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Edited Transcript of KMD.NZ earnings conference call or presentation 19-Sep-22 10:30pm GMT

·44 min read

Full Year 2022 KMD Brands Ltd Earnings Call Christchurch Sep 20, 2022 (Thomson StreetEvents) -- Edited Transcript of KMD Brands Ltd earnings conference call or presentation Monday, September 19, 2022 at 10:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Chris Kinraid KMD Brands Limited - Group CFO & Company Secretary * Michael Philip Daly KMD Brands Limited - Group CEO, MD & Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Steele Jarden Limited, Research Division - Director of Equity Research * Bianca Fledderus UBS Investment Bank, Research Division - Analyst * Mark Wade CLSA Limited, Research Division - Research Analyst * Marni Lysaght Macquarie Research - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the KMD Brands Ltd Full Year 2022 Results release conference call. Today's conference is being recorded. Kindly note that there will be no online submitted questions taken, only audio questions shall be taken for today. (Operator Instructions) At this time, I would like to turn the conference over to Michael Daly, CEO of KMD Brands. Please go ahead, sir. -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [2] -------------------------------------------------------------------------------- Good morning, everyone, and thank you for joining us for today's presentation of the KMD Brands results for the 2022 financial year. My name is Michael Daly, and I am the CEO of the group. I'm joined on the call by Chris Kinraid, our Chief Financial Officer. We will be talking through the presentation lodged on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. Today's presentation will begin with an introduction to our group, followed by the full year highlights, group financials, brand results, and we will conclude with a trading update and outlook for FY '23. I will begin with a short overview of KMD Brands. We have a very clear purpose that we, as a company strongly about, which is to inspire people to explore and love the outdoors. Our vision is to be the leading family of global outdoor brands producing products that are designed for purpose driven by innovation and best for people and the planet. This purpose and vision guides all operating decisions we make. Moving on to Slide 5, we can see how our brands have expanded across the globe with over 300 owned stores currently operating globally and our brands being sold in over 8,500 locations. Australasia is still our biggest market, in a normal year generating approximately $650 million in sales, 80% of which is from Australia. North America generates approximately $200 million of sales, Europe $100 million; Asia $30 million; and South America, $20 million. Kathmandu and Oboz currently operate in 3 of the 6 continents, while Rip Curl has a global presence with stores operating in all major continents across the globe. Moving on to our group strategy on Slide 6. We have 4 defined strategic pillars that guide our strategy. We are building a portfolio of global brands. We aim to continue to expand our global footprint as we invest in world-class brands and customer experiences. We are elevating our digital capabilities by investing in group digital platforms to deliver a world-class unified commerce experience. We are leveraging and delivering operational excellence to all brands across shared group support functions. And finally, we are demonstrating leadership across environmental, social and governance by transforming business culture and mindset. As we execute on our strategy, it is important for us to maintain balance sheet flexibility to support organic growth and M&A initiatives. Moving on to Slide 7. I would like to provide an update on our B Corp certification. B Corp certified companies are for-profit organizations that use the power of business to build a more sustainable economy meeting stringent standards of verified social and environmental performance, public transparency and legal accountability to balance profit and purpose. Kathmandu become a certified B Corp in 2019 with a recertification application submitted last month. Initial applications for Rip Curl and Oboz have now been submitted and we are underway in becoming B Corp certified across all 3 of our brands. As I covered earlier, leading in ESG is a key pillar of our strategy. Slide 8 shows in more detail what our ESG strategy looks like, where we are focusing our efforts and what some of our achievements in this area have been. Our first area of focus is to positively impact the well-being of people and places. This is to create a people-centered, equitable and inclusive workplace culture shown through KMD's 29% Board and 44% Group Executive female representation. This is also to protect human rights through transparency with strategic suppliers and is about engaging, inspiring and supporting local communities. This year, over $1 million has been invested with our local community partners, including over 2,200 volunteer hours. Our second area of focus is to transition to a low-carbon future. In line with the Paris Agreement goals, we are on track to reduce Scope 1 and 2 emissions by at least 47% by 2030 and to reduce Scope 3 emissions by at least 28% by 2030. This year, we made inroads to this goal by investing in LED lighting upgrades across our store networks and installing solar panels at our Onsmooth wetsuit factory in Thailand. Our third area of focus is to eliminate the take-make waste approach that many businesses use. This means commercializing circular business models, sourcing materials responsibly and reducing operational and packaging waste. This is evident through Rip Curl's 40% of produced cotton being responsibly sourced, Kathmandu's 65% of wool products using Responsible Wool Standards and Oboz's 95% of finished leather sourced from Leather Working Group certified tanneries. Moving on to Slide 9. We will now go through the group's highlights for the 2022 financial year. KMD Brands achieved a record group sales result in FY '22 with Kathmandu having its highest-ever sales for quarter 4. Rip Curl sales increasing 9.5% to $536 million, and there was record order demand for Oboz limited this year by COVID impacts on supply capacity, which has since been scaled up. We are really pleased to report that the second half of FY '22 delivered record group sales and underlying EBITDA. Our full year gross margin was maintained despite elevated international freight costs and raw material cost pressures with Kathmandu experienced highest ever gross margin and earnings in quarter 4. Online sales increased 19%, now comprising more than 16% of direct-to-consumer sales. Our strong balance sheet position allows us to invest in organic brand growth which this year included increasing the investment in brand marketing and ESG by $18.6 million year-on-year as well as strategic investment in inventory to temporarily build stock positions given current supply chain challenges. We are pleased to announce a record dividend payout returning $43 million to shareholders. The group did experience significant COVID disruptions in FY '22. As previously communicated, the year-on-year impact of COVID on Kathmandu and Rip Curl first half EBITDA was approximately $35 million. Lockdowns in Australasia were more severe than last year and less government support and rent assistance was received. All up, Kathmandu and Rip Curl lost over 11,000 trading days due to COVID lockdowns in the first quarter of FY '22. Oboz was also unable to meet unprecedented customer demand due to the 3-month COVID closures of our Vietnam factories compounded by international freight delays resulting in around 40% of customer orders are unable to be fulfilled. As a result, Oboz's EBITDA was down $8 million on prior year. Moving to Slide 11. We will look at the sales growth for the 4 quarters across our 3 brands. Rip Curl experienced consistent sales growth for the final 3 quarters following lockdowns in the first quarter in Australasia. Fourth quarter sales -- fourth quarter total sales growth increased 18.1% compared to quarter 4 last year. Kathmandu rebounded strongly in the second half following lockdowns in the first quarter. The third quarter was impacted by ongoing COVID interruption to footfall and staff availability, particularly in New Zealand. However, the fourth quarter saw record revenue and earnings with total sales growth of 24.5% compared to Q4 last year. Oboz's second and third quarters were heavily impacted by the 3-month COVID closure of Vietnam factories and international freight delays. The fourth quarter saw strong sales growth of 17.2% compared to Q4 last year as supply challenges were addressed. Overall, as COVID disruptions eased and operations returned to normal, we saw a strong rebound in sales in quarter 4 across all 3 of our brands, putting us on a strong footing to FY '23. Turning now to Slide 12. During the year, we continued to deliver on our 4 pillars -- 4 pillars of our group strategy. At a group level, we appointed leaders in North America and Europe to oversee the growth of all 3 of our brands in our key international markets. We implemented a new loyalty management system across both Rip Curl and Kathmandu in Australasia. We made some key appointments to leverage operational excellence across back office functions for all 3 brands and in the area of ESG, we have now submitted B Corp applications for all of our brands. In relation to Rip Curl, we enhanced Rip Curl status as a leading global surf brand by sponsoring the first-ever World Surf League finals held in the U.S.A., a key international growth market. We launched Rip Curl's membership program in Australia, and we also leveraged operational efficiency by consolidating the point of sale and retail ERP systems across Australasia for Rip Curl and Kathmandu. In ESG, we recycled around 2,500 wetsuits in Australia by implementing our wetsuit take-back program with TerraCycle. Kathmandu's global brand expansion is underway with initial sell-in success to limited wholesale customers in Europe and Canada. We are leveraging Rip Curl's infrastructure to drive our international expansion into Europe and Canada and plan for a U.S. launch in FY '23. Kathmandu's brand strength and customer engagement is demonstrated by demonstrated by a very strong Net Promoter Score of 73 across all customer groups in Australasia. The execution of our digital strategy is evidenced by close to 25% growth in online sales now accounting for over 18% of wholesale. Kathmandu remains a leader in ESG, winning the Deloitte New Zealand Top 200 Sustainable Business Leadership award, also leading the way with breakthrough sustainability innovation, the BioDown jacket and industry-first biodegradable down-filled jacket received international recognition by winning the Outdoor Retailer and ISPO awards. For Oboz, additional factories were onboarded to diversify the supplier base and increase capacity. Online sales exceeded expectations once inventory levels were recovered, with this channel representing a significant growth opportunity for the brand. We leverage operational excellence by implementing a group business intelligence tool for Oboz and made progress in the ESG by fully digitizing the product design process using 3D designs to reduce material waste. It's been a very productive 2022, and we are very proud of these achievements under each of our strategic pillars. I'll now hand over to Chris to cover the financial slides. -------------------------------------------------------------------------------- Chris Kinraid, KMD Brands Limited - Group CFO & Company Secretary [3] -------------------------------------------------------------------------------- Thanks, Michael. On to Slide 14, our statutory results include the adoption of IFRS 16. For comparability, the impact of IFRS 16 has been excluded from our underlying results. Statutory EBITDA was $180 million. On an underlying basis, this was $92 million. Our sales increased 6.2% to $979.8 million in FY '22 as a result of the positive Q4 across all brands, in particular Kathmandu. Gross margin was maintained at 58.9% of sales despite elevated international freight costs and raw material cost pressures. Operating expenses reflect the impact of COVID lockdowns with higher wage and rent costs relative to sales, supporting teams during significant periods of COVID-related store closures. The group continued to invest in brand growth with marketing and ESG spend $18.6 million above last year. It should be noted that we expect FY '23 operating expenses as a percentage of sales to improve towards FY '21 levels. Moving to Slide 15. The group achieved a record sales result with sales growth across all channels. In terms of brand contribution, Rip Curl was 55% of total group sales; Kathmandu, which was more impacted by Australasian lockdowns this year, contributed 39%; and Oboz 6%. By region, Australasia accounted for 64% of sales, North America 20%; Europe, 10%; and the rest of the world accounted for 6%. By channel, retail store sales grew 3.2% to account for 57% of total group sales despite over 11,000 loss trading days. Wholesale accounted for 31% of total sales, growing 6.9% despite Oboz COVID supply challenges. Online sales accounted for 11% of total group sales and now over 16% of direct-to-consumer sales. Let's take a closer look at online sales on the next slide. On Slide 16, our online sales continue to grow beyond the COVID step change. Kathmandu online sales are now 47.1% higher than pre-COVID comprising 18.7% of direct-to-consumer sales. Rip Curl achieved record online sales of the highest ever penetration at 13.0% of direct-to-consumer sales. Rip Curl's online sales are now more than double pre-COVID levels. Oboz's online sales exceeded expectations in the fourth quarter once inventory levels recovered. There is significant opportunity for growth in Oboz's online channel, supported by inventory depth and product range expansion. Moving to our balance sheet on Slide 17. We are in a strong balance sheet position, which allows us to invest in organic brand growth and strategically invest in inventory when required. We have significant funding headroom of circa $260 million and that within our long-term leverage ratio target of around 0.5x net debt to EBITDA. Our inventory is $79 million higher than in July '21, reflecting a historically low position last year and a strategic decision to temporarily build stock positions to meet forward wholesale orders, expected retail demand and to mitigate increased production lead times and international shipping delays. Clearance stock levels are below last year, and inventory obsolete provisions only represent 1.9% of gross inventory on hand. Inventory balances are expected to normalize during FY '23 through careful management of our buys throughout the year. Trade receivables increased relates to wholesale sales growth achieved in the fourth quarter, and the increase in trade payables reflects the level of temporary stock build at year-end as we aim for long-term net working capital target of 18% of sales. Moving to Slide 18. Operating cash flow was impacted by COVID lockdowns in the first quarter plus the strategic decision inventory build to mitigate increased production lead times and international shipping delays. We expect the full trade in FY '23 and an unwinded inventory to underpin increased operating cash flow generation in FY '23. The directors declared a final dividend of $0.03 per share, fully franked for Australian shareholders and not imputed for New Zealand shareholders. The total FY '22 dividend of $0.06 per share was up 20% on the prior year. I will now talk through the segment results and the performance of each of our brands. Starting with Rip Curl and moving to Slide 20. Slide 20 shows that sales grew across all channels and in total were 9.5% above last year. Strong sales growth was achieved in Europe, Hawaii and Southeast Asia. North America achieved sales growth despite wetsuit shortages, port congestion and softer consumer sentiment in Q4. Wholesale sales grew by 16.5%, with less COVID disruption in the sell-in period for the first half of the year. and continued strong sales growth in the second half. Direct-to-consumer same store sales were up 3.9% overall. The EBIT result was below last year. Primarily, this was due to through COVID where we continue to invest in the long-term value of our brand with increased brand marketing spend year-on-year, including the sponsorship of the World Surf League finals. Moving to Slide 22. We can see Rip Curl's recent brand and product achievements. The 2022 Rip Curl World Surf League Finals was the most watched day in the history of professional surfing and as a strategic brand sponsorship event. Women's categories are a key growth opportunity for the brand, diversifying by gender further strengthens the Rip Curl's position as a most authentic brand, surf brand in the market and women's represents one of our fastest-growing categories. This year, Australian customers returned around 2,500 wetsuits for recycling through our partnership with TerraCycle. This program will be further launched globally throughout the year. Turning to Katmandu on Slide 23. Katmandu saw a strong rebound after lockdown and achieved the best ever winter season performance, resulting in full year sales growth of 6.8%. Kathmandu's largest market in Australia grew sales by 13.2%, of New Zealand sales declined by 6% overall due to the continued COVID on footfall. Same store sales grew by 9.1% overall. Gross margin increased by 90 basis points as raw material and freight cost pressures were more than offset by currency benefit and a deliberate strategy to carefully moderate the historic high-low pricing model. Our operating expenses were carefully controlled through lockdowns, while we continue to invest in the long-term brand growth. Our brand momentum is building due to our renewed focus on marketing and products. Turning to Slide 24. We look at Kathmandu's brand and product achievements in FY '22. Last summer, we launched new ranges of summer specific colors and on-stream products, supported by an upweighted summer marketing campaign to build all season perceptions. The result was an increased consideration of Kathmandu for summer products by younger Australian consumers. Leading the way with breakthrough sustainability innovation, the BioDown jacket and industry-first biodegradable down-filled jacket won international recognition. Kathmandu remains an industry leader in ESG and is certified as a B Corp since 2019. Turning to Oboz on Slide 26. Oboz wholesale and online sales were heavily impacted by the 3-month closure of factories in Vietnam as well as international flight delays. Despite record demand for its products, Oboz was unable to fill approximately 40% of customer orders in FY '22. Factories resumed full production in quarter 3 and sales growth resumed in Q4 as inventory levels recovered. Gross margin decreased by 200 basis points due to international freight costs, more than offsetting mix improvement from growth in direct-to-consumer online sales. Operating expenses have been carefully managed, while we continue to invest and support the brand momentum. Forward wholesale orders into FY '23 support the path to our USD 100 million medium-term revenue target and the online performance in FY '22 also indicates a significant growth opportunity as we head into FY '23. Now on to Oboz's brand and product achievements on Slide 27. Online growth supported by inventory availability and product campaigns has enabled the Oboz brand to make connections with new consumers. Expansion of wholesale accounts into specialty outdoor and footwear stores has supported growth in demand for Oboz products with scope to expand distribution further in the future. FY '23 will see the expansion of exciting new product ranges of Oboz. Fast [hike] and Camp product launches have achieved strong sell-in, contributing approximately 18% of the Spring/Summer 2023 order book. Our first-to-market arrangement with key customers, increased exposure and storytelling and our color strategy is focused on attracting younger customers. Lastly, our One More Tree initiative for planting one tree every pair of footwear sold has seen over 4 million trees planted since Oboz began. I'll now hand back to Michael to talk through the outlook. -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [4] -------------------------------------------------------------------------------- Thanks, Chris. Moving to Slide 29. We have a clear set of strategic priorities to focus on in FY '23. We -- we will continue to build global brands with the full rollout of Rip Curl membership program in Australasia. We will build on the initial success of Kathmandu's international launch into Europe and Canada with plans for future launch in the U.S.A. Oboz will continue to expand its distribution through connections with new consumers and exciting new product ranges. We will elevate digital through the continued global rollout of our new group-wide loyalty management, customer data and online trading platforms across all brands. We will launch Kathmandu online sites in Europe and Canada, relaunch Kathmandu loyalty program with an exciting new value proposition and build out Rip Curl and Oboz's B2B dealer platforms. We will leverage operational excellence at the group level through merging our Canada and U.K. fulfillment centers across brands. Kathmandu will also leverage our existing Rip Curl infrastructure as it continues to expand internationally. Lastly, we will continue to lead in ESG as we progress towards B Corp certification across all of our brands. Rip Curl will roll out its TerraCycle wetsuit takeback program globally. Kathmandu will launch a trial take-back and renewal program, And Oboz's innovative use of bio-based alternatives to EVA midsoles will continue to reduce our carbon footprint. Turning to our outlook for FY '23 on Slide 30. We have a positive expectation for revenue and earnings growth, which continues the momentum from the second half of last year. In terms of a trading update, we are pleased with the early results. It should be noted that comparisons to last year are clouded by cycling Australasian lockdowns in the first quarter last year. Compared to pre-COVID in August 2019, group sales are up 10.3% in August 22. Group direct-to-consumer total sales for the first 6 weeks of FY '23 are 86.7% above last year. Kathmandu sales for August 22 were comparable to pre-COVID August of 2019 and strongly above pre-COVID levels for both Rip Curl and Oboz. Underlying earnings are currently cycling COVID lockdowns in the first quarter of FY '22. August 2022 underlying EBITDA was approximately $10 million above August 21. Our positive FY '23 outlook is supported by many factors, including the expectation of uninterrupted trade in the first quarter compared to cover closures last year, the return of travel and improving supply chain conditions. Normalized buying time lines are expected to deliver a reduction in working capital and increased cash flow generation in FY '23. We -- we expect to see gross margin resilience with wholesale price increases, actioned in market for FY '23 in response to inflationary cost pressures. Also, forward wholesale orders remain at record levels for Rip Curl and Oboz supporting our growth expectations. In terms of consumer trends, we've seen positive results recently from both Australia and Europe. Trading in North America has been inconsistent over recent months with consumer confidence impacting general discretionary spend. However, pleasingly, our Rip Curl USA direct-to-consumer sales are up 12.6% year-to-date. In FY '23, we expect operating expenses as a percentage of sales to improve towards FY '21 levels with an unwinding of COVID sales disruption and associated costs offsetting inflation impacts on rent, wages and freight costs. Capital investment of $35 million will be used to support 16 new stores and ongoing digital investments. With the effects of COVID now largely behind us, the strong finish of FY '22 and the positive start to FY '23, KMD brand is in a really strong position to continue to invest in the long-term international expansion of our global house of brands. This now concludes the formal part of today's presentation. I want to thank you all for taking the time to join us on this call. I would now like to open the call for questions. Cynthia, back to you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. Kindly note that there will be no online submitted questions taken, only audio questions shall be taken for today. For those who have questions, please dial in to the audio line at this time. (Operator Instructions) We will take our first question from Marni Lysaght with Macquarie. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [2] -------------------------------------------------------------------------------- Can you hear me? Excellent. Still working -- my first question relates to some of the targets you [held to us] back at the November Investor Day last year. And you'd mentioned some around Oboz today at the result. Can you make any comments around, I guess, those targets, their ongoing relevance, just particularly in light of ongoing macro headwinds and disruptions? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [3] -------------------------------------------------------------------------------- Yes. Look, obviously, you're referring to Investor Day, I think it was last November, I believe. Yes. Look, the targets that we've put out at that session and including a refresher on that in this script for this morning was we really feel that Oboz is on track to $100 million sales levels. Obviously, the closures of the factories for that 3 months in this financial year was a slight slip up in our, I guess, delivery of that target. But really, it's just delayed us a year on our aspirations. Our forward order book for Oboz is really strong. We've expanded into 2 new categories with Fast [Hike] and Camp. And both of those categories have been very well received by our account base, and that has translated to a really strong wholesale orders. So we remain really upbeat with the Oboz brand. Of course, we're facing, like everyone in North America in particular, some economic headwinds. We've seen some cancellations from our wholesale account base, but our direct-to-consumer sales with Oboz, which are a small percentage remain really strong. And even where we are seeing constant cancellations, we're seeing other wholesale accounts pick up those extra orders. So honestly, our momentum for that brand is really strong, and we're really confident with their ability to deliver on those targets that we set and communicated in Investor Day and have reiterated today. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [4] -------------------------------------------------------------------------------- Okay. Okay. That's all of it I have around that. And just in terms of, I guess, the trading update, when you call out Rip Curl and Oboz being well ahead of those pre-COVID levels year-to-date, and you've said you've given us a number for data sets of Rip curl being up? Can you make any comments just around, I guess, wholesale? I know that post pandemic, Oboz has gone into this period of strength net of the factory closure. So just kind of what is driving that? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [5] -------------------------------------------------------------------------------- Yes. Look, as we reiterated in the call, Rip Curl and Oboz are sitting on really strong wholesale order books in all the key markets. Both brands have really good momentum. We expect that to continue. Obviously, depending on where you are in the world, I guess, the strength of the economic headwinds are softer or stronger. U.S. is probably the market where we're seeing the word that we're using is inconsistent we're seeing really strong results with our direct-to-consumer business. We are seeing some wholesale accounts look to moderate their buys or reset their inventory just to make sure that they are not exposed, but that all said, with all of the trends that we're seeing and with the numbers that we've communicated in the second half of last year as well into this year, now we're really confident that even in the North American market, our brands are well positioned to deliver growth, and we're sitting on growth year-to-date. And the numbers are well above pre-COVID levels. So it fills us a lot of confidence that we're well positioned. -------------------------------------------------------------------------------- Marni Lysaght, Macquarie Research - Analyst [6] -------------------------------------------------------------------------------- Okay. And just a final question for me. When you talk about like OpEx as a percentage of sales normalizing back to like FY '21 levels over FY '23. Kind of what are the -- I guess, the drivers of that? Because you've got your ongoing investment in marketing to grow Kathmandu offshore. But I guess, with FY '21, that was a COVID-impacted period too with some concessions in there, too? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [7] -------------------------------------------------------------------------------- Yes. Look, the key driver of that reduction back to sort of FY '21 levels, Marni, will be. In the first half of this year, we essentially and quite frustratingly almost had all of the cost, but not all of our revenue. So we didn't see the same, I guess, allowances from landlords and relief from landlords this time around on lockdown. So essentially, we had the best part of all our rent. We supported all of our staff through those lockdowns with continued payments to our permanent staff because we didn't want to be stuck with -- we knew that there were some labor shortages. So we needed to keep our staff incentivized to want to come back to work. So we maintained our payments. So essentially, we had the -- we had all the wages. And also prior to us knowing those lockdowns, we definitely recommitted to reset our marketing budgets back to pre-COVID levels. Now of course, with the benefit of hindsight, we might not have done that. But once we've made that call, that's a medium to long-term call, we were stuck with that expenditure. So essentially in the first half of this year, we had all of the costs but didn't have all the revenue because of all those loss trading dates. So what we're seeing through August, we have particularly, I mentioned, that extra $10 million of profit, EBITDA in August '22 versus August '21. What we're seeing is we're getting all the revenue potential. We're seeing our numbers all come back to pre-COVID levels, indeed stronger than pre-COVID levels across all 3 brands. And we're essentially moderating and focused to ensure that we don't let the cost increase. We've already reset our cost base for all our marketing. So you're not going to see a continued growth in that. Our FY '22 marketing levels are very comfortable, and that we'll just carry that through to FY '23. So that gives us great confidence with that return of reopening, increased travel, all the order books that we've got, we're going to deliver some really strong results and that will certainly moderate back our expense to sales ratio through FY '23. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- We will take our next question from Andrew Steele with Jarden. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [9] -------------------------------------------------------------------------------- The first one for me is just on inventory. You've highlighted that there's $36 million of goods in transit. But what I was wondering was could you provide sort of an estimate of some sort of sense as to how much of the current inventory balance relates to, I guess, strategic caution on managing the supply chain, which is unusual. And how should we think about that moderating during the course of the coming financial year? -------------------------------------------------------------------------------- Chris Kinraid, KMD Brands Limited - Group CFO & Company Secretary [10] -------------------------------------------------------------------------------- I think a good way of looking at it, Andrew, is that goods in transit balance is probably a good guide of how much extra we brought forward. And effectively, our buying time frame have moved, we brought them forward close to 2 months. So inflow were more on the water at year-end. I'd kind of use that as a bit of a guide to this extra we're carrying at the moment. But that's a strategic decision. And throughout the year, we can manage that quite carefully as we manage our buys in relation to the extra stock on water at year-end. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [11] -------------------------------------------------------------------------------- And so just following on to that, where do you expect stock turn to be at the close of '23? -------------------------------------------------------------------------------- Chris Kinraid, KMD Brands Limited - Group CFO & Company Secretary [12] -------------------------------------------------------------------------------- I think for us, overall, we look that working capital overall would expect to land somewhere around at 20% of sales, as the working capital point overall is what I'd say to that. -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [13] -------------------------------------------------------------------------------- Yes. As we've seen the supply chain complication days and with that, we're resetting our time lines back to pre-COVID levels. So that buildup that we clearly saw in July '22 won't repeat because it's essentially product is coming through quicker -- even quicker than we plan to be honest. So we're holding more stuff than we would generally like to. But certainly, with the reset of those buying time lines, we're very confident that we will have overall working capital sales to return to 20% or below by FY '23. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [14] -------------------------------------------------------------------------------- That's very clear. Just on Rip Curl, you called out there is gross margin pressure of 100 basis points. Could you just highlight how much of that related to channel mix? And then related to that, what's your expectation for that channel mix going forward? Should we see a sustained greater weighting towards wholesale in the year ahead? What's your sort of thinking on that? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [15] -------------------------------------------------------------------------------- Yes. I mean the -- in terms of the drop in the basis points of Rip Curl margin, certainly, a little bit of channel mix because in FY '22, we saw a full return of wholesale; in the FY '21 year, effectively both Rip Curl and Oboz lost a season because of the sell-in that was made right at the start of the pandemic. So change in channel mix is the bigger driver to the overall margin, a slight percentage margin reduction for Rip Curl. There's also an element, both Rip Curl USA and Oboz in particular, we talk about freight rates and increased rates and obviously, poor congestion and its impact on inventory and margins. We saw that most certainly through the North American market. So if you were to look at our margins across all 3 brands and look at it by geography, North American margins are the ones that have been under most pressure. But that said, both Oboz and Rip Curl have reflected price rises which didn't kick in, in the FY '22 year but have now kicked in with our 4 winter shipments that we're making now. So with that, we will see a recovery of any of that lost margin coming from increased international freight costs. So I'm not sure I've answered your question really quickly. But I think overall, I think the margin for Rip Curl will probably continue to slightly increase. The channel mix will probably stay roughly the same as what we saw in FY '22, but what you see is those price rises is coming through, which will benefit not only wholesale, but direct-to-consumer. So I would see the margin probably bottomed here and then from here recovering slightly upwards back to sort of FY '21, FY '20 levels. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [16] -------------------------------------------------------------------------------- Great. Just I guess a question of clarification. In terms of the outlook for marketing investment, I think you stated that you expect it to be stable year-on-year. Is that in absolute dollar terms? Or it is as a percentage of sales? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [17] -------------------------------------------------------------------------------- Yes, pretty much stable in total dollars, and it's actually coming down in percentage [in each term]. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [18] -------------------------------------------------------------------------------- And then just again, so a couple of more clarification points. In terms of your outlook for '23, you've noted you're expecting gross margin resilience. I mean, what's sort of the right way to interpret that? Is that broadly flat year-on-year sort of plus or minus a small amount. -------------------------------------------------------------------------------- Chris Kinraid, KMD Brands Limited - Group CFO & Company Secretary [19] -------------------------------------------------------------------------------- Yes. Broadly but resilience; means, of course, it can move around slightly but broadly flat year-on-year. -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [20] -------------------------------------------------------------------------------- Yes. Look, we saw in FY '22, all sorts of -- all sorts of things would our margin in FY '22 and our margin stayed relatively the same. And certainly, as we move through to FY '23, we would expect much of the same to be... -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [21] -------------------------------------------------------------------------------- And just one final one for me. Just to be clear on the outlook for OpEx as a percentage of revenue on an underlying basis, I assume that's on a like-for-like accounting basis for the change in the standard for Software as a Service? -------------------------------------------------------------------------------- Chris Kinraid, KMD Brands Limited - Group CFO & Company Secretary [22] -------------------------------------------------------------------------------- Yes, that's correct. There is a (inaudible) . -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- We will take our next question from Mark Wade with CLSA. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- Just looking at the Kathmandu brand itself. You're on the cusp of an expansion offshore in the U.S. And in the context of that $100 million international sales target in 5 years' time that was set out a year ago. How important is that U.S. market? And what do you really envisage the challenges as you push into that area? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [25] -------------------------------------------------------------------------------- Yes. Well, the U.S. market is a very competitive market, as we know. Obviously, speaking openly, it's been the graveyard of many Australian and new Kiwi brands looking to go into that market. So we're very cautious. The advantage that we have is with both the Rip Curl business and the Oboz business, we have existing infrastructure, existing knowledge and an existing presence in North America, which is a little bit different to both other brands in history and certainly for Kathmandu's history. Our business in North America is circa $200 million. So we've got good scale in that market already and good know-how. So that all said, we are going to take a very cautious approach. I would -- the way I would (inaudible) international expansion at Kathmandu, it's very much a soft launch approach at the moment. Now we really across Europe and Canada, in both markets, are sort of working with sort of 20 to 30 key accounts, really influential outdoor wholesale accounts, really just testing our concepts, testing what works, getting some level of brand awareness out there. At the same time, looking to get our online presence in both of those markets up and running. And that will give us some more knowledge and some more know-how and some more data from which to really tinker with our U.S. approach. So I would think in 12 months' time from now, we'll have U.S. shipping products, again to a small amount of select customers, and we'll have our U.S. site up. So really 12 to 15 months from now across North America and Europe, we'll have our online presence up and running. We'll be running with 20 to 30 sort of key influential wholesale accounts across each of those markets. We'll have a little bit of data around what works, what doesn't work. And I think will be then really set for, I guess, a bigger bang approach where we look to broaden out the distribution and then look at things like the odd flagship store and so forth. So really, at this point in time, it's a soft launch phase really just giving ourselves confidence, getting some data, testing some concepts to see what works, so that when we really look to go more aggressively, we're well positioned. So -- and we'll continue to update everyone on our progress there. But early -- we're certainly reaching all our internal targets for now, which gives us some confidence. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Very good. And just looking at this latest quarter you had Kathmandu best every you're saying on record. Does the return of international tourists and obviously you think if it is going offshore, would make that number better or worse in the future. I mean if you'd like to consider the... -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [27] -------------------------------------------------------------------------------- Yes, we've been -- yes. Look, we've been very clear and consistent in our communication with respect to Kathmandu that we felt there will be a sort of 2-step recovery for Kathmandu Brand. The first step recovery being -- having all of our stores open through winter. And we're certainly seeing the benefits of that, and we're realizing those benefits now, not only in the results that we talked about in quarter 4 of FY '22, but certainly, in the results we're seeing in August, and we're seeing our stores back to sort of pre-COVID levels in terms of sales through the winter, which is great. The second step for that Kathmandu recovery is travel. And that's both the outward travel and inward travel. What I would say is with the outward travel, we're definitely seeing Aussies and Kiwis more willing and wanting to travel. So we think that, that's going to translate to us well, particularly as we're moving into the Northern Hemisphere winter period. So we think that with Aussies and Kiwis wanting to travel and while those numbers have not got back to pre-COVID levels, they appear to be strongly growing. That gives us confidence that we'll see some good sales trajectory across the Kathmandu stores through that sort of Southern Hemisphere summer, Northern Hemisphere winter. So we're looking forward to see what happens there. In terms of the inward, we just don't think we've seen the European, the American, the Chinese tourists return to Australia and New Zealand in anywhere near pre-COVID levels. So that has a negative impact on our numbers because we're not getting those cruise ships, we're not getting those footfall through the big CBD locations like Sydney, Melbourne, Auckland, Queenstown. So that, again, gives us confidence for the future because as we see a recovery of that travel, we think that's going to really help our winter sales because we'll see those tourists in and around those cities. And hopefully, on the back of those tourists as well as more workers being in CBD locations, we're confident we'll see even better results in our CBD stores because the results were poised at the Q4 winter to be fair, our suburban mall stores and our destination of stores have gone really strongly but our CBD stores continue to struggle just on the back of not seeing the same levels of people in and around cities, whether it be workers or whether it be those international tourists coming in. So to answer your question, we think we've benefited from Australian and Kiwi starting to travel. We're feeling that. We're seeing that in our stores, and we think that, that will continue to build momentum as we move into the Northern Hemisphere winter, but we still think we've got upside with that second step of the recovery when we see more tourists coming into Australia and New Zealand. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [28] -------------------------------------------------------------------------------- Yes. That's excellent. And lastly, just maybe if you could reflect on the differences between the New Zealand market, down 6% and in Australia, up 13% in constant currency? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [29] -------------------------------------------------------------------------------- Look, I mentioned I mean the challenge -- yes. Look, all we say about the New Zealand market, obviously, it's been challenging. We saw the reopenings in Australia happened in a lot greater speed than in New Zealand. We're seeing a natural hesitancy for the New Zealand consumer to be out and about and spend relative to Australia. And I would say at the start of the year, there was sort of like a 3-month differential, but we have to remember that mask mandates were only just removed in New Zealand last week and certainly, we think as we saw in Australia, the removal of those mask mandates really gives the end consumer more confidence to get out in CBD and more locations. So we're hopeful that what we'll see with those mask mandates finally being removed last week that we'll see the New Zealand consumer certainly come out more. And as I mentioned before, in the tourist, New Zealand skews more heavily to tourists in our opinion in terms of our consumer than, say, in Australia, particularly in those CBD or town locations like Queenstown and Auckland. So yes, so it gives us some confidence that moving forward, no mask mandates, more tourists coming in. We hope to see some improvement in New Zealand numbers. But yes, New Zealand has been more challenging than Australia in 2022, for sure. -------------------------------------------------------------------------------- Mark Wade, CLSA Limited, Research Division - Research Analyst [30] -------------------------------------------------------------------------------- I mean it feels like you finished the year strongly and you're really just getting started in many ways, all the best. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) We will take our next question from Bianca Fledderus with UBS. -------------------------------------------------------------------------------- Bianca Fledderus, UBS Investment Bank, Research Division - Analyst [32] -------------------------------------------------------------------------------- So first question for me, just around your DTC stores. So you mentioned lower footfall in FY '22 and still seeing low footfall in CBD stores. Could you provide some color on what you're seeing with regards to conversion ratios today? Is it a lot stronger compared to pre COVID? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [33] -------------------------------------------------------------------------------- Yes. Look, no real change in the trend that we've seen right through COVID is that footfalls are still off from pre-COVID. But the willingness of the consumer to come in and spend when they do come in is really strong. So conversion rates and average basket sizes certainly remain better now than they were pre-COVID. -------------------------------------------------------------------------------- Bianca Fledderus, UBS Investment Bank, Research Division - Analyst [34] -------------------------------------------------------------------------------- Okay. And then with regards to the capital investment of $35 million to support 16 new stores, could you provide some color on where these will be geographically and for what brands they will mainly be? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [35] -------------------------------------------------------------------------------- Yes. Look, with that capital, obviously, $35 million is not just for those 16 stores. We have an ongoing upgrades of existing stores and protecting existing strong sales and EBITDA of those as well as ongoing digital IT platform. But yes, and roughly sort of Rip Curl, IT and Kathmandu, 1/3, 1/3, 1/3 across that $35 million. In terms of the locations of the stores; for Kathmandu, we will principally be focusing on the Australian market, where we've got really strong momentum and we feel our penetration in the Australian market is such that we've still got some growth potential. If we look at our store count, we think we can still grow in Australia, probably by anywhere between 20 and 40 stores. And so we're testing a couple of new location stores that if they work well, we think that, that gives us a good runway in Australia. In terms of Rip Curl, we'll continue to open such stores in all of the key markets with a principal focus on Australia, the U.S. and Europe. And largely focusing on coastal locations as Rip Curl has always done. -------------------------------------------------------------------------------- Bianca Fledderus, UBS Investment Bank, Research Division - Analyst [36] -------------------------------------------------------------------------------- Yes. Okay. And then are you planning to close some stores as well? Like obviously, CBD struggles at the moment. Do you expect that will come back significantly as office works come back and all of that? Or are you planning to close a number of stores as well in the coming years? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [37] -------------------------------------------------------------------------------- We don't believe in loss leaders. I don't like any store that loses money. So we've got a small number of stores in our network that we'll close this financial year just because they're not commercial, and they do more heavily skew to CBD locations, to be honest. So -- but we're talking 3 to 5 stores possibly will close through this financial year. It's pretty small. Most of our stores are certainly viable and financially performing well. It's just that small handful of stores that aren't and they largely are CBD locations. -------------------------------------------------------------------------------- Bianca Fledderus, UBS Investment Bank, Research Division - Analyst [38] -------------------------------------------------------------------------------- Okay. And then last question, your underlying EBITDA margin target of 15%. Do you still have that target? And when do you expect you can achieve that again? -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [39] -------------------------------------------------------------------------------- Yes. It's absolutely right in our sights. Certainly, obviously, second half, we saw really strong performance. First half, we were impacted by those COVID lockdowns. Looking ahead, I don't think it's FY '23. But certainly, as we set ourselves for FY '24, that would be a target that we certainly have in mind, but I think it will be a 2-step approach to get in. Immediate -- Yes, our immediate focus of the anchor is, we're very vocal in the first half of FY '22 that we lost circa $35 million in EBITDA. Our immediate focus is just getting that EBITDA back. That's our immediate focus and once we get that money back, we'll reset ourselves for achieving the 15%. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- That concludes today's question-and-answer session. Mr. Daly, I will turn the call back over to you for any additional or closing comments. -------------------------------------------------------------------------------- Michael Philip Daly, KMD Brands Limited - Group CEO, MD & Director [41] -------------------------------------------------------------------------------- Yes. Thanks, Cynthia. Look, it was a difficult start to the year for us in the first half with COVID lockdown severely impacting all brands. Essentially, we had all of the costs and overhead, but not all of our revenue potential. In the second half, on the back of full openings and factory openings for Oboz, we saw a clear return to pre-COVID indeed above pre-COVID sales levels. That momentum has continued in into August with sales up 10% to August 19, and underlying EBITDA up circa $10 million in August '22 versus August '21. We feel the second half result is more indicative of where we are as a group. Further, our forward order book, current sales trends and gross margin resilience gives us great confidence looking forward for all of our brands. That said, we are conscious of potential headwinds and accordingly, are focusing on continued reduction of our operating expenses to ensure we progressively achieve our targeted 15% EBITDA ratio. Our balance sheet is strong and resetting our inventory buying time lines will deliver strong cash flow in FY '23. We are looking forward to a good year ahead. Thanks for all your time. That's all for today. Thank you. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- This concludes today's call. Thank you for your participation. You may now disconnect.