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Edited Transcript of SSG.AX earnings conference call or presentation 26-Aug-19 12:30am GMT

Full Year 2019 Shaver Shop Group Ltd Earnings Call

MELBOURNE Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Shaver Shop Group Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cameron Fox

Shaver Shop Group Limited - CEO, MD & Executive Director

* Lawrence R. Hamson

Shaver Shop Group Limited - CFO & Company Secretary

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Conference Call Participants

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* Danny Younis

Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers

* Nicholas McGarrigle

Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Shaver Shop Group Limited FY 2019 Full Year Results. (Operator Instructions)

I would now like to hand the conference over to Mr. Cameron Fox, Managing Director and Chief Executive Officer. Please go ahead.

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [2]

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Good morning, ladies and gentlemen. Welcome to Shaver Shop's Full Year Results Conference Call.

In terms of agenda, I'll quickly outline some of the financial highlights for FY 2019 before handing you to Larry, who will take you through the results in more detail. We'll then revisit our progress against key growth initiatives before wrapping up with a trading update and our views about this coming financial year.

So now on the second slide, Shaver Shop's trading performance rebounded very strongly in the second half. The strength of our brands and business model as well as the strides we've taken as an omnichannel retailer was evident over this period as we delivered a number of very strong promotional campaigns, both online and in-store.

Our customer service metrics also continued to improve as we increasingly become the destination of the men's and women's personal care needs.

Annual ex Daigou like-for-like sales or what we refer to as underlying like-for-like sales for the year were up 4.8%. This was supported by online sales growing 30% over the year as well as like-for-like sales growth in our bricks-and-mortar business.

Normalized gross profit margins also improved 120 basis points to 42.6%, leading to normalized EBITDA being $13.5 million. The midpoint of our EBITDA guidance range was $13.25 million. So to exceed the midpoint after having a soft Christmas is really a pleasing result for our business, and I'm very proud of our store teams and national support office staff for their efforts over the course of the past 12 months. The sales and EBITDA result is also indicative of the trading momentum we experienced in the second half.

Normalized operating cash flow was $12.5 million, leading to net debt of $6.4 million at 30 June 2019. And with the strong balance sheet -- we see strong balance sheet position and trading performance. The Board has today declared a final dividend of $0.025 per share, 80% franked. That brings total dividend for the year to $0.045, up 7% on last year's $0.042 per share payout.

Let's go through the top line results in a bit more detail on Slide 3. Total sales were up 8.0% to $167.4 million driven by 6 new store openings and the buyback of the Eastland franchise store. We also delivered total same-store sales growth that is including Daigou sales of 1.1%. We split out our estimates for Daigou contribution on Slide 3. As you can see, Daigou sales were almost nonexistent in 2019, taking away the most volatile drivers of sales and earnings in the past 24 months.

Our achieved like-for-like sales growth of 1% despite having $5 million left in Daigou sales in 2019 is a pleasing result. We still engage with the Daigou channel, but the price arbitrage opportunities that existed with certain products 24 months ago simply no longer exist today. The positive from this is that our business is more predictable and the growth that we are seeing is coming from our core categories.

If you exclude the Daigou contribution from both years to get a picture of the current drivers of performance, underlying sales were up 11.9% in the second half, leading to annual underlying like-for-like sales of 4.8% growth in 2019. As you can see from the bottom chart on this slide, it was a tale of 2 halves this year with a soft Christmas trading period in the first half being replaced with significant sales growth on the back of implementing a number of omni-retail initiatives in the second half.

Our New Zealand business also had a very strong second half performance with in-store execution as well as improved online presence being key drivers of this result.

Slide 4 provides you a little bit more color around having investments into our omni-retail capabilities that we did call out at the start of the year translated into significant growth in sales, particularly through the online channel in the second half. Many of these initiatives revolve around changes in our online marketing activities. That being said, we don't include the website as a discrete business within Shaver Shop. It's just one of the avenues our customers can engage with our business and is complementary to our store network.

Our store teams and our store allocations have always been competitive differentiators for Shaver Shop. We continue to believe these assets are critical in meeting customer needs in what is becoming increasingly technical-driven personal care categories. I'll talk a bit more around the improvements we have made to our omni-retail approach later in the presentation. But suffice to say, this slide shows you the significant momentum we achieved from the second half, with online sales up 63.2%. For the year, online sales were a record $23.5 million across the network and now represent 12.6% of total network sales. We are well and truly on our way to realizing our vision as a leading omnichannel retailer, but there remains plenty of opportunities for further development, which is exciting for our business.

Moving on to Slide 5. What's also pleasing about our 2019 result is that our core business is what really drove the full year results. We've had very solid growth across our men's and ladies' Hair Removal categories. This is an important point as it demonstrates our core business is healthy and gross profit margins also tend to be attractive across these same areas.

Men's electric shavers, beard trimmers, body groomers and female electric hair removal, all delivered positive like-for-like sales growth. Hair Removal like-for-like sales were up 5.6%, more than offsetting a significant decline in complementary categories, particularly Female Beauty, noting, however, that this category had significantly lower Daigou contribution sales in 2019. In fact, when you exclude Daigou sales from both periods, complementary categories also grew in FY '19, up 2.6% on a like-for-like basis.

Not surprisingly, following the launch of ghd in June 2018, Hair Styling was a strong contributor to this growth. The success of this category reflects our stores' teams' ability to sell top end beauty products where features and benefits are critical in the sale process. So to reiterate, the Daigou channel was not a meaningful contributor in 2019, and we don't see this changing.

For those of you who have seen our new Father's Day catalog, we're also trialing some new men's personal care categories such as fragrances. It's early days, but we're encouraged with the results so far. We'll continue to pilot opportunities like this that are highly complementary to our existing range.

I'll now hand you over to Larry Hamson, our CFO, who will explain our financial results in more detail.

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [3]

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Thanks very much, Cameron. We're on Slide 7, which shows our normalized financial results for 2019 against 2018. These are normalized results because we've had some significant and nonrecurring items in both years.

Last year, these normalizations related to a couple of supplier liquidations, a South Australian stamp duty settlement dating back to 2015 as well as an internal fraud associated with the Daigou channel.

In 2019, we incurred significant due diligence costs in relation to a potential acquisition that did not proceed in the first half. A full reconciliation of these normalizations is shown as an appendix to this presentation. However, the EBITDA impact in both years of these expenses was around $1 million.

And just so we're clear, these results do include contributions from the Daigou channel. In subsequent slides, we tried to estimate the contribution to earnings so that investors are able to understand how the Daigou channel influenced our results over the prior 2 financial years. So total sales were up 8% to $167.4 million. This increase was due to the addition of 7 corporate stores comprising 6 greenfields and 1 franchise buyback as well as ex Daigou like-for-like sales growth being 4.8% and total like-for-like sales growth including Daigou at 1.1%.

Margins improved by 120 basis points leading to total gross profit dollars being up 11.1% to $71.4 million. Franchise royalties decreased again this year, down $0.4 million or 19.8%, both as a result of fewer franchises operating across the year, but also due to negative like-for-like sales experienced in the franchise networks.

As foreshadowed this time last year, FY '19 was an investment year for the business. Operating expenses were $59.5 million, up 12% or $6.4 million in FY '19 as we invested in our omni-retail capabilities and tested some new rostering options in store. This led to normalized EBITDA of $13.5 million, up $0.4 million or 2.8% on last year's result of $13.1 million. This is a pleasing result given 2018 EBITDA included around $1.1 million in earnings from the Daigou channel. So we were able to cover this gap as well as the incremental omni-retail investments to grow EBITDA in 2019.

As we extend -- expand our store network and invest in our core business systems, depreciation and amortization increased $0.3 million to $2.3 million. This has resulted in normalized net profit growing to $7.4 million, up 1.7%, and normalized earnings per share increasing 3.7% to $0.06 per share. If you adjust for the tax benefit we get on franchise buybacks, cash NPAT was $9 million or $0.0735 per share, up 1.3%.

Slide 8 explains a bit more about our margins. Total gross profit was up 11.1% to $71.4 million with ex Daigou gross profit up 13.2%. The improvement in normalized gross profit margins of 120 basis points really comes down to a few key factors. Firstly, the reduced contribution from the high-volume, low-margin Daigou channel lowered gross profit margins by around 70 basis points last year but obviously provided a strong incremental dollar contribution. While the reduced Daigou contribution was the largest single factor leading to the rebound in gross profit margin percentage, improved supplier and category mix, increased focus on margin at the store level, strong alignment across the promotional programs with suppliers as well as lower discounting in key categories like Hair Styling were all key factors leading to the improvement in gross margin. And while the Australian dollar has depreciated in recent months against the U.S., we haven't seen any meaningful changes in our buy prices with local suppliers. Substantially, all buying activity still happens with local distributors in Australian dollars, and history shows that Australian dollar movements, either appreciating or depreciating, have not had a significant impact on overall margins for the business.

Slide 9 reviews our normalized cost of doing business as a percentage of underlying sales. The reason for using underlying sales is that it provides a more indicative sales level for the business that is not impacted by the volatility of Daigou sales over the last few years.

As foreshadowed this time last year, cost of doing business increased in 2019 as we made investments in our support office and omni-retail capabilities. This was most noticeable in employment costs where we hired a number of new team members, including our Chief Marketing Officer and Head of Digital and E-commerce as well as 2 marketing support roles. Our support office is now nearing optimal levels to support our future growth initiatives. However, the full year expense impact of the appointments that we made in 2019 will be felt in 2020. It's also worth noting we're able to successfully mitigate the above CPI retail award increase of 3.5% last year. This year's retail award is 3%, so this should be factored into any modeling you're doing.

The level of marketing expenditure is always a balance. Marketing as a percentage of underlying sales reduced 100 basis points to 4.2% in 2019. Last year, we took a deliberate decision to reduce our investment in TV advertising, while increasing proportion of marketing spend focused on digital channels. These decisions resulted in reduced overall dollar spend in marketing, while still successfully growing underlying like-for-like sales by close to 5%.

So looking forward to 2020, with the growth we are seeing in our recent digital initiatives, we expect the proportion of spend and additional marketing will continue to increase. We also intend to increase marketing dollar spend overall so that we're in the best position to grow our business not only in 2020, but in subsequent years as well.

Slide 10 shows our EBITDA trend over the last 5 years. Having -- with regard to the incremental expenses we planned in 2019, the turbulent macro environment we encountered for much of the year, not to mention the decreased contribution from the Daigou channel, the final EBITDA of $13.5 million was a very pleasing result, particularly because the omni-retail investments we're now making are driving strong growth, most significantly evidenced in the second half.

Moving on to our balance sheet. Shaver Shop continues to have low gearing. Net debt ended better than expectations at $6.4 million, driven by strong sales momentum coming into the end of the year. Overall gross debt reduced by $1 million to $10.3 million at the end -- at 30 June, and all debt covenants remained well within thresholds.

Average inventories were up slightly on the prior year. The overall increase of $1.8 million primarily reflects the fact that Shaver Shop had 7 more stores in the network.

We expected average inventories per store to be slightly higher at 30 June than what they eventually were, but a strong end of financial year sales program, particularly through the online channel, generated higher cash conversion in June, leading to the lower -- lower-than-expected inventory and net debt levels. Payments for the stock purchase coming into the end of the year were made in July as evidenced by the higher trade payables balance at 30 June.

Finally, in relation to our deferred tax asset, balances reduced significantly in 2019 as we continue to reap the benefit of lower tax payments associated with franchise buyback tax deductions. We will start paying more tax in the coming years as these tax benefits reflected in the bottom right-hand of the slide start significantly reducing in the coming year.

Now on to cash flow on Slide 12. Shaver Shop, again, generated strong operating cash flow of $11.5 million in 2019, while normalized operating cash flow, that's excluding the impact of the due diligence costs incurred in the year, was $12.5 million. It's down on last year as the first half of 2018 benefited from an abnormal reduction in working capital following the previously disclosed Philips stock purchase in May 2017 as well as the reduction in stock that was being held at 30 June 2017 to support the Daigou channel. If you adjust for these items, operating cash flow was relatively flat year-over-year. We invested $3.8 million in net CapEx to roll out 6 new stores, complete fixed store refits or relocations and continue our technology transformation investments. We also bought back the Eastland franchise store, which continues to be a very strong performer in the portfolio.

As a result of the conservative financial position and strong cash flows of the business, Shaver Shop's Board has declared a final dividend of $0.025 per share, 80% franked. This is up $0.001 or 4.2% on last year's final dividend. That brings total dividends for 2019 to $0.045, 80% franked, up 7.1% on a fully franked dividend of $0.042 per share last year. This is a payout of roughly 61% of cash net profit after tax and is in line with our dividend policy to pay out 60% to 80% of cash net profit after tax. Shaver Shop's strong cash flows allows the business to continue to invest for growth while maintaining a healthy dividend for shareholders.

Now on to Slide 13, which reflects the expected impact of the new lease accounting policy standard that came into effect on 1 July. Importantly, there's no change to cash flow or risk to our debt covenants. The change in policy effectively treats all operating leases as capital leases and, therefore, had a significant impact on how we account for our store lease portfolio. We expect to recognize around $32 million in right-of-use assets and receivables relating to franchise leases. We also recognized approximately $34 million in additional lease liabilities on 1 July 2019.

The net balance sheet result is a drop in retained earnings of $1.5 million to $2.5 million. Rent expense on the income statement reduces significantly and is replaced with incremental depreciation and interest. As a result, EBITDA will increase significantly, EBIT will increase marginally and net profit will be flat to slightly positive. The pro forma impacts that are shown for 2020 are estimates and will vary based on the level of new leases and lease renewals we execute as well as changes in any assumptions we need to make following adoption.

While we're not restating our prior year results, we will provide a bridge between 2019 and 2020 to assist with the transition to the new standard at both our half year as well as our full year results.

I'll now hand you back to Cameron, who will update you on our growth priorities and trading performance for the first 7 weeks-or-so.

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [4]

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Thanks, Larry. We're now on Slide 15. So we had 4 key growth priorities for Shaver Shop. The first is to be the best omni-channel retailer in our category. We've taken significant strides to accomplish this goal over the past 24 months. Online sales now represent around $23.5 million or 12.6% of total network sales, growing 30% from last year.

You may recall, we appointed a new Chief Marketing Officer and Head of Digital and E-commerce in August 2018. Those individuals have brought significant and relevant experience as well as new energy and approach. I will talk a little bit more about this new thinking and how this has translated into significant sales growth on a subsequent slide.

Secondly, we are revisiting and refining our store design. As mentioned before, our bricks-and-mortar locations and our passionate staff within those stores are a key competitive advantage of Shaver Shop. So store design and merchandising is critical to maximizing customer engagement opportunities.

Third, we still see opportunities to grow our store network through both greenfield opportunities as well as through franchise buybacks. We will maintain our prudent approach to greenfields over the next 12 months as online continues to grow in prominence and the retail landscape continues to change. Importantly, we have completed 2 franchise buybacks already in 2020, Doncaster in Victoria and Hornsby in New South Wales. These are strong stores that I expect will do very well within the corporate store portfolio.

Finally, product innovation exclusivity remained core to our business model and, therefore, a key strategic imperative. Maintaining strong supplier relations is critical to this, and I'm pleased with the promotional program I've seen thus far. The December quarter remains our key trading period for the year, so performing well over this period obviously remains a significant priority for the business.

Now on to Slide 16 and getting into a bit more detail about our omni-retail improvements. We want to replicate the rich and engaging experience you get from entering one of our stores and speaking with our store staff across all sales channels. We also want the ordering and logistics experience when you order online to be best-in-class. Our decision many years ago to treat every store in the network as a distribution point for online orders has led to Shaver Shop developing a sophisticated, highly efficient and very effective order management solution. Our approach allows us to direct any order to the nearest store in the network that has the stock to fulfill the order. This new model improves the time frame, facilitates Click & Collect opportunities and utilizes the staff to pick and pack orders in slow foot traffic periods across the day. This isn't something that can be replicated easily by a pure-play online retailer.

In addition to optimizing the process for online deliveries, over the last 12 months we've adopted an "Always-on" approach to digital marketing and customer engagement. "Always-on" means that we are marketing to engage customers through as many channels as we are able to at all times of the day with relevant and compelling offers that had strong call to action.

We've also sought to attract new customers to Shaver Shop through social media, search engine strategies as well as increasing the depth and breadth of relationships within marketplace partners. All these customer acquisition plans have led to our database more than doubling to 234,000 active customers in the last 12 months. We have significant plans to grow this further in 2020.

All of these activities are important factors in the business, driving 63% online sales growth in the second half of 2019. Almost every one of our online metrics improved in 2019 from the level of quick email marketing campaign, the sales conversion on our website, the average transaction value to dwell times on the site.

The exciting thing to me is that I still see so much more potential to improve in both our online presence as well but also how we merchandise our stores, more on these on Slide 17.

The 2 stores shown here were stores we recently reopened in Doncaster and Highpoint, 2 key doors of Shaver Shop in Victoria. The new store design reflected contemporary industrial feel at the front of the store. Large high vis screens create a dynamic, fun store experience and help create a [level of] theater. They need to market engage with customers as they pass the store. Once inside the store, we've created more space to browse, we've improved category segmentation as well as increase the use of touch and feel display units. We've also increased the linear wall space for core growth categories like Hair Styling and Female Beauty. These changes are evolutionary, have driven incremental like-for-like sales growth of around 10% for the stores that were refit in March of this year. We've made great improvements to the look and feel at the entry to our stores. However, I think we can do more on how we merchandise products within the store. We've made solid progress here, but our team is still not yet satisfied. With a number of stores across the network now ready for a refit, we will continue to make these improvements that we expect will continue to drive incremental growth in some of our longest-standing store locations.

In terms of New Zealand on Slide '18. We had a very strong performance last year with above company average like-for-like sales growth rates. We expect this will continue in the coming year as several growth opportunities are implemented.

Firstly, we launched ghd in April, a significant addition to the product range, and one which we think will put Shaver Shop on the map for hair styling stores in New Zealand.

Secondly, we're adding a store in the newly refurbished Westfield Newmarket center. This store will become the flagship store in New Zealand, reflecting the latest branding and store design to Shaver Shop, and with a strong foot traffic we expect from the center, should be significantly accretive in the first year.

We're also implementing several improvements to the New Zealand website and back-end systems that we expect will drive significant growth in sales, improved logistics efficiency as well as improve the overall experience for those customers that prefer to purchase online in New Zealand.

Finally, we've launched TradeMe, the leading New Zealand marketplace. This is significant not only for the sales potential this brings, but also to increasing brand awareness and exposure. Early results following the launch have been promising, but it is still early days.

All of these major tweaks will drive strong growth in sales and profitability in New Zealand over the coming year.

Finally, on to our trading update on Slide 20. We've had an encouraging start to 2020 with like-for-like store sales up 9.5% over the first 7 weeks of the year. We completed 4 full store refits in July and have completed the buyback of the Doncaster and Hornsby franchise stores. We have 3 more stores slated to be refit prior to Christmas.

2020 will be another year for the business from an OpEx perspective -- another year of investments for the business from an OpEx perspective. Firstly, we are continuing our omni-retail investments in 2020, which will lead to incremental marketing spend up $0.6 million to $0.8 million over FY '19 period.

We also have the full year impact of the marketing support office roles that we added in 2019 as well as the retail award wage increase of 3.0% that will have a full year impact of EBITDA in 2020.

Finally, we are continuing to progress in operational efficiency solutions in the back end. These solutions are required investments for the business, but we don't expect will drive a positive in year return over 2020.

So while the start of the year is very pleasing, it's still very early. We're still investing for the future, and as a seasonal business with heavy reliant on Christmas for delivering the full year results, we're certainly not getting ahead of ourselves. All that said, we do expect to grow sales and normalize EBITDA again in FY '20 on a consistent accounting basis with FY '19.

So in summary, the strong finish to FY 2019 is evident that Shaver Shop's specialty business model remains resilient in the current retail environment. We focus on delivering exceptional customer service through all channels and providing our clientele with innovative and exclusive products at competitive prices. Our store refit program is delivering strong returns on the back of incremental sales results. The New Zealand business has also grown strongly, with several initiatives being implemented in 2020 that should also reach further.

We continue to have a conservative balance sheet with low net debt, supported by strong cash flows. We're using this cash flow to reinvest in our business as well as increase our dividend payout, now at $0.045 per share for the year, up 7.1%. We've also had an encouraging start to 2020 with like-for-like sales up 9.5%. As I said, it's early days and while this is pleasing, our annual profitability is highly dependent on Christmas trade. So we are focused on delivering growth in quarter 2 this year.

We continue to invest in our omnichannel retail capabilities and systems in the coming years as well as impacting systems to drive operational efficiency and support future growth. And finally, we acquired 2 franchises at the start of the year. So it's fair to say, there's a lot happening in our business but we feel we're in a good position and focused on delivering another year of sales and earnings growth for shareholders.

That brings to an end to our formal part of the presentation today. I would now like to hand over to our moderator who will take questions from the audience.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is Danny Younis from Shaw and Partners.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [2]

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Just a couple of questions if I can, please. The first one around the gross margins. That 42.6% print, that's your best result in 2 to 3 years. Should we look at that now as the new normal going forward? Or should we look at it, the lower 40s that you've done over the last 2 to 3 years?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [3]

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I think somewhere around that mid-42% level, Danny, that we were able to achieve in 2019. When you look back sort of 5 or 6 years, that's in line with the long-term company averages. So I think something around that level is where you should expect margins to come in.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [4]

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Okay. And can you maybe provide an update on the CRM and loyalty system, what that road map looks like over the next 6 to 12 months? I noticed you doubled your customer database to 230-odd thousands. So clearly, there's a lot of embedded value there. How are you looking to road map or take advantage of that over the next, say, 6 to 12 months?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [5]

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Yes, absolutely, Danny. So one of the key things that we're doing at the moment is implementing those core platforms. The area that we're focused on right at the moment is integrating between the POS and the online systems to make sure we're gathering all the information from that and then analyze it. I guess -- so the CRM is looking to be in place in the coming months, in the next 2 to 3 months. We certainly expect the core CRM and those platforms fully integrated, which is a big step for our business.

The next part of it in terms of loyalty and your question around that. Loyalty is one of those ones where we've done some market research that indicates there might be some bigger fish to fry prior to the loyalty program. And so with some of the gains that we've seen in our omni-retail activities and digital marketing over the last 6 months, that reflects some of that prioritization that we've chosen to do over loyalty because we think there's a bigger opportunity there in the short term. It's not to say loyalty is off the table, it's just we're prioritizing our spend and where we think the biggest returns are going to come from.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [6]

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Okay. And you mentioned a couple of times on the call the dependency on the Christmas period. Is it too early to ascertain what the product pipeline looks like right now in terms of innovative products for Christmas?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [7]

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Yes, probably, Danny. I mean, we're probably about 80% of the way through supplies promotional program, so we've got a reasonable line of sight. And I think that's going on, but it's still fair to say it's a work in progress. So I think it would be premature to call out any sort of specific category opportunities. But overall, it's looking on pretty promising.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [8]

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When would you have more certainty? By the AGM, at least?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [9]

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Yes, we would, for sure. I think AGM would be locked and loaded by then. But having said that too, we're probably cautious about calling out any specific product category opportunities because, obviously, that's pretty sensitive information awaiting through Christmas period. But certainly line of sight would be -- we'll ensure we got investors by AGM, Danny.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [10]

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Okay. Maybe one more, if I can. Just quickly, the percentage of stores in the network that have currently been refurbed or refitted, I think you had 120-odd stores. What percentage of those have gone through a refurb or a refit now?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [11]

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Well, if you're talking about like the latest sort of design that we've obviously been showcasing, you're probably talking about only 10% to 15% of the store network that have what we call the latest store design. So there's a significant proportion of the network that could obviously undergo a full refit and hopefully get the uplifting sales that we've experienced from those 4 stores we did in March this year.

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Operator [12]

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(Operator Instructions) Your next question comes from Nick McGarrigle from Ord Minnett.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [13]

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And to the operator, that was very well pronounced. That's probably the best pronunciation over [previous calls] so congrats. In terms of questions for the team. I think Danny asked about the gross margin, so that's great. Just in terms of the stores, can you quantify the proportion of the remaining stores that you'd like to refurb and maybe just the rough sort of sales per store uplift? So just some metric around that, just so we get a sense of the return on capital that's going into that strategy.

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [14]

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Yes. Yes, sure. I mean, firstly, look, Nick, the way we're really looking at it is targeting probably the bigger doors. So at this stage in terms of what we'd say we'd be committing to or looking at closely with the store, the full refits would be probably a dozen, 10 to 12, because obviously you want to put the latest store design into those key doors where we think we get the most uplift on. So we're certainly not necessarily looking at some of those regional stores or the stores that are turning over $1 million to $1.1 million, roughly $2 million. I don't think that'd necessarily be a priority for the store refit because obviously to see if the amount of CapEx you're putting into those store refits as well.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [15]

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Okay, cool. And then just in terms of the remaining franchises. You obviously think it'd be quite high revenue per store. Is that true of the store that you just bought in the first quarter? Can you give us a sense on what the metrics were around those?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [16]

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Yes, the metrics on those buybacks, we've maintained within our threshold of 20 -- more than 20% return on capital employed is what we're expecting from those. You're exactly right, the last 6 stores of the network are key trading doors, Parramatta, Galeries in the middle of Sydney, Chatswood, Castle Towers, Burwood. So very strong trading doors.

The key thing, if you're doing your analysis, you need to try because we had revenue contributions from Eastland, Doncaster and Hornsby in 2019. You just can't -- you have to look at taking those contributions from the buybacks that we've undertaken in terms of coming up with an average sales result for 2019. So it's not just the digits you're taking the franchise sales and divide it by the 6 stores that are remaining.

But yes, they're obviously key doors. With those franchises, I'm expecting that probably the next question. There's no active dialogue at the moment with those franchises. If the multiples, as we've always said, come in line with our expectations and return on capital employed expectations, and would we look at them -- at those deals at the moment, it's not something that we're actively focused on.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [17]

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Sure. And then obviously that's a lot -- of the franchise lot has recorded revenue were in terms of corporate stores. But then greenfields, there wasn't much commentary around the plan there. Have you gotten new sites now down? Or have you sort of decided to regroup and focus on the network and online and other things instead of applying capital to greenfields?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [18]

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Yes, I mean we're still certainly looking at the greenfield sites. It's just making sure that we do the right greenfield sites. And I think with the growth of online, we do have to be pretty balanced in terms of when we do look at a greenfield site opportunity, but there's still out there, Nick, no doubt about that. I think we've got one locked and loaded for pre-Christmas opening and broadly, we still sort of feel that this financial year, we're probably looking around 6 to 8 greenfield sites or thereabouts. But obviously, that's depending on finding the right location and making sure we get the right commercial terms.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [19]

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And what are you finding on those commercial terms? What's the impediment to finding the right -- is it finding the right rental deal? Or what's sort of been driving that?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [20]

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Well, we've got 120-odd stores across Australia and New Zealand. So obviously, in terms of finding the right locations, you certainly can't -- I mean, we're in the top 50 centers, I think, in Australia. So that's the first thing you're going to find the right design with the right catchment area and the right population to support a solid store, and then obviously trying to negotiate with the landlord on solid commercial terms. And we're very, very disciplined on walking away from opportunities. We've got to find the right location, the right area. But if we feel we can't negotiate commercial terms there in our favor, we'll happily walk away. That's something which we just never compromise and we won't moving forward.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [21]

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And there was some commentary around marketing spend, and presumably remain actual dollars or do you mean as a percentage of revenue. Just trying to figure out what that number might look like into next year on the marketing? And then also, just a comment on cost of doing business just in general.

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [22]

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Yes, absolutely. I'll take that one, Nick. I think on the trading update slide, we provide a bit of clarity around that. So it's on dollar spend that we expected to increase, about $0.6 million to $0.8 million in total dollars. Basically, what it's doing is bringing it back up to in line with the 2018 financial year levels. So an increase in dollar spend overall for 2020. Cost of doing business overall. We've highlighted that we expect 2020 to be another investment year for the business. That being said, we still expect to grow sales and EBITDA on a consistent accounting basis. So what that really means is that cost of doing business is going to be pretty flat year-on-year as a percentage of sales.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [23]

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And over time, do you expect to get leverage? And you said over the last few years, you've seen a lot of greenfields, a lot of franchise buybacks, not much operating leverage through the cost of doing business [plan]. Then another part of that is buying back franchises. The margin is lower than franchise income, but do you feel like [CBDs] is where you want it to be longer-term or bigger investments that you hope are going to see that margin expand over time. Or is it more about leveraging more online sales or more sales through the network?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [24]

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So we expect to see some leveraging in the P&L coming through in years after 2020. We're starting to get up to a point where there's a national support offices at levels where we think it's pretty sustainable to accommodate some of the growth, also some of the systems we're putting in place that Cameron referenced. The back-end operational platform should assist with us not having to sort of increase spend going forward as we continue to look to grow the business.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [25]

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And then, I know you discussed online quite a bit and it's really encouraging to see the growth rates through that business, but maybe just some color around what drove the quite large uplift between second half '18 into the second half '19, but they are changing sort of conversion rates. So what were the actual -- just some metrics around basket size, just probably the difference there if it's conversion or some -- anything else that sort of drove that step change?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [26]

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Yes, look, I think I mentioned in the presentation all the metrics were up. So conversion was up, average basket size was up and units in dollar value. And obviously the data base numbers, our data base numbers are doubling in a pretty short period of time. Means we're able to really leverage that database with EDM activity, for example. We'll have phenomenal uplift from a response front. So I think it's a combination of those assets and also the actual buying or the product deals driving that. Obviously, you've got -- it's one thing to communicate to the customer your great offers. We have offers but you've actually got to get good offers in the first place. So for me, the last 6 months has just been a real case of the buying guys have done their job. They saw some very good deals working collaboratively with suppliers. And a combination of good product innovation with really strong value for money offers. And then our marketing team has just done an excellent job in terms of communicating that through all channels in not just your catalog channel, but obviously through your digital opportunities, which is reflected in that 63% growth in the second half.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [27]

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Is the pick-up in database reflective of the whole cost structure? Or is it reflective of just more traffic to the site?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [28]

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It's actually a combination of just a few tweaks. It's even just when we send out a lot of offers these days, we're actually asking customers to subscribe, to actually -- or join that database to receive the offers. So it's really just what I'd call tweaking out communication strategy to make sure our database offers growth. And then once we get our customers on our database, we're also offering them specific offers, what I'd call VIP offers or whatever you like to call it, where the offers are only specific to those people in the database. So I just think we're actually doing a good job in providing real reason to our customers why they should actually join our database and giving them something meaningful after they've signed up.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [29]

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And the sale that get through online mainly go into corporate stores or a lot of them are still going through, say, other stores but existing franchises are left there in the Sydney CBD. So I believe they basically have a lot of action?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [30]

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Yes, absolutely. So we haven't changed the methodology. So wherever the stock exists in the store network that's the closest to the customer, that store will get that order, regardless of whether it's a corporate store or a franchise store. It's all based about getting the best customer experience by having the stock at that -- near a store location to the customer.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [31]

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Do you have -- you mean you obviously would be happy for it grow the way -- as much as it naturally can, but do you have a feeling for what you think that mix model look like longer term? The online sales team, which (inaudible) 60-ish and it's growing quickly. But do you have a vision just sort of 20%, 30%? Or are we -- or am I being too conservative?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [32]

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Yes. Look, I think if you look at the data obviously, and obviously every market is slightly different. But if you look at our categories' online penetration, easily matures around 16 to 18 points. I think in U.S., it might as high as 20. So it wouldn't be unreasonable to think online penetration in Australia had increased to sort of similar level, 16% to 18%. I think the benefit for us, Nick, is we'll just say we're positioned being -- we're -- being an omni-retailer who can actually offer the experience to customers both online and in-store. And I think that's the thing we're really benefiting from and realizing over the past couple of years, we just got a great platform, we drive conversion, whether it's bricks-and-mortar business or through online.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [33]

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I mean to better the -- I don't know if you have the number to hand. But if we strip out the online sales and the Daigou channel and then we'll put underlying like-for-like growth in the physical network, absent the online sales, do you have a sense on what that number might look like? And presumably if we want to strip all those things out, the like-for-like growth in the -- where you're going to (inaudible) even provide message or implication for continuing to roll out stores if online is growing quickly?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [34]

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Yes. I mean the good thing is I think we did reference in the presentation the bricks-and-mortar sales still grew last year. It's low single digits, but still grew, which is pleasing. As you look to become an omnichannel retailer, the benefits that you have of having a store closer to the customer as well as an online offer becomes increasingly difficult to disaggregate. And so while we are looking at those metrics, the overall result is what we focus on for the store, and whether it's growing like-for-like sales or not, because it's very difficult to say whether or not a customer had gone into a location, spoken to our staff, got an idea and then checked prices outside of the store and chose to purchase from us. So it's incredibly difficult now, I think, to just focus on online or on bricks-and-mortar. We look at it together and with all the metrics. And we do that when we're evaluating new stores as well. So it is one of these things that goes in the equation on new stores next. So we are being a bit more cautious, I guess, given online is growing so strongly. But it's just one of those factors that we look at.

We'll probably take a question from someone else, Nick, if that's all right?

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [35]

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Okay.

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Operator [36]

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Your next question comes from Danny Younis from Shaw and Partners.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [37]

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Just a couple of quick follow-ups. Firstly, online has been a rocket ship, but you've pointed out higher postage costs in the press pack. Can you maybe talk about what the strategy is to mitigate that in the next 12 months and your ability to lower that dollar cost per unit?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [38]

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Yes. Obviously, it's something that we're focused on, Danny. Whether or not we're able to achieve that, difficult to say at this point. But clearly, it puts us in a better position for growing volumes the way we are in our online channel. And the fact that we have, already our store is acting as that distribution point that's closest to the customer. We're already in a pretty good position, I think, when you look at our cost per unit compared to maybe some other retailers that may have 2 or 3 distribution points across Australia. So it is work in progress, but can't guarantee anything is going to happen this coming year, Danny.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [39]

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Okay. And maybe one for Cameron, a more general question. Can you maybe talk about the discounting environment, how much is your competitors in the dry category across supermarkets, chemists, online and what you're seeing there?

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Cameron Fox, Shaver Shop Group Limited - CEO, MD & Executive Director [40]

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Pretty standard, to be frank, Danny. I mean, the main events we're seeing in the financial year sale was pretty aggressive last year. Prom Day was pretty aggressive about 4 weeks ago, which we expected. So I wouldn't say there's anything unusual personally. I'd say it's relatively standard. But obviously, we're probably coming up to the period, Danny, in Black Friday and the cyber week, where we expect discounting to be potentially at its most aggressive point.

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Operator [41]

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(Operator Instructions) Your next question is a follow-up question from Nick McGarrigle.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [42]

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Good to come back. Just a boring one maybe, which is the franchise benefit to the tax from the trade that you've done and then signal any sort of intentions when it comes to, I guess, ongoing franking. I noticed the final was 80% franked?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [43]

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Yes. So in terms of that 80%, we think that 80% based on our current forecast assumptions can be maintained at sort of a similar pivot.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [44]

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Okay, I think (inaudible)

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [45]

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Sorry, Nick, I'll repeat that. So with the dividend payout, we expect that can continue to have an 80% franking on our current forecast assumptions and assuming a consistent dividend payout of around $0.045 per share.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [46]

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Okay, then the reason why the franking is down, I guess, is the tax benefit you get from the franchised buybacks when they roll off. There's no -- should be no longer-term impediments to come back to 100? Is that fair to say?

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [47]

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Yes, that's exactly right, Nick. The only reason we can't pay full franking at the moment is because we don't pay as much tax because of those franchised tax.

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Nicholas McGarrigle, Ord Minnett Limited, Research Division - Head of Institutional Research & Small-Caps Industrial Analyst [48]

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And then the benefits from the 2 that you've just done, do you have a rough estimate on the profile of that might look like. You've been good at giving the profile on the existing one.

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Lawrence R. Hamson, Shaver Shop Group Limited - CFO & Company Secretary [49]

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Yes. So we'll update that graph. It's going to be the same sort of profile evenly over 5 years. The overall purchase price of those 2 is in your sort of $2 million to $3 million.

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Operator [50]

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There are no further questions at this time. Therefore, that does conclude our conference for today. Thank you for participating. You may now disconnect.