KMD Brands Limited

Good morning everyone and thank you for joining us for today's presentation of KMD Brand's financial results for the first half of the 2024 financial year. My name is Michael Daly and I am the CEO and Managing Director of the group. I'm joined on the call by Ben Washington, our Interim Group Chief Financial Officer. We'll be talking through the presentation lodged on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. When it comes to questions, can phone participants please follow the instructions of the operator? Online participants may ask a question at any time during the presentation by clicking the ask a question button. And those questions will be addressed at the end of the presentation after the questions by phone are cleared. Today's presentation will begin with a summary of the key first half results. We will then discuss the group's financials, brand results, a strategy update, and a closer look at Kathmandu. We'll conclude with a trading update and then our outlook for the second half. I'll begin with a summary of the key first half results. Drawing your attention to slide four, sales were 14.5% below last year's record sales result, reflecting ongoing weakness in consumer sentiment. Sales declined for all three of our brands, cycling their strong sales growth achievements last year. Despite the challenges on sales, it was pleasing to see gross margin increasing and expenses and working capital reducing despite the inflationary environment. Gross margin remained resilient despite currency headwinds, improving 10 basis points year on year to 58.8%. Operating expenses were $15.8 million lower than last year despite continued inflation pressures. Operating expenses benefited from restructuring implemented last year and lower variable costs associated with lower sales. with sales almost $80 million lower than last year, and despite improvements in gross margin and operating expenses, underlying EBITDA decreased by $30 million to $15.1 million. Networking capital ended $18 million lower than January last year, with reductions to both inventory and receivables balances, a significant achievement given the first half sales result. Moving to slide five now, and looking more closely at the group's sales history, you can see from these sales charts just how strong last year's sales result was, as all brands and channels rebounded post-pandemic. We're now operating in a more challenging consumer environment than we were 12 months ago, but first-half sales this year remain above the COVID-impacted years. Moving to slide six, we have had many highlights from our iconic brands in the first half, but I just want to call out three that really stood out and are representative of the positive direction we are heading in. The Ripkel Flashbomb Fusion wetsuit is the latest in a long history of leading-edge wetsuit innovations. Following successful launches in ANZ, North America and Europe, this innovative product has given Rip Curl its 11th consecutive SBIA Wetsuit of the Year award. Earlier this year, Kathmandu launched its refreshed loyalty program, Out There Rewards. Similar to Rip Curl's new loyalty offer, the program rewards members for engaging in their passion, getting outdoors. Kathmandu's loyalty proposition had not fundamentally changed for many years and was becoming less effective with the primary focus on discounts. A revamped and innovative new program in what has become a competitive market for awards is just what we need to continue to deliver in this space. It's early days with plans in place to expand the reach of this program with exclusive partnerships and further targeted personalization. And finally, we have extended our offer in a new category of oboes. Following the commercial success of the katabatic style, our first foray into the popular fast hike category, oboes has now launched the katabatic wind program, With market-leading technology and innovation delivering even faster and lighter performance, we expect this range to open doors for new distribution and consumer connections. I'll now hand over to Ben Washington to take you through the financials in detail. Thanks, Michael.

Drawing your attention to slide 8, we'll now go through the group's preference loss for the first half of FY24. Our statutory results include the adoption of IFRS 16. For comparability, the impact of IFRS 16 has been excluded from our underlying results, as well as the notional amortization of Ripkill and Oboe's customer relationships. As Michael described in his introduction, sales for all three brands have been impacted by a challenging consumer environment. Group sales for the first half of FY24 were 14.5% below last year's record sales result. Kathmandu saw cost of living pressures soften consumer sentiment from the fourth quarter of last financial year. compounded by the warmest winter on record in Australia. With the brand's current reliance on winter weight product, the sales result for the first half of this year has been disappointing. Rip Cool and Oboz are both cycling record sales results for the first half of last financial year. While the direct-to-consumer channels for both brands have recorded single-digit declines, the wholesale channel has been more challenging. Wholesale customers for both brands have made short-term correction to reduce inventory holdings to de-risk their own business in the current consumer environment. The wholesale customer destocking period has caused a short-term flow-on effect to our wholesale sales channel. Statutory EBITDA was 64.4 million for the half. On underlying comparable basis, EBITDA has decreased by 30.2 million to 15.1 million due to the disappointing sales result. Gross margin remained resilient, increasing 10 basis points despite currency headwinds. The US dollar hedge rate used to purchase inventory in the first half of this year was down approximately 7% from the rates achieved in the first half last year. The currency headwinds were fully offset by lower freight rates, improved channel mix, existing low margin business, and new product introductions. Operating expense control has been a real focus for each of our brands, finishing $15.8 million lower than last year, despite continued inflation pressure. Operating expenses benefited from restructuring implemented last year and lower variable costs associated with lower sales. Now looking at a more detailed view on slide nine of sales. Our sales in our largest international regions have decreased from last year's highs. All key global regions have delivered sales above COVID-19 impacted years. Sales decreased year on year by 16.6% in Australia, 14% in New Zealand, and 15.9% in North America, with Europe and the rest of the world holding up better than ANZ in North American markets, with a 2.2% and 7.4% decline year-on-year. Kathmandu challenges dominated the ANZ result, and we'll talk more about the challenging wholesale market in North America when we come to Ripco and Oboe's brand slides. Sales declines spread across all of our channels to market, albeit with direct-to-consumer sales performing better than wholesale sales, especially for rootkill and oboes, with direct consumer sales channels decreased 4.4% in aggregate. Moving on to slide 10, customers continue to return to shopping in stores. Our omni-channel offering provides customers the choice of in-store or online shopping. Whilst online sales have moderated, the channel remains significantly above pre-pandemic levels, with nearly 30% growth in online sales since the first half of FY20. Kathmandu delivered 16.4 million of online sales in the half, comprising 10.9% of the direct-to-consumer sales. Rickhill delivered 18.5 million of online sales, also comprising 10% of direct-to-consumer sales. Oboz delivered a record 3.8 million of online sales, a 34.2% increase on last year. Moving on to our balance sheet on slide 11. We have a very strong balance sheet position with low net debt, significant funding headroom, and improving inventory levels. Inventory is well positioned, $5 million lower than last January despite over $3 million increase in inventory balance year on year from the translation of regional inventory balances to NZ dollar reporting currency. With significant trade still to come in the second half, we expect the July 2024 inventory balance to be lower than July last year. also contributing to the net working capital decrease of over 18 million year on year, trade receivables have been well managed. At the 31st of January, 2024, the group had a net debt position of 96.2 million with significant funding headroom of approximately 190 million. Moving to slide 12, we're expecting an unwind of inventory to underpin traditionally strong operating cashflow generation in the second half year. As previously communicated in the FY23 results release, the balance between interim and final dividend will be adjusted to better reflect the profitability of each half. As a result of this change, and due to the first half performance, the directors have not declared an interim dividend. Our dividend policy remains aligned to first half and second half earnings weightings, with a target payout ratio of 50 to 70% of net profit after tax. Moving on to our brands, each of our brands has experienced a challenging start to the year in terms of weakened consumer sentiment, cautious wholesale customers, and sales underperformance. In this environment, our brands have worked hard to control gross margin, operating costs, and working capital. On slide 14, we'll talk through Ripkill. Ripkill is cycling a record sales result for the brand last year. sales in the first half of the year were impacted by wholesale customer caution, with sales down 9.2% year-on-year. Direct-to-consumer channels performed comparatively well, decreasing by 5% against cycling record results last year and reflecting weakened consumer sentiment in key global markets. Stronger direct-to-consumer results were delivered in Europe, Asia, and South America. Online sales have stabilized 4.3% above last year, and remain significantly above pre-COVID levels. Wholesale sales were 14.1% lower than last year as wholesale customers actively reduced the inventory holdings in response to the challenging consumer environment. We are optimistic that the wholesale customer inventory reduction cycle will end, giving us a more positive FY25 outlook in the wholesale channel. Gross margin increased 90 basis points, reflecting improved pricing and freight rates. along with reducing low-margin liquidation business in North America and Europe. Operating expenses were well controlled despite the continued inflation pressure. Moving to slide 15. Kathmandu total sales decreased 21.5% year-on-year, reflecting ongoing weakness in consumer sentiment. Kathmandu sales have softened over the last eight months with a combination of weaker consumer sentiment the warmest winter on record in Australia and an over-reliance on winter weight product, resulting in a disappointing first half. Sales were impacted in both Australia and New Zealand, with Australia down 22.9% and New Zealand down 15.9%. Online sales decreased 36.9% to 16.4 million as consumers returned to shopping in stores. Online sales represented 10.9% of direct-to-consumer sales and remain above COVID-19 levels. There is a clear opportunity to improve the recent online sales performance. Kathmandu's international sales opportunity remains a longer-term goal. In the first half, $1.7 million was delivered to Canadian and European customer accounts as we continue to test and learn in these markets. While gross margin decreased 240 basis points, this was driven by specific clearance of end-of-line product in August. Excluding the month of August, gross margin for the remaining five-month period was 50 basis points lower year-on-year, despite currency headwinds. The long-term fundamentals impacting gross margin remain strong. Operating expenses were tightly managed while facing continued inflation pressure. Operating expenses were almost $10 million lower year-on-year, benefiting from restructuring implemented last year and lower variable costs. Later in this presentation, Michael will take you through a deeper analysis of Kathmandu's recent challenges and update you on the focus areas for the brand to improve execution and profitability. Finishing up on slide 16, Oboz. Oboz was citing a record sales result for the brand last year. Sales in the first half of the year were impacted by wholesale customer caution, decreasing overall sales by 20% year-on-year. Online sales grew 34.2%, with strategic promotional activity. The online channel remains a key growth opportunity for the brand. Wholesale sales were 23.5% lower than last year as wholesale customers actively reduced the inventory holding in response to the challenging consumer environment. We view the wholesale customer caution as a cyclical reaction to the North American market. Gross margin has improved strongly by 450 basis points. reflecting lower freight rates, improved channel mix, improved pricing, and new product introductions. We continue to build areas of brand, online, and product to support the long-term growth objectives, which also include international expansion. As the North American footwear market recovers from its cyclical inventory reduction and discounting phase, we expect to leverage this operating expense investment with sustainable growth in sales and significant improved profitability. I'll now hand you back to Michael.

Thanks, Ben. Moving to slide 18 and reminding you of our strategic pillars, our strategy remains unchanged. We will achieve our vision of building global brands by our continued investment in market leading innovative products engineered for purpose and made specifically with the outdoors in mind. We are actively building our brands to have global appeal, presence and reach through investing in world class brand and customer experiences. Elevating our digital capabilities remains a key focus, building off the launch of Club Rip Curl and the relaunch of Out There Rewards. We will continue to tailor our personalisation of offers to our customers while continuing to improve and streamline our digital experience to the customer. We will use the power of the group to leverage operational excellence across brands, with digital transformation being a key enabler. We are a leader in ESG. Sustainability is now part of the DNA of each of our brands, woven into decision-making in all parts of our supply chains. Moving to slide 19, the sales challenges in the first half of this year have impacted our progress towards the group's KPI targets. We have provided an update on the latest KPI results on this slide, but the key message is that we remain committed to the short, medium and long-term goals that we've previously communicated. We remain confident in the group's abilities to drive towards these targets. Recent trading has delayed our progress with our EBITDA margin target of 15% of sales changing to a medium-term timeframe. Also, with our immediate focus on improving execution and profitability in Kathmandu's local A&D business, Kathmandu's international aspirations move to a longer-term goal. Next, we want to give you some more context on Kathmandu's current position. Drawing your attention to slide 21, Kathmandu has been negatively impacted by a number of external factors in recent years, which slide 21 details. These include COVID lockdowns, reduced tourism, changes in the competitive landscapes, and most recently, weather and softened consumer sentiment. I do want to point out that the rolling 12 months to May 2023 represent the most recent 12 months of uninterrupted trade post-pandemic and immediately prior to the warmest winter on record in Australia. Kathmandu delivered 463 million of sales at almost 16% EBITDA margin during this recent rolling 12-month period. It's also worth noting that despite the external challenges in recent years, Kathmandu remains the outdoor leader in the ANZ market. Onto slide 22 now. Not all of Katmandu's challenges in recent years have been due to external factors. We outline on slide 22 the areas across brand and product where our execution has not been sufficient. In product, our reliance on winter weight product has increased, specifically in outerwear. Our breadth and depth of core categories has been insufficient, and our outerwear inventory investment has been overweighted compared to other categories. Unfortunately, though innovation continues to be a focus for Kathmandu, it has not delivered commercial outcomes in recent years. Product development timelines had less flexibility to allow us to capitalize on emerging market trends. Until recently, product was developed on an 18-month plus timeline with an industry standard. Finally, in terms of product, there has been too much reliance on vertical brand products versus leveraging third parties, including OBOs. For brand, our execution of the rebrand since 2021 has been inconsistent. We also had a lack of connection with target customers. And prior to our recent Out There Rewards launch, the Kathmandu loyalty proposition has not fundamentally changed for many years, becoming less effective over that time. Slide 23 looks to summarize the immediate focus areas of the Kathmandu team led by CEO Megan Welsh. The customer is key. We will focus on targeting outdoor enthusiasts in key product activity segments, hike, outdoor active and adventure travel. We need to exceed the expectations of our target customers by focusing on product and brand. With product, our key focus is to reduce our reliance on outerwear. While we have managed to build and maintain a strong outerwear business, it has come at the cost of other categories where execution hasn't been to the same level. To do this, we must continue to innovate and invest in broader categories to address the year-round needs of our customers. Our spring-summer product must provide a stronger balance to our autumn-winter product. We must react to market trends faster and produce more regular product drops. In the first half, we leveraged Rip Curl's suppliers and delivered 80 new SKUs on reduced timelines, and we have over 100 planned for the second half. We have expanded our third-party brand strategy and are actively leveraging premium brands in categories we are not experts in, like on-running shoes, blunt umbrellas, and hydro-flustering bottles. For brand, we know we have strong equity in AMZ, but execution needs to be refined and more authentic to the outdoors. Loyalty is an important part of this. The launch of Out There Rewards in the first half has connected our customers more authentically with our brand than ever before, but we need to continue to expand this program with further targeted personalization. In-store and online, we must deliver a premium brand and product experience. bringing to life an authentic outdoors connection with technical and sustainable features clear to our outdoor enthusiast customer. We'll achieve this by continuing to build our talent pool, ensuring our people bring specialist expertise while truly understanding our customer. Our medium-term ambition is to deliver $500 million in sales with a 16% EBITDA margin. We are committed to Kathmandu being a premium brand and the continued market leader in ANZ. With new leadership and an action plan in place, we are optimistic about the future for the Kathmandu brand. Okay, moving on to the outlook. On slide 25, we highlight a sample of innovations for our brands. Rip Curl is arguably the number one surf brand globally in today's market. Through reigniting the search as the primary product, creative and marketing vehicle, Rip Curl plans to inject this strong brand DNA into new innovative products and collaborations centered around athletes. with execution tailored to regional markets. Kathmandu is the market leader in the outdoor market in ANZ with a long history of cutting edge outdoor innovation. Here are some examples of exciting innovations launching this half. The new Sika range in stores now is a new insulated active jacket and vest made from recycled materials. In a first for Kathmandu, the insulated trailhead will extend the adaptability of an already successful rain jacket with the addition of insulation. Coming this winter is an exciting sustainable addition to the hugely popular Epic Puffer franchise. The Epic Special Edition is made from fabric drawn from end-of-life tyres. Oboz is one of the newest and fastest growing hiking footwear brands in the market. Recently, Oboz has launched the new Cottonwood range, its most sustainable hiker to date. It's an important direction to the brand, consistent with the group's strategic pillars, and timely in the North American and European markets as enhanced regulations are introduced. And finally, as we hit slide 26, I want to take you through a brief trading update and our outlook for the sales. Group sales for February were minus 3.5% below last year. While noting that February is not a significant trading month, we have seen improvement on year-to-date sales trends from each of our brands. February sales trends have continued into the start of March. As we begin the second half trading, it's important to remind ourselves that the group will be cycling less challenging sales performance last year, particularly Kathmandu in the fourth quarter. As I've already stated, improving Kathmandu sales performance and execution is our immediate priority as we approach the key winter trading period. I've taken you through Kathmandu's focus areas that we believe will start to materially improve Kathmandu's performance progressively over the next 12 to 18 months. The Kathmandu team are already implementing these changes at pace. With regards to the wholesale market, we are optimistic that the wholesale customer inventory reduction cycle will end, giving us a more positive FY25 outlook in the wholesale channel for both Rip Curl and Oboz. Despite the challenging consumer environment and with significant trade still to come in the second half, we do expect the July 2024 inventory balance to be lower than July last year. We expect this ongoing reduction of working capital to drive strong cash flow generation in the second half. We believe that our portfolio of the iconic global outdoor brands and leadership in sustainability, we remain a unique investment proposition and well-placed for the future. Okay, time for questions. This now concludes the formal part of today's presentation. I want to thank you all for your taking the time to join us on this call. I would now like to open the call for questions.