareness and buying consideration in the European markets, particularly in France and Germany. We have seen underlying improvements in conversion and still some underlying improvements in frequencies I touched on earlier. And that went some way to offsetting some of the traffic decline. I'll run through some of the key things we're doing differently now. Firstly, we're upgrading our digital marketing, restoring and going beyond to where we were last year. We're also taking action to boost our awareness and consideration and support organic customer acquisition. 1st piece of activity here was the ASOS Design campaign that we're looking at on the way in. We're also upgrading our influencer activity. Investment here will double year on year. And this will part of this is the U. S. Summer festivals, but it'll be a 6 month campaign to upweight our influencer activity. We're also making some changes to how we talk to our customers. We know they love us for our constant conversation we have with them, the inspiration, the hints, the tips. So we are increasing the velocity here. If you follow us on Instagram, you'll have seen a notable step change over the recent weeks. On to warehousing capacity. Over the last few years, we developed a formidable logistics capacity or capability. And we're about to this is about to start contributing to the customer experience in a different and increasingly potent way. Our facilities are in different phases. U. S. Is now stabilized. EU automation about to go live. U. K. Is in optimized in an optimization phase and the return centers are driving efficiencies. In summary, we have 3 custom built, probably state of the art fulfillment centers in 3 of our most valuable territories, U. K, EU and U. S. And 7 returns processing centers, mostly in lower cost operating territories and in an increasing efficiency optimization phase. All of this is capability to deliver a minimum €4,000,000,000 of sales capacity and a footprint to go after far more, particularly in the U. S. We'll now start to leverage these investments, as I said earlier, to drive efficiencies and customer experience. The charts on the right show you some of the improvements in capacity and the efficiency we are targeting. The bottom charts are indexed off the Barnsley performance. So let me pick out a couple of key elements of how we're going to deploy these efficiencies. In the U. S, we will start with next day delivery services in Atlanta this month in New York in May, in LA in June, in Austin and San Francisco later in the year, all key customer hotspots for us. In Europe, the Eurohub, we're expecting the biggest step change in efficiency and capacity. We'll deploy these benefits to deliver next day delivery with midnight cutoff to 25 German cities, matching the ASOS experience that our U. K. Customers enjoy and expect from us. In Barnsley, in CapEx terms, we've come to the end of our investment in Barnsley. We have invested about $105,000,000 in total. We've recently added a dynamic buffer, which means product can go even faster through the warehouse and we're now driving out and optimizing that solution. Let's focus a bit on technology. 1st, within Transformation Programs. Transformation accounts around 26% of the H1 spend, the majority of which was in the Truly Global Retail program on our major supply chain programs. Investment in lights on CapEx totaled 15% of the spend and covered upgrades to our finance systems and security systems. 17% of our tech spend was directed to improving efficiency with the majority direct towards logistics. This included new software to improve processing efficiency in our returns facility. We're expecting about 10% to 15% improvement in there and also outbound carrier management systems. Growth in customer experience, focused developments represent about 40% of the tech spend, which we split across our e commerce platforms and data platforms, including AI product enhancements, sizing, recommendations and greater AI and personalization. Highlights within the rollout also include Fit Assistant, which gone to all our apps, further development in recommendations and on our product and category pages, bag abandonment, back in stock, selling out fast and our boards feature. The boards feature is what I demonstrated 6 months ago. It's a bit like Pinterest meets OSOS. This has been one of the most successful recent tech launches for us, with customers creating over 3,000,000 boards and adding new boards at the rate of 130,000 a week. Growth for international specific investments or rollout of gift vouchers in all currencies to sit alongside the sterling offer as well as 4 new currencies and new payment methods in Australia and Russia. We also deployed the U. S. Sales tax at checkout that went earlier in the that went in February, providing the functionality to pass on sales tax on a state by state level for our customers. Lastly, on tech, we haven't forgot about velocity as it's key to our digital platforms. We released 2,200 customer enhancing releases during the half compared to 1200 in the prior year. Let's just have a quick look at our global opportunity. When you've had a difficult few months, it's sometimes easy to forget the opportunity or the addressable market ahead of us. We're not losing sight on this prize. I thought it was worth reminding you of the data I showed you back in October. Our view of the total addressable market and the global opportunity for ASOS remains unchanged, and the shift online continues at pace. The online global market will be worth at least €220,000,000,000 and it will be rising. And we are confident that we're well positioned in the right channels and with the right capability to access our share of that market. So in summary, our revised guidance is unchanged. We are confident of a stronger H2. We've conducted a thorough review of our business and taking corrective actions and they're underway. We're on the edge of significant infrastructure and technology benefits. Medium term, we're confident in maintaining our top line sales growth, restoring our EBIT margin and moving to greater free cash flow generation. Our long term ambition for the potential of the business remains unchanged. Thank you very much. I'd like to hand over to questions. First of all, looking at Marketplace, which you said you're going to develop, is there a case of integrating that within the main site so that a search function would give results from right across your offer? And then secondly, on warehousing cost to sales, how low could that ratio go do you think in the medium term? Are we talking sort of 9%, 8% if you could put a figure on that? And then thirdly, thinking about the medium term growth rate, you say that ASOS can do more. Are we stuck at 15% or would you look for an acceleration into the outer years? Okay. Thanks, Anne. First of all, Marketplace. The inspiration of Marketplace was around 9 years ago where we developed Marketplace. It was almost like an eBay and we were following consumer behavior around the Internet and seeing an increasing trend of people buying our products, wanting to then re monetize their wardrobe. We wanted to keep them in our ecosystem and provide that service for our customers. Over the last 2 years, we've seen and regrettably, we've forgotten about that. And then we repurposed it for a vintage only small brand engagement. In terms of commercial impact, marketplace is not meaningful. In terms of engagement with our customers, it's really meaningful. We have a much higher resonance with our younger customers, particularly students. So over the last few years, we've seen new marketplaces come to a fall come to the force. Some of the fastest app downloads are on sort of marketplaces, such as the likes of Depop. We've kind of forgotten that we have something that we've treasured and is a potential future gold mine for us. And so we've just rolled investment to enhance the technology, improve the underlying functionality, And we'll be looking to see how we can offer those things for our customers where they can stay in our ecosystem. That might end up being integrated in a better way within the ASOS platform. So just watch the space on that one, Anne. With the second one, warehouse costs. How low can it go? I've said before, I'm expecting around 8% to 9%. And so as the efficiency rolls through, the chart shows you the current level of inefficiencies. They're still very manual. That's about to flow through. But bear in mind, there is we also are leaders on the living wage for our people where they fall. So we look to we've moved significantly on all of those areas. So I've got 8% to 9% as our future operating level in there. Are we stuck at 15%? ASOS can do more. ASOS can do far more. I think it will be a little bit early for me to start going. We're now expecting 2025 in FY 2020 until we've just restored our own confidence. So if you don't mind, can I leave that one for a later conversation? We're certainly confident on 50% for FY 2020. What follows behind that, we'll have another look as we see our investments unwind. David Gardner, Morgan Stanley. Following up on the medium term guidance. On the EBIT, does your 4% medium term still stand? And when you talk about restoring margins, where should we expect those to go to? Would you be in a position at the full year results to give us a more explicit guide on both growth and margin? And then secondly, can you just talk through what's driving the big cash inflow from the change in trade payables? Sure. Greg, do you want to do payables? I'll come back to you today shortly on that. I'll give you time to think about it. So the you have seen in my presentation, I talked about restoring our profitability. That means going back to 4%. If you remember, 4% was our discipline and it's what drives some of the key fundamentals in our business model. So we have no intention of coming off that target. This year, 2%. So therefore, some things we were either ill disciplined on or things worked out differently. But our medium term trajectory is to restore to 4%. On a terminal value, the whenever that is, we still believe the business could have a high single digit endpoint margin. I mean, just a follow-up on payables. Nearly every question around this was moving from the old finance system to the new finance system. And I think we told you moving to Microsoft's Analytics was a little bit bumpy. So it's moved from one place on the balance sheet to the other. We'll come back to you with the exact detail on that, but it is driven by the change in that finance So in So in the previous statement that you guys put out, it was talking about never seen before levels of demand and then more granularity was given in that statement saying 80% increase in the 1st 3 days. But then in the logistics section, you're talking about 2 to 4 days backlog. And if I'm not wrong, the warehouse went live at the beginning of February. So shouldn't we have seen some of the pickup by the back end of February because customers would have been delivered is my first question. And then my second question is on gross margin, you had FX tailwind into the first half. What do you expect for the second half of this year? So you're entirely right. I didn't repeat all those stats in the presentation because we did a lot of that 3 weeks ago on Q2. But your recall is bang on. The 1st 3 days, it was over 80% demand. It took us around 4 weeks to recover the backlog. And so we started to see stabilization at the back end or early into March. The propositions are fully restored to where they should have been. But now we're moving the propositions on again. So it's stability first of all, restoring the propositions. And actually, one of the it was really interesting is actually the power of the propositions when we added on 4 to 5 days, we saw demand go backwards at a rate of knots. So and we know that, but it also reminds us how important the delivery propositions are. They were back and restored sometime in March, and now we're moving the propositions on again. Does that Yes. On the proposition, it's important in the U. S. That people always forget that you don't have weekend delivery like you do here, right? So depending on when you order, you've suddenly got 2 more days than you would expect it to be delivered in the U. K. And I think everyone nearly always forgets that one. Sorry, Paul, on the FX, with guidance next year broadly flat at the moment. 2nd half of this year. This year, second half of this year, I'll come back to you. But I don't think it's changed in terms the overall guidance we've given you on that and that it wouldn't have done because of the long term nature of the hedging. Andreas or Rebecca? Rebecca? Rebecca McClellan, Santander. Just in terms of the collection, how do you feel it happened that the collection went off track? And sort of what are the lead times? And you sort of said that you'd reassessed everything since December. Do you feel that the collection is now sort of back as it should be? Or is there still work to do? And then the second question just on working capital. In the statement you mentioned that the focus was on availability, which had an ultimate consequence on choice. If you're looking to improve choice, does that mean we should expect some changes in working capital? Okay. The it's sometimes difficult to isolate why the presentation changed, but it did. It's more important to identify it and then get it back on trend. Now have we got everything where we wanted to be? No. But we're working really hard at it. And so the 3 images I showed you are just examples of how the presentation has just gone a bit more sizzle, a bit more engaging and actually what our customers want. And the impact from the customers was brilliant on the back of it. So sometimes more is more, more hair, more makeup, more presentation, more glamour. And certainly, I've called it Project Glam. And so we're just planning some of the presentation back up. And you know what, we're famous for it. We're brilliant at it. We've just forgotten it a little bit. If I was going to say we got a little bit vanilla of being self worthy, I think that might be part of it. But we're doing more work on the back of it. The other things around so that's the presentation piece. The other things around it is regrettably around the stock moves, we made a couple of decisions around newness and width to help facilitate those transitions. And so we cut some of the menswear width by 20% and that compromised newness. And so that meant we went deep on some lines and we lost some of our appeal on the back of it. We've replanned all of that. And this is ASOS Design specifically. And because the biggest proportion of our sales is ASOS Design, so it gets a disproportionate impact. Will that increase working capital? Potentially, but it will also increase rate of sales. So it might offset it. So I will restore it fully. We've taken the actions and we've already started to see it come through. And I think it's going to intensify over this month and next month and big months in the summer. So does that sort of answer? Try to. Hi. Michelle from Berenberg. Three questions, please. First of all, on the price investments in France and Germany, can you give us any indication of what you're seeing from those price investments if it's delivered any acceleration in growth in those markets in the early stages? On the automation of Berlin that's coming live over the next month, is there any risk of disruption from that automation? And then thirdly, on the labor cost per unit and the man pick hours that you've given us for Eurohub and U. S, how does that compare to the U. K? Okay. So the first bit is we started to deploy price investment in France and Germany. We'll wind back some of the prices that we'd put in there earlier in the half, round about February. And we did it on ASOS Design. And so and I wanted to do that because there's a lead time for pickup. And I wanted to do that and start rebuilding momentum ahead of the cutover. Well, we want to start doing that way. We're going to go again because one of the things that I think has changed on the back of it is some of our 3rd party brands have also moved their prices in those territories as well. And so we're having a good look at that and we're seeing on an individual category level the price elasticity moves and all of that. So and we started to see some tick up. And so that's encouraging. But I know there's some more to go. In terms of the second point was warehouse disruption, always bound to be the potential for bumps on the road when you have the scale of change that we are going through. It won't be the same potential risk that we saw in Atlanta because Europe's already a closed pool and all we're doing is extending the second half of the warehouse. So Atlanta sorry, Berlin's around 450,000 square feet. We're opening up the 2nd chamber, which has already got product in it. And all we're doing is opening up the mechanization and the efficiency. And that's been significantly tested for several months. So I'm confident that there will be a different benefit, a different experience, but there's always a risk of something going wrong. So we'll let you know if that's the case. The last one was on labor cost per unit. Well, the chart shows an index on the back of it. So if Barnsley is 60p, Atlanta is 3 times that or 2.7 times that of the tire at the moment and heading down. Does that help you? Yes. All right. Thanks, Michel. Andreas, Nestle Macquarie. I have three questions. The first one on I think you mentioned a shift towards lower price points for other brands and also within ASOS? Do you think that's structural? It's the first one. The second one on CapEx. It's just over a year ago or so, you guided €230,000,000 250,000,000 CapEx for the medium term. Now you say the big investment program is over €150,000,000 euros So why such a big delta? And what can we expect beyond 2020? And my last question is, you mentioned investments in software for your return centers and an efficiency pickup of 15%. Maybe you can elaborate on that, what's behind there? Sorry. The thanks, Isaac. I don't know the answer to that. And the all I can do is observe customer behavior. So is it structural and therefore forever? I don't know. Is it It is not a year though. It's been going on for quite some time. So is it do customers love value every day? So do they also does value also mean price? No, it doesn't. And so certainly, the way we respond to customers is we offer them the most compelling brands, the most compelling price points and work hard at it. Do I think it'd be really important going forward? Yes, I do. Will it always be at that level? Don't know, highly likely. The second one was CapEx. Yes. Right. So we did guide to around €200,000,000 €250,000,000 for the medium term. We've just had a closer look at all of those things. The investment program is coming to a close. Next year, the big change in the 200 to 150s on warehousing predominantly and some of the software programs falling away. We're going to therefore work our assets a lot harder. It will be certainly around €150,000,000 for FY 2020. Going into the future, it will be somewhere between €150,000,000 €200,000,000 depending on warehouse build outs and the next stage of our growth. But we've certainly got capacity with at least €4,000,000,000 to in the warehousing where we don't need another lumpy investment for during FY 2020. On the last page, returns efficiency. We've built 7 returns processing centers now, which can handle around 3,500,000 returns a week. We've had a good look at the software in all of those. We've replatformed the software, improved the functionality. We're expecting 10% to 15% productivity improvement through better more intuitive software, faster throughput, all of that, helping that cycle. That's really important because that's quite a high cost processing activity in our business. It's also tied to the lower CapEx, right? Because we're not going to need the next returns processing center as soon as we did before. Obviously, 12 months ago, we're predicting 25% revenue growth. It's now 15%. So there's a capacity correlation on that CapEx as well. I don't think there's nothing that we're not doing that we would have done, just potentially a different time. Efficiency is delayed CapEx as well, right? Because it's if you get 10%, 15% throughput improvements, you won't need extra facilities obviously as soon. Charlie? Thanks very much. Charlie from Exane. Three questions. Firstly, when you think about the midterm recovery to objectives, what's more important, getting sales over 20% again, getting back to 4% margin and or getting and holding free cash flow positive? The second question All 3, Charlie. If you have to choose, the response of the customers is not sufficient to get all 3 simultaneously. Right. So within that, we have set our objectives for the medium term to maintain the current level of sales growth. We won't hold it back if it's there. But also our commitment to our shareholders is to restore our profitability and we will do that. And the consequence of those two things and more efficiency and having another look at our CapEx plans will also drive free cash flow positive as well. So it's kind of sales and margin and optimizing our investments to drive free cash flow positive. It's not free cash flow positive lagging the dog if you if that helps you. The second question sorry, I think you said warehouse transition costs will gradually fade. I wondered next year whether we're still talking about sort of a number over £20,000,000 I know precise numbers might be a bit early. And then my last question was, I think in the other OpEx, you called out a £3,100,000 rebate. I appreciate it's not a big number in the context of your revenue base, but I just wondered whether you could explain what that was. Thank you. Sure. Well, let's look at the transition cost for next year because we haven't finalized those. But to give you a direction of travel, CHF 24,000,000 in the first half of this year is likely to fall to CHF 12,000,000 in the second half of this year. That's potentially helpful for you. So we'll probably come back in more detail in October with detailed line by line guidance for next year. But it will half again in FY 2020 would be a guide now, the transition costs. In terms of the 3.1 €1,000,000 rebate, just working our costs harder, renegotiating on certain line categories. We got a rebate, a one off nature on the back of it, which is a rebate of cost we previously paid. A quick one on active customers. So can you give us some color or comments on what you're seeing in terms of gross customer adds? So you've obviously hopefully given us all of the information on net customers, but I'm just interested in the trend in growth, particularly given that you're also talking about churn down. So I think you can come to that conclusion yourself, right, because we haven't really talked about churn rates before. We put them in the statement and say they've improved. You see the net number, so you can deduce that yourself. And can you tell us what the churn rate is? I think that was working out yourself, Emily. You're not going to give any more help than that? No. Okay. John Stephens at Peel Hunt. First up, just on that point actually in terms of customer loyalty. I mean, you talked about the proposition, it impacted natural traffic, it's impacted your ability to recruit new customers and yet the loyal customers seem to be reasonably loyal. I don't know if you could sort of comment on that. What are you actually seeing amongst the loyal customers and why if the proposition has sort of softened a bit in terms of how you betraying the product, why that's the case? Second question on brands, you've talked about the churn being higher because you're not resonating with younger customers. Is that because the sell through on those brands hasn't been good? Or is it actually the targeting of the sort of specific demographic, the younger demographic that hasn't been strong enough? And finally, just on that distribution capability and sweating and optimizing, at what point, not as a sales point, do you actually need more warehousing to actually to deliver the improved proposition that you want to in the States? Okay. Good questions. The first one is, I think our propositions are still market leading or as good as local in most of the major territories. So I don't think that's been the main issue. I think the main issue on the slowdown in customer acquisition, particularly at the younger demographic, has been around our presentation, product width, product newness. And so that's what I mean by a key element not quite looking as good and feeling as good as it wants to. So I think we're on that now and we're seeing good reactions to it. So I don't think it's about customers choosing a different set of payment methods. And there's been an customers choosing a different set of payment methods. And there's been a surge in pay now buy now pay later, installment payment methods that are really compelling actually. Why wouldn't you? So we've launched a couple of new payment methods in the last few months. And we're going to do a lot more on that because it's resonating with the customer. If you can choose to pay something over 4 installment periods, it's great. So I think we may have been a little bit slower on some of those, but we now want to that too. Does that answer the first point? Yes. Yes, I think so. I mean, I guess the loyalty, I guess, has been quite good. So obviously, yes Our existing customer base, we've increased our conversion. We've increased our orders from it. And so we're certainly engaging with our loyal customer base. But mission critical too is growing new customers too at an increasingly young rate because then they get into the proposition, they stay with us for a while. So that there's bittersweet in those dynamics. I know we can do better on the younger demographic. We've got a lot of things going on to improve that. On the 3rd party brand point, we're just looking at the sell throughs on some of them. Again, that's just not resonating, right? So we normally churn over about 200 a season, 100 and 50, 200 a season. We've just gone a little bit hard on some of the brands going, it's just not us. It's someone else's customer, not ours. And as we said, that is the premium price point brands and the 3rd party ones. So it's the same kind of thing we were saying earlier. Last point was about the 4 €1,000,000,000 or next warehouse specifically in the U. S, was it? Yes. Obviously, you said €4,000,000,000 But I mean, I guess the critical point might not be the sales line, it might be the actual service line. Yes. So having 4 having 3 major fulfillment centers custom built with great automation and fast throughput and low operating costs is a real advantage. Does that mean we'll be building warehouses in every market at the same rate? I don't know. So we'll be certainly looking at a different method of connecting and offering increasing choice with less capital intensity. I just need to get through the TGR in development that gives me some of the capability to access a different way. So that's not a pivot in the model. That's just looking at how to deliver choice for customers at a very different rate without necessarily having the same level of capital intensity. But when you've got those investments in those centers that we've built, they're very, very useful. And I've called out today some of the customer enhancements that we'll get on the back of it such as next day delivery in the U. S, which is definitely a first for us. I don't know, it's not really that common in the U. S. Market yet. But it should be because why would customers in the U. S. Wait any longer than the European customer? Simon Owen from Credit Suisse. Just two quick ones. Can you give us an update on U. S. Sales taxes as to how many states are kind of getting themselves organized in terms of local state taxes. So this can all be rolled out and what your kind of thoughts around timing, where you're passing it through, etcetera. And then just a broader question about the ethical consumption as to which markets you're seeing it matters and how customers are reacting? Are they buying more of product that is deemed to be ethical? Or are they just buying less because that's deemed to be the right thing? Or is it all talk and not much action? Sales tax? Yes. So that's gone live. We there's 32 states currently, Simon. I think the only big one that's meaningful to us is California that hasn't gone live yet, but we firmly expect it to. I suppose in terms of removing a forecast risk in the balance to achieve, it's gone live now and being passed through, right? So if that was a margin risk to us, it's no longer there for the balance. Not every state will do it because there will be some like Nevada, for example. There's a few states that don't have any sales tax. So we're, I don't know, 80% of the way there now. I would imagine within 12 months, they'll all be there. But for us, it's all in place and being passed through as from February. All right. On your second point, Sam, interesting one. Our approach to this is, we'll take care of the sustainability in terms of fabric sourcing for you. And we're 80% ASOS Design already and we'll be 100% shortly. There aren't many brands that are currently where we are. We'll also take care of the sourcing and make sure that the people who are making your garments are paid the right wages, they have freedom of association, they have access to the right working conditions. That's part of our modern slavery commitment. And we'll also take care of the packaging too. So at the moment ASOS plastic bags are 100% recyclable and all the boxes are 100% recyclable and recycled. We've got around 35% of our plastic packaging at the moment is recycled. We're trying to work hard on sourcing increased levels of recycled virgin plastic. So the view of that is, there's enough things for consumers to worry about. Those things they don't have to worry about by shopping at ASOS. We're also making sure we're pushing a number of our partners and there's a 5 point plan as a minimum thing that they should continue they should sign up to. And there'll be a moment where we'll have to push those compliance levels. And if people don't comply, we'll have to have different conversations with them. Do I think it's dominating demand right now? No. But I think there's a tipping point. And the advent of social media, the younger customers are more connected, more aware of these things than ever before and that's right. I do not think they'll pay more for it. They'll expect brands to take care of it for them. And I think it will become a defining feature of how people consume their fashion and many other items. We're ready on that. We're on it. We're about to launch a new set of jeans that is 100% recycled material. Denim is one of them. Denim, average pair of jeans consumes about 1500 liters of water. Water is a key element of that. Cotton is a key element that goes into denim, of course. 100% recycled jeans. And by just breaking down old denim, recycling it into new fabric and away you go. So we're on it. Customers know we're on it. We will weave this into our narrative far more. And I think there'll be a moment where it'll become a defining feature. It's not yet, but it will be. I'm very conscious of time. Should we take one more? Sam Lorenz, Arete. So you mentioned about growing your proposition for next day delivery and I think it's 25 German cities and select cities in the U. S. Can you maybe talk about some regions slightly further afield how you think you can maybe expand this offering? And also your thoughts on how you can stay competitive given such a drastic cut in CapEx, especially given that you say delivery proposition is so important? Which regions you want to talk about? Maybe the U. S. And Europe? Right. So take this as a phase first this year. So during the course of the next few months, I've just set out our roadmap for Germany, first of all. It's the biggest single market in territory in Europe, clearly. So that's where we're targeting first. But we won't stop there. We'll keep on going. But we haven't set out which cities will do that yet. In U. S, we've picked off our hotspots and where we know we've got high customer concentration already. If you remember, 6 months ago, we talked about mapping our demographics where we know that there's customer hotspots. We'll start there and then expand. So we the ones we're planning to do next day delivery on are the ones where we know there's a customer base already waiting on wanting that. As we see more demand light up, we'll just point the propositions accordingly. But it would be full hard to go next day delivery everywhere in the U. S. Because the geography just wouldn't work. So going forward, I fully expect in the U. S, Atlanta just being one part of that solution. And I expect at some point looking at more facilities or a different way to connect those propositions with other consumers, but it's not now. The Atlanta warehouse has got around we'll have around 20,000,000 unit capacity, which is about 1,500,000,000 sterling processing capacity. So I've got a 3x improvement within what I'm already doing in the U. S. So I don't need to do that just yet. I forgot your other question. It was about CapEx and market challenge, about EUR 150,000,000. It's still 4x, 3x what it was 4 years ago. It's still a significant amount of money. We're certainly saying that's guidance for 1 year. So it's not guidance for every year adding for an item. Yes. But then you said in the medium you said in the medium term that CapEx would likely increase to between €150,000,000 to €200,000,000 But if you're expecting that you do want to expand to further cities, then maybe in the medium term, it's actually going to have to increase again. Not what I'm expecting. I appreciate my CapEx guidance hasn't been the most precise, but that's not what we're currently expecting. All right, guys. Thank you very much for joining this morning. I hope that was useful.