Articore Group Limited

Good morning to our Australian participants and good afternoon and evening for those joining us from the Northern Hemisphere. My name is Francoise Dixon and I'm responsible for Investor Relations at Articore. With me today, I have the Articore CEO and Managing Director, Martin Hosking, and Group CFO, Rob Doyle. Martin and Rob will provide an overview of our FY24 results shortly and we will then open it up 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 in our ASX release regarding forward-looking information. That safe harbour statement also applies to this investor call. This session is being recorded and a transcript will be released to the ASX. I will now hand over to Martin.

Thank you, Francoise, and good morning, everyone. FY24 has been an important year for the Article Group as we stabilised the business, achieving positive underlying cash flow and improvement of $47.8 million on the prior year. This was my primary objective on returning to the CEO role in March 2023. I want to reiterate our vision Providing a way for creators to monetize their works is the cornerstone of our business. Our vision is to be the global leader connecting digital creators with their customers has remained essentially the same since we founded Redbubble in 2006. In FY25, we'll be taking concrete additional steps in pursuit of this vision, building on the base of creators as we expand beyond our two existing marketplaces. The next slide provides a summary of the group's overall performance in FY24. The group delivered the first phase of a significant turnaround in FY24, achieving positive underlying cash flow of $0.9 million and operating EBITDA of $10 million, a $41.8 million turnaround on FY23. Gross profit increased 4% to $181.7 million in FY24. and our gross profit margin increased 570 basis points to 42.9%. This uplift was driven by the implementation of initiatives which focused on maximising our unit economics. Gross profit after paid acquisition, or GPAPA, increased 11% to 108.3 million and the Group's GPAPA margin increased 470 basis points to 25.6%. This improvement was driven by this uplift in gross profit and reduction paid marketing spend. We also realised the full benefit of initiatives implemented in FY23 to right-size our cost base and have maintained a disciplined approach to cost management. In the second half of FY23, we began the process of resetting the business by identifying key priorities. As outlined on slide four, We have achieved what we have set out to do in this first phase. This revolved around our organisational restructure and has provided greater insights into the performance of each marketplace and significant leadership renewal across the Group, bringing new capabilities and experience. Absolute profit and margin improvement was a primary objective. This was achieved through better unit economics and more effective marketing spend, leveraging each marketplace's unique strength and value proposition. At the same time, we reduced our cost base by 31 million, or 24%. During this process, we were careful to ensure that the Group retained capability to return to growth and position the Group for long-term success. While a lot was achieved in FY24, there is more to be done, and our immediate priority is to return the Group to profitable revenue growth and leverage our assets to create additional growth opportunities. On the next slide, we've provided a snapshot of each marketplace's performance during FY24. Both marketplaces have contributed to the Group's significant improvement in operating EBITDA and delivered positive underlying cash flow. The turnaround has been particularly significant for Redbubble, with a $32.4 million improvement in operating EBITDA in FY24. Both marketplaces also delivered significant margin expansion by prioritizing profitable revenue over volume and focusing on initiatives that drove better unit economics. For the year overall, Redbubble NPR declined by 17% as the marketplace reduced its marketing spend and adopted a more disciplined approach to being profitable on first order. In the third quarter of FY24, the Redbubble marketplace implemented significant changes to its marketing strategy to efficiently scale its paid marketing spend. These changes took time to take effect, with the anticipated benefits becoming evident in the fourth quarter as the NPR rate of decline moderated to 14%. Optimizing paid marketing activities will remain a key focus area for Redbubble and FY25. Turning to the individual marketplace performance, on slide seven, we provide a summary of Redbubble's key metrics for FY24. These operational metrics reflect the transformation that is going on at Redbubble. The increase in selling artists to 575,000 in FY24 demonstrates our focus on improving the artist experience, particularly for pro and premium artists. The number of customers and designs sold in FY24 were lower on PCP, largely due to the declining paid marketing spend which brought fewer new customers to the site and the addition of friction in the sign-up process to reduce the volume of lower quality accounts. We believe that the reduction in design sold is a short-term response to some of the measures which we have taken to improve the content library and are confident they will deliver long-term benefits. A better quality content library will ultimately improve the on-site experience and enhance off-site marketing. As highlighted on slide 8, flywheel dynamics remain at the heart of the business model. Returning the Redbubble marketplace to profitable revenue growth remains our main priority and in FY24 we made significant progress in addressing the issues that were inhibiting the flywheel. This began with the measures taken to control the surge of low-value content, which I've highlighted in previous calls. We are confident this issue is now fixed, as indicated by the 45% increase in new work sold in June on the PCP. We also extended the use of AI to improve search and discovery, and then focus our offsite marketing on the best performing content. Strong offsite promotion helps attract new customers and it also reminds customers who have previously bought a product about Redbubble and increases the likelihood of a repeat purchase. Another recent initiative has been the mobilization of artists to fill content gaps. At the same time, we've made a number of improvements to drive new customer acquisition and increase repeat purchases. These include new products and the Align extension, as well as increased promotions that offer the free shipping on stickers in the US. In FY24, Redbubble's paid marketing spend was down 12% on PCP. Our paid marketing is profitable in first order, and while this remains the case, we can increase our spend without compromising our profitability. We have also made good progress in improving our margins by optimising the Redbubble marketplace supply chain, shortening delivery times and reducing shipping costs. As a result of these initiatives, our gross profit margin was up 670 basis points in FY24 and our OpEx was down 35% during the same period. Turning to slide 9, TeePublic has delivered a solid set of results this year as we leveraged our strong foundation to drive sales and customer retention. The metrics on this slide show the TeePublic flywheel is operating well with the number of selling artists and designs increasing. Improving the artist experience has been a focus area for TeePublic with the introduction of two account categories, Artisan and Apprentice, well received by the most valuable artists. Artisan accounts are given more prominence on-site in search results as well as in off-site marketing and the amount they earn for each product sold is also higher. The decrease in artist earnings in FY24 reflects these changes due to a decrease in earnings for apprentice accounts. The number of customers declined slightly during the year, reflecting a reduction in new customers in a challenging economic environment. Pleasingly, we continue to see growth in repeat customers. In FY20, repeat purchases represented just 30% of total NPR. In FY24, it was 48%. In FY24, TPublic has focused on enhancements to the website to improve the customer experience with the launch of new accounts features that include favoriting to drive higher customer engagement. We also introduced a new product page and navigation to improve conversion rates and an expanded bundling offer to increase order size. As a result, new customer orders were 4% higher in Q4 FY24. We further optimized the supply chain by increasing allocation of volume to lower-cost third-party fulfillers and continue to localize the supply chain in non-US markets. These changes contributed to a 400 basis points expansion in TeePublic's gross margin in FY24. Before handing over to Rob, I want to highlight how the group has embraced AI to reduce costs and enhance the consumer experience. AI is impacting all areas of our business, and we are already realising benefits. For simplicity, we grouped AI benefits into five major categories. In customer acquisition, AI has enabled us to enhance marketing campaigns from a relevance as well as customer matching perspective. It also allows us to categorise incoming artworks by topic, guiding artists to meet demand and supply gaps. In customer engagement, We are using AI in vector search, analyzing and matching images to search queries. This is already applied to about 30% of Redbubble's search traffic. TeePublic has used AI to create canonical pathways through their content. In future, we see users in guided discovery that create pathways specific to each customer. AI is also particularly useful across our content library. detecting duplication and defining and categorizing into hierarchy of themes. Elsewhere, AI is driving internal and operating efficiencies, reducing costs and improving how we work. This is just a brief scan of the landscape. We expect the benefits to accumulate both in revenue opportunities and allowing the business to scale efficiently. I will now hand over to Rob.

Thank you, Martin. Turning to slide 13 in our profit and loss statement. As Martin highlighted, we've delivered a significant improvement in performance this year. Our focus has been on increasing absolute GPAPA, maintaining strong cost discipline, and returning the group to positive underlying cash flow, all of which have been achieved and are evident in the numbers released today. As I mentioned at the half-year results in February, I'd like to call out an adjustment that we've made to the results highlighted in our investor presentation and ASX announcement, which means that gross profit, GPAPA, EBITDA, EBIT and net profit are £2.7 million lower in these materials than in our statutory financial statements. This non-cash adjustment relates to the identification and correction of a reconciliation issue relating to artists' expense accruals, specifically the treatment of cancelled orders. This reconciliation issue resulted from a system change in 2020, which has now been remediated. In each historical period, the adjustment was below our materiality threshold, but in total since 2020 amounted to 2.7 million, which we've written back in full this period. As this is a one-off item, we've adjusted our results in the investor presentation and ASX release to enable the market to compare this year with prior periods on a like-for-like basis. Importantly, this reconciliation issue had no impact on artists. The increase in the Group's profitability has been driven by Redbubble and TeePublic improving their GPAPA, alongside a 24% reduction in the Group's operating expenditure. The waterfalls on this slide highlight the improvement in gross profit due to the successful delivery of a number of initiatives in the last 12 months. This included a review of base prices, which has been enabled by our greater understanding of unit economics by product and geography, supply chain efficiencies, which were particularly significant for the Redbubble marketplace following the introduction of a dynamic order routing system, and the creation of artist account categories and associated fees. As we previously signaled, both marketplaces have scaled investment in paid marketing in the second half, while remaining profitable on first order. This was especially evident for Redbubble and contributed to a moderation in the rate of decline in Redbubble's NPR in Q4. The year-on-year reduction in operating expenditure was evident in a number of expense categories. Payroll expenses reduced significantly following the restructures implemented in the second half of FY23, and we have maintained a very disciplined approach to managing headcount throughout FY24. This discipline will continue into FY25. IT costs also reduced significantly year on year with the renegotiation of major software contracts and the consolidation of providers across the Group to maximise scale benefits. Again, this remains an ongoing focus as we seek to maximise synergies and improve efficiency in the Group's operations. Finally, as you know, we ceased investment in brand marketing during FY23 in order to focus on lower funnel performance marketing. Our closing cash balance at period end was $36.9 million, which was 3% ahead of 30 June 2023. Importantly, we met our guidance to be underlying cash flow positive in FY24, achieving an almost $48 million turnaround on PCP. In June, we launched an on-market buyback, which is an important capital management initiative and reflects our confidence in the future performance of the Group. I'll now hand you back to Martin, who will talk about the strategy going forward.

Thank you, Rob. Turning to slide 17, while we remain focused on driving profitable revenue growth, we are also pursuing a longer-term strategy based on our vision of being the global leader for connecting digital creators with their customers. We have distinctive assets underpinning this vision, namely our leading network of creators with commercial content, our scaled and growing fulfillment network and superior unit economics. We aim to build on these assets to dramatically increase the range and value of services we provide to our existing creators and creators not yet on the platform. The loyalty and depth of our creator membership is highlighted on slide 18. Unusually for a marketplace, we have a high level of established sellers who continue to sell on the marketplace. with 30% of sales in FY24 coming from creators who joined the marketplace before 2020. Importantly, the marketplaces are also renewing with new creators joining at a solid clip and getting early sales. Combined, this gives us an unusually vibrant and diverse platform on which to build by attracting new creators and providing more services to those who are already with us. Slide 19 provides a snapshot of our geographic diversity, with over 90% of sales coming from outside Australia and New Zealand. The fulfillment network extends across 46 third-party sites. I'll now hand back to Rob to go through our FY25 priorities and guidance.

Thanks, Martin. Articore exited FY24 in a strong financial position, and our immediate priority is to leverage the Group's assets to drive sustainable and profitable revenue growth. The Group expects trading conditions to remain mixed in our key markets, especially the US. In this environment, we will remain focused on optimizing COGS and paid marketing activities to extract maximum value from both marketplaces. In FY25, the Group expects its GPAPA margin to be between 24 and 26%, operating expenditures to be between 96 and 100 million, and to deliver positive underlying cash flow. We will build on the solid foundation established in FY24 to deliver the next phase of growth by investing in organic opportunities that leverage our distinctive assets. By the end of FY25, we aim to have gone beyond the existing marketplaces in pursuit of our vision of being the global leader for connecting digital creators with their customers. Thank you for joining us today and I'll now hand back to the operator for questions.

Thank you. Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. We'll pause a moment for questions to register. Once again, to ask a question, please press star 1. Thank you. Your first question comes from Steven Sassine from Morgan Financial. Please go ahead.

Thank you and good morning, good morning team. Just a couple of quick ones from myself, if that's okay. I'm probably just touching on the FY25 guidance for GPAPR. I was just thinking, is there any conservativeness baked into that given the hard work that you've done over the last couple of years already and you came in at the top end of that range for FY24? I would have thought that maybe we'd see a bit more GPAPA margin expansion into 25. So maybe just your thoughts around that. And secondly, I think Martin touched on it in the strategy outlook where you talked about investing in organic opportunities beyond existing marketplaces. I was just hoping if you can unpack that a little bit for us as well. Thank you.

Hi, Stephen. Thanks. It's Rob here. I'll take the GPAPA question and then Martin can cover off the strategy. You know, we continue obviously to optimize GP margin and GPAPA, but FY25 is also a year of investing in revenue growth. So, you know, we'll continue to optimize paid marketing and we do want to put the foot down, you know, while still being profitable on first order and really drive the revenue growth. So, you know, that's really why we expect to be within that range, pretty consistent with what we saw in FY24.

And in relation to the strategy, Martin here, what we're doing at this point is really outlining the assets which we have, and particularly this strong base of creator and artists. So we're actively working on how we may deploy those assets to create new opportunities for us. There are two things which are perhaps worth mentioning. One is that the current creators on the platform overwhelmingly would think of themselves as artists. And so there's a whole bunch of creators who may be using YouTube or Instagram or TikTok who could want access to a distribution platform for their content. We have had some penetration in that market with the Tee Public Merge Program. So that's an area which we're actively looking to leverage up. Secondly, our artists, on both platforms have asked for more services and more ways of distributing their content. So that's another area which we're indicatively looking at to make further investments in. So what we're aware of is that this strong base, this strong asset base and the importance of leveraging that create new opportunities for us. That's perfect. Thank you.

Thank you. Your next question comes from Owen Humphreys from Canaccord. Please go ahead.

Good day, team. So we've had 12 quarters in terms of negative revenue growth. Just looking at that fourth quarter, you know, it was in line with your expectation that the growth would moderate. Year-on-year was down, was it 6%, but quarter-on-quarter was up 9% or was positive. Just curious as to now that we've kind of reset the cost base, we've realigned the GPAP and margins call it, we're cycling out of the marketing that happened over 12 months ago, and looking at your guidance statement, it looks like you're forecasting positive growth for this year. Is that the expectation?

Hey, Owen, I'll take that. It's Rob here. It's very early in the year, as you know, to be giving sort of explicit revenue guidance. You know, we've obviously got July under our belts, but that's a sort of low seasonal month. And there's a lot of runway to go, obviously, through holidays and beyond. So we're not explicitly guiding to sort of when we turn positive. We've said very clearly that that remains One of our key priorities is to return both marketplaces to revenue growth. That continues to be the goal, but we're not going to provide more explicit guidance on that at this stage. It's just not helpful, I don't think.

Maybe not helpful, but it's definitely an evaluation. People are looking for those early signs. Just on that comment, it looks like July was still tracking negative effects of that comment.

I'm not going to comment on July specifically. And as I said, you know, you're right. It is obviously very important. And we've certainly stressed that in the materials that we've presented today. So, you know, that obviously still remains the primary goal for us in the existing marketplaces is to return to revenue growth.

Okay, good one. And just around the cash balance, obviously now you're going into free cash flow positivity, 35. plus mil of cash in hand, which is a strong number than what most people are expecting. Just understanding the capital management going forward. What's the buffer that you guys are comfortable with? Is it 20 mil, 30 mil? Let's just understand what you believe you have available cash for investment, whether new assets or the likes.

Yeah, the aim, we're very comfortable with where we're at from a cash perspective. As you say, one of the main highlights really of FY24 was very much stabilizing that and getting back to underlying cash flow growth. In terms of the organic investment, really the priority is around allocating the existing resources that we have and creating capacity to focus both on the existing marketplaces and driving growth, but also then leaning into some of the strategic areas that Martin talked about. So we're obviously not guiding, as you can see from the OPEX numbers, a significant increase in OPEX. It's really about allocating the significant resources that we have within the business on the highest priority areas. So we're seeing that stability continuing through FY25 whilst investing in key areas that we've identified. Good one. Thanks, guys.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. We'll pause a moment for any further questions to register. Thank you. There are no further questions at this time. I'll now hand back to Mr Hosking for closing remarks.

Thank you very much. Thank you all for joining us today. I would like to take this opportunity to acknowledge and thank the incredible team across the article group for their hard work and dedication during a year of substantial change. I'm excited for the journey ahead and look forward to sharing it with you. Finally, please get in touch with Francoise if you have questions as you review the materials in detail. Thank you.