KMD Brands Limited

and welcome to the KMD Brands Limited 2023 Half-Year Results Release Conference Call. Today's conference is being recorded. Finally, note that there will be no online submitted questions taken. Only audio questions shall be taken for today. For those who have questions, please dial into the audio line at Q&A time. At this time, I'd like to hand over the call to Michael Daly. Please go ahead, sir.

Thank you.

Good morning, everyone, and thank you for joining us for today's presentation of Carnegie Brand's financial results for the first half of 2023 financial year. My name is Michael Daly. I'm the CEO of the group. I'm joined on the call by Chris Kinray, our Chief Financial Officer. We will be talking through the presentation advice on the NZX and ASX this morning, and those otherwise specified or financial numbers are in New Zealand dollars. Today's presentation will begin with the half-year highlights. and we will then discuss the group's financials and grant results before concluding with the trading update and outlook for the second half of FY203. I will begin with the financial highlights and achievements of the first half of FY203. On slide four, we have the lightest of results Canada's grant has achieved in the first half of FY203, with record first-half sales increasing 34.5% to $547.9 million. continued growth in Ripple sales, a strong recovery for Kathmandu, and record first-half sales for Ozo. A four-year growth margin increased by 100 basis points to 58.7%, reflecting improved Kathmandu performance, assisted by total currency, more than offsetting continued elevated international freight costs and raw material cost pressures. Q1 sales recovered strongly, cycling Australasian COVID lockdowns last year, in which more than 11,000 retail trading days were lost. We delivered strong Q2 sales growth on top of last year's post-COVID lockdown rebound, aided by the return of international travel and tourism. This contributed to the group's underlying earnings before interest tax depreciation and amortization increasing significantly from 10.2 million last year to 45.3 million this year. We reported an underlying impact of 16.5 million for the half, which reflects a substantial turnaround from first half of FY202's underlying net loss of $5.1 million. These results have enabled us to declare an interim dividend of $0.03 per share. Moving to slide five, during the half, we continued to deliver on the four pillars of our group strategy. At a group level, we remained focused on building global brands. During the half, we saw sales closer to all brands and all regions. Ripco saw a retail store expansion with net nine new stores, and USA sales increased by 8%. Kathmandu's first deliveries were delivered to select wholesale partners in Europe and Canada, and we saw IBOs achieve record first-half sales as well as expanded product range into adjacent categories. In the digital space, we have successfully launched Club Ripco's loyalty scheme, Club Ripco, which has attracted over 120,000 members in the first five months. For the first time, Whip Curl customers are connected to the group's loyalty ecosystem, enabling a single view of the customer and customized communication. We have also aligned Whip Curl retail store pricing with pricing on its online store. Pat Manzoub now has French, German, and Canadian websites, and our growth online sales demonstrate significant growth opportunities, growing by more than 500% of last year's supply and package base. KMD Brands continues to leverage operational excellence with our EHSR margin increasing to 11.3% in sales and a roll in top-notch prices. We are continuing to grow scale across brands to maximise the efficiency of our overhead spend. And our portfolio approach to lease negotiations achieved a 2% reduction, a net 2% reduction, across leases renewed in the first half. We have made excellent progress in ESG with KMD Brands and all three of our individual brands now certified B Corporation one of the first multinational companies based in Australia and New Zealand to have all of its brands individually certified. This is a testament to our commitment to setting ourselves high standards for social environments with impact, accountability and transparency. The group has been recognised for ESG leadership winning the Deloitte New Zealand Top 200 Sustainable Business Leadership Award. We have submitted science-based targets to SDGI with 2030 emission reduction goals aligned Climate Agreement with assessment underway. Our RISCO Reconciliation Action Plan has been formally approved by Reconciliation Australia and we have the likelihood of joining a network of more than 1,100 corporate, government and not-for-profit organisations that have made a commitment to reconciliation for Aboriginal and Torres Strait Islander peoples. It's been a very productive first half of FY23 and we are proud of the achievements made under each of our strategic pillars. Moving to slide six, you can see how we are progressing towards our short and medium-term goals. We are striving to achieve the short-term goals on the left side of the slide in the next one to two years, and the medium-term goals within the next three to five years. Underlying EBITDA margins and percentage of sales grew to 11.3% in the rolling 12 months of January 2023, with ongoing work to grow sales and control and leverage expenses as we progress towards our EBITDA margin targets of 15%. Looking at working capital as a percentage of sales, the January 2023 balance equates to 21.8% of sales over the last 12 months, and we aim to reduce this to 18% in the short term as we normalize our inventory levels following the impact of COVID supply disruption. With OZO still recovering from supply challenges in the first half of the 2022 calendar year, we still saw over $50 million in US dollars in sales in the rolling 12 months to January 23rd. We're on track to achieve our medium-term target of US $100 million sales, considering opportunities to further grow the North American wholesale customer base, online growth opportunities, plans to expand the brand outside of North America, and further fast-growing expansion. In terms of regional growth opportunities, North America is a key market for Riscal. Riscal is a top-three brand in other key regions and is a real opportunity to grow the brand's top-three status in the North American market. In the rolling 12 months of January 23, North American sales were $146.4 million, and we are aiming to hit a target of approximately $200 million in the next year. In terms of cat and egg goods, we have the median terms of both reinforcing market leadership in our home Australian market, as well as executing on international growth opportunities for the brand. Kathmandu currently has 155 stores in Australasia, and this number has not changed significantly over recent years as we have navigated the impact of COVID on consumer shopping preferences. We've seen opportunities ramp up our retail store presence by 40 to 50 stores in the medium term, focusing on suburban and regional shopping center opportunities in Australia. Kathmandu has begun the journey of growing internationally with the recent launch of new websites in France, Germany and Canada, and the first wholesale deliveries to select European and Canadian wholesale partners. We look at this as a testing phase with these whole-star partners to learn consumer product and channel preferences in each market. As Katmandu expands into North America, Europe and beyond, our sales target for Katmandu International remains the same, $100 million. Moving on to slide seven, I'm very proud that Kanzi Brands and all of its brands have achieved B Corp certifications. In 2019, Kathmandu Made History is one of the first significant apparel brands in Australia and New Zealand to become B Corp certified. In 2023, Ripkel and Oboz have achieved certifications, as well as the Ripkel Wetsuit Factory on smooth in Thailand. The Kathmandu brand achieved recertifications with major improvements that were commended by B Lab. The Kathmandu brand is one of the first multinational companies based in Australia and New Zealand 45 listed businesses globally out of more than 6,000 B Corps. This globally recognised certification demonstrates commitment to leading in ESG and is a significant achievement for a company outside complexity and scale. We continually push ourselves across our group of brands to be better and being B Corps certified is recognition of our commitment to balancing profit with our impact on people and planet. This is a great achievement for our business and our people. I'll now hand over to Chris to cover the financial slide. Thanks, Michael. Moving on to slide nine, we'll now go through the group top and bottom for the first half of FY23. Just a reminder, our statutory results include the adoption of IFRS 16, the comparability, the impact of it, and other and emotional amortization of RIPCO and OVO customer relationships have been excluded from our online results. We achieved record sales in the first half. Group sales increased from 34.5% to 547.9 million. First quarter sales recovered strongly, cycling off from the COVID lockdown last year. Much more than 11,000 retail training days lost. We delivered strong second quarter sales growth Sanctuary EBITDA was $19.8 million, up substantially on last year, and on an underlying basis, excluding EBITDA 16, EBITDA was $45.3 million. While the group continues to experience elevated international freight, COT and raw material pressures, growth margin increased by 100 basis points to 58.7%, which reflects improved Canada performance. Operating expenses returned to historical levels post-COVID, So this is slide 10. The group achieved a record sales result in the first half, strong diversified sales growth across brands, channels and regions. Staff and do sales grew by 51.2% after a strong recovery. Recurl grew by 18.8%. and OBOE grew by 124.3%, recovering after its high-chain challenges last year. We saw strong sales growth across areas to consumer, wholesale and licensing channels, and retail sales, store sales grew by 46.2%, as customers returned to in-store shopping, moderating online sales, which decreased by 3.2%. Wholesale sales grew by 27.1%, assisted by OBOE's sales growth on last year's supply chain. By region, Australasia sales grew by 33.6%, starting from COVID lockdown last year. North America sales grew by 52.8%, with photo sales recovery, and Hawaiian stores capitalised on the return of international tourism. And European sales grew by 6.9%. We'll now have a closer look online sales on the next slide, slide 11. On slide 11, we're seeing consumers returning to shopping and stores. Our omnichannel offering provides customers the choice of pen store and online shopping. While online sales have moderated in the first half of the year, group online sales still remain significantly above pre-code. We were growing at a compound annual growth rate of 17.4% since the first half of FY19. Cabinet new online sales have normalised at $26 million, comprising 13.6% of direct consumer sales. Procure for $17.8 million online sales, requirement of 9.7% of direct consumer sales. COVID online remains a significant growth opportunity, increasing to 2.8 million off last year for buying impacted bags. Now on to slide 12, we continue to maintain operating expenditure enrichment or leveraging sales growth. With the post-COVID lockdown sales recovery, sales grew by 34.5% while operating expenses grew by 20.3%, excluding one-off COVID assistance received last year. And there are a lot of operating expenses that have been sent to sales, reduced from 30.4% to 30.4% from the first half. Of the dollar increase in operating expenses, nearly 80% related to bearable costs of operating stores following last year's COVID lockdown closures. We have held our brand and marketing investment, and we expect to do this through a level of leverage as sales growth continues. FY23 four-year operating expenses are expected to be around 48% of sales, and there are ongoing initiatives to further reduce annualized operating costs by up to 2% of sales, very close to 24%. Moving to our balance sheet on slide 13, we have a strong balance sheet position, which leads us well-placed to invest in organic brand growth and to strategically invest in inventory where required. The high entry balance of $318.8 million reflects investment in OVO's industries in the second part of the board of orders, for perennial soils to mitigate international supply challenges. Brookfield's inventory balance has been reduced in the second half. This puts more in place during the third half, allowing for improved supply chain timelines. Camden Doe's inventory lost a vision, sitting 24 million lower than July 2022. Consumptive Aging's clearance stock was below July 2022, and inventory obsolescence We expect the inventory balance to reduce to between $270 and $280 million by July 23, depending on currency translation and climate climate in terms of transit. For January 23, we have 84.9 million, with the discounted funding in India of over $200 million. Moving to slide 14, operating cash flow will be affected by the temporary inventory balance. Exceeded unwavering limit treatment will underpin the traditionally strong operating cash flow generation in the City part of the group. The Directors declared an interim dividend of NZ3p this year, fully franked for Australian shareholders and not included for New Zealand shareholders. The record dates will be the 15th of June, 2023. The payment date will be the 30th of June, 2023. Moving to slide 15 on a rolling 12-month view, This is the second half of FY22 combined with the first half of FY23. We were pleased to report the group sales were well over $1 billion. The first time since Ripkill was acquired, the group has experienced a full-time month's trade without significant disruptions from the COVID pandemic. We've now surpassed the acquisition expectation of a global $1 billion outdoor company. In terms of sales, because we're on five months, Ripkill made up 52% of sales, Katmandu up 40% and Ovo is made up 8%. The underlying EBITDA or on-site marks was $127.5 million. I will now talk through the standard results and performance of these five brands. And moving to slide 17, to Rookhill. Now, Rookhill's sales results were strengthened by the growth across all channels. Total sales up 18.8% to $306.4 billion. The direct consumer sales growth was especially strong in Australasia after the COVID lockdown of last year, with Hawaii also performing well off the back of the return of international travel and tourism. The direct consumer channel concluded its own three-day online general sales growth of 13.9%. While online traffic reduced year-on-year despite the COVID lockdown boost last year, 12-dollar sales dropped 2.2% at constant trend rate, maintaining the strong growth delivered during COVID, despite stocking mixed demand for Ripple Pies and strategic stocking for retailers. Even though it was up 11.4% to 37.6% despite the impact of growth margin gaps, rates, and higher distribution costs. Now, turning to 10 and 2's results on slide 18, 10 and 2's performance in the first half of FY23 was attributed to a strong post-COVID sales rebound and recovery. We saw a total sales increase of 51.2%, to $194 million, driven by a rebound in Australia, 51% up after last year's lockdown, and a return of the next second international throw of $1.2%. With an international sales of $1.1 million, which included the first deliveries to selected wholesale customers in Europe and Canada. slide 19. We saw total claims for sales growth, including online, of 48.8%. Recently, growth margins increased by 580 basis points to provide some currency benefits and to deliver careful moderation of the historic high-value pricing model. In this slide 19, growth has recovered from the significant supply challenges that impacted last year's results. The OVO brand continues to diversify its input product offering to the general market, with first-up sales increasing by 124.3% to 45.5 million. Online sales grew strongly with associated high growth margins, increasing the next-office turnover sales, and this channel remains a significant growth opportunity for the brand. Growth margin decreased 50 basis points due to elevated potential rate costs over the last 12 months. Operating expenses include We've now seen international freight costs trending towards historical levels. I'll now hand over to Michael to talk through the outlook. Yes, thank you Chris. Moving to slide 21, we remain clear on our medium-term strategic priority. We will continue to build global brands with the ongoing goal to grow comparable sales for each brand. while executing new growth initiatives. We will focus on improving Lithgow's North American market share and operating margins. We aim to reinforce Kathmandu's market leadership in the Australasian market, opening 40 to 50 new stores over the next few years, while also executing the international sales growth opportunity through wholesale and direct-to-consumer channels. The ongoing opportunity is to deliver sustained growth in both wholesale and direct-to-consumer channels, both within North America and globally. With the successful launch of our club, loyalty program in Australasia. We're planning to roll out in the US and Europe over the next two years. The immediate goal is to launch CutRip Curl online in the USA, followed by a full omni-channel launch in North America. Planning is well underway for the relaunch of Kathmandu's loyalty program with an exciting new value proposition. We also plan to implement personalisation at scale across Kathmandu and Rip Curl. Our goal is to be launching our B2B platform utilising the Crip technology. We will focus on leveraging operational excellence at a group level with ongoing inventory management driving toward the working capital target of 18% of sales. We will also continue to leverage the operating cost base to help deliver the group underlying EBITDA margin target of 15% of sales. The ongoing consolidation of procurement and supply chain operations is an important priority to support achievement of the operating margin target. Lastly, we'll continue to lead in ESG. with the aim of rolling out circular business models across brands. We are currently launching the Catman Redo apparel repair and re-commerce pilot in select Victorian stores in Australia, and we'll continue the global expansion of repair of TerraCycle WebTube take-back and recycling programs. We are progressing well towards approval for FCPI for our science-based targets and the development of our mission reduction roadmap. Turning to our trading update, an outlook for the second half of FY23 on slide 22. Positive first half sales momentum has continued through February, with strong diversified sales growth across grains, channels and regions. In terms of the trading update, group sales increased by 31.9% year-on-year in the month of February 23. We saw retail sales grow by 13.3%, cycling FY22 growth. We can see cap name group sales momentum continuing into the second half of FY23, year-on-year sales, increasing by 20.8% in the month of February. Those numbers rebounded from last year's supply challenges. Please note that February is not a significant trading month, nor necessarily indicative of results for the remainder of the year. Our positive second half FY203 outlook is supported by several factors, including the positive direct-to-consumer sales trend continuing through February. The group is also well-positioned to continue We've seen holiday destinations such as Hawaii, Queensland and New Zealand as well as Australian airport stores choosing sales growth year on year and tracking above three COVID levels. As we potentially enter a period of challenging global market conditions, the group is well diversified. Product ranges across all three brands appeal to a diverse range of consumer interests, ages and demographics. Whereas knowledge of the consumer outlook remains uncertain with high global inflation and rising interest rates, On the wholesale side, we have seen retailers around the world strategically do stocking and increased promotional activities from the competitors. The second half is traditionally the strongest cash generator for the group and we remain well capitalised to continue to invest in the long-term international expansion of our global house offering. This now concludes the formal part of today's presentation. I want to thank all of you for taking the time to join us on this call. Thank you.

And again, kindly note there will be no online submitted questions taken, only on the audio for today. For those who have questions, please dial into the audio line at this point if you have not already. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And at this time, we will go to our first question, Marnie LaSite of Macquarie. Good morning, Michael and Chris. I just kind of would like some just more colour around, I guess, the gross margin expansion in Kathmandu. I think you've called out, you know, FX being a benefit in the first half in moderation of the high-load discounting model, which will be the second, you know, half where you started to deliberately moderate that, that, you know, it started to kick off, you know, second half 22. Like, because I understand your clearance mix in the first quarter of FY22 and You're just trying to kind of triangulate, I guess, cycling lockdowns and how much of the expansion is FX versus moderation of prices?

Yeah, look, obviously, our group margin is up a full point, of course. Obviously, that's a blend of all of our margins of each of our brands. In terms of the Captain Andrew brand, as you say quite correctly, Some of the margin up we've seen in Kathmandu is a function of both some positive currencies as well as ongoing inventory management. Obviously, the mix of inventory to a site and the level of equipment as well as our continued high-low moderation. From our point of view, there's not one particular thing that is helping that margin lift for Kathmandu unless they all play a key role. I guess most importantly, We've certainly faced some increased FX headwinds with obviously where the dollar is at today, but at the same time, our clearance levels at Kathmandu are really well positioned. We've been quite aggressive through the last six months in just making sure that we take any tough calls on any product that we have and see that in Kathmandu in terms of numbers which are down year on year.

And just to follow up on that, just to kind of refresh our memory how we should be thinking about, I guess, SXC tasks given current hedging and SX going to next year and also I had to shove another question into one. You are going to comp this winter at Kathmandu, having a phenomenal gross margin in the back end of second half 22. So just a way to be thinking about that, given you've lowered the stock levels and the potential macro outlook.

Yeah, that stock position is really good. We're seeing in the market today that, yes, I mean, if you want to sell some volume and At discount, you can, but we're certainly not seeing the strong need for us to discount our brands. Our brands are wanted by the consumer, and we can certainly display a margin of discipline. As I said, I think, before, Marnie, that we've had the kitchen sink thrown at us in terms of margin over the last six, five, 18 months, and you wouldn't even know it because our margin continues to go up, and that's a function that the strong management that our wind winds are already very aggressive when we need to be, and being careful where we take our risks. So, yeah, from our point of view, yeah, we definitely face some headwinds with the FX, but it's important to note that in today's group, we have a diversified group. So while we will face some headwinds with a stronger US dollar relative to the New Zealand and the Australian dollar, we also have 20% of our sales over in North America. So this is an obvious natural hedge because of the translation profits. Translation of those profits will be stronger as well. So from that point of view, it does give us somewhat of a natural hedge, not a full natural hedge. But again, I guess it supports our confidence in our margins, not only historically, which has continued to trend up for the future.

Is this like you've given us before kind of indication of what the hedge rate is versus prior period, so kind of what does the hedge rate look this half and early first half 24 versus prior period?

Yeah, we do hedge, obviously hedge at a time up for a reason, while it's protected. When the dollar popped back up, a lot of people took advantage of that recently. But that's the average rate, for example, from a 72 to a 72 on the only dollar, for example, this is the US. It's not a significant movement overall. It's something we can get managed through product teams and we're at a great time on data.

So just to clarify, you can manage that through price? Is that what you just said?

Price is product. That's price and range.

All right. Excellent. Thanks for answering my questions. I'll jump back in the queue.

All right.

Thanks, Carmen.

And we will hear next from Bianca Flutters with UBS. Yeah, thanks, Michael and Chris. First question for me is just on your North American vertical growth. So, yeah, obviously growing your market share of your countries to be one of your key priorities, as you mentioned. Could you share what you estimate your current market share is in that region for the good, cool brands? And what you estimate it would grow to when you reach that $200 million in sales that you mentioned?

Yeah, I think, yeah, referring to what's in the pack as well as what we've expressed previously, our perception of where we sit in the market puts us at anywhere between the number five and number six brand in that market. We probably thought more about our position in the market relative a bit of a hypothetical. So, yeah, we see ourselves as number five or six brand in that market, particularly in terms of our wholesale positioning. We feel strongly that if we were to be successful in continuing to stay in market share and move into a top one, two or three brand, that we're looking at a circa US $100 million opportunity and that's what we've been pursuing. and that remains an ongoing focus.

Okay. And I guess just following up on that, could you give an indication about what sort of cap expense we can expect given currently from Rome, but I believe it's a lot of DTC still growth for that region from Zipco back?

Yeah, I think we're relatively comfortable where our capital expenditure sits, to be honest, on a per annum basis. You know, it's roughly run at 30 to 35 million capex per year. We feel pretty comfortable with that. I say that because we've had some big, chunky IT spend with rollouts of new policy systems and loyalty programs, particularly across the observation market, which is a bigger market. As they slow, we'll see some cutbacks there and redirect that to some of the ongoing growth in terms of DTC, whether it be online or in stores. We don't see a change from our history in terms of our capital spend at this point in time.

Okay. Great. Thank you. And then just on your underlying EBITDA margin targets, there's obviously a good improvement in underlying EBITDA margins compared to the top 22. But at 8%, that is still quite a big jump to your 15% full-year targets. So I guess the second half margins, of course, are usually higher. But are you still expecting to reach a 15% margin for FO24, or are you expecting that to be more realistically FO25?

Oh, look, we're trying hard to get there as quickly as we can. I wouldn't obviously want to be giving out a specific forecast, but, you know, we remain committed to achieving our 15% target. We certainly, the Kathmandu and the Ovo brand, both have much better second half based on the seasonality of their products. Kathmandu on the back of Australasian winter and Ovo's on the back of Northern Hemisphere spring-summer. in the second half. Yeah, so we'll be pushing as hard as we can to achieve our 15% target as quickly as we can. You know, maybe a stretch-wide 14. I'm sorry, stretch-wide 24. But certainly we'll be doing it every intent to try to achieve it.

Yeah. Okay. Great. Thank you. That's all from me. And so we'll go next to Andrew Steele with Jardin. Andrew, your line is open. Please go ahead.

Hi, Andrew.

If you're . We're not able to hear you. And again, we're not able to hear you, Andrew, if you're on mute. Well, at this time, then we will move to our next question from Mark Wade with B of A. Good morning, guys.

Good morning, guys. Thanks for taking the question. Just trying to get a sense of this opportunity for Kathmandu internationally, the touted $100 million target that's been out there for about a year or so. How do you get there from the $1 or so million you're doing today? Is it just about getting that brand awareness and recognition globally? Is it trying to get a bigger range, more customers? What's the secret sauce on how to realise that target in a reasonable timeline?

Yeah, look, the two key points there, while that target's been out there for a while, you've got to remember we only started our first delivery in August 2022. We're also very consciously and strategically in a test or a soft launch phase. We're only dealing with select accounts so we're talking 20 to 25 accounts that we're working with in Europe and Canada. They are very small numbers to start with but if you look at what that likely number is going to be over an annual basis and you're talking 20 to 25 accounts, the average sales per account is actually pretty healthy. I say that because, you know, we're dealing with 25 accounts, so if we were to ramp up interactions with all the possible accounts we could have in an ultimate benefit, we're talking thousands to more than a thousand, a couple of thousand accounts we could be dealing with. But we're really happy with where we're at. We strategically wanted to start with a soft launch just to make sure as an organisation we're really clear on what the consumer wants and expect from a brand like us in the markets of Europe and Canada, and also to understand what our wholesale partners expect from us. So in terms of us realising the opportunity to take it from a couple of million to tens of million to hundreds of million, really the main focus is expanding that distribution, so taking that from the 20 to 25 account Really, that comes down to the timing at which we think it's appropriate. We want to do our international expansion on our own timeline. From a point of view, we don't want to take too many risks. to expand that distribution and make a more concerted push into one or more geographies that we're ready for it. And when we are ready for it, we want to be able to do it in a more mobile style, where we'll be able to ramp up our performance as well as a couple of circulators each year. We'll be able to do that in addition to the remote opportunities market and when we do that and go more aggressively, that's when we take a little bit more risk and that will involve some more marketing spend, that will involve a couple of stores and that will involve timing up our income assortment and our distribution or fulfilment strategies to those consumers. Look, I think we're realistically another six months away from

That's helpful context. Thank you, Michael. And in close to the home, on those store opening plans in the Kathmandu brand, what's the thinking on how to get to that 200? Do you need to acquire some of the existing competitor, or is it just about rolling out stores in the existing geographies there? I mean, it looks like you haven't opened any on a net basis anyway.

Yeah, if you look at our assortment of stores on the Kathmandu side, We think we've got a good segmentation of stores across larger format, destination small stores, smaller format, high street or airport stores, through to your mega mall, destination mall to our suburban, out of suburban regional mall. So we think we've got a good segmentation of stores that gives us the flexibility to expand our network. If you look at our penetration in New Zealand, what we've got Circa, 45 to 50 stores across New Zealand, the population is 4.5 million. There's just over 100 stores in the population of 25 million in Australia. So we do think we under-represent in the Australian market and there are a number of out-of-the-burden, even city as well as regional locations where we're not represented and we think there's an opportunity for us. And certainly there are plenty of other examples

Okay, I'll leave it there. Thanks so much. All right, thanks, Don.

And we'll go back to Andrew Steele with Jarden at this time.

Good day, Andrew. Good morning, guys.

Can you hear me?

Yeah, we've got you.

Great stuff. Okay, the first one for me is just on the outlook for the wholesale markets. You've noted retailers be stocking and it's a sort of inconsistent activity. So when you look at your four and a half, could you provide some colours to your expectations for how wholesale performs year on year for Ripkill and Oboz? Yeah, so, I mean, what you see in our half-year results is, you know, we've certainly seen... our wholesale performance moderates relative to our direct-to-consumer performance. We're seeing where we're interacting with the consumer directly. We're seeing continued strong performance, all brands, all markets, all regions. There has been a bit of a change in that mix as consumers get back into the store and so our e-commerce has softened up a little bit. But overall, our direct-to-consumer channel, all brands, all regions, performing really strongly. On the wholesale side, we've certainly seen that soften up. So we're still seeing some growth. Obviously, OVO's are seeing great growth, but that's on the back of supply chain issues of last year. But we've seen that growth moderate. We've seen that growth moderate because basically all retailers out there either spooked by all the media news about potential recession or they just have too much stock and are strategically B-stocking to make sure they're not taking so much risk. So what we're seeing consistently across the market is retailers are holding off on taking delivery, willing to take the risk that if they need more stock, they can chase it. So not willing to put the same commitment down. So we're seeing that across each of our brands, across both the surf market and the outdoor market. We think, what does that mean? We think for the next six or 12 months, it will take probably six to nine months for that cycle to finish. and then I'll be aggressively chasing stock again. From what we see, we still think there's growth opportunities. We're still posting growth. That growth is just moderating, but at some point in time in that six to nine month period, if the consumer continues to show strong demand across outdoor and surf, which there's no signs of that stopping as yet, we certainly know that the retailer is going to be chasing stock. From our point of view, yeah, just has moderated a little bit that wholesale demand, but we're still in the growth position, and we've got the stock to meet the consumer's needs on a direct-to-consumer. So, yeah, I think it's going to probably moderate the demand for six to nine months, but certainly it's going to be a lot of retailers changing stocks. So we think our outlook for wholesale moderates more single-digit growth. And at some point in time, assuming the consumer demand remains strong, we should see another bounce beyond that deep bottom cycle. That's great. It's very helpful. Just in terms of gross margin, and just to clarify, because unfortunately my line cut out during my next question, do you expect gross... Are you saying you expect gross margin to improve in the second half and then into... you see ongoing gross margin improvement trends. And then just to be clear, I assume that's driven largely by price and mix, given that you're kickstarting. Yeah, look, with a group as diversified across channels and geographies and brands as us, gross margin is a fairly detailed conversation, to be honest. But that's it as an overall group point of view. Obviously, we're up in the margin in the first half. We expect in the second half will remain relatively flat. You know, we might see some improvements on the prior year, but we're not expecting any dramatic changes to be made. We think in terms of median term on margin, as I said before, we've had the kitchen sink on it in the last couple of years on margin. Our margin has only improved. There are clear pockets in our organisation that our margin is not where it's expected to be. underpin some margin strength to offset any other headwinds we may face, whether that be consumer sentiment, whether that be other competitive activities. So we remain relatively happy with where our margins are at, if anything, in the short and medium term. Great, thanks. And then just on the key percentage points of objects improvement that you were talking to, FY24, could you sort of just talk about some of the parts within this? I mean, is there any specific cost out? And if so, could you quantify that? And then elsewhere, could you be more specific as to the measures that you are taking to achieve this margin improvement, or is it simply just operating leverage coming through? Yeah, in terms of our operating costs and our operating leverage specifically, there's not one particular area. Our focus has been so much in the last four months of just actually having our schools open again and overcoming our supply chain distractions. And the harsh reality is when you're focusing on those sorts of things, it does mean that you can't necessarily focus on a whole bunch of other things. So from our point of view, We know that it's continued work to do to moderate our expenses, particularly in an inflationary environment. So we are continuing to focus on that. There's not one particular pocket, to be honest. As we mentioned in the past, we're seeing some good results of portfolio negotiations across our lease exposures. Obviously, we've seen a fairly aggressive lift in everything from We've certainly seen how international freight costs moderate significantly over the last six months as they start to return to more historical levels. Obviously, we're continuing to work on our labor costs to make sure that we might continue to moderate that, as well as just forward looking at our overall head office costs. Even our marketing costs have been quite growth so that we were quite aggressive on lifting the standards of our marketing standard, particularly coming out of COVID. And we've held that flat in this first half of the year, but certainly as against the second half of what happened before, we'll see that marketing standard continue to moderate down as well. So there's no particular one pocket that's really across the board in our broader drive to bring the brands together. and completing that integration. Okay, thank you. And one last one for me. Reflecting your industry, have you decided year-on-year improvement in debt is achievable by year-end? Yeah, we've reached that.

We've done a lot of that.

And so, you know, we so expect that, you know, will that be some improvement or some broadly flat? I won't give you more comments than that, Andrew. It seems a long sentence that we expect to be here. Yeah, well, thank you very much for your good answer to the questions. Thank you, guys.

Thank you, Andrew.

And we'll go next to Kieran Carling with Craig's Investment Partners.

Just thinking back to the last full year result, there was some commentary around M&A opportunities and I think at the time you were indicating that a buyback might look like a better option with where the share price is currently. Just wondering if you can shed any light on whether you expect to see that any time in the near future?

Well, probably no change from our commentary of six months ago, to be honest. Where we are today, our main focus is just delivering on the opportunity that our brands have in local and international markets. Obviously, we've got some work to do to continue to I think once we get there we'll be in a positive net cash position which should be six, nine months away and once we're there we'll assess those options whether they be M&A and or further dividend enhancement or capital management but at this point in time business. So that's our main focus and we've certainly got all those other things in mind but not our most immediate priorities.

Thank you. And just thinking about the strong sales that you've seen through the first half and in February, particularly for that Kathmandu brand, just wondering what the mix has been between the core product range and maybe some of the new summer gear that you've been selling and whether you expect any of you know, the bad weather that we've had through the start of the year, particularly in New Zealand, has pulled forward any of those rainwear and insulation sales from the second half?

Yeah, I think it's, you know, look what we're seeing. You know, we never like to point to weather, of course, but, you know, it's been very wet in the North Island and New Zealand, so our rainwear sales have been pulled forward in that part of the market, so... on the eastern seaboard of Australia with, you know, near 43 weathers in Sydney all last week. So, to be honest, our rainwear sales completely disappeared in that market. So, look, it's a bit of both across the diversification of not only the Kathmandu brand but this group. It's hard to point to any one particular thing. But, yeah, specifically in terms of the summer mix versus the core range, you know, I would say both remain relatively popular. The core range continues to be strong. We've seen a lot of the basic installations, even right through summer, sell really well because people go on holidays over to the USA or Spain or Europe. But at the same time, we're certainly seeing some good growth in things like T-shirts and But we're pretty happy with how things are progressing and that's going to be an ongoing focus for the Katmandu brand to become a 365-day destination for consumers.

Cool, thanks for that. And then this last one from me, just if you're able to comment on any mix shift that's taken place between your normal stores and outlets and any change in margins across those two distribution methods.

No real change in margin across those two, if anything. Yeah, no real change in margin, to be honest. As we said, our margin is up across the group, so what we're seeing is a slight margin across each of those channels and across all of our brands. In terms of what we're seeing, there's no doubt, I think as we alluded to six months ago, we are starting to see or have seen Our outlet's performing really strongly in all markets. We think that's two reasons. There's no doubt there are some consumers that are hurting with higher interest rates and inflationary pressures. And in my experience, when that happens, you will see a positive impact on our outlet performance. And we've certainly seen that through not only the back end of last financial year, but through this first half. So our outlets are performing really well across both brands, both cat and animal, in all markets. But at the same time, our outlet 12 months ago was significantly understocked, particularly on the Ritz-Carlton side. We're basically on the back of a great stealth route. We really had no stock. So to be honest, we think our strong outlet performance, particularly on the Ritz-Carlton side, is as much about having depth of inventory as it is what the consumer might be up to. But overall, definitely, I'd say outlets... performing slightly stronger than our primary reaction stores at the moment, but not that noticeable to be honest.

Great. Thank you. That's all from me. Thanks, Karen. Thanks, Ken.

And at this time, with no other questions in the queue, I will turn the call back to Michael Daly for any additional or closing comments.

Thank you, Ty, that's all. Thank you, everyone, for joining, and that's all from us.

And so this concludes today's call. Thank you for your participation. You may now disconnect.