Articore Group Limited

Thank you for standing by and welcome to the Redbubble 1H FY23 results conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Virginia Spring, Vice President, Investor Relations. Please go ahead.

Good morning to our Australian participants and good afternoon and evening for those joining us from the Northern Hemisphere. My name is Virginia Spring and I am responsible for investor relations at the Redbubble Group. With me today I have the Redbubble Group CEO Michael Olczynski and Interim CFO Mark Hall. Michael will provide an overview shortly and we will then open up the lines for questions. The key information for today's call is contained in the ASX announcement and investor presentation released to the market this morning. I would like to call your attention to the safe harbour statement regarding forward-looking information in our ASX release. That safe harbour statement also applies to this investor call. The session is being recorded and a transcript will be released to the ASX. I will now pass over to Michael.

Thank you, Virginia, and welcome to everyone joining us. I'd like to start with an overview of our results. In January, we released our preliminary unaudited results. These have not changed. The group delivered marketplace revenue of $289.3 million for the half, which was in line with the prior corresponding period. We saw marketplace revenue accelerate over the half, and particularly in the second quarter, with the second quarter 3% higher than the same quarter last year. This growth was driven by TeePublic, which had its largest quarter to date, surpassing its previous high at the peak of the COVID-19 pandemic in late 2020. We also saw continued strong demand for our largest product category, apparel, across both marketplaces. As we highlighted in January, customers appeared to be particularly value-driven during the half, which drove strong promotional intensity throughout the holiday season. In this environment, we adjusted our promotional activities to attract customers and deliver revenue growth. This included lifting our number of promotional days and experimenting with a number of new promotional offers. These initiatives enabled us to compete, to win the customer, and helped deliver revenue growth. When combined, the impact to our margins of some of these initiatives was not commensurate with the total uplift generated. And as such, we are refining the use of these initiatives to better manage our margins going forward to ensure we are maximising our GPAPA dollars or our contribution dollars. In January, we announced that we had begun to implement a cost reduction program to reduce our operating expenditure. This was primarily in response to what we saw ahead for the group. We expect the consumer landscape to be challenging in calendar year 23, and we want to ensure our business has an appropriate cost position for this environment. We've also refined our near-term priorities to focus on what will have maximal impact on the key elements of our flywheel, content, customers and margin, in order to accelerate our return to cash flow positive, which we are aiming to achieve by the end of the calendar year. Moving to slide four, I wanted to start this section by touching on the macro tailwinds, which we've discussed before and have contributed to the group's growth. We believe that these trends will continue to benefit our business over the long term and that the potential of the group remains enormous. Over the past decade, we've seen a steady increase in the penetration of online shopping, which was accelerated by the COVID-19 pandemic, with many individuals trying online shopping for the first time. I, like many others, expected to see a plateau in online demand following this acceleration. Instead, in many categories, we have seen a pullback, and that impacted our ability to generate enough of a return from the investments we've made over the past two years. However, buying goods online has become a more accepted practice among a much broader cohort of society, and we expect e-commerce penetration will normalise at a higher level than before the pandemic in the near future. The Group is also a beneficiary of evolving consumer preferences. Today's customers are often looking for products which express their individuality, personality and passions. Rather than wanting mass produced products, they are seeking out items which mean something to them. Across our marketplaces, individuals can choose from tens of millions of designs on more than 100 products to create something truly unique that expresses who they are. Customers are also increasingly aware of the impact of their decisions on the planet and are wanting to make environmentally responsible choices. Since its inception, Redbubble has sought to deliver social good and maintain a small environmental footprint. Print on demand manufacturing has a relatively low environmental impact by limiting inputs and reducing waste, and therefore is strongly aligned with the Gen Z and Gen Y purchasing preferences. Moving to slide five, the Group has benefited from these tailwinds since its inception 16 years ago. From humble beginnings in Melbourne, Australia, the group has now grown to be a truly global business. This half, the group shipped 5.8 million orders to customers in almost every country of the world. In 2018, we acquired TeePublic, which really transformed the group. The marketplaces are similar in their offerings, but have some notable differences, which has been a positive for the group. TeePublic's target consumer market is a bit different to Redbubble, primarily Gen Y, who are 26 to 40, and their revenue is much more concentrated around apparel sales to US consumers. Redbubble's target market is Gen Z households, so 12 to 25 year olds and their parents. Revenue is spread across a range of products including apparel, homewares and accessories and more than 50% of the Redbubble marketplace's revenue is generated outside the US. Having the two marketplaces has proved beneficial for the group in recent years in a changing consumer landscape. as each marketplace is at a period where it has outperformed the other. During the COVID-19 pandemic, there was strong demand for homewares, which benefited Redbubble. More recently, we've seen demand for apparel in the US remain strong, benefiting TeePublic. Their relative performance provides valuable insight for the group and increasingly we're implementing successful initiatives from one marketplace onto the other. On slide six, Both marketplaces operate as a flywheel, where improving one element creates a positive impact on another. The content that artists sell attracts customers, and as customers purchase, that enables the fulfillment network to scale, lowering costs and attracting additional customers. This increase in customers creates more artist revenue, encouraging new artists to the platform, they add more content, and thus more customers, and the cycle continues. For many years, we have spoken about the benefit of the flywheel. We continue to believe that ensuring the flywheel is operating efficiently will enable us to deliver long-term growth. We have narrowed our focus for this calendar year on the areas we believe will have the most impact and generate a significant return in the short term, so across content, customers, and margin. More specifically, we are focused on, one, ensuring additive content is uploaded to the marketplaces and customers can find the very thing, two, Increasing the number of new customers and turning existing customers into repeat purchasers. And three, driving margin improvement to maximise gross profit after paid acquisition dollar generation. So that is our profit after COGS and paid marketing. On slide seven, TeePublic's success since we acquired this marketplace in 2018 reinforces our conviction in the potential for the group. As you can see on the slide, TeePublic has grown significantly over the last five years. with a marketplace revenue compound annual growth rate of 39%. This half, it continued on its impressive top-line trajectory, achieving double-digit marketplace revenue growth. In the current environment, there were not many other US e-commerce businesses that delivered that sort of growth. And we're excited about what lies ahead for TeePublic. As I mentioned, TeePublic's business is very concentrated. It is primarily T-shirts in the US. We see a huge opportunity for the business to grow its market share in other apparel categories, and to other markets such as Canada and Australia. The TeePublic team have a strong focus on increasing customer attention through improvements to the on-site experience and the use of more targeted marketing campaigns. Further optimising search and discovery on-site and off-site will also drive growth. In slide 8, ensuring customers are able to find the content that appeals to them is vital for the flywheel to effectively operate. This is an area where TeePublic is currently outperforming the Redbubble marketplace with higher search-to-sale conversion. So we've been focused on the differences between the content experience on the marketplaces in order to improve each business, and Redbubble in particular. Historically, we have spoken about how Redbubble's growing content library was a key competitive element for the marketplace. A core advantage of the content library is having something that can appeal to the most niche taste. And historically, we've seen a strong positive correlation between more content and revenue growth. However, around 18 months ago, this relationship started to break down as we had a surge in the volume of new content uploaded to the Redbubble marketplace. Unfortunately, a lot of this content was non-additive. It wasn't particularly unique or creative. Given the volume and the way it was described by the artist, it impacted the perceived quality of search results and the overall customer experience. Often page two had better search results than page one, which is not ideal for a search-driven experience. As a result, we've seen a drop in onsite conversion as potential customers, people who have never visited the site before, decreased in their engagement and add to cart rates. This problem was initially masked by the surge in demand during the pandemic, as well as by other improvements we've made that nullified our ability to see this impact for some of this time. During the same period, as you can see on the slide, uploads to TeePublic's content library have stayed relatively stable, thanks to differences in artist acquisition and review processes. And as we just discussed, their business has continued to grow. To address this issue on Redbubble, we've taken a number of actions. We've added much more friction when artists are uploading content to the Redbubble marketplace to promote the uploading of additive content only. We've also introduced new technology, as well as changed processes within our group artist teams. That team is built out of Tee Public's artist acquisition team and is now taking a lead role in artist acquisition across both marketplaces. Overall, this approach is working. From October 22 to January this year, we've seen a 35% drop in new content being added to the Redbubble marketplace, while upload and sales from more established artists on Redbubble have increased. On slide 9, further on content, while we're pleased with the improvement in reducing non-additive uploads, we are most excited about the opportunity to step-change our understanding of artists' content through the use of AI. This will enable improvement in search and discovery across both marketplaces, both on and off-site, and solve a core, long-standing challenge of how to build an objective, accurate understanding of each piece of content available in the marketplace so we can place the right design in front of the right consumer every time. To explain this further and why this is so important, On the Redbubble Marketplace, our search functionality is reliant on data provided by the artist, the title, the description, and the tags. This means that up until now, our understanding of each piece of content has been dependent on the data the artist provides. Unfortunately, this data is not always accurate, sometimes accidentally and sometimes deliberately. This can mean that irrelevant designs appear when a potential customer searches. As there are currently millions of designs on the Marketplace, Solving this problem at scale has been an ongoing challenge for Redbubble. It is just not possible to human review more than 60 million different individual designs and every piece of information an artist has provided about each one of them. However, the advances in AI in the last 12 months hold the key to addressing this issue where we will be able to remove our sole reliance on artist-supplied information as we can use AI to objectively enrich the data on every piece of content. AI has provided accurate text information for content on the site. This will significantly increase the relevancy of search results. AI can also provide an alternate search engine in terms of surfacing relevant images for a given search, and it can detect highly similar content that evades our current duplicate detection. The image on the right of this slide is Redbubble search results generated using AI. If you do the same search of spring and sunset on Redbubble, the results are noticeably less relevant. There are other potential benefits of this technology which will ultimately also help us to surface relevant content to customers. We are really excited about the potential of this technology and saying it could revolutionize search and discovery on the Redbubble marketplace is not an overstatement. And this is not a pipe dream. We've already tested this on several thousand designs and we have just recently produced AI generated data or tags across the entire Redbubble content library. Now it is all about testing and learning and then applying this at scale into the marketplace. This will take some time, but we expect to be at scale in production during this calendar year. Moving to slide 10 in terms of customers, new customer acquisition has been a challenge this half, particularly for the Redbubble marketplace, where we saw total unique customers decline versus last year. Whereas for the TeePublic marketplace, total unique customers increased up 7% this half. The previous slide where we highlighted using AI to help get the right content in front of customers will help address both attraction and conversion of potential new customers. Some positive aspects from a customer perspective. First, the proportion of revenue from repeat customers hit a first half high of 47%. Particularly pleasing was that we saw in absolute dollar terms repeat marketplace revenue increase. driven by growth in reactivated customers. These are customers that made their previous purchase over 12 months ago. Marketplace revenue from reactivated customers was up 18% versus the PCP across the group. The focus and investment we have put into this area is generating improvement. Similarly, while total unique customers were down for the half, marketplace revenue for the half was flat, indicating that average order value per customer increased. Again, this has been a particular area of focus with initiatives such as increased bundles, product comparison upsells and free shipping thresholds contributing this and our efforts in fan art and licensing. So further on customers and expanding on that last point, an initiative that is assisting with customer retention, that is assisting in bringing consumers back to the site to purchase again, is a new fan art licensing agreement we have signed with Netflix during the half. This is the largest licensing agreement we have signed to date. Already, there are more than 20,000 fan art designs on Redbubble inspired by 16 popular Netflix properties. These are early days for this partnership. However, we are seeing some interesting trends. These designs are over-indexing on repeat purchases, so they are bringing existing customers back to the marketplace. And when they do come back, the average order value is significantly higher. This reinforces the point I was making about Redbubble content and the use of AI. We know that when we put relevant, interesting designs in front of customers, they engage. And the AI work will help us do this in a much better way. This partnership with Netflix is a step change in our licensing agreements. I've talked previously about the human and technology investments we have made in content moderation over the past 18 months. This demonstrates that this investment to improve the site for all parties including rights holders, is paying off and now creating positive business opportunities. We are really excited to continue to grow this side of our business. Lastly, on customers and moving to margin on slide 12. This half, we added significant promotional functionality and experimented heavily across them. On Redbubble, we added strikethrough promotions. Historically, on the Redbubble marketplace, customers were required to use a discount code during promotional periods to access the sale price. Whereas on TeePublic, they've favoured strike-through pricing with great success, seeing a much higher uplift in days with this type of promotion compared to using a discount code. The benefit of strike-through pricing is that customers are reminded as they travel around the site that a sale is happening and it is much more effective in off-site channels as well. Based on TeePublic's success, we invested in building this functionality on the Redbubble marketplace during the half and we were pleased with the results. The sales uplift compared to non-promotional days was much higher when offering strikethrough pricing than when requiring the use of a code. For example, comparing two 30% off promotions we ran during the half, one strikethrough, the other discount code, the uplift was 20% to 25% higher for strikethrough. We've also been experimenting with offering free shipping to encourage customers to increase their order value above a free shipping threshold. This experiment showed good initial uplift, particularly in the UK. However, as the graph on the right highlights, the notable increase in the proportion of customers above the free shipping threshold was not as strong in the US as the UK. On the Redbubble marketplace, we experimented with offering these two promotional activities, strike-through discounts and free shipping, at the same time during the half. We believed this would drive both increased conversion and higher average order value. Unfortunately, this did not generate the extra uplift in marketplace revenue that we expected, and as such, there was a significant cost to Redbubble's GPAPA margin from running these offers concurrently. As such, we've adjusted our strategy, and we are unlikely to offer these concurrently again. We will continue to experiment with free shipping. However, our focus is on ensuring this is done in an accretive manner. This is the approach we have taken in December, and in January, we have seen the expected rapid improvement to the Redbubble Marketplace's cheap upper margin. On to slide 13, in addition to improving customers' on-site experience, another area of focus and investment has been working across the Marketplace's third-party fulfillment and logistics network to ensure customers have a great post-purchase experience and ultimately love the product they receive. This is vital for increasing repeat purchase rates. One element of this is getting artists' products to customers sooner. We've made some great progress on this On the Redbubble marketplace, we've seen a 22% increase in the number of orders that are shipped within two days and a 26% reduction in the overall time it takes from when a customer pays for their product to when it is shipped. As we've been able to consistently bring down these days, this gave us the ability to extend our Christmas last order by dates. This is great for customers as they have longer to buy gifts and also for us as a business as these days leading into Christmas are some of our biggest during the year. The dates on the slides are averages, which showed great improvement even though we were negatively affected in the UK by some Royal Mail challenges. We've also been focusing on improving quality by reducing product defect rates. Again, this is an area we've invested in through an expanded quality team that works with the Third Party Fulfillment Network, and these improvements not only positively impact customers, they also help reduce cost of make goods for the marketplace. And finally, before Mark takes you through the financials, I wanted to highlight some of the experienced leaders who have joined the company over the past 18 months and are driving a number of the exciting initiatives we've discussed today. Despite the workforce reductions we had to make last month, we still have a great group of both leaders and team members across both marketplaces. The majority of the people on this slide were actively recruited by us as we respected the marketplaces where they were working and we wanted to bring those skills across to our group. For example, Thilo Kuipert is ex-Uber and is leading the charge on improving the seller side of the Redbubble marketplace, encompassing the artist experience and content strategy. Stacey Wallace joined us from Amazon and is responsible for the improvements to the Redbubble supply chain, logistics and customer service. We've also included Rob Doyle on this slide. Rob will be joining the group in March as our new Chief Financial Officer. Rob is currently CFO of Domain Group, an ASX 200 company which operates a leading property marketplace in Australia. and Vivek Kumar joined as CEO of TeePublic last year. He's done a great job onboarding into the role and I also really want to acknowledge the whole TeePublic executive team who have not missed a beat and continue to deliver despite a significant leadership change during this year. Unfortunately, we don't have time to talk about all the exceptional people on this slide, let alone the great team members we've left off. I'm confident that we've got the right team in place to deliver on both our near-term priorities and our medium-term aspirations. I'll now hand over to Mark, our interim CFO.