boohoo group plc (DEBS) Earnings Call Transcript & Summary

Welcome to the boohoo group Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present John Lyttle, CEO. Please go ahead with your meeting.

Good morning, everyone, and thank you for joining our call this morning. Joining me on this call are Neil Catto, CFO; Carol Kane, Executive Director; and Tom Kershaw, Sustainability Director. On the 8th of July, the boohoo group Board announced it was undertaking an independent review of its U.K. supply chain to be led by Alison Levitt QC. The review is now complete and was delivered to the Board yesterday, the 24th of September. Our publication of the report in full this morning demonstrates our commitment to increase transparency and communication, particularly around sustainability matters and our supply chain going forward. We also remain committed to manufacturing in Leicester and recognize the group influence and opportunity to drive change in the U.K. textile industry. The document is published in full on our website, and you have seen that we issued an RNS this morning, which summarizes Ms. Levitt's recommendations and set out the actions we plan to take in response to these. The group intends to implement Ms. Levitt's recommendations in full. Our call this morning provides me with the opportunity to personally address the findings of the report and to answer any initial questions. We are due to announce the group's half year results for the 6 months ended 31st of August, next Wednesday, the 30th of September. This will be an extended presentation to cover the group sustainability strategy in more detail, alongside the publication of its financial results. I look forward to conversations with our shareholders over the coming weeks, which will provide an opportunity to discuss the report in more detail and steps that we are taking to drive long-lasting change that all stakeholders in the boohoo group will benefit from. The group is founded on the principles of test and repeat. This allows us to react to the latest trends and bring them to market to customers quickly, with little stock risk and markdown or wastage. We are very confident that we can successfully embed all of the independent review's recommendations without impacting this model and do not anticipate any change to guidance. This has been a very thorough review, and I would like to start by thanking Ms. Levitt and her team for their hard work and the speed with which they delivered the report. I'd also like to thank our internal team and our external suppliers, who have worked tirelessly over the few -- last few months and further positivity and commitment to the group through a period of intense scrutiny. The review has identified failings in the Leicester supply chain and makes recommendations for improvements to boohoo's corporate governance, compliance and monitoring processes. [indiscernible], however, recognize that the group has already taken positive steps towards remedying problems in its Leicester supply chain, which has been stepped up nearly a year ago, well before the recent publicity. However, with the benefit of hindsight, the Board recognizes that it should have acted faster to advance these steps. Our announcement sets out further detail around our planned actions, and we will also provide further color with our half year results next week. The most significant actions we are announcing today as a group are: substantial enhancements to the Board's corporate governance and oversight through. One, supply chain compliance will become a mandatory item in every Board meeting agenda with immediate effect. A new risk committee on the Board reporting into which is a new supply chain committee headed up by our recently appointed responsible sourcing director, who joined us from a major global apparel retailer. We are close to appointing a highly experienced and respected individual to provide independent oversight of the implementation of our change agenda. In addition to this, we have pre-existing plans to announce a further 2 Non-Executive Directors, and we hope to update you soon on our progress. We plan to strengthen our purchasing and buying practices, including strengthening the sourcing team through further experienced hires and implementing a new set of purchasing principles. We will increase the level of transparency of our supply chain through consolidation of our approved supply list. A smaller number of larger, more efficient and well-managed suppliers should result in increased productivity, better quality control and compliance and reduce further wastage. And through the extension of our independent audit program rest of the U.K. and global supply chain. Completing our audit process across Tier 1 and Tier 2 suppliers in the U.K., after which we will publish a list of our suppliers and update this annually. We have also set out a number of planned initiatives to support the Leicester manufacturing industry and its workers, which include the launch of a state-of-the-art manufacturing facility in Leicester. We have never been vertically integrated, and the plan is not to move to being so, but this facility will enable us to demonstrate best practice in manufacturing and act as an educational facility to nurture new talent in the U.K. textile industry. We will continue to work more closely and collaborative with suppliers, and we recognize our responsibility towards them. We are setting up a garment textile community trust and plan on working alongside statutory and civil partners in the region. I'm incredibly proud to be the CEO of the boohoo group. And I like to think that today as a turning point for the group. I have absolute confidence in our ability to deliver on our plans. The influence the boohoo group has on the U.K. textile industry could not be clearer. There is a lot of change, but we're in a unique position to be a real driving force behind positive change and to be a tremendous force for good. I have absolute confidence in our ability to get this right and in a manner that will allow for many stakeholders will benefit. Our customers can take reassurance that our suppliers have been treated fairly. Our employees will feel a greater pride in working for the group. Our shareholders will have greater confidence in the Board's oversight and our investment will benefit the Leicester region and U.K. manufacturing industry as a whole. Within the report's conclusion, it is confident that the necessary adoptions that we are committed to making should involve a relatively easily achieved realignment of our priorities and governance systems, which we as a Board, do take encouragement from as we move forwards. Thank you all for listening, and I'll now open up the line for Q&A.

[Operator Instructions] Our first question comes from Anne Critchlow from Societe Generale.

I've got 2. So the first is what percentage of products you envisage coming from the Leicester region and from the U.K. in the future? And then the second question is about the manufacturing JV that you intend to set up, what are the financial implications of that? And is it successful, is it something that you could see extending in the future? I mean do you think that manufacturing would become central to the business model in the future, can you envisage that?

So just to take the question on manufacturing in the U.K. and our "soon to be opened" facility. We do think this will be a great benefit to the business from a speed point of view. Obviously, supporting U.K. manufacturing and jobs in the current climate is a real positive also. Can I see us adding to this in the future? Perhaps, but obviously, we would like to get the first operation up and running, which we believe at this stage, hopefully, will be in the early part of 2021. And your other question regarding mix of U.K. product, I've stated many, many times previously, as the group expands and requires further capacity, particularly around garment type and fabric, it won't be suitable for the U.K. to manufacture. And I give examples there, for example, denim, it's not a natural source to manufacture in the U.K., and there are other types also. Equally, for example, the brands we have taken in the last sort of 12 months, Karen Millen, Coast, Oasis and Warehouse, pretty much 99.9% of their supply chain comes from overseas, and we don't see an immediate change to that in the future. So while U.K. manufacturer is circa 40% today, I do envisage that mix will reduce as we go forward, and we continue to grow in the next couple of years.

In terms of your second question and on the financial implications of the manufacturing JV, those are included in the envelope of the GBP 10 million investment that we outlined, which is included in all the financial guidance going forward. Now that GBP 10 million is a mixture of CapEx and OpEx, and it will fall into 2 financial years, this current financial year and the next financial year.

Our next question comes from Aneesha Sherman from Bernstein.

I have 2 questions, please. The first is, in the report, there seems to be some conflicting views on how much responsibility the buyers have into making sure they are picking vetted suppliers. Are you going to fundamentally change the way that the buyers place their orders and put more of an onus on them to make sure they're picking suppliers that have been vetted? And my second question is, in the U.K. specifically -- sorry, can you hear me? In the U.K. specifically, will your supply chain cost increase, even though overall through the chain, you don't expect it to have a financial impact on your P&L?

So I'll address the question on the buyers. I spoke this morning about our recent appointment of our new responsible sourcing director and obviously, the team in our sourcing. And one of their key responsibilities going forward will be effectively to set up and run the hubs of manufacturers in the different countries by which we operate. So effectively, from the buyer's point of view, who are today very focused on the fashion, effectively creating a menu that the buyers will use so the factories that they will work with. So the sourcing and compliance team will run the factories from operational point of view, compliance point of view. And then the buyer is obviously doing therapies around buying and product. Equally, however, we have taken on board the findings of the report. And certainly, we will be instigating a new training program across all of our buyers and across all of our brands to teach the buyers effectively in -- with regards to the running of factories, costing of garments, et cetera.

And on the overall cost increase in the U.K., we've stated quite clearly today that we're very confident that there shouldn't be an implication for our financial guidance going forward. And what we -- the way we see this is that we are going through a very detailed process with all the suppliers in the U.K. We really want to stress that we want to give every supplier the chance to meet the required standards. And -- but we also recognize that some may not be willing or able to make that change. And I think the report states as well that there's likely to be a consolidation in the U.K., but not so much in volume terms, but definitely in number of supplier terms. And what we then think is that the growth in the business is coming as it is doing at the moment from more overseas sourcing. And overall, the picture is that we're going to get some areas where cost may increase and some areas where we may get cost savings. The key priority is to maintain our model and the lead times, which we are also very confident about. And overall, there's not an overall cost increase going forward, which is why we're maintaining the guidance. And obviously, we've outlined the GBP 10 million investment, which I've just spoken about, which is included in all of our financial guidance.

Our next question comes from Georgina Johanan from JPMorgan.

Three for me, please. The first one, and I apologize if you laid this out somewhere, but just on the GBP 10 million investment, could you perhaps just give a bit more detail on sort of the larger buckets of that investment? Because I do understand that you guys have a sort of fairly detailed breakdown internally of how that's going to be spent. The second question would be sort of initial view of how much consolidation we might see in the U.K. supplier base and kind of a rough number where you expect that to land? And then the third one was just around your auditing process, particularly in the U.K., I understand that you've sort of chosen to build an audit process that's different to some others using in the U.K., which is the Fast Forward approach. Could you just perhaps explain why you didn't choose to be part of that and why you've gone down a different route, please?

Just on the GBP 10 million, I think the call today is very much about the independent review. So I don't want to talk anymore about the GBP 10 million that we have done yet. And obviously, we've got half year results next week. So I want to be very clear that this call got to focus on the independent review. And then over to...

I'll take the consolidation one. So yes, will there be consolidation? Absolutely. Have we got a target specific on that at the moment? No. It's really going to come around compliance. We've got an extensive audit program that has been worked through with our manufacturers in the U.K. at the moment. So it's really going to be subject to that. But we are clear there will be consolidation.

And on the audit program itself, I guess, in February, what we decided to do was to take control of that program by appointing a dedicated third party with sufficient resource to do a piece of work over a period of time of 12 months to audit all our suppliers and importantly, they're subcontractors that they work with. So the initial process was to take control, do that program and then the output of that program will be that we will look at alternative models, and we're in conversation with Fast Forward, that's something that we recognize as a key initiative. So I think there's more to come on that once we conclude our initial program.

Our next question comes from Ben Hunt from Investec.

Can you hear me?

Yes.

So I just wanted to push a little bit more on Georgina's question on the consolidation target. I think you've previously said that 40 of the Tier 1 to 80% of the output in the U.K. I mean can you give us some details as to how radically that is likely to be cut to or if it will at all? Or maybe a little bit more detail on where you see that going?

There will be some movement in the Tier 1. But I think really where we'll see the movement will be in the Tier 2. So the subcontractors as such, as we run through the compliance program with these guys. So not -- in summary, I'd say, some movement in Tier 1, but most of the movement will come in the Tier 2.

Our next question comes from Simon Irwin from Crédit Suisse.