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Edited Transcript of KMD.NZ earnings conference call or presentation 22-Sep-20 10:30pm GMT

·39 mins read

Full Year 2020 Kathmandu Holdings Ltd Earnings Call Christchurch Oct 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Kathmandu Holdings Ltd earnings conference call or presentation Tuesday, September 22, 2020 at 10:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Chris Kinraid Kathmandu Holdings Limited - Group CFO & Company Secretary * Xavier Simonet Kathmandu Holdings Limited - Group CEO, MD & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Steele Jarden Limited, Research Division - VP of Equity Research * Julian Mulcahy Evans & Partners Pty. Ltd., Research Division - Executive Director of Small Caps * Mark Wade CLSA Limited, Research Division - Research Analyst * Marni Lysaght Macquarie Research - Analyst * Ray David * Tony Mitchell Ord Minnett Limited - Financial Advisor * Tony Mitchell ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to Kathmandu Holdings Limited Investor Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Xavier Simonet, Group CEO. Please go ahead. -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [2] -------------------------------------------------------------------------------- Thank you, Amanda. Good morning, everyone, and thank you for joining us on today's presentation of the Kathmandu Holdings results for the 2020 financial year. My name is Xavier Simonet, and I am the CEO of the company. I'm joined on the call by Chris Kinraid, our Chief Financial Officer. We'll be talking to the presentation slides on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. We will begin on Slide 2, which briefly covers our response to COVID-19. It has certainly been a unique second half, and like all companies, we have had to navigate very challenging conditions. Our response to COVID was swift and strong in order to manage the impact of the pandemic on our business. Following the release of the FY '20 half year results, we undertook a $207 million equity raising to preemptively fortify our balance sheet, reduce net debt and provide liquidity. In conjunction with this, we enacted structural cost reduction initiatives that accelerated synergies across the group and underpinned around $15 million in annualized cost savings. Following the initial lockdowns, the group exhibited a strong recovery. Retail sales performed strongly, driven by changes in consumer trends towards outdoor and recreation activities. Online sales, in particular, have shown strong growth as customer preferences shifted, and we have sufficient capacity to meet the extra demand we've experienced. Our prudent operational and capital management and the strong cash-generating ability of our brand will support future returns. Turning to Slide 3. I now want to discuss in more detail the impact we saw from the COVID-19 pandemic and how we have responded. The overall FY '20 revenue impact from COVID-19 is estimated at around $135 million with $80 million attributed to retail and $55 million attributed to wholesale. The largest contributor to this was the full global retail store closures during the initial lockdowns. Other factors, such as reduced demand for travel-related products, also weighed down sales during the lockdown period. Rip Curl wholesale sales were also affected. The impacts of COVID-19 are still ongoing in some regions. Melbourne stores continued to trade during July but with impacted footfall due to a second wave of infections and the current lockdown continues to impact store performance. Retail stores in Hawaii and wholesale sales in Bali also remain impacted by travel restrictions as well as airport stores. In response to COVID-19, wages were reduced for senior management and office support staff through the lockdown period. $207 million of capital was raised to strengthen the balance sheet, and covenant waivers were negotiated with the banking syndicate. Rental negotiations are ongoing with around 70% of stores settled with landlords. Our relationships with our landlords remain strong. In terms of working capital, inventory orders were deferred, nonessential capital projects delayed and dividends have been suspended for FY '20. The group also benefited from various government assistance programs with wage subsidies passed directly through to team members. Moving to Slide 4. This provides a quick overview of the strengths of each of our brands. Each of our brands, Kathmandu, Rip Curl and Oboz, is distinctive and iconic and has strong financial fundamentals, with highly credible and technical products and a loyal customer base. We believe that now more than ever, strong brand identity is critical. We certainly have [top] 3 brands with category-leading products, and we believe that each brand is well positioned for continued growth in the future. Slide 5 shows a breakdown of our global footprint. Following the Rip Curl acquisition, the group has expanded its global presence. Rip Curl has a presence in all 6 key geographies with Kathmandu and Oboz -- while Kathmandu and Oboz have a presence in Australasia, North America and Europe. The wider network allows the diversification of both geography and seasonality and provides great opportunity for each brand to expand. Moving on to Slide 6. We have seen a rapid acceleration in online sales during the COVID-19 lockdown period in particular, as consumer preferences changed along with the circumstances. Our ongoing investments into omnichannel were invaluable during this period, providing us with the capacity and capability to rapidly scale up to meet the fast-growing demand. Kathmandu online sales growth during COVID-19 from April to July was 96% above last year, delivering a step change in online penetration from 10% in FY '19 to more than 18% of direct-to-consumer sales in FY '20. Likewise, Rip Curl's online sales growth for the same period was 115% above last year, and its online penetration increased from 6% to more than 10% of direct-to-consumer sales. I will now hand over to Chris to cover our financial results. -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [3] -------------------------------------------------------------------------------- Thank you, Xavier. I'll just move on to the group results on Slide 8. Statutory results include the adoption of IFRS 16. For comparability, we have excluded the impact from IFRS 16 from our underlying results. Total sales increased to $801.5 million, reflecting the addition of a 9-month contribution from Rip Curl since been acquired. Other financial metrics were lower with underlying EBITDA of $83.4 million, reflecting the impact of COVID-19 on trading. Government wage assistance across geographies contributed a net benefit to operating expenses of circa $16 million. Operating expenses also include restructuring savings of $4.7 million in FY '20. As support office synergies are realized, this will increase to annual savings of $15 million for the full year of FY '21. Statutory depreciation includes a $76 million depreciation charge for IFRS 16 right-of-use assets. Moving on to Slide 9, cash flow. We again delivered a strong operating cash flow of $93.1 million, despite the challenging trading conditions. Working capital management was a key contributor to this with a $56 million turnaround as we managed our inventory orders throughout the COVID period. In addition, nonessential CapEx projects were delayed and dividends were suspended in order to further strengthen our balance sheet. Net interest paid and borrowings have increased due to the Rip Curl acquisition. Moving on to Slide 10 and our balance sheet. We are well positioned following the equity raise, which we will discuss in our next slide. We managed our inventory prudently in second half, and our current inventory position is well placed in this uncertain demand environment with low Kathmandu clearance stock levels. Current liabilities are elevated by rent accruals of circa $15 million at the end of July, which are pending our final agreements with landlords on rent abatements. On Slide 11, we can see a breakdown of our net debt level over the past 3 years. This has been brought down to $9.4 million at the FY '20 year-end, supported by the capital raise as well as cost savings and structural cost reductions implemented during the lockdown period and the temporary suspension of the dividend. These cost savings allowed the business to generate $63.8 million cash in the second half despite the COVID-19 lockdowns. Currently, the group complies with all debt facility covenants as well as we have waivers remaining in place for FY '21. There is an ongoing review of the appropriate facility structure going forward. Reinstatement of dividends as anticipated in FY '21, dependent on trading conditions and covenant positioning. We will now talk through the segment results and performance of each of our brands. So moving to Slide 13, Rip Curl. You can see the P&L contribution for the 9 months since acquisition. The impact on COVID-19 on revenue is estimated at circa $70 million, including continued impacts on wholesale accounts and retail trade globally. Sales were 17.1% below the comparable 9-month period last year. Lockdown disrupted the wholesale sell-in period for the upcoming northern hemisphere autumn/winter season. Order books for subsequent seasons, I'm pleased to say, are improving. Operating expenses include restructuring savings of $2.8 million in FY '20, delivering annualized savings of $8.8 million. Additional COVID-19-related debtor and inventory provisions are circa $7 million and are included in operating expenses. During these 9 months of ownership, Rip Curl generated $34 million of cash despite the impacts of COVID-19. Turning to Slide 14. We are pleased to say that we saw positive signs post lockdown, with direct-to-consumer same-store sales growth at 14.4%, adjusted to non-open stores that were unable to open for this year for a comparable week. This compares to 2.6% pre lockdown. Strong sales performances in the post-lockdown period were assisted by government economic stimulus and by the increased opportunity for surfing while consumers worked from home. Demand for technical surf products has been particularly solid during and since lockdown. Australia benefited from a successful winter season with post-lockdown adjusted same-store sales growing at 17.7%. The European summer saw record wetsuit sales as interest in surfing increased with adjusted same-store sales up 20.6% post lockdown. Mainland USA retail same-store sales adjusted were up post -- 12.3% post lockdown. However, Hawaii continues to be impacted by the 14-day quarantine travel restrictions, with adjusted same-store sales down 73.3%. Other tourist locations and airport locations remain significantly impacted. Rip Curl online sales, on Slide 15, showed rapid acceleration for the Rip Curl brand. Pre-COVID-19 from August to March, online sales grew at 12.9% compared to last year. During COVID-19, online sales grew at 115% as consumers shifted to purchasing via our online platform in response to lockdowns and restrictions. This has delivered a step change in online penetration from 6.5% of direct-to-consumer sales in FY '19 to 10.6% in FY '20. Over the past 4 years, the compound average growth rate in online sales has been 48.6%. We will continue to leverage our expertise on the Kathmandu business to help further improve Rip Curl online platform. I'll now hand it to Xavier. -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [4] -------------------------------------------------------------------------------- Thank you, Chris. Moving on to Slide 16. This showcases a few of our flagship Rip Curl products launched in FY '20. A key tenet of Rip Curl, and actually all of our brands, is technical excellence and innovation, which allows us to provide the best possible products for our customers. The Mirage 3-2-ONE boardshorts and Playa Blanca Collection swimsuits have won awards at the Surf and Boardsports Industry Association Awards. The E-Bomb E7 wetsuits has also been developed in conjunction with World Champion Surfers. Slide 17 covers how we have reinforced the Rip Curl brand through social media advertising of these products and engaging current and potential customers. Our campaign for the E-Bomb E7 was particularly successful with 135 posts across Facebook, Instagram, Twitter and YouTube, generating a total of 6.4 million views and 112,000 comments likes or shares. The latest video on the Rip Curl YouTube channel has garnered 284,000 views and increased Instagram following for ripcurl_women to 257,000. High-profile professional surfers and other influencers have also been endorsing Rip Curl products through the social media. We expect social media to continue to play and have an increasing role in promoting our brands. I'll now hand back to Chris to take you through Kathmandu's financial performance. -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [5] -------------------------------------------------------------------------------- Thanks, Xavier. On Slide 19, outdoor segment, and it shows Kathmandu's P&L for FY '20 pre-IFRS 16. The COVID-19 revenue impact we estimate at circa $50 million due to the full retail network store closures in April and Melbourne lockdown restrictions in July. Gross margin was impacted by higher input costs as a result of foreign currency, increased mix of clearance sales and promotional activity for the winter season. Operating expenses include restructuring savings of $1.9 million in FY '20, delivering annualized savings of circa $6.2 million for FY '21. Turning to Slide 20. Total sale for Kathmandu were down 11.6% for Australia, with all 117 stores closed during lockdown; and down 7.2% for New Zealand, with 48 stores closed during lockdown. Demand for core warmth and leisure products post lockdown was strong, which contributed to strong same-store sales growth post lockdown of 6.9% compared to pre-lockdown growth of 1.2%. However, I want to point out, demand for travel-related products was reduced, contributing to a $17.5 million to the sales shortfall year-on-year. Moving to Slide 21. Online sales accelerated for Kathmandu in FY '20 as consumer preference moved to online during lockdown. Our omnichannel strategy leveraged the strength of the brand and infrastructure, and our platform investments allow the team to scale up and meet record online demand. We also introduced same-day Uber delivery to selected areas. Online sales growth pre COVID from August to March was already trending strong, 30% above previous corresponding period, while online sales growth during COVID-19 from April to July was 96% above the previous corresponding period. Online penetration increased significantly from 10.1% of direct-to-consumer sales in FY '19 to 18.5% in FY '20. Conversion rates were also tracking above last year and spiked during COVID-19. Over the past 4 years, the compound average growth rate for online sales has been 29%. I'll now hand back to Xavier. -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [6] -------------------------------------------------------------------------------- Thanks, Chris. Turning to Slide 22. We have continued to actively engage our customers through the Summit Club loyalty program, driving personalization of the customer relationship and building loyalty. We currently have 2.2 million active Summit Club members, with membership having grown at a CAGR of 8.1% over the past 4 years. These members represent over 70% of total Kathmandu sales and spend an average of 27% more per transaction than nonmembers. Our personalized marketing automation program for Summit Club members has grown 39% over the past year. The success of our ongoing customer engagement program can be seen through our Net Promoter Score, which stands at 72 across all groups. Slide 23 covers our digital marketing strategy. Due to travel restrictions imposed by COVID-19, we switched to a local adventure focus and launched Adventure Near, Not Far, encouraging the safe return to local travel. We have also launched a Sustainability virtual Q&A series, educating customers on how to live more sustainably in their everyday lives. Our digital marketing campaigns are all about building brand relevance and engagements with our customers. Slide 24 showcases some of our recent product innovations. We have created long line and synthetic versions of our most popular insulation styles to meet consumer demand. We've also given a lot of products focused on sustainability, for example, using Bionic DPX, a unique, fabric-containing polyester made from recovered plastic ocean waste, which is used in our Moana pack range. I'll now hand back to Chris to take you through the Oboz financial performance. -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [7] -------------------------------------------------------------------------------- Thanks, Xavier. Yes, moving on to Oboz. The COVID-19 revenue impact we estimate is around $15 million. Sales pre-COVID for 8 months to March were up 4.6% year-on-year. However, sales from April onwards have been down 52.8% year-on-year due to retail store closures amongst Oboz's wholesale customers. Penetration in market share has been strong and key customer online trading sites, such as REI and Zappos, sales to these online wholesale customers grew in FY '20 despite COVID-19. Oboz will launch its own direct-to-consumer online trading site in this financial year. Operating expenses increased pre-COVID-19, with Oboz investing in new third-party distribution facility with improved capability. And also Oboz invested in strengthening the brand and product team for future growth. From March onwards, these operating expenses were carefully controlled in response to COVID-19. I'll now hand back to Xavier. -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [8] -------------------------------------------------------------------------------- Thank you, Chris. Moving on to Slide 27. Oboz has been growing its range of products since acquisition. New product launches include the Arete collection; the Sypes collection, which has been exclusively launched with Kathmandu and REI; the winter-focused Bridger collection; and Oboz's first-ever cause-benefiting footwear line to benefit Yellowstone Forever. The Oboz brand is being developed through a new Truist influencer program that has been implemented in conjunction with the launch of the Truth to the Trail podcast. This has contributed to a 36% growth in Oboz's social media audience. Other highlights of Oboz -- of the brand and marketing campaigns of Oboz include the opening of an online training portal for retail education and the donation of insole to COVID-19 frontline workers in Bozeman, where Oboz is based. I would now like to take you through the group's growth strategy and outlook for FY '21. Starting with Slide 29. Being a good corporate citizen with a strong focus on sustainability remains a key priority for our group, particularly on circular economy principles across all aspects of our business. An ongoing goal for our group is to achieve net 0 environmental impact by 2025. In addition to this, we are ensuring that all our direct suppliers meet our minimum expectations on their social and environmental impact. Rip Curl has scored a B+ in the Ethical Fashion Report for the second year running and will continue to strive towards improvement along with Kathmandu and Oboz. We have focused on using recycled materials across our brands, and Kathmandu uses 100% sustainable cotton, recycled plastic bottles through its REPREVE product ranges and has moved to solution-dyed fabrics to save water. Rip Curl uses 30% recycled plastic in bottles and uses Forest Stewardship Council-certified recycled paper swing tags, while Oboz launched the Sypes and Bozeman collections made with recycled materials and algae. Diversity has also been a strong focus of our group. Kathmandu has obtained the Rainbow Tick certification in New Zealand, and the Oboz team's gender diversity has improved with 41% female representation among staff now. Moving on to Slide 30. Our strategy, our long-term strategy has not changed throughout this challenging period. And in fact, it has been further reinforced. We are a global outdoor and action sports company, underpinned by iconic brands and technical products with a focus on sustainability and customer satisfaction. We have been building a portfolio of brands that provides diversification across geography, channel, product and seasonality, which will allow us to meet global year-round demand of customers in the outdoor sports and lifestyle categories. We will then leverage this portfolio, delivering operational excellence in sourcing, supply chain and systems, accelerating digital transformation and driving margin expansion through the synergies, complementary expertise and core capabilities of our brands. By maintaining a relentless focus on core customers and delivering solutions to their needs, such as through the development of technical, differentiated and sustainable products, and by accelerating expansion of the direct-to-consumer business, we'll be able to grow these brands to a global scale and enhance customer loyalty. Throughout this whole journey, we will remain true to our values. Sustainability is part of our DNA and is ingrained in everything we do. We will also embrace diversity and inclusion in the workplace and build strong ties with local communities. Moving on to Slide 31. Slide 31 shows the 6 key pillars that anchor our operating model. We adopted a decentralized model. Our structure and operating principles ensuring that our brands, Rip Curl, Kathmandu and Oboz, have a high level of autonomy, accountability and agility within the group requirements. This decentralization doesn't mean that our 3 brands operate exclusively from each other, rather the brands collaborate to leverage their respective strengths and build on each other's competitive advantages over time. Organic growth is a priority for our growth, and we will commit significant resources to develop each of our brands. We aim to provide a seamless customer journey and experience through relevant commercial channels. And we will accelerate the implementation of digital technology into all areas of the business to fundamentally improve how we operate and deliver. This will all be done with the goal of engaging core customers and driving long-term loyalty to our brands. Turning to Slide 32. Our key strategic priorities for FY '21, as previously discussed, remain unchanged. We will continue to develop our brand and product, implement our online and digital acceleration and drive customer loyalty and personalization, utilizing data analytics. In terms of outlook, COVID-19 has continued to impact key markets at the start of FY '21. Melbourne, Auckland, Hawaii, Bali and international airport stores continue to be affected by closures. However, given post-lockdown retail performance in FY '20, we expect demand to return in these markets when stores reopen. As a result of the COVID-19 disruption, same-store sales performance of FY '21 to date has been mixed. However, this is a short and nonindicative trading period. Wholesale orders books, for both Rip Curl and Oboz, are improving following the initial COVID-19 lockdown impact. Pleasingly, the lockdown conditions appear to have increased participation in outdoor beach and surfing activities. Our brands are well positioned to capitalize on this trend as well as changes in consumer preferences towards online channels. However, we should caution that risk to consumer sentiment remains, given the potential economic impact of the COVID-19 outbreak. This now concludes the formal part of today's presentation. I want to thank all our teams around the world for their resilience, their flexibility and their motivation. I also want to thank all our shareholders for their support through this challenging year and for taking the time to join us today on this call. I would now like to open up the call for questions. Amanda? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Andrew Steele from Jarden. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [2] -------------------------------------------------------------------------------- The first one from me is just on the forward order book for wholesale. Could you give a sense for the decline that is expected in 1H '21 and then what you're seeing to date in 2H '21? And how has that improved over the 1H? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [3] -------------------------------------------------------------------------------- Yes. I'll speak to -- without giving too much guidance out, but speaking for the 2H, we're seeing it moderate back to pre-COVID level or towards pre-COVID levels for 2H. What's first half, it's hard to get a full view because you're getting infill orders as we go through the period. So I can't really give too much more on that. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [4] -------------------------------------------------------------------------------- And just to clarify, you're not sacrificing price or margin, I guess, to achieve that outcome in 2H? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [5] -------------------------------------------------------------------------------- No, no. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [6] -------------------------------------------------------------------------------- Great. And just on sort of the cash flow for the year ahead, obviously, this is a period which is -- sorry, FY '20 was a period that saw inventory deferrals and other sort of working capital measures. You also deferred some CapEx. Should we be thinking about a reasonable working capital outflow as that sort of normalizes into FY '21? And just on the CapEx, could you give us some sort of sense as to what your current expectations for CapEx are for the period? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [7] -------------------------------------------------------------------------------- Yes. For working capital, I expect it to hold relatively flat across the group. So it's -- the balance between all our brands, so I'd say it's more relatively flat. As mentioned, there is some rent accruals on the balance sheet as we're going through negotiations with landlords, which will cycle out. But overall, it will be a significant shift in working capital from the reported position, and CapEx is between $25 million and $30 million. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [8] -------------------------------------------------------------------------------- Okay. You've made some comment on the rent negotiations. Could you just comment as to what outcomes you've seen to date? I know that you're sort of a large way through that. What sort of rental improvement are you seeing on average? And how are you looking to shift lease structures from sort of (inaudible) variable nature. -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [9] -------------------------------------------------------------------------------- Yes. So with REIT renegotiations, we are about 70% through completing those. Overall, also it's mixed across a whole variety of landlords we're dealing with, which is a big tail of Rip Curl and then the big guys in Australia. I mean, largely, it's similar to (inaudible), we can call it, across the group. In terms of store changes of the leases, that's not -- we're not seeing a significant shift to percentage of sales across the whole portfolio, that's still, largely, at this stage, standard contracts. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - VP of Equity Research [10] -------------------------------------------------------------------------------- Okay. Great. And just one last one from me. Given the -- given your current sort of hedging profile and inventory balances, could you give any comment as to your expectation for gross margins heading into the financial year? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [11] -------------------------------------------------------------------------------- Yes. So first half, we expect to be relatively flat with the reported number for the full year. And second half, we'll see some recovery as we get some benefit from hedging, but yes, that's maybe a percentage point, 100 basis points in the second half. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Your next question comes from Guy Hooper from Forsyth Barr. (technical difficulty) Your next question comes from Marni Lysaght from Macquarie. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [13] -------------------------------------------------------------------------------- My first question just relates to the current trading. You're speaking about it being quite mixed. Can you just give us some more granularity? What are the points of strength? Is it online? Is it stores in locations where, I guess, the infection rate's quite low, and you're not really seeing the strict restrictions? -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [14] -------------------------------------------------------------------------------- Yes, sure. It's mixed because of the diversification in geographies between brands and also, I mean, as you know, lockdowns are not over. And I think the lockdown in north is having an impact also on the rest of the economy in Australia. So it's a mixture of factors. We talked about Hawaii, which is an important market for Rip Curl. Hawaii is too, closed to tourism because of the mandatory 14-day quarantine and California and Europe has had a great summer. Bali is kind of closed to tourism. And in Australia, borders are still closed and there's still a lockdown in [Melbourne.] So it's really mixed factors, explaining why the performance is mixed. -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [15] -------------------------------------------------------------------------------- Yes. And for the first -- for that period as well, [while not] a significant trading period. So that's an important point in that as well. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [16] -------------------------------------------------------------------------------- Yes. And just within wholesale. I guess I mean just to understand, and it's a question I've had for some time. It's like how much of it is skewed to independents versus large clients? And also within wholesale, just -- can you talk maybe about geographically, is a lot of it in Maui or in Bali? Or is it quite spread? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [17] -------------------------------------------------------------------------------- Yes, quite it's quite spread. REI is significant for Oboz, which we've always said before. But for Rip Curl, it's quite a widespread. So it's not -- they don't have a significant customer concentration, which is quite helpful. And then it's spread geographically. So it's not concentrated just in Hawaii. Obviously, it's a key market for surf (inaudible) California and Florida. So it's geographically dispersed as well as through France as well. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [18] -------------------------------------------------------------------------------- That's clear. And just on the PPP disclosure in note 4, you -- can you -- is there anything to add to it in terms of timing or kind of how we should be thinking about it? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [19] -------------------------------------------------------------------------------- No, I can't. Nothing more to add at this stage on that... -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [20] -------------------------------------------------------------------------------- And a final one for me is just about, I guess, the surfing competitions? And you've spoken about before to investors about the emergence of wave pools. Is that being impacted by COVID moving forward? And are surfing competitions resuming globally? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [21] -------------------------------------------------------------------------------- Not yet. It's not fully clear, when it's going to resume and what's going to happen, but for sure, competitions have been impacted. Yes, and in terms of ability to go to the beach and surfing, it's really depending on the countries and on the lockdowns as well. But overall, I think we can say that there's been an increase in participation in surfing on the coast of California, the coasts of Europe and the coast of Australia over the last 6 months. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [22] -------------------------------------------------------------------------------- So -- and just a final one. Just about kind of this online sales moving forward. How do you plan to sustain, I guess, the strength that many retailers saw over the pandemic and kind of how are you thinking about that? Even in your disclosure, you've mentioned that you're quite confident on your omnichannel capabilities. But I guess, how should we expect its performance? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [23] -------------------------------------------------------------------------------- Yes. Part of the online sales growth comes from the fact that our stores were closed. So I think part of the demand will come back to the stores when they'll be open or when they reopen. But I think part of the change and -- in terms of online growth, is structural, and we'll continue to accelerate. We've made serious investments in digital capabilities and also infrastructure over the last few years to be able to fulfill orders, and we're going to continue investing behind digital change. But also, we want to make sure we continue interacting with our customers and engaging with them through digital and create a great experience through all our channels, so brick and mortar stores and online. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Mark Wade from CLSA. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [25] -------------------------------------------------------------------------------- In your commentary, you're talking about that increased participation in outdoor activity post COVID. How long might that last had you better positioned your business and try and capture that and then really extend that trend? -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [26] -------------------------------------------------------------------------------- Yes. I think there are a few aspects I want to mention. The first one is, of course, as soon as lockdowns are over, people just want to go to the outdoors, the beach to surf, the mountains and the bush. And on their way, they will always find a Kathmandu or Rip Curl store, whether it's a brick-and-mortar store, a wholesale store or online. So that's what we experienced after the first lockdown. And we reckon that after the second lockdown, it's going to be pretty similar. I think there's also a more structural change in terms of the focus people are going to have moving forward on their health, well-being and our activities, whether it's activities related to surfing, to beach sports, outdoor activities and mountains. Our activities are going to continue growing based on the impact of COVID and the willingness of people to be healthy and fit. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [27] -------------------------------------------------------------------------------- Okay. And following up, I mean, how do you feel each of the brands are resonating with your customer base at this point in time. What can be done and trying to reinvigorate them more? I mean I see your Net Promoter Scores at 72%, which is great for Kathmandu. I looked on Google Trends, which is crude, but I mean you haven't, in this -- the figures here suggest, Rip Curl has been pretty flat (inaudible) short time. Your Summit Club members numbers are flat. You haven't really held onto that new interest spike you normally get over the [weekend] sales. So there's mixed messages there. I mean how do you feel the brands are going? -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [28] -------------------------------------------------------------------------------- No, I don't think there's a mixed message. I think there's been huge disruption. And we've been impacted by the disruption. But I think we've got really loyal core customers for each of our brands. I mean throughout the winter in Australia, you could see the sales of Rip Curl wetsuits just skyrocket. It was a great winter for Rip Curl in Australia. It was a great summer in California and in Europe with core customers, but also tourists coming to the stores and buying online. So I think actually, the COVID pandemic has shown that our brands are strongly relevant and offer the right products to their core customers, and that there's going to be the opportunity in the future, with a focus on health and fitness, to drive more growth. But obviously, we've been seriously impacted by the store closures. Absolutely. -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [29] -------------------------------------------------------------------------------- Yes. I mean, and Kathmandu also had a very strong winter season as a whole across both Australia and New Zealand comparative to previous years. So I think we're very happy with this positioning. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Our next question comes from Julian Mulcahy from Evans & Partners. -------------------------------------------------------------------------------- Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Executive Director of Small Caps [31] -------------------------------------------------------------------------------- First, with my 2 questions, my line wasn't very clear, then got I cut off. Firstly, with the cost synergies, I assume that most of it's just all heads and where you had duplicated functions. Is any of that assuming any revenue synergies yet? Or that's yet to come? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [32] -------------------------------------------------------------------------------- Yes, that's cost synergy, right, Julian. Obviously, there's opportunity for revenue synergies, which take longer-term to drive but it is a cost synergy and costs restructuring. -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [33] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Executive Director of Small Caps [34] -------------------------------------------------------------------------------- Okay. And with the acquisition of Rip Curl brand, I mean, a key part of it was getting access its huge wholesale network. What's the timing on actually seeing Kathmandu product into the Rip Curl network? -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [35] -------------------------------------------------------------------------------- There's no guidance on that. Julian, as you understand, the whole business has been disrupted by COVID like many geographies and many other businesses. And for sure, we are going to revisit that. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Your next question comes from [Rodney van Royden], private investor. -------------------------------------------------------------------------------- Unidentified Shareholder, [37] -------------------------------------------------------------------------------- Acknowledging the Kathmandu team and shareholders, well done. So my 2 questions, I'll just keep broad because of the (inaudible). Question's the -- our net profits after tax. So bottom line, can you talk about how much you're doing and focusing on improving the margin or at least being cognizant of the fact that your expenses are increasing faster than your sales at this time. And particularly also around hedging and how that's affecting the bottom line too for you? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [38] -------------------------------------------------------------------------------- Yes. I mean I wouldn't say expenses are increasing faster than sales. It's more of the COVID impact on sales had the impact and we've restructured costs or expenses. A bigger thing we also look at for margin is to manage the average selling price and then design to price or design products for a margin. So obviously, our product teams work towards those tasks. So that's what we've actually done. -------------------------------------------------------------------------------- Unidentified Shareholder, [39] -------------------------------------------------------------------------------- Great. And then the second question, on the growth aspect. So obviously, you've had the Oboz and the Rip Curl acquisitions. But now what are you doing to focus on just building what you've currently got? -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [40] -------------------------------------------------------------------------------- Yes. We've got 3 great brands Oboz, Kathmandu and Rip Curl. We've got this new focus around adventure. And we're going to continue focusing on what we've done, which is focus on brand [refranchising] and product innovation for the 3 brands on online and digital acceleration, and we're going to accelerate on investments in that area and also on the loyalty personalization and data analytics. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Your next question comes from [Craig Bern] from Craigs IP. -------------------------------------------------------------------------------- Unidentified Analyst, [42] -------------------------------------------------------------------------------- I was just wondering if you can take me through -- did I -- just wondering whether you could take me through the net debt number and in terms of what happened around the industry, I mean I was expecting quite a bit higher number. And in terms of the inventory, I mean, did you manage to cancel quite a bit more than you were expecting earlier in the year? Or was it just sell-through was better? Can you just sort of give us a bit more color around that? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [43] -------------------------------------------------------------------------------- Yes. A mix of both. We didn't cancel since the (inaudible) deferred. So we pushed them out. And the teams, both -- all 3 brands did a great job in managing inventory number so credit to them. Also sell-through was stronger than we expected through the winter trading period, Kathmandu particularly strong. So we got through our clearance stock very well. Also, it was more of the working capital fund for that as well as is a bit of, as I said earlier, to do with the finalization of our rent. So it became a bit more integral on the balance sheet as well. -------------------------------------------------------------------------------- Unidentified Analyst, [44] -------------------------------------------------------------------------------- Okay. And just secondly, in terms of Oboz, I know it had been the double-digit sort of revenue growth story. I know it's been impacted by COVID like everyone else, but pre COVID it was sort of growing at 4% this year. I mean, is there something that's sort of a short term? I mean, it's very much an early-stage growth story. Is this something we should expect to go back to double-digit top line growth? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [45] -------------------------------------------------------------------------------- Yes. I think part of that was we always signaled for that first half. It was impacted. We didn't have a big slew of products introductions. Because second half is introduction of Bozeman and the [Surf collection.] [Fortunate] timing with COVID. So we're seeing some very strong sell-in before COVID hit in terms of double-digit growth. I expect, as things normalize, we can return to a reasonable growth level, depending on how -- and that depends on how COVID goes. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Your next question comes from Tony Mitchell from Ord Minnett. -------------------------------------------------------------------------------- Tony Mitchell, Ord Minnett Limited - Financial Advisor [47] -------------------------------------------------------------------------------- I was just going to ask you, in light of the forthcoming budget, they're bringing forward tax cuts for 2 years, and there's going to be a lot of stimulation. What impact would that have on you? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [48] -------------------------------------------------------------------------------- I think it's more of anything that supports consumer sentiment. It's obviously going to be positive for us. But to what degree? I mean, that's hard to tell. But for us, also it's important that consumers are feeling confident. So if that aids that, then that will be supportive. -------------------------------------------------------------------------------- Tony Mitchell, Ord Minnett Limited - Financial Advisor [49] -------------------------------------------------------------------------------- And also, the second question is, in light of the fact that in Victoria, it's likely that the restrictions are going to be eased in Melbourne from Sunday, that should be very positive for you down there because you've got a lot of stores that have been closed, correct? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [50] -------------------------------------------------------------------------------- Yes, that's right. Melbourne is a key market for Kathmandu specifically. Xavier, you're up. -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [51] -------------------------------------------------------------------------------- Yes. Yes, that's right. I think when stores reopen in Melbourne, it's going to be great for the business, but also in terms of consumer sentiment, the fact that the number of COVID cases goes down day after day in Victoria is giving hope to everybody in Australia and should drive optimism. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Your next question comes from Nelson (inaudible) from [ASA NAOS] Asset Management. -------------------------------------------------------------------------------- Unidentified Analyst, [53] -------------------------------------------------------------------------------- My question is just the view to -- I know you're in a bit of a consolidation phase at the moment coming out of COVID, but [did you do] Kathmandu store buildups in America in sort of the Alpine outdoor skiing regions in the airports and the like? Because we know how well the brand works in New Zealand and Australia. And I was just thinking a lot of those middle states where there's sort of outdoor lifestyle, I think there's a real sort of growth patch there for you? -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [54] -------------------------------------------------------------------------------- Yes, that's right. That's right. But as you said before, we're in a period of consolidation, and we are currently [really] optimizing what we have. And hoping that things are going to come back to a more normal level in terms of stores reopening. So we're more in a period of consolidation at the moment. -------------------------------------------------------------------------------- Unidentified Analyst, [55] -------------------------------------------------------------------------------- So moving forward, are you looking at sort of FY '22? Or is it in your growth plans at all? Or you're just happy to stick to the regions and maybe just do online in America? -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [56] -------------------------------------------------------------------------------- At the moment, we're trying to optimize the assets we have in terms of the channels and the brands. As the pandemic evolves throughout the world, we'll review our position. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Your next question comes from Ray David from Schroders. -------------------------------------------------------------------------------- Ray David, [58] -------------------------------------------------------------------------------- Just a question on your, I guess, future store footprint. How are you thinking about allocating resources to new stores or the current store given online is growing at a much faster rate, and as you said, it's probably a structural step-up in online sales relative to bricks-and-mortar? -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [59] -------------------------------------------------------------------------------- Yes. Two points on that. The first one is our brands are trying to give customers a consistent experience across all channels. So we're trying to drive that experience through the online channel, but also our bricks-and-mortar stores. So in that sense, we need to continue investing beyond customer experience in our bricks-and-mortar stores and not just online. And that's something we've always done. We've always invested in online capabilities and digital capabilities, but at the same time, we've continued investing in our store portfolio, and we'll continue to do that. Obviously, COVID is having an impact on everything. And as always, we've been very disciplined and we're going to review the profitability of our channels and our stores and adjust our store portfolio to the profitability of the stores. -------------------------------------------------------------------------------- Ray David, [60] -------------------------------------------------------------------------------- Okay. And you talked about rents being in line with kind of the national code. Is there any indication that balance of power is shifting somewhat to retailers? Or do you think post COVID, there'll be a return to sort of standard negotiations with landlords where rent was escalating at CPI plus a few percent? -------------------------------------------------------------------------------- Chris Kinraid, Kathmandu Holdings Limited - Group CFO & Company Secretary [61] -------------------------------------------------------------------------------- Yes. We have strong relationships and long-term relationships with landlords, and we're trying to build up long-term relationships with them. At the end of the day, both landlords and tenants need to make money in good times, but also in challenging times like now. So yes, I think some things are changing. What it means in the long-term is difficult to define at this point in time. But for sure, no one can ignore the impact of the current pandemic on businesses. Absolutely. But we really trust that we have good relationships with our landlords, and we'll be able to work together in the longer-term to make sure it's a win-win situation. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- Thank you. There are no further questions at this time. I will now hand back to Xavier for closing remarks. -------------------------------------------------------------------------------- Xavier Simonet, Kathmandu Holdings Limited - Group CEO, MD & Executive Director [63] -------------------------------------------------------------------------------- Thank you very much to everybody, and thank you, Amanda. Have a great day. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.