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 2025 financial year. My name is Michael Daly, and I'm the CEO of the group. I'm joined on the call by Ben Washington, our interim group chief financial officer. We will be talking through the presentation lodged on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. Today we will begin with a summary of the key first half results. We will then discuss the group's financials and brand results. We'll conclude with a look at our focus areas, a trading update and our outlook. I will begin with a summary of the key first half results and an overview of our group. Onto slide four, while the profit result is not where we want it to be, we again demonstrated our ability to manage the controllables through challenging trading conditions. Gross margin was pretty resilient, operating expenses were tightly controlled, and we reduced inventory and networking capital year on year. Sales were 0.5% above the first half of last year, with an improving quarterly trend, especially in a direct-to-consumer channel for all three brands. Wholesale sales are taking longer to recover as wholesale accounts remain cautious on pre-season commitments. Group online sales performance has been a highlight with all three brands achieving double-digit sales growth year on year. We were able to hold the line on sales with resilience and gross margin. Gross margin decreased by 0.3% of sales year on year to 58.5% for the group, despite increased promotional intensity for Kathmandu and clearance of inventory for OBOS. Operating expenses were actively managed while facing global cost pressure. We continued to invest in our brands, particularly Kathmandu's brand advertising, product innovation and consumer experience. While we held the line on sales with improving trends, the combination of reasonably flat gross margin and global cost pressure meant the underlying EBITDA decreased to $3.9 million for the first half year. The group's net loss after tax was 20.7 million. On an underlying basis, excluding some restructuring costs plus leasing and software as a service accounting impacts, the group's net loss was 16.1 million. In a challenging trading environment, net working capital efficiency is a key focus for the group. Pleasingly, net working capital ended 33.6 million dollars lower than January last year, with inventory reducing, a significant achievement. The group's balance sheet position is stable with $76.2 million of net debt, down 20 million from 96.2 million one year earlier, and with funding headroom of approximately $215 million. Moving to slide five, this provides a quick overview of the strengths of each of our brands. Each brand is iconic. authentic and distinct with highly credible and technical products and a loyal customer base. We know that now more than ever, strong brand identity is critical and each of our brands has this. With category leading products and strong customer bases, each brand is well positioned for continued growth. On to slide six, a reminder of the global reach of our brands, an important consideration as macroeconomic conditions start to improve at different paces in key global markets. We operate over 300 owned stores and our brands are sold in over 8,000 locations globally. Australasia is still our biggest market with over $600 million of annual sales, 80% of which is from Australia. North America generates $200 million of sales annually. Europe, $100 million. Asia, $45 million. And South America, $20 million, all on an annual basis. Moving to slide seven and reminding you of our strategic pillars, our strategy remains unchanged. We continue to strengthen and glow our global brand presence. The Eddie Aikau Big Wave Invitational is Rip Curl's latest event partnership. The Eddie is an invite-only iconic big wave context held in Hawaii. The event ran over Christmas period this year with impressive streaming and social media brand exposure, especially in the key North American growth market. An exciting recent announcement is that Katmandu is now the official apparel partner of the New Zealand team for at least the next four years, providing athlete apparel through the next cycle of Winter Olympics, Commonwealth Games, Youth Olympics and Summer Olympics. This partnership not only makes sense in terms of honouring the brand's New Zealand heritage, it will also provide valuable brand exposure on the world stage. With our focus on elevating digital, we are pleased to see all three brands achieving double digit sales growth year on year in the first half online. Group online sales performance has been a highlight and the online channel remains a key growth priority for the group. In a challenging trading environment, networking capital efficiency is a key focus for the group. A reduction in networking capital of $33.6 million year on year is a significant achievement. In terms of aligning global systems, both Oboz and the Rip Curl Wetsuit Factory in Thailand have been migrated to group ERP systems in the first half of this financial year. With respect to our Best for People and Planet initiative, the best businesses create lasting value for people and the planet, and this belief is at the heart of everything we do at KMD Brands. We embrace responsible and sustainable business practices to deliver positive social, environmental and financial impact. B Corp certification for our business and all three of our brands provides independent verification that we meet globally recognised high standards in these areas. Kathmandu's Fika active wear range is a recent example of our focus of innovative and sustainable materials development. The range uses carbon capture technology to capture carbon emissions from steel mills before they enter the atmosphere and uses them to make polyester fabric. I'll talk more about this later in the presentation. I will now hand over to Ben Washington to take you through the financials in detail.

Thanks Michael. I'll now take you through the group profit and loss for the first half of FY25. 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 amortisation of Rip Curl and Oboe's customer relationships and one-off restructuring costs. Total group sales for the first half was 0.5% above last year, with an improving sales trend through the second quarter. Statutory EBITDA of $52.7 million for the first half of the year. On underlying like-for-like basis, first half EBITDA was $3.9 million, a decrease from $15.1 million last year. Cost of living pressures and geopolitical issues have had a prolonged impact on the consumer sentiment globally. These factors contributed to a challenging global environment for our brands, particularly in wholesale for Rookkill and Oboe's. Our brands have responded with increased promotional intensity in the direct-to-consumer channel. Second quarter, DTC sales grew year-on-year for all three brands, underpinned by improving Black Friday and Christmas trade and strong online sales growth. Most encouragingly, Katmandu's quarterly sales results have now shown improved trend for each of the last five quarters. Wholesale accounts remain cautious on pre-season commitments in a challenging market. Forward orders and in-season buying from key accounts support an improving wholesale trend through 2025. Gross margin decreased 30 basis points below last year to 58.5%, remaining resilient despite increased promotional intensity in a challenging market over the Christmas trading period, plus specific clearance inventory for OBOS. Operating expense control, while faced with global pressures, has been a real focus for each of our brands. The group operating expenses finished plus 4.2% higher than last year, while operating an additional four stores year on year. Within this, we continue to support brand development, in particular Kathmandu's advertising, product innovation and customer experience. Drawing your attention to slide 10, we'll now look more closely at the group's sales history. As you can see from the sales chart, just how strong that first half of FY23 sales result was, with all three brands and channels rebounding post-pandemic. While cost of living pressures are impacting consumer sentiment globally, the pace of recovery will vary in each of our key regions. By region, Australia made up 54% of total group sales and was the only key global region to achieve positive sales growth in the first half of the year. North America accounted for almost 20% of first half sales, with Europe a further 8%. By channel, direct-to-consumer made up almost 75% of the first half sales, showing improved trends through the second quarter. Wholesale sales made up 26% of the first half sales. This channel is slower to recover. By brand, RIPCOO accounted for nearly 60% of the first half sales, with improving sales year-on-year through the key Southern Hemisphere summer trading period. Now moving to slide 11. Rip Curl in Kathmandu achieved positive sales year-on-year in the second quarter, with OBOS improving their sales trend. For Rip Curl, the direct-to-consumer retail store sales and online channels led the improving sales trend, with strong sales growth across Australia as well as Europe and South America, supported by strategic new store openings. As previously mentioned, wholesale sales remain subdued. Kathmandu sales have continued to improve for each of the last five quarters, now showing growth year-on-year in the most recent months. In Q1 FY25, Kathmandu was cycling specific clearance activity in August last year. If we exclude the month of August, Kathmandu sales grew 6.6% year-on-year across September and October. This then followed by 6.9% sales growth year-on-year in the second quarter, which includes the key Black Friday and Christmas trading periods. Oboes benefited from diversified sales channels, achieving strong online sales growth in the second quarter, with promotional activity driving increased traffic and transactions, particularly around Black Friday. Wholesale sales have remained subdued in the North American outdoor market. In FY25, lower pre-season orders have been partially offset by improved in-season buying from key accounts. As Michael mentioned, online sales have been a highlight. All three brands have achieved double digit sales growth through online sites and marketplaces. Our omnichannel offering provides customers the choice of in-store or online shopping. Our brands have worked hard to improve the customer experience and online journey, and as a result have improved conversion of traffic to transactions. Here are the key highlights from each brand. Rootkill delivered a record $21.1 million in online sales for the first half, an increase of nearly 14% year-on-year. Online now comprises 11.5% of direct-to-consumer sales. Kathmandu delivered $20.8 million online, growing more than 26% year-on-year. Online is now 13.4% of direct-to-consumer sales. And Oboe delivered a record $5 million of online sales, a 32.8% increase year-on-year, with a particularly successful Black Friday and Christmas promotional period. The online channel remains a key growth priority for the group. Moving to our balance sheet, we continue to maintain a strong balance sheet position with low net debt, significant funding headroom and improving inventory levels. In a challenging trading environment, net working capital efficiency has been a key focus. Pleasingly, net working capital ended $33.6 million lower than January last year, with inventory continuing to moderate down. This is a significant achievement in a challenging market. Most importantly, inventory continues to moderate back towards historical levels with further moderation expected. At the 31st of January, inventory was nearly $10 million below January last year despite unfavourable currency impacts and more goods in transit than last year. At the 31st of January 2025, the group had a net debt position of $76.2 million, down $20 million from $96.2 million a year earlier. The group is targeting net debt below $50 million at the end of the year. Looking further ahead, our long-term leverage target remains less than 0.5 times net debt to EBITDA. The group continues to have a strong support from its banking syndicate. We took preemptive action to amend the January 2025 covenant measurement point and fully comply with all covenants during the period. On slide 14, you can see that the January inventory balances are monitoring back towards historical levels. In recent years, we've held inventory as wholesale accounts work to reduce their own inventory balances. We also took strategic investments in wetsuit and insulation inventory as we navigated challenging global conditions. Inventory composition continues to improve and inventory balances are moderating back towards historical levels. On slide 15, you can see on the charts there is a historical reduction between January and July for both net working capital and net debt. January net working capital balances are typically higher as incoming inventory is shipped before Chinese New Year to support both Kathmandu's upcoming autumn and winter seasons and Ripkill's northern hemisphere summer season. The inventory investment ahead of key trading periods for the second half results in typically higher net debt in January each year. As a result of our operating performance and challenging market conditions, the directors have not declared an interim dividend. The group dividend policy remains unchanged, with a target payout ratio of 50% to 70% of underlying net profit after tax. Moving on to the brands. Each brand continues to operate in a challenging global market. In this environment, our brands have worked hard to control gross margins, operating costs, and working capital. Rootkill total sales were pretty flat, up 0.1% year-on-year for the first half. Difficult trading conditions in the broader surf industry is reflected in this result and has recently led to significant changes in the competitive landscape in North America. Store closures by key competitors may cause short-term headwinds as inventory is divested in the North American market. As I showed you earlier, the sales trend has improved from minus 6.7% year-on-year during Q1 to plus 6.5% year-on-year in Q2. The direct-to-consumer channel performed comparatively well, with sales up 4.1% year-on-year for the half. We saw strong sales growth in the key Australasian summer and Christmas trading period, and stronger results in Europe and South America, supported by store openings. As we mentioned earlier, online sales growth was a highlight, growing 13.9% year-on-year to $21.1 million. The wholesale channel remains subdued in a challenging market. While wholesale sales were down 7.9% year-on-year for the half, forward orders indicate an improving wholesale trend through 2025. Rootkill gross margin remained resilient, increasing 20 basis points year-on-year in the first half. Channel and product mix help to offset the impact of increased promotional intensity in a tough trading environment. Operating expenses continue to be tightly managed, while facing global cost pressures and operating eight additional stores year on year. Earlier this week, Ashley Reid was announced as the new Ripkill CEO. Ashley brings two decades of global experience in the sportswear industry, most recently from his time as the Vice President and General Manager of Nike Pacific. He'll join us in the coming months, based in the Ripkill head office in Torquay, and will report directly to Brent Scrimshaw and sit on the Camdy Brands global executive team. Moving to slide 19, Kathmandu sales have increased 3% year on year for the first half, improving from a 2.7% decline year on year during Q1 to 6.9% growth year on year in Q2. Sales in Kathmandu's largest market, Australia, increased 3.8% year on year for the first half, supported by enhanced in-store execution and new products. While New Zealand sales were down 2% year-on-year for the entire half, there was strong sales growth during the key Christmas trading period. As I mentioned earlier, Kathmandu New Zealand in particular was citing specific clearance activity in August last year. If we exclude the month of August, the New Zealand sales increased 4.8% year-on-year for the remaining five months of the half. The Kathmandu online digital team last year implemented a series of continuous improvements including redesign of the e-commerce mega menu, search engine optimisation and new payment methods, all of which contributed to improved conversion and ultimately online sales growth of 26.6% year-on-year. Kathmandu's gross margin decreased 40 basis points year-on-year with increased promotional intensity in a competitive trading environment. Operating expenses for the first half include $3 million of incremental year-on-year spend to refresh and bring more brand advertising investment into the first half, increase product newness and innovation, and improve the customer experience. Finally, finishing up with OBOS. Total sales continue to be impacted by wholesale caution, decreasing 6.3% year-on-year. iBose continued to benefit from a commitment to diversified sales channels with strong online sales growth. Online sales increased by 32.8% to a record $5 million for the first half, growing strongly over the Black Friday and Christmas promotions and reinforcing the opportunity for the brand. Wholesale sales were 10.6% lower here on year. As mentioned earlier, wholesale accounts remain cautious on pre-season commitments. But we have seen recent improvement to in-season buying from key accounts. Forward orders also support an improving trend through 2025. Gross margin decreased by 570 basis points, a specific clearance of end-of-line life inventory contributed to a lower gross margin result year on year. The OBOS team have worked hard to return their inventories to historical levels despite the recent challenges in the North American outdoor footwear market. It's important to note that gross margins on core styles and new launches remain in line with historical margins. Operating expenses were tightly controlled year on year as the North American footwear market recovers from its cyclical inventory reduction and discounting phase. We expect to leverage the operating expense investment with sustainable growth. To finish, I'd like to point out the Kathmandu segment includes sales of Oboz products through the Kathmandu Australia and New Zealand store network at full vertical gross margins. These sales grew from $2.2 million in the first half of last year to $3.4 million in the first half of this year. I'll now hand you back to Michael.

OK, thanks, Ben. We're moving on now to the focus areas and the outlook. On slide 22, I'll now touch on Kathmandu's progress against the focus areas that we have highlighted in the past. This slide summarises the immediate focus areas of the Kathmandu team, led by CEO Megan Welsh, with the aim of exceeding the expectations of outdoor enthusiasts and ultimately returning the brand to sustainable sales and profit growth. As Ben discussed, Kathmandu invested an incremental $3 million year on year to bring more brand advertising investment into the first half, increase product newness and innovation, and improve the consumer experience. As these brand foundations have been put in place, we have seen Kathmandu sales trends improve through each of the last five quarters. In terms of product, progress is being made to diversify categories, reducing Kathmandu's reliance on outerwear by addressing customers' year-round needs. This season's introduction of activewear for the outdoors provided balance to the range while remaining true to the brand's leadership across hike and adventure travel. Our team continue to lead in the use of innovative materials, technology and sustainability. Kathmandu's refreshed brand campaign is resonating with consumers, boosting key brand health metrics in Kathmandu's largest market, Australia. We expect this to have a positive impact on building key long-term brand associations. As I mentioned earlier, Kathmandu is now the official apparel partner of the New Zealand team, providing athletes with training and village kits and uniforms for opening, closing and podium ceremonies at next year's Winter Olympics in Milano Cortina, the Commonwealth Games in Glasgow and the Olympic Games in Los Angeles. This partnership not only reinforces the brand's connection to its New Zealand roots, it also provides opportunity for significant brand exposure on the world stage. In terms of consumer, Kathmandu continues to deliver progress on the overall goal to exceed the expectations of outdoor enthusiasts by delivering a premium brand and product experience in-store and online. Improvements have been made to visual merchandising. For example, fixtures and fittings have been removed to open up sight lines, elevate the brand and showcase product stories in store. The online team have implemented continuous improvements, including a redesign of the e-commerce mega menu, search engine optimization, and new payment methods. All of these have contributed to improvements in conversion and customer experience online with more to come. A new digital platform with a refined design aesthetic is under development to be launched this year. Kathmandu is also finalizing a story of the future design concept, which will start to roll out in the initial locations this calendar year. On slide 23, we highlight a sample of the latest innovations for our brands. Ribkill has continued a rich history of championing surfing events with its latest partnership, the Eddie Aikau Big Wave Invitational. The Eddie is an iconic big wave contest held in Hawaii. The event goes ahead only when surf conditions are huge, and this year it ran for just the 11th time in its 40-year history. Around 50,000 core fans and tourists watched the event live from the beach. In terms of reach, the event attracted 6.1 million streams and 13.6 million social media impressions. Half of the audience who had consumed any content were new to Rip Curl. Merchandise sales have also been strong, especially in the key North American growth market. Kathmandu continues to push the boundaries of sustainable product innovation with the latest Sika Activewear range. Kathmandu is at the forefront of innovative sustainable materials technology, with this range combining three sustainable technologies, carbon capture, advanced recycling and a bio-based anti-odour finish. Carbon capture is the term used to describe Lanzatec's innovative process which captures carbon emissions from steel mills before they enter the atmosphere and uses them to make polyester fabric. The Women's Seeker 4-inch shorts won Kathmandu's second ISPO award in 2024 following the win for the Feather Flight Carry-On earlier in the year. And finally to Oboz, building on the commercial success of the fast and light Catabatic and Catabatic Wind styles, Oboz has launched the new Catabatic LT, Oboz's lightest and most breathable collection to date. The Catabatic LT for the first time uses Gore-Tex invisible fit waterproof and breathable technology. Initial digital and sales metrics for this new style are encouraging, continuing momentum in the fast and light category and lessening reliance on Oboz's core rugged category. And finally, as we hit slide 24, I want to summarise our focus areas, take you through a brief trading update and also our outlook. Our concise focus areas are as follows. First and most importantly, stabilise sales and return to growth. We want to grow gross margin. We want to continue to simplify our business. We also want to continue to reduce working capital and use our inventory investments efficiently. Finally, improving profitability and returning to dividends is a key focus. I have a brief update on our trading performance for the start of the second half, noting that this is a seasonally non-significant trading period for both brands and that Tropical Cyclone Alfred has impacted Queensland and Northern New South Wales stores for both brands with approximately 100 lost trading days. With that in mind, direct-to-consumer sales, including online, for the first seven full weeks to 16th of March are Kathmandu, plus 5.2% year-on-year, noting that gross margin is under pressure due to increased promotional intensity and a competitive trading environment. Rip Curl Global direct-to-consumer sales for owned stores and websites are approximately plus 0.7% above last year. Gross margin for Rip Curl remains resilient. As we have noted earlier in the presentation, wholesale accounts remain cautious on pre-season commitments in a challenging market. Forward orders and in-season buying from key accounts support an improving wholesale trend through 2025. Gross margin is under pressure in the short term for all brands in a highly competitive global market. Our teams remain focused on growing gross margin in the medium term as markets improve. We continue to monitor the impact of geopolitical uncertainty on consumer confidence and supply chains. Global monetary policy settings have been easing, but the return of consumer confidence will take time. In the meantime, our teams remain focused on delivering positive sales growth, improving profitability, maximising cash flows and reducing inventory. We believe with our portfolio of iconic global outdoor brands and leaderships in sustainability, we remain a unique investment proposition and well-placed for the future. And finally, following the announcement of my resignation in October, next week is my last week with KMD Brands. I will spend the next few days meeting with investors and handing over with new group CEO, Brent Scrimshaw. Brent brings a great deal of experience to the role, given his time at Nike. He knows what consumers want from global brands, and I have every confidence in the future success of this great company under his leadership. It's been a privilege to lead KMD Brands for the last four years and many more at Rip Curl. Thank you to the board for the opportunity, to my team for your partnership and all KMD employees for your ongoing dedication. Okay, time for questions now. 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 and I would now like to open the call for questions.