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.