ASOS Plc (ASOMF) CEO Nick Beighton on Q2 2019 Results - Earnings Call Transcript

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About: ASOS Plc (ASOMF)
by: SA Transcripts
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Earning Call Audio

ASOS Plc (OTCPK:ASOMF) Q2 2019 Results Conference Call April 10, 2019 4:30 AM ET

Company Participants

Nick Beighton - CEO

Greg Feehely - Director of IR

Alison Lygo - Head of IR

Conference Call Participants

Anne Critchlow - SG

David Gardner - Morgan Stanley

Paul Bonnet - Bank of America

Rebecca McClellan - Santander

Michelle Wilson - Berenberg

Andreas Inderst - Macquarie

Charlie Muir-Sands - Exane

Emily Want - Redburn

John Stevenson - Peel Hunt

Simon Irvin - Crédit Suisse

Sam Lourensz - Arete

Nick Beighton

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 six months to the 28th of 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 a challenging six months for us, and one of the most challenging we've seen in many years. Economic uncertainties, undermining 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 are undertaking across the business. H1 PBT was £4 million after a £24 million of temporary transition costs.

The quantum of this change also led us to a number of actions that compromised our right customer proposition, notably newness, also in pricing, but also with engaging with our customers. In essence, we didn't put our best foot forward. You see the statement this morning, we've detailed the wide range of review we've undertaken to best engage with our customers and we've already begun corrective actions. This always builds the strength of the ASOS proposition and will lead to a much stronger H2 performance. Correspondingly, we've left full year guidance FY19 unchanged.

We're also coming to the end of the current phase of significant investments. 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 plan to reengage with our U.S. customers.

Lead material supply chain investments will significantly prove our capability, our customer experience and our productivity, and these benefits are ahead of us, and we are now ready in a great position to capture them. We have a strong, efficient and localized operations now in 3 major markets, the UK, Europe and U.S. with over £4 billion of net sales capacity for 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 is £50 million but by the year-end will 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 of circa £150 million. Over the last three years, we've financed over £0.5 billion of investments in the 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 markets 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 is clear evidence here pointing to areas we should and could have done better where 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 -- firstly, taking a step back from the numbers on the screen, what we've seen is a softness in organic customer acquisitions and in traffic over the last six months. There's a number of contributing factors there that I’ll draw out later in the presentation and it does vary by territory.

In the UK first, our UK sales growth held up at 16% and it does demonstrate a continued market share gain and what has been a pretty soft and competitive market. Our consumer level, we see significantly improved demand from our existing customers with order growth of 20% from only a 4% increase in traffic and frequency up 11%. ASOS 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 marginally over period, largely driven by ASP which is the promotional activity in the first quarter and to a lesser extent continued trend of customers buying into lower price bands. Ad share icons and 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 accounted 50% of this segment. The EU sales grew up 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 disproportionately impact on our demand.

The rest of world segment pleasing, however remained robust. With the completion of the next stage 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 has 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 into enhanced delivery propositions. We're actually targeting next day delivery with a midnight cut-off 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 over 50%, these increased by 30% and orders were 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. in the Q2 conference call. So, you know the largest drag in that segment was initial problems we faced when the Atlanta’s warehouse went live. This was an unexpected surge in demand following in web to warehouse cutover. I'll again talk more shortly about the Eurohub -- more about the U.S. shortly. But I will mention here, we see some encouraging green shoots and we know we’ve got a long way to go to in the U.S. Notwithstanding the warehouse front, we did see some underlying and encouraging consumer dynamics, giving us an instinct of what's possible and is ahead of us. For example, during the initial cutover, conversion increased by 1 percentage points.

Final, rest of world, our Russian customers responded most significantly to our improved trading sense in Q3, 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 experiences have given us greater confidence in that. The U.S. clothing market was worth nearly £400 billion last year, with online representing around £80 billion. 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 four years. So, 70 million, 20 to 34-year old girls and boys in the U.S. of which we're confident of sizable number of fashion loving and potential customers for ASOS.

In the U.S. we already have 2.6 million active customers and we've grown our business around $400 million already. And this has been done without deploying significant cash flow in infrastructure or in technology. Atlanta on 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 touch out what it means. In essence, we're using our technology to gear target our customers and provide the best possible localized product content and social media. Up to now, we treated the U.S. as one country, offering customers from New York to LA and Chicago to touch with 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 serve depending on your time zones, ZIP code and climatic conditions. Our clustering tech will be deployed in May, and from there on, we begin significantly enhance our delivery propositions. We're talking 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 third-party platform, third-party branded product too. The spike in the 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, our customer acquisition strategy will be based around acquiring fashion loving, loyal customers through a more targeted, direct marketing, through PPC based on your ZIP codes. And as part of this approach, we’ll be offering a summer of festivals program. This is a six-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 one, and for us and e-commerce generally. Overall market demand in this month was soft and we saw and observed an extremely aggressive promotional stance, not only our fellow e-commerce players, but also more traditional high street brands, and dramatic shift from these players to catch demand, clear excess stock through unseasonably warm weather, which is to stimulate sales was the biggest impact on our performance.

Our promotional stance during Black Friday enhanced to 20% didn’t look quite as compelling for our customers. We also didn’t offer the Black Friday promotions for our Russian and Australian customers, which was a trading error and we lost an opportunity to enhance our customer acquisition. Of the timely guidance we set in December, this is our narrative and key diagnosis. But standing back from that, we had a real closer look at our offer during the period. We've concluded the 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 that product, our rated newness had slowed particularly within the ASOS Design. And our natural traffic growth had stepped back significantly. Also, some of the reasons behind that with substantial catch from website design changes we deployed earlier in the year.

We worked hard over Q2 correcting these errors and frankly 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 UK, and a more stable EU growth, but a weaker U.S. growth profile, this was fairly down to Atlanta warehouse change. The U.S. performance during the first three days quite blued 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 through the main movements in the regions.

You can see, we had a small FX tailwind year-on-year and small improvements in the buy margin that the teams have worked through. These savings we invested in improvements in sourcing and improvement in sustainable fibers into the ASOS Design product. This is a key trend 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 the ASOS Design come from recycled materials and we’re actually 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 is an increase in the branded sales mix, adverse country mix is 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. UK margin was down 120 basis points in the half, we saw a good recovery in 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 activities, delayed and the timing of the French and German sales and slightly reduced clearance debt accordingly and some of the price increases that we put through the European market accordingly.

Within the U.S., the margin was back 40 basis points as we have begun to incur incremental duty in freight costs from importing stuff in Atlanta warehouse.

Finally, looking at the rest of world, which is about 250 basis points year-on-year. This is largely due to increased markdown 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 that drop from the U.S. freight and duty but also gives us flexibility to invest greater in products for our U.S. end customers.

On to operating costs. Total operating costs as percent of sales increased 170 basis points over the period including £24 million of temporary transition costs which mostly fell in the warehouse cost line. As a result of the low growth trajectory this year, we have 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 of sales fall in second half as we start seeing greater increase of orders from the U.S. warehouse. To give you indication of the size of benefit we see, U.S. distribution costs have moved from another 22% of sales to 10% to 15%, over the medium term.

In warehousing, this is the biggest part of operating costs increase year-on-year. This is mainly due transition cost in Atlanta and Eurohub. Flipping these transition costs out, warehouse costs would have been 9.3% of sales, corresponding distributing last year 8.9%, so an underlying move of 40 basis points. We're expecting significantly lower amounts of transition cost 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 include 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 is in our technology. Depreciation, we got some time now. Depreciation will be on 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're through the peak of our heavy investment phase. CapEx guide for the current year is maintained at £200 million, and we're expecting to reduce it next year FY20 to around £150 million. The investments we're making on 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 £130 million of CapEx during the period and that’s been our case across major projects.

On the right hand side, we're doing some additional customization which I hope is helpful. Looking at our CapEx by lights on, efficiency, growth and transformation CapEx. Within transformation, we refer to transformation project as a three-year program of major infrastructure and technology that provide a marked step change in our operating capacity. Projects in this program include TGR, a 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 that very nature we won’t expect them to repeat in the medium term.

I'll talk you a bit more about the benefits playing from the from the warehouse investment shortly but a bit more color on our TGR, Truly Global Retail systems. At the conclusion of this program we were invested around £80 million in this capability. We'll have a complete replatform in all the buying of 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, align buyers to place orders at the point of contact with the supplier. It also allows us to trade our product from multiple warehouses in multiple currencies on the localized basis.

Investing at 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 warehouse systems, but also the outbound carry management system and the returns processing software.

Finally, lights on CapEx is investment that we know we need to make just to pull the ongoing business, specific growth or efficiency, it’s just step to keep things moving forward.

On to cash. We closed the year -- we closed the half with net debt of just under £38 million, a reduction of 86 since August 2018, mainly driven by CapEx. Shortly for the half year, we successfully renegotiated the banking facilities and the group now has in place £220 million of facilities until the end of August 2019. This then pulls back to 150 and it’s committed to May 2021. This provides 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 of £50 million. We expect return to free cash flow positive in FY20 and each year thereafter.

So, moving to summary of the areas of focus. As I said earlier in Q2, we had a good look at ourselves and a good look at the 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 are set out on that slide and I'll take you through the more details 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 to our presentation. And we've always believed at that. This is some of the -- these are three images here, same product, reshot, restyled, and we’ve seen dramatic uplift and that you can see below. The sales uplift and customer engagements also have been dramatic, and it's a bit more of the ASOS presentation our customers expect from us. This is 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 billion. 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 -- which are all internally generated brands, the overall ASOS Design numbers are around 38%.

A key area of focus on ASOS Design is to profile like other brands on our apps. You should have seen a notable difference with the presentation that you've been following 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 width 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 Germany, we've also taken some price investment on a number of the ASOS Design lines. We've done this ahead of the Eurohub and benefit release and we expect to do more in the second half. The key change on that product top of an 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 have 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 is being one of the most successful brands ever launched at ASOS. We launched it in October last year and sold over 1.5 million units since then and 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 -- it's most searchable brand term for our customers. We're expecting to achieve around £55 million sales this year, and it's the brand that was created for the younger generation or Generation Z, using collaborators to work directly with our ASOS Design team. And it will be -- it'd be reaching a size where it's becoming a business in its own right.

ASOS 4505 was launched last year as part of our activewear refresh. And we are now annualizing those sales and it's growing to over 100%.

Third-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 have a 190 new ones. And it's a lot higher than normal because just thought some of these brands weren't resonating with our 2017 customers the way they should. And we're onboarding a newer mix, smaller, fresher, up and coming brands alongside some more established brands such as & Other Stories.

Globally, our face and body category continues to grow strongly at 47% year-on-year. Last year, we get £60 million in sales, and we're expecting it, and it's from a standing start, and we're expecting to deliver over £100 million this year. We launched 31 new face and body brands in the half, 4 of these from Estée Lauder range, and we now have around 14 brands from the overall Estée 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.

Our marketing. We shouldn't lose sight of the fact we have a great brand and some pretty impressive awareness engagement stats. However, we've seen low organic customer acquisitions and softer traffic than we had hoped for in the year or in the half year.

Part of this was due to our pull back and promotional marketing to the back end of last year, and we felt the impact in the first half greater we anticipated, and we have also seen a reduction in awareness and buying consideration in the Europe -- in European markets, particularly in France and Germany.

We have seen underlying improvements in conversion and still some underlying improvements in frequencies I've touched on earlier. And that went someway to offsetting some of the traffic decline.

I'll run through some of the key things we're doing differently now. Firstly, we're outweighing 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. The first piece of activity here was the ASOS Design campaign that we're looking out on the way in.

We're also awaiting our influencer activity, and investment here will double year-on-year. And this will -- part of this is the U.S. summer festivals, but it will be 6-month campaign to outweigh our influencer activity. We're also making some changes on 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're increasing the velocity here. If you follow us on Instagram, you would have seen a notable step change over the recent weeks.

Onto warehousing capacity. Over the last few years, we developed a formidable logistics capacity or capability. And we're about -- 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 -- is 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 several returns processing centers, mostly in lower cost operating territories and in an increasing efficiency and optimization phase.

All of this is capability to deliver a minimum of £4 billion of sales capacity, and a footprint to go after far more, particularly in the U.S.

We will now start to leverage these investments, as I said earlier, to drive efficiencies and customer experience. The chart on the right shows some of the improvements in capacity and the efficiency we are targeting. The bottom chart are indexed of the Barnsley performance. So let me pick up 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 -- 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 already invested £105 million in total. We've recently added a dynamic buffer, which means product can go even faster to the warehouse, and we now driving out and optimizing that solution.

Let's focus a bit on technology. First, within transformation programs. Transformation accounts for around 26% of the H1 spend, the majority of which is 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 direct 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, both developments represent about 40% of the tech spend, which was split across our e-commerce platforms and data platforms, including AI product enhancements, sizing, recommendations and greater AI personalization.

Highlights were in the rollout also include Fit Assistant, which control 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 six months ago. It's a bit like Pinterest meets ASOS. This has been one of the most successful, recent tech launches for us with customers creating over 3 million boards and adding new boards at the rate of 130,000 a week.

Growth, our international specific investments. So, rollout of gift vouchers in all currencies to sit alongside the Sterling offer as well as four 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. I think it's key to our digital platforms. We released 2,200 customer-enhancing releases during the half compared to 1,200 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 site on this prize. I thought it was worth reminding of a data I shared with you back in October. Our view of the total addressable market and the global opportunity for ASOS remains unchanged and the shift on lines continues at pace. The online global market will be worth at least £220 billion 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 the stronger H2. We've conducted a thorough review of our business and taking corrective and they're underway. While, on the edge is significant infrastructure and technology benefits, medium term, we're confidently 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.

Question-and-Answer Session

Q - Anne Critchlow

Anne Critchlow, SG. First of all, looking at Marketplace, which you said you're going to develop, is there a case of integrating that within the main sites 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 said that ASOS can do more. Are we stuck at 15%? Or would you look for an acceleration into the RTS?

Nick Beighton

Okay. Thanks, Anne. First of all, Marketplace. The inspiration of Market place 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 increasing trend of people buying our products, wanting to them remonetize their wardrobe. And 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.

I went to generally small brand engagement. In terms of commercial impact, Marketplace is not meaningful. In terms of engagement with our customers, it's really meaningful. And 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 the force and the fastest app downloads are on the sort of marketplaces, such as the likes of depo. We've kind of forgotten that we have something that we've treasured, and it's a potential future gold mine for us.

So we 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. We haven't figured that one out yet, but we are working on it. We do know it's a rich thing, we don't know if you want to facilitate those experiences for our customers. So just watch this space on that one, Anne. Was the second one warehouse costs?

Anne Critchlow

Yes.

Nick Beighton

How local it can go? I've said before, I'm expecting around 8% to 9%. So as the efficiency rolls through, the chart shows you the current level of inefficiencies. They're still very manual. That's about a flow through. But bear in mind, there is -- we also are leaders on the living wage for our people wherever 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.

Greg Feehely

Always stuck at 15%.

Alison Lygo

ASOS can do more.

Nick Beighton

ASOS can do far more. I think it will be a little bit early for me to start going. We're now expecting 20%, 25% in the -- in FY '20, until we 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 15% for FY '20. What follows behind that, we'll have another look as we see our investments unwind.

Greg Feehely

David?

David Gardner

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?

Nick Beighton

Sure. Greg, do you want to do payables?

Greg Feehely

I'll come back just very shortly on that.

Nick Beighton

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, somethings we were either ill-disciplined on or things were attacked differently. But our medium-term trajectory is to restore it to 4%. On a terminal value, the -- whenever that is, we still believe the business could have a high single-digit endpoint margin.

Greg Feehely

Let me just follow up on the payables. Nearly every question around this was moving from the old finance system to the new finance system. And I think, we told you maybe [indiscernible] was a little bit bumpy. So it just moved from one place in 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 system.

Paul Bonnet

I'm Paul Bonnet from Bank of America. Two questions from me. The first one relates to the U.S. 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 first 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?

Nick Beighton

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 you're recall is bang on. The first 3 days, it was over 80% demand. It took us around 4 weeks to recover the backlog. And so we've 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 stability, first of all, restoring the propositions. And actually one of the -- it's -- it was really interesting is actually the power of the propositions when we added on 45 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...

Paul Bonnet

It's on the proposition...

Greg Feehely

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 certainly got 2 more days than you would expect it to deliver it in the U.K., [indiscernible] one maybe always forgets that one. Sorry, put on the FX with guidance next year broadly flat at the moment.

Paul Bonnet

And for the remaining half of this year?

Greg Feehely

This year, second half of this year, I'll come back to you, but I don't think it's changed in terms of 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.

Nick Beighton

Andreas or Rebecca?

Greg Feehely

Rebecca.

Rebecca McClellan

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 choices, that means we should expect some changes in working capital?

Nick Beighton

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 want it to be? No, but we're working really had I said. And so the 3 images I showed you are just examples of how the presentation has just gone a bit more sizzled, 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 glamor. Internally, I've called it Project Glam. And so just climbing some of the presentation backup. And do 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 -- it got a little bit vanilla of being self-worthy, I think that might be the 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 moods. We made a couple of decisions around newness and width to help us sustain 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 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 you'd get a disproportionate impact. Will that increase working capital? Potentially, but it will also increase rate of sale. 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? Tried to.

Michelle Wilson

Michelle from Berenberg. Just 3 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, Eurohub and U.S., how does that compare to the U.K.?

Nick Beighton

Okay. So the first is, we started to deploy price investment in France and Germany. We'll wind back some of the prices that we had put in there earlier in the half around about February, and we did it on ASOS Design. And so -- and I wanted to do that because there's a leadtime for pickup. And I want to do that, start rebuilding momentum ahead of the cutover or 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 third-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're all going through. It won't be the same potential risk that we saw in Atlanta because Europe's already a closed pole.

And all we're doing is extending the second half of the warehouse. So Atlanta -- sorry, Berlin is around 450,000 square feet. We're opening up the second chamber, which has already got our 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, I've -- the chart shows an index on the back of it, so with Barnsley, GBP0.60, Atlanta is 3x at a -- 2.7x at a -- at the moment and heading down. Does that help you?

Michelle Wilson

Yes.

Andreas Inderst

Andreas Inderst, Macquarie. I have 3 questions. Just the first one on, like 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. Just over a year ago, so you guided GBP230 million, GBP250 million CapEx for the medium term. Now you say the big investment program is over, GBP150 million, 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?

Nick Beighton

What was the first one?

Alison Lygo

Shift to lower price points for future.

Nick Beighton

Oh, sorry. The...

Greg Feehely

Thank you, Alison.

Nick Beighton

Thanks, Alison. I don't know the answer to that. And the -- all I can do is observe customer behavior. The -- so is it structural, therefore, forever? I don't know. Is it...

Greg Feehely

[Indiscernible] to a year though. It's been going on for quite some time.

Nick Beighton

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. Would it always be at that level? Don't know, highly likely. The second one was CapEx?

Greg Feehely

Yes.

Nick Beighton

Right. So we did guide to around GBP200 million, GBP250 million for the medium term. We 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 GBP200 million, GBP250 million is on warehousing predominantly and some of the software programs falling away. We're going to, therefore, work our assets a lot harder. It'll be certainly around GBP150 million for FY '20. Going into the future, it will be somewhere between GBP150 million and GBP200 million, depending on warehouse build-outs and the next stage of our growth.

But we've certainly got capacity with at least GBP4 billion to -- in the warehousing, where we don't need another lumpy investment for -- during FY '20. On the last piece, returns' efficiency. We've build 7 returns processing centers now which can handle around 3.5 million returns a week. We've had a good look at the software, and all of those were replatformed with software, improved the functionality. And we're expecting 10% to 15% productivity improvement through better, more intuitive software, faster throughput, all of that helping the -- helping that cycle. That's really important because that's quite high-cost processing activity in our business.

Greg Feehely

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 were 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.

Nick Beighton

Efficiency-related CapEx is all right because it's -- if you get 10% to 15% throughput improvements, you won't need extra facilities, obviously, as soon.

Charlie?

Charlie Muir-Sands

Charlie from Exane. Three questions. Firstly, when you think about the midterm to recovery to objectives, what's more important, getting sales over 20%, again, getting back to 4% margin and/or getting to -- getting and holding free cash flow positive? The second question...

Nick Beighton

Three, Charlie. So...

Charlie Muir-Sands

If you have to choose -- the response of the customers is not sufficient to get all 3 simultaneously.

Nick Beighton

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 2 things and more efficiency and in having another look at our CapEx plans, we'll 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.

Charlie Muir-Sands

The second question -- sorry, I think, you said warehouse transition costs will gradually fade. I wondered, next year, whether we're still talking about a number over GBP20 million. I know precise numbers might be a bit early. And then my last question was, I think, in the other OpEx, you called out GBP3.1 million rebates. 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.

Nick Beighton

Sure.

Greg Feehely

Well, actually the transition cost for next year because we haven't finalized those, but to give you a direction of travel, GBP24 million in the first half of this year is likely to fall to GBP12 million in the second half of this year. That's potentially helpful for you as we'll probably come back in more detail in October, with detailed line-by-line guidance for next year.

Nick Beighton

But it will half again in FY '20. It would be a guide now, the transition cost. In terms of the GBP3.1 million rebate, just working our costs harder, renegotiating on certain line categories, and we got a rebate, one of major on the back of it. We should rebate of cost we've previously paid.

Greg Feehely

Let's take this side. Emily.

Emily Want

Just a quick one on active customers. So can you give us some color on comments on what you're seeing in terms of gross customer adds? So you've obviously helpfully given us all of the information on net customers, but I'm just interested in the trending growth, particularly, given that you were also talking about churn down?

Greg Feehely

Exactly. So I think you can come to that conclusion yourself, right because we haven't really talked about churn rates before. We've put them in the statements, saying that improved. You see the net number so you can deduce that yourself.

Emily Want

And we -- can you tell us what the churn rate is?

Nick Beighton

Right. I think that was working out yourself, Emily. We're not going to give any more help than that. Over here somewhere.

John Stevenson

John Stevenson 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 mean if you could sort of comment on that. What are you actually seeing amongst the loyal customers? And why, if the proposition is sort of softened a bit in terms of how you're 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 the 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 not 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 state?

Nick Beighton

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, the younger demographic, has been around our presentation: product width, product newness. And so that's what I mean by [indiscernible] and not quite looking as good and feeling as good as it once did. So I think we're on that now. And we're seeing good reactions to it. So I don't think it's about propositions. I don't think it's around delivery of returns.

We're certainly seeing customers choosing a different set of payment methods. And there's been an -- there's been a surge in pay now -- or buy now, pay later, installment payment methods that are really compelling actually. Why wouldn't you? So we've launched to cover 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're now on to that too. Does that answer the first point?

John Stevenson

Yes, I think so. I mean, I guess their loyalty, I guess, has been quite good. So obviously...

Nick Beighton

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's -- there's a bitter, sweet 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 third-party brand point, we're just talking about the sell-throughs on some of them. Again, that's just not resonating, right? So we normally churn over about 200 a -- 150, 200 a season. We've just gone a little bit harder on some of the brands going -- it's just not us, it's someone else's customer, not ours.

Greg Feehely

And as we said that is the premium price point brands and the third-party ones, so it's the same kind of the thing we were saying earlier. Last point was about the GBP4 billion or next warehouse, specifically, in the U.S., was it?

John Stevenson

I mean, you -- obviously, you said GBP4 billion, but, I mean, I guess, the critical point might not be the sales line, it might be the actual service line.

Nick Beighton

Yes. So having 4 -- having 3 major fulfillment centers, custom-built, with great automation and fast throughput and low operating cost is 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 development. That gives me some of the capability to access a different way.

So this is -- 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-based 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. But 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 Irwin

Simon Irvin from Crédit Suisse. Just 2 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 states taxes so this can all be rolled out? And what are your kind of thoughts around timing, way you're passing it through, et cetera? 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 a 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?

Nick Beighton

In terms of sales tax?

Greg Feehely

Yes. So that's gone live. We invest 32 states currently, Simon. I think the early 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 our forecast risk in the balance to achieve it's gone live now and being passed through, right? Say, 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 are few states that don't have any sales tax, say, with -- 80% of the way they are now, I'd imagine, within 12 months, they'll all be there. But for us, it's all in place and being passed through as -- from February.

Nick Beighton

On your second point, Simon, interesting one. Our approach to this is we will take care of the sustainability in terms of fabric sourcing for you, and we're 80% ASOS Designed already, and we'll be 100% shortly. There aren't many brands that are currently where they -- where we are. We'll also take care of the sourcing and make sure that the people 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're also taking 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 there's -- 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 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 take care of it for them. And I think it'll become a defining feature of how people consume their fashion and many of the items. We're ready on that, we're on it. We're about to launch a new set of jeans that is 100% recycle material.

Denim is one of them. Denim average pair of jeans consumes about 1,500 liters of water. Water is a key element of that. Cotton is a key element that goes into denim, of course. A 100% recycled jeans. And by just breaking down all denim, recycle it into new fabric and the way 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'd become a defining feature. It's not yet, but it will be.

Greg Feehely

I'm very conscious of time. Should we take one more?

Sam Lourensz

Sam Lourensz, 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 a field? 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.

Nick Beighton

Which regions do you want to talk about? Because...

Sam Lourensz

Maybe the U.S. and Europe?

Nick Beighton

Right. So -- take this as a phase, first [indiscernible] during the course of the next few months, I've just set out our road map 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 we'll 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, a few -- 6 months ago, we talked about mapping our demographics where we know that there's a customer hotspot, we'll stop 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 or wanting that. As we see more demand light up, we'll just point the propositions accordingly. But it would be foolhardy to go next-day delivery everywhere in the U.S. because the junk feed 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, then those propositions will have consumers. It is not now. The Atlanta warehouse has got around 120 million unit capacity, which is about GBP1.5 billion 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.

Greg Feehely

It was about CapEx and local challenge with the GBP150 million, 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, ad infinitum.

Sam Lourensz

Yes. But then you said in the medium term that CapEx would likely increase to between GBP150 million to GBP200 million, 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?

Nick Beighton

No, we're not expecting. I appreciate my CapEx guidance hasn't been the most precise, but that's not what we're currently expecting.

Is that it? All right, guys. Thank you very much for joining this morning. I hope that was useful.