ASOS Plc

Good morning, everyone. I never thought I would be too tall for a mic. Anyway. So good morning again. Thanks for coming along to our fiscal year 23 interim results presentation. And to those watching online, thanks for listening in. So you have seen our results this morning, as well as our second annual fashion with integrity progress update. And I'm going to take you through a summary of our first half before giving you more color on our progress with our driving change agenda, which has been our core focus since we last spoke to you in January and since October as well. And I'll hand over to Katie to run you through our financials in more detail. Today is Katie's last results announcement at ASOS, and I would like to take this opportunity to thank her for her hard work to the very last minute, I promise, and her valuable contribution throughout her time here. It's been a great pleasure to work with you, Katie. And I will then ask our incoming interim CFO, Sean Glitherow, I never pronounced it so early, to take us through the outlook for the year ahead before we have some time for Q&A. So with that, when I first spoke to you as a CEO back in October, I said my diagnosis of our strengths and weaknesses, which led to the launch of our driving change agenda, which is an action plan to accelerate the transformation of ASOS into a profitable cash generative business. We are determined to do this while retaining our commitment to protect people and reduce our impact on the planet through our Fashion with Integrity program. I'm pleased to say this morning that we have made great progress over the last six months, creating strong foundations for a return to profit and cash generation in the second half of the year and beyond. Against a challenging backdrop, sales in the period at constant currency and excluding Russia declined 7% with a deterioration since P1 largely due to the impact of our profitability initiatives. This is to be expected as we prioritize order and customer profitability over our mentality of growth at all costs. Adjusted loss before interest and tax was 69.4 billion pounds, reflecting the facing of headwinds and driving chain benefits across fiscal year 23, which we'll give more detail on later. I'm encouraged by the progress we have made so far. We're having some technical difficulties. Sorry about that. Let's see if we can get back to it. And the idea is that I'm going to continue talking to the slide we have here. Okay, so we're having an issue with the slides. Okay, thank you. Sorry about that. My apologies. So I'm encouraged with the progress we have made on our journey towards operational excellence so far. Thanks to the hard work and dedication of all ASOSers, we are on track to deliver over the 300 million benefits of our profitability and cost savings measures this year, as we announced in October. The team has delivered over 100 million pounds of benefits in the first half, and over 95% of the 200 million benefits planned for H2 will come from actions that we have already taken. The shift to our new commercial model is a core pillar of the driving change agenda. In this sense, I'm pleased to report that our stock reduction is ahead of plan, down by 9% in the first half of the year, and we have plans in place to reduce our stock position by around 20% by year-end. It will take time for all the benefits of this shift to flow through, but I'm pleased to see recent gross margin up more than 300 basic points year-on-year, driven by some of our commercial initiatives and supported by freight and duty pricing. At the end of February, we had cash and undrawn facilities of over 400 million pounds. And this month, we have also amended and extended our 350 million RCF facility through to November 24, supporting the business as we continue to execute our plan. Alongside our robust and flexible balance sheet, leadership and culture is a core enabler of our strategy. Over the period, we have reinforced our senior leadership team, simplified decision-making processes, and empowered our culture of innovation. We have made great progress in the period, but there is still so much opportunity in this business. As we move through the second half of the year, we remain focused on the delivery of our driving change agenda to create strong foundations for the next phase of our growth. Thank you. So hopefully you remember the four pillars of the driving change agenda as we set it out in October. But let me remind you a little bit. The first one was renewing our commercial model. The second was improving our order economics and removing inefficiencies in our operation. The third one was ensuring that we maintain a robust and flexible balance sheet. And last but not least, refreshing our leadership team and culture. Now we'll talk about our progress in each of these pillars a little bit more in detail. The eagle eye among you may recognize this slide from the full year results presentation, but I wanted to recap on our plans for the year under our renewed commercial model. The shift to the new commercial model involves, first, a comprehensive change of our ASOS buying and merchandising processes, an improved stock management discipline, and removing complexity from our supply chain. These actions will enable us to give our consumers the best possible experience, increasing the visibility of more relevant full-price products. To drive the benefits of our renewal commercial model is critical that we are operating with an optimized stock profile. Given the current lead times on product, there is a lag between operational changes and visible results, and I'll explain this more in detail on the next slide. But I'm pleased with the progress we have made to date. We have reduced our stock balance by 9%, as I said before, since the end of fiscal year 22, which is ahead of plan. While this reduction has been supported, obviously, by the £130 million write-off, it must be taken in the context of the challenging market backdrop and the typical stock build over the first half of the year. In addition to taking remedial action on stock, we have changed the way we manage our stock position on an ongoing basis. This enables us to be more flexible in creating and managing our assortment, meaning our customers see more relevant product. That is the end game. To ensure continued discipline in the future, we have empowered a central merchandise planning team to oversee a more dynamic approach to stock management and develop new channels to clear stock outside of the ASOS platform in order to protect our brands and ensure our customers get the best possible experience. A key pillar of our driving change agenda is the shift to this renewed commercial model, which is both supported by and a driver of better stock management. That means better buying, better selling, and better clearing of excess stock. I wanted to spend a bit of time on this slide explaining the development of our stock profile, including the three-phased approach we are taking to right-size our inventory. Let me first give you some high-level background on our stock profile. At the onset of the pandemic, we saw a spike in demand, stock turned accelerated, and inventory levels dropped. As we move through Through fiscal year 21, in response to demand expectations and supply chain disruption, intake was increased considerably and stock trend declined. And as demand fell over fiscal year 22, under the old commercial model, we did not adapt intake or clear stock quickly enough. This resulted in a build-up of excess inventory and low stock trend. In the past, we have kept past season products on the platform for too long. We believed we could sell through all stock at breakeven or for a small profit if it was available for long enough. But this ultimately comes at the expense of customer experience, full price sales and profitability. The new model represents a break from this approach. We will be more responsive, we're already more responsive to what our customers want. We will clear through stock faster and show our customers the most relevant full price product. With my famous image, the fresh fish, if you want. Sorry to repeat it. So the three phases of our approach are first, the first stage is that the stock write-off that we did, we took a decisive action to clear 130 million pounds of excess stock. Approximately 90% of it is now extracted from our core network and this alongside brings a significant operational efficiencies and improving profitability in ourselves. Then the second one involves a reduction in our intake for the spring-summer 2023 season that we have already implemented, obviously. Given the change took place partway through the buying cycle, the opportunity to reduce intake was predominantly action via reduction in the number of options, rather volume or depth by option. This is a drag on sales, but will drive the 20% planned reduction in inventory levels by year-end. The third phase applies to our autumn-winter 23 intake, where we've been able to apply our new approach properly. The optimized intake for that season, which is effectively H1 fiscal year 24, reduces volume by option and restores option width, removing the drag on sales and restoring the stock turn to pre-pandemic levels. Alongside the short-term action we are taking to optimize our inventory, we're also focused on increasing our flexibility in the long term. ASOS has a unique proposition that combines our own brand product with corrected partner brands. To fully capitalize on the proposition, we need to be able to respond more quickly to our customer demands. Before I talk you through our test and react pilot, let me first explain our own brand approach. ASOS is not aiming to be the cheapest product on the market, nor the fastest on every item. The aim is to offer customers good value. That means fashionable products with good quality at competitive prices. Our customers appreciate that we're able to offer product like embellished dresses, which are exceptional value for special occasions, or their favorite denim that fits so well they wear on, repeat on, on and on again, as well as product that applies to our unique twist to the latest trends. Having the full breadth of ASOS product, that perfectly blends with customer favorite brands. And this is one of the reasons that makes ASOS unique. The test and React pilot will allow us to improve our offering further, to make our offer more relevant while we leverage our data capabilities and accelerate our speed to market where appropriate. The pilot, which is currently in progress, tests our ability to go from concept to site in approximately two weeks across a small number of product categories. This differs from our major competitors in the React part. We don't just want to repeat successful styles at speed. We want to adapt our designs based on our customers' feedback, our customers' behavior, learn from what they are doing, so we are first to market with trends. Initial results have been very positive, and once the pilot has concluded, we will consider how we can roll it out, what we have learned so far, more widely. To increase our flexibility on the partner brand side, Then, the Partner Fulfills model allows us to expand the range and depth of our product offering without the associated inventory risk. More than that, this new business model will have an extraordinary impact on our longest lead time product areas, such as sportswear, which typically operates on a much longer lead time than other categories, close to a year. Partner Fulfill has gone from 2 to 24 brands since launched in November 2021 and is expanding rapidly for our key brands. For instance, one of our key sportswear brands is already accounting to over 20% of sales through the ASOS platform in the countries where this formula is live. Our tech is continually developing to facilitate the addition of more brands and geographies and improving the partner experience. The second pillar of the driving change agenda focuses on operational excellence, improving our order economics and reducing our cost base. We remain committed to investing in the areas where the returns are greatest. We are relocating capital from non-strategic areas and improving our operational excellence. As I said earlier, I'm really proud of what the team has achieved to date. We are delivering on an ambitious plan with more than £100 million of benefits already realised. And importantly, we will reap the benefits of the actions we have already taken during the second half. The initiatives already in place will drive more than 95% of the £200 million of profit initiatives expected in the second half of the year. As part of this programme of profit optimisation and cost mitigation measures, we have made significant improvements to the profitability of our most important territories, as well as removing substantial costs in the business. The actions we have taken in the first half of the year can be split between four buckets. The first one is our buying optimization initiatives that include improving supplier packaging and labeling compliance to reduce reprocessing costs at our fulfillment centers or taking action to improve profitability, for example, reducing exposure to higher risk categories like bridal wear. Second is our pricing and proposition changes that have resulted from the country review we mentioned at P1 and which I will come back on the next slide. Third is our supply chain initiatives that include things like reducing the use of the currently more manual Leachfield Fulfillment Centre, eliminating split orders and rationalising our UK returns footprint. And finally, the other category, we couldn't find a better name, which is a reduction in our property footprint and increase in discipline of marketing spend and consolidation of our tech contracts, for instance. Much like our approach on stock, we have taken an action in three phases to improve our customer profitability. Firstly, at the brand level, we constantly refresh our brand portfolio to offer consumers the most exciting and curated edit of product. In October, we added to this with a comprehensive review of brand profitability. So we added a lens of profitability if you want. Brands can become unprofitable for a number of reasons, including heightened productivity or high returns, which often coincides with limited product relevance. The action we took with each brand, depending on whether this partner was deemed to be strategic or not. For strategic brands, remedial actions are taken to improve profitability. We have included one example on the slide. This brand was loss-making in fiscal year 22. We took action to remove promotional activity, reduce discounts, and cap discount debt. This resulted in sales of approximately 9 million units in H1 and a swing to strong profitability. Where the brands were deemed not to be strategic, then we have ceased to buy from them. This has been the case with the 35 unprofitable brands we highlighted at P1. From November, we focused on underperforming territories as well, taking a differentiated approach to maximizing profitability in each market. Taking the example of Poland, which is one of our top 20 countries by sales and was last making in fiscal year 2022, we have removed free delivery while reducing our standard charge, increased prices, reduced our investment in markdown and scaled back marketing spend. These actions have driven a significant swing in profitability with an average basket value up double digits as a result. Similarly, in the U.S., we told you in October that we were particularly disappointed with the return on investment in that market. We have since taken remedial actions as well, including removing unprofitable brands in the territory, a review of pricing, and changes to the delivery proposition. This has resulted in significant improvement to profitability, supported by a 6% increase in average basket value as well. In short, we have applied the medicine, and while the option to exit countries which continue to be unprofitable remains as a last resort, evidence to date indicates that this may not be necessary. The third more targeted level of action is at the customer level. We are very proud of the customer base we have built at ASOS. We have approximately 25 million highly engaged, young, fashion-loving customers who shop with us regularly. but incentivizing more positive behavior from a small number of our customers could have a significant impact on our profitability. We currently have approximately 100 million profit drag from a group of customers accounting for 6% of our customer base. It's a very small group of customers with a very big impact. These customers generate a loss of approximately £6 per order due to a heavy reliance on discounted products and high returns rates. For some of these customers, the behavior is temporary. And for others, it's part of a profitable lifetime journey. But for some, it's simply bad business for ASOS. We are now testing a more personalized approach to incentivize positive behaviors from specific customer groups. Moving on our third pillar, our robust and flexible balance sheets, we ended fiscal year 22 with ample liquidity of more than £650 million of cash and undrawn facilities. However, we also made clear that we would revisit our financing within the next 12 months to provide the certainty and security to support our reimagined ASOS strategy. Today, I am pleased to announce that we have amended and extended our existing £350 million RCF to November 24th. This secures our funding beyond fiscal year 24, supporting the business as it continues to execute on its driving change agenda and return to profitability and cash generation. Strategic investment and innovation remains critical for the long-term future of ASOS business, but we are now deploying capital in a more disciplined way. Having set CAPEX guidance for fiscal year 23 at somewhere between £175 and £200 million, below our previously stated mid-term range of £200 to £250 million, we are committed to focusing our spend on projects which will drive improved profitability and enhance customer experience in a highly competitive market. Our tech teams have achieved some really great things in the last few months, and I wanted to highlight some of their most recent projects to you today. They have built AI-based tools to optimize our pricing, markdown, and stock management. They have developed recurring payments functionality, and they have created an infrastructure for us to launch ASOS Drops, a really exciting new capability enabling consumers to compete to access limited drops of our most in-demand partner brand product. The final pillar of our driving change agenda relates to simplification of the ASOS decision-making processes, developing a culture of innovation across the business, and reinforcing the senior leadership team with key strategic hires. Over the course of the last nine months, we have established a new management committee, replacing many of the numerous boards that used to exist in the business before. This flattered leadership structure is designed to ensure that all critical elements of the business are represented when important decisions are made, encouraging cross-functional collaboration and enabling us to be more agile, reducing our time to market. A strong top team is essential to refocusing the whole business on operational excellence. It was important to me to combine the fresh perspective of external hires with internal promotions who understand what makes ASOS so special. In terms of external hires, we have recently announced Dan Elton as our new Senior Customer Director and Michelle Wilson as our Senior Director of Strategy and Corporate Development, as well as appointing Sean Glither as our new Interim CFO. As you can see, the Management Committee is now fully functional and I'm excited about the energy the team is already bringing to the organization. And I'm now handing over to Katie for her final ASOS result presentation and to take you through the financials in further detail.

Thanks, Jose. As Jose noted in his introduction, our financial performance in H1 has reflected our focus on sustainable profit and cash generation over the pursuit of top-line growth at any cost, all set against a challenging backdrop for online retail. Amid cost-of-living concerns affecting consumer sentiment, our core 16- to 35-year-old demographic have reported feeling disproportionately hard-hit. Meanwhile, online retail has suffered as shoppers have returned to physical stores post-pandemic. Online penetration has fallen by circa 100 bps year on year, but we remain confident in the growth prospects for the channel in the longer term, with penetration still substantially higher than before the arrival of COVID. At the same time, we have taken wide-ranging actions to improve profitability. Driving change initiatives include changes to pricing and delivery proposition across multiple geographies, reducing our investments in markdown and marketing and exiting unprofitable brands, as well as reducing intake to right size inventory. We estimate that around half the decline seen in sales since our last update in early January is a consequence of these actions, but we remain convinced that they are in the best interest of the business in the longer term. Consistent with this, we've seen sales decline by 7% year on year, but gross margin remains resilient at 42.9% in the context of headwinds from input cost inflation. You'll remember that the previously guided 100 bps full year tailwind from freight will primarily impact the second half. The phasing of headwinds, two thirds H1 weighted, and benefits of the driving change agenda, two thirds H2 weighted, have resulted in an adjusted EBIT loss of 69.4 million and an adjusted loss before tax of 87.4 million. CapEx in the period came in at £150 million, a step up from the same period last year, due to the timing of the renegotiated contractual payments relating to the paused automation projects in Atlanta and Litchfield. We expect a step down in the second half to bring the full year investment in line with our guidance of £175 to £200 million. Meanwhile, our cash outflow was of a similar magnitude to last year, driven by the much larger accounting loss, CAPEX and the phasing of stock receipts and payments with the cash benefit associated with the lower H1 intake expected in H2 FY23. The profit actions we've taken in the half are reflected in our KPIs, with average basket value up 5%, supported by an increase in our average selling price. In the context of flat gross margin, this indicates an improvement in cash profit per order, as the benefits of our profitability actions start to drive results. However, similar to the trend in sales, we've also seen visits, order frequency, customers and conversions step back in line with our profit actions and a temporary reduction in the number of options on the platform to facilitate a reduction in intake volumes partway through the spring-summer buying cycle. We have seen some churn in our customer base following the increase we saw during the pandemic. new customer acquisition has also slowed as we scale back spend against a weaker consumer backdrop however over the same period we've taken a larger share of wallet from our customers than this time last year giving us confidence that the actions we're taking are the right ones to transform asos into a sustainably profitable more resilient business in the future here you'll see the slide we usually show you with some segmental detail I won't talk about each region individually, but as is the case at group level, the variability in performance between segments reflects a combination of the economic backdrop and country-specific profitability actions, as detailed by Jose. Turning to adjusted gross margin. This has remained resilient in the face of inflationary pressures in the period. We said in our P1 trading update that we would hold gross margin flat into the half year, which is exactly what we've done. with the expected tailwind from freight starting to come through to offset some adversity from trading activity, including input cost inflation, partially offset by benefits from pricing. We're particularly pleased by the gross margin run rate in recent months, which is up more than 300 bps year on year, and gives the business the flexibility to prioritise further reduction in stock in the second half, even against a challenging trading environment. Looking down the P&L to the EBIT level, we've seen circa two-thirds of the expected headwinds in our cost base come through in H1, while the benefits of driving change agenda are primarily weighted to the second half. The majority of the freight benefit that we've guided to at our FY22 results is also second half weighted. Jose has talked you through the main elements of the more than 100 million of benefits realised in the first half of the year, but I wanted to give you a bit more colour on the countervailing headwinds. We've experienced inflation in the mid single digits across our total cost base, with run rates normalising above pre-pandemic levels, the impact of which will persist until the increase annualises in May. In addition, we annualised incremental costs added during the FY22, and in the early part of the year, we experienced inefficiencies in our supply chain due to overstocking. These inefficiencies resulted in increased distribution costs relating to split orders in the UK being shipped from Litchfield, which is not fully automated, as well as an increased warehouse cost due to fulfilment centres operating above their optimal capacity. As a result of these factors, labour cost per unit in the UK was up 16%. Converting some of these changes into our standard disclosure around operating costs. You can see from this slide that by far the two biggest movers in the first half warehouse costs up 210 bps as a percentage of sales and other costs up 260 bps both of these cost lines included labor inflation in warehouses and head office respectively while warehouse also saw the majority of the impact from return rate normalization and other includes the impact of incremental costs arising in the course of fy22 finally bridging from adjusted ebits to our reported free cash flow for the period you'll see that the largest drivers of the outflow are, firstly, the EBIT loss, secondly, CapEx, which we expected to step down in the second half of the year, and third, a working capital outflow, which reflects decrease in payables, largely offset by the lower stock value, with the cash benefit associated with lower intake in the first half flowing through in H2. With that, I'll hand you over to Sean to talk you through our outlook and guidance.

Thanks, Katie. And hello, everyone. It's great to see many of you in person for the first time. Whilst the first half of FY23 has been challenging for many reasons, the actions ASUS has already taken have laid strong foundations for a return to profit and cash generation in the second half. While we're not expecting the trading environment to improve in the coming months, and the actions we've taken to reduce unprofitable sales will continue to drag on top-line growth, we're very confident that we're pursuing the right strategy to restore profitability and right-size our stock position. The headwinds we experienced in the first half will continue but abate somewhat. Inflation is expected to persist in the mid-single digits, albeit starting to ease, and the impact of normalising return rates were analysed in May. In parallel, the benefits of the various driving change initiatives will ramp up, with more than 95% of the total H2 impact, or around £200 million, flown from initiatives already in place. and we will also see the full benefit of contractual freight reductions at a gross margin level. As a result of these dynamics, we continue to expect a return to profitability and cash generation in the second half, and I'll now talk through some more detailed guidance for the remainder of the year. Since the end of the half, we've seen a continuation of the sales trends experienced in January and February, were approximately half of the sales decline linked to profitability measures we have taken. However, the improvement in adjusted gross margin run rate has also been maintained. Looking ahead to the remaining four months of the year, we expect no change in the external trading environment and a continued impact from our planned profitability measures. As such, we expect a low double-digit decline in our top line for H2. In terms of the other guidance for the second half, we expect second half adjusted gross margin up around 200 bps year on year, after allowing for more investment in markdown to achieve our planned inventory reduction of about 20% by the end of the year, as the weak trading backdrop persists. We anticipate second half adjusted EBIT in the range of 40 to 60 million pounds, as a return to profitability, representing an adjusted EBIT margin of about 3%. Free cash flow before incremental refinancing costs will be over £150 million, or over £125 million after extra interest, arrangement and advisor fees. CapEx in the second half, or between £60 to £85 million, will be considerably lower than in the first half, so that we are in line with our previous guidance of £175 million to £200 million for the full year. And finally, for FY23, free cash outflow prior to those incremental refinancing costs will be around £100 million, and that's at the bottom end of the £0 to £100 million outflow guidance we provided at FY22. I'm now going to pass over to Jose for a few closing remarks.