Adairs Limited (ADH) Earnings Call Transcript & Summary

We might get started. Okay. Welcome, everybody, and good morning, ladies and gentlemen. My name is Brett Chenoweth, and I'm the Chairman of Adairs and Chairman of the Board of Directors. It's good to see everybody here today. We've had 2 years of sort of turmoil here. So after the sort of virtual meetings in the last couple of years, it's actually good to get everybody back in the room. So again, we're very pleased about that. We do recognize, of course, that COVID is still active in the community. So there will be people joining online, hence us making sure we start at the precise time and we record everything that's happening today. I would like to begin by acknowledging the traditional owners and custodians of the land on which we meet today, the Wurundjeri people of the Kulin Nation, and I also pay my respects to their elders, past and present. It's now 11 a.m., just after, and at the point of time for the holding of our 2022 Annual General Meeting. I've been advised that there's a quorum present, and I therefore have the pleasure in declaring this meeting open. And I want to thank you all for your attendance. Details about how the shareholders can participate is set out in the notice of meeting. That was sent out on the 20th of September, so you should have seen that. It's also published on our Investor Relations website. So the details are there. And before proceeding with the formal business of the meeting, I'd like to advise that I'm joined here by my fellow directors and also by the management team of Adairs. I particularly like to acknowledge also Ash Gardner, who's sitting here, the CFO of the business, and obviously, he's available to answer questions today. And from the Board, just to quickly go along the Board here, we got it on the screen. There's Mark Ronan, who's the CEO and Chief Executive, obviously, also the Managing Director, sitting to my right. Trent Peterson is Chair of the Audit and Risk Committee and an Independent Director; Kate Spargo, Chairman of our -- sorry, the other way around. So Kate is Chairman of the Audit and Risk Committee. Trent is Chairman of the Remunerations Committee. We've got Kiera Grant, Independent Director; David MacLean; and Michael Cherubino, who's an Executive Director of the company. So you've got the Board of Directors with you today. We did have one director who resigned during the course of the year, Simon West, our director from New Zealand. He resigned on the 24th of June. He is an experienced retail and e-commerce director who is on the Board. He had to step down from the Board because of his commitments in New Zealand with The Warehouse Group. So he got a promotion and has a much bigger role there, so which, of course, we're congratulating him for and wish him well. He did a great job on our Board of supporting the management team and the Board, particularly thinking about technology and e-commerce type issues. So his expertise was greatly appreciated. He made a significant contribution to the Board. And we absolutely wish him well in his future endeavors, of course. And as we previously foreshadowed, the intention is to put another director on the Board. So we do have a Nominations Committee that reviews the structure of the Board and the composition of the skills around the Board. We've got a skills matrix that we update. We continue to look at that. Our intention is to identify one more Board member. It will probably take between now and the end of the financial year, we think, to appoint that person. But that is the intention of the Board as we sit here today. Today, we have also in attendance, we've got Tony Morse, our engagement partner for our company auditor, which is Ernst & Young. Tony will be available to answer any questions on the audit and the accounts, of course, at the appropriate time. We also welcome the team from the company's share register, Link Market Services. In terms of the agenda for today, I'll do some introductory remarks in a couple of minutes, which is really about just the review of FY '22 company financial performance. Then I'll hand off to Mark, who will do his update. And he'll probably do a short presentation on the strategy behind the business and on his views of the company. And then we will proceed to the sort of formal part of the meeting, where we have to receive and consider the financial report of the company. And there's a series of resolutions that we need to vote on. So we will do that after Mark's presentation. In terms of the procedural matters, and I don't want to bore you with the procedural matters too long. But in terms of shareholder questions, we're only taking questions from shareholders who are in attendance here, so people in the room, or their appointed representatives as well as any shareholders who have prelodged their questions in writing prior to the AGM, in accordance with the procedures that were set out in the notice of meeting. And we do have a few of those questions, which we'll get to at the appropriate time. And of course, we'll endeavor to answer any questions that you have from shareholders. So they should just be directed to me as Chairman, and then I will get the appropriate executive team member or Board member or adviser to answer those appropriately. In terms of voting procedures today, voting today will be conducted by way of a poll on all items of business. So voting for the resolutions, well, that means voting for resolutions will remain open until 5 minutes after the meeting, after we close the meeting. And that provides eligible attending shareholders or their proxy with sufficient time to cast their votes. So that will happen as we work through. So with each resolution, I'll point out there, once a resolution comes up, we'll show the tally of votes which have been lodged prior to the meeting. And then the final outcome of each resolution, including the votes that are cast at this meeting, will be released to the ASX and then posted on our Investor Relations website later today, once voting is closed and all the numbers have been tallied. So you'll see the situation as it stands prior to this meeting, and then it will all be published at the end of the day today. Okay. So look, let me -- I don't want to take up too much time, but let me give you my views on the performance of the business in FY '22. So look, as I'm sure you're all aware, in the last 2 years, Adairs has become a multi-brand business. So I thought that I would importantly state right upfront how we see Adairs' position strategically because there has been a change, moving from one-brand Adairs, to a multi-brand business. So just to be really clear, our strategy is to own, operate and grow sector-leading homeware brands in Australia and New Zealand. So own, operate and grow. So we target middle-market consumers with an omnichannel model, which allows customers to shop when, where and how they choose. And each of our brands are vertically integrated, which allows us to deliver exclusive and differentiated products, with a strong value for money proposition and superior margins. So that's our sort of strategy in a paragraph. Very clear, drives a lot of the thinking around the Board table, certainly frames the management execution, and we think is a strategy that's right for the times. And turning to our 2022 financial year, and you will have seen this in the annual report, the group achieved another strong sales result, including a record level of online sales, which is consistent with our strategy. We also announced the acquisition of Focus on Furniture. We've got the team here today, which is a highly profitable, vertically integrated furniture retailer, operating in Australia. And this acquisition increases our exposure to the bulky furniture category, which is an $8.3 billion market. And this provides the company with another significant growth opportunity. So that was a real milestone for us to make that acquisition this year. In terms of sales for the year, group sales were up 12.9% to $565 million, with online sales approaching $200 million, which is about 35% of total sales. Again, this highlights the benefit of this omnichannel model. And this sales outcome, we think, was excellent, given that the Adairs brand, and this is a big number, the Adairs brand lost over 10,000 store trading days due to government-mandated closures in the first half of the year. So COVID had a real impact in the first half of the year, 10,000 trading days lost. Now in terms of the year, group gross margin did soften, and we expected this, but that's given the higher contribution from both Mocka and Focus on Furniture. These are businesses which both operate at lower gross margins than Adairs. So with gross margin impacted there. We also had higher sea freight costs during the course of this year, and that did impact all 3 businesses. On the cost front, even though we had the strong sales result, we -- that was offset by a number of factors. And those factors weren't blind to us. These were management decisions taken in the first half of the year to manage through some of this COVID uncertainty. Again, right decisions we thought at the time, but we have increased our cost base in areas across the group. Again, Mark will talk to this in his presentation. Importantly though, the majority of any costs that we have incurred into this business over the course of the last year won't continue into future years. And the underlying business, as a whole, continues to perform above its FY '20 pre-COVID levels. Importantly, also at Adairs, we continue to pay the Adairs store teams during the store closure period that I mentioned. And that would ensure that they would be available when the stores reopen. So really looking after the teams and ensure that we pay them. The other thing that's happened through the year is we transitioned to a new DHL-operated national distribution center. This was slowed down during the course of the beginning of the year, and we kept the existing distribution center open as well. And that was retained to reduce the concentration of risk and ensure that stock would continue to flow to stores and continue to be available online. So that slowdown and change, combined with some efficiency challenges that we've had in the new DC, added considerable cost to the business in the financial year. Those challenges remain and are a key focus for the company. And again, Mark will talk to that today. In addition, during the year, we incurred some additional costs in Mocka as a brand. There was an increase in costs through local supply chain issues. Again, Mark will talk to that. And we invested more in the team to build out the future of that business. We do see a long profitable growth in that business. So we've invested behind the Mocka brand. So all up, the group delivered an underlying EBIT of $76.4 million for the year, which was down 30% on FY '21. But I would like to highlight, that's still 38.2% higher than what was achieved in FY '20 and 76% higher than FY '19, which was the last full year that was not impacted by COVID. In terms of our balance sheet, after funding the Focus on Furniture acquisition and we also had funded the final Mocka earn-out payments during the year, the group ended the year with net debt of $93.2 million. This will come down over the next few years, given the strong cash generation of the business. We remain confident within our banking covenants. And we've got sufficient headroom to accommodate any adverse changes in the general macroeconomic environment or any issues that we foresee or encounter on business performance. And pleasingly also, our banking syndicate have recently extended $90 million of our facilities through to January 2026. So we're on top of those balance sheet issues. The Board declared a final fully franked dividend of $0.10 per share. So that took the total dividend payout for the year to $0.18 per share, which is 69% of statutory NPAT. That's towards the lower end of our policy. The policy is 65% to 80%. We thought a 69% outcome was appropriate given the environment that we're sitting in today. In response to the shareholder feedback, we also activated our DRP, the Dividend Reinvestment Plan, in FY '22, and just over 10% of shareholders have elected to reinvest their dividend in new shares under that plan, which is a pleasing result. In terms of trading, and we did provide the market with a trading update this morning, which was on the ASX, which covers the first 16 weeks of FY '23. This showed continued growth in sales over the same period last year. And we continue to see good engagement for our customers. Again, Mark will talk to this in his report. You may also recall that we provided sales and EBIT guidance for FY '23 in August at our FY '22 results. And today's trading update sees the Board affirm that guidance. One issue that we thought we should touch on, which is highly topical and important, is the recent cyber issues that Optus and now Medibank have been subject to. It's a timely reminder that all companies really need to ensure that not only do they protect customer data, but they're very clear about what customer data they collect and how they store it. So we are very focused on the fact that data should only be collected to deliver a great customer experience, and that all of that data should be rigorously protected at all times. We've got a range of systems and processes in place. We've got infrastructure that's designed to identify and prevent those kinds of attacks. The Board and management team are proactive in thinking and planning around these sorts of issues. I personally sit on the Board of a telco, so I'm highly focused and -- on a data center Board as well, highly focused on cyber issues. So we did talk about this a lot. We do also realize that you've got to continually improve your systems, processes, data collection, ways of doing things because these attacks are sophisticated, and they do change over time. So you have to be on top of that. We think that we are. And we also think it's important that you have to bring in external cybersecurity specialists to assess the ongoing real-time effectiveness of your own program. So we're doing that. So not only do we have internal teams, we also have cybersecurity specialists that we bring in to check us. So that's an important point given the sort of environment that we're sitting here today. Finally, I want to thank all shareholders here for your continued support. As a Board and as a management team, we're very aware that the share price has been disappointing in the last 12 months. And it clearly sits below its IPO price today, and that's despite the group recording 7 years of consistent sales growth. And earnings per share, as we sit here now, is twice that, that the company was at IPO. So despite the earnings per share increase, despite the fact that we've had 7 years of consistent growth, we've had an impact on our share price in the last 12 months. Now that's -- it's easy to blame that on the market. But it is -- there are clearly market issues. I don't think anyone's blind to that. We're not the only public company going through this. But we, as a Board and a management team, focus on the key things. We believe we've got the right strategy. We've got the right business models. We've importantly got the right team. And we can grow sustainable profits well into the future given that mix of capabilities. And as we move forward, we think if you continue to focus on strategy, execution and importantly, communication of how you're doing those things, that the valuation of the share price will improve over time. All of our directors and senior leadership team are shareholders with you in the business, so you can be sure that we all are joined at the hip in our desire for the share price to rise. In closing for my piece, I really wanted to acknowledge our team. We've got a lot of our team here today. These are the people that actually -- they deliver and build the business. These are the reasons why people invest in companies. You invest behind teams. You don't invest behind brands or technology. So we have got a great group of executives. We're very, very happy with the way that they're engaging in the business. They've proven over many years, not as just homewares experts, but retail experts. So we're very proud that we've got a very strong retail team. And that's not just in the Adairs brand, it's in Mocka and it's in Focus on Furniture. The senior leadership team here, and actually, I would want actually, for the senior leadership team, putting your hands up just to identify yourselves. So for shareholders, there's the senior leadership team. So they're all in the room. I would encourage you, at the end of this meeting, to talk to them and grab them and get their perspective on the business. You'll see that Mark, Mark here, as I'm sure a few of you have already met, is an incredibly approachable CEO, an impressive CEO. His entire team is of the same ilk. So we've got a very approachable management team here. Happy to answer any questions that you have at all. So from my perspective, as a Chair and from the talking on behalf of the Board, we feel like this business is in great shape with the team that we have. So look, that concludes my report. We will have time for questions shortly, and we'll make sure we go through the questions in the room and the ones that have been sent in. But for now, why don't I hand it over to Mark so he can do his report. Thank you.

Thanks, Brett. And welcome, everyone, this morning to this meeting after the FY '22 results. But with our results largely being covered by Brett, I really wanted to focus my report on the strategy of the business, what was achieved in FY '22 and moving us forward with our strategy and where we will deliver the future growth from. As you see in the presentation, FY '22 saw us achieve a number of important milestones in our strategy delivery. At Adairs, we passed through 1 million Linen Lovers. Now for those who have listened to me before, we consistently talk about the importance of Linen Lovers to Adairs as they account for more than 80% of all Adairs brand sales and represent our most engaged customers. In this respect, we think of them as a true barometer of our corporate health. And we are proud to have one of the largest paid-for loyalty programs of any retailer in Australia. And we continue to actively grow our Adairs store floor space over the last 12 months, opening 4 new stores and upsizing 11 existing stores, which delivered a 7% gain on the prior year in our GLA. This growth in floor space and our Linen Lover program are each key drivers of sales growth, which I'll talk to in more detail shortly. Our new National Distribution Centre became operational in September last year. The process of consolidating 4 distribution centers into a single DC was initially delayed due to COVID, as Brett mentioned, particularly the impact it was having in Victoria, but was finally completed in June this year. While all of our Adairs inventory is now in one location, at the National Distribution Centre, the cost efficiency and productivity of the facility is well below our expectations and is a key focus of us as a management team, together with the DHL guys running the facility day-to-day. Over the course of FY '22, the group recorded another record level of online sales, with 35% of all sales coming through this channel. Whilst this was a terrific result, we have seen the mix of online sales reduced to around 26%, following the inclusion of Focus on Furniture into the group and as customers in a post-pandemic world returned to physical stores. When we think about this, this just continues to further support the way we go about thinking about our customers, how do we enable them to shop where they want, how they want, when they want, is a key part to our customer strategy. Rather than thinking that they are channel-specific, customers shop how they want, and our job, as a retailer, is to make sure we provide that experience across each of those channels for them. The acquisition of Focus on Furniture during the year was an important development for the group. Focus is a highly profitable omnichannel furniture retailer, operating in Australia. And in line with Adairs and Mocka, it targets the middle-market customer. It has 23 stores today, 2/3 of which are in Victoria. And all our stores are profitable, and we see a clear opportunity to roll out significantly more stores. As Brett mentioned, the acquisition strategically increases our exposure to the bulky goods category in bulky furniture, which is an $8.3 billion market in Australia. And this provides -- one of the other key elements of this acquisition is it provides us with an experienced bulky goods management team. Bulky goods is different to soft furnishings. It's a very different category. And what we wanted to do when we acquired an asset like this, we wanted to make sure that we acquired a management team who were highly capable of helping us transition and understand that market in detail. We've been really pleased with the performance of the Focus brands since we have acquired it, and it only goes from strength to strength with the store rollouts to come from here. The other thing that happened in FY '22 is we released our first sustainability report as a group, which I hope which is included in the annual report and I hope shareholders have had a chance to read. As the group grows, we need to make sure that we look to manage our impact on the environment, the communities we serve as well as meeting ever-evolving stakeholder expectations. Going forward, you'll hear more from us on our sustainability strategy and initiatives, including how these are being integrated into our businesses and how they impact our decision-making going forward. Obviously, when we think about sustainability, it covers a diverse range of important issues, such as our carbon footprint, the amount of waste we send to landfill, our community support efforts and think about how we support communities, both in Australia and around the world, and the diversity of our Board and team. Sustainability is closely linked to our values and our culture. And while being sustainable is not new to Adairs, it's great that we now get to shed some light on some of the things we have been doing and start to lean into some of our sustainability strategy goals and initiatives going forward. I always think our AGMs are a great time to pause and just reflect on where we have come from and where we're going. Since listing on the ASX in 2015, as Brett mentioned, we have consistently delivered double-digit annual sales growth. Profitability over this time has also grown by about 130%. Whilst the annual EBIT results have been more volatile, this reflects the preemptive investments that we have made to drive future growth and the range of factors that impact the retailer from year-to-year, such as gross margin, cost of doing business and other elements. Whilst at times, these factors can be difficult to manage in the short term, it is the success of our underlying strategies that produce favorable, multiyear trends and reward patient shareholders. We are clear about what success looks like and what it requires. Rather than simply focusing on driving sales, we run the group with a view to maximize gross margin dollars in the medium term and EBIT over the longer term. Within this, there is a significant business-as-usual component, which we must remain focused on delivering every year. This includes things like delivering differentiated on-trend product and great customer experience across all of our brands. Ultimately, retail is about those 2 elements. And getting that right year in, year out is a key part of what we do. And so therefore, within our brands, we always have a commitment to delivering strong execution and continuous improvement, to ensure we never stand still, consistently bringing new product to market, consistently enhancing the look and feel of our stores and improving our customer experience year-on-year. This commitment is what has enabled us to deliver this year-on-year sales growth and remains a key focus of each brand as we look forward. If I move to our future growth. And when we released our FY '22 results, we put a 4- to 5-year sales target of $1 billion for the group. Whilst I've spoken to some of this previously, it warrants repeating as one of the key things we aim to do as a group is not move our strategy day-to-day, year-to-year, it's about knowing what that strategy looks like and how we continue to execute upon it as we move forward. And the levers that each brand have allowed us to look forward with significant growth opportunities. When I think about that, it's important to talk about the brands individually as this reflects the way we think about the group and how it operates. As a group, we look to own vertically integrated retail businesses in the home space. This enables us to leverage the experience within each brand, to support the overall growth of the group, allowing us to grow group capability faster, reduce execution risk and deliver greater returns to shareholders. If I start with the Adairs brand. Stores are where over 80% of our loyalty membership sign-ups occur, and so it's not surprising that there's a very strong correlation between our floor store space and Linen Lover membership numbers, reflecting the importance stores play in reaching customers. On average, every 500 square meters of new floor space adds approximately 12,000 new Linen Lovers. Consistent with historical long-term trends, we expect to grow store floor space by at least 5% per annum over the next 5 years and have identified lots of locations whose demographics will support an Adairs store and a further 15 to 20 stores that we expect to upsize over the time period. New stores will generally be large stores. And while homemaker sites are highly sought, the addition of Focus on Furniture as a brand to the group means we have the ability to take larger sites and share that space between the 2 brands, being Adairs and Focus. This 5% annual space growth implies approximately an additional 5,000 new Linen Lover members over that period of time, taking total membership to more than 1.5 million. For context, that equates to about 1 in 8 households across Australia and New Zealand, up slightly on 1 in 11 that we have today. It also implies an annual growth rate in that Linen Lover program of about 7.5% to 8% and which compares to historically growing it at 12%. As we get further, we know that we're going to slow down the growth rate, but it's still another 0.5 million members. And then when I think about that as we grow Linen Lovers and it then ties neatly to sales because there is a massively high correlation obviously between our Linen Lover being our customers and our sales. Linen Lovers are our most engaged customers, and account for over 80% of the Adairs sales, as I said before. They shop twice as often and spend 50% more each time they shop. On average, each member who shops with us over the course of the year spends about $400 per year. Therefore, as a business, by focusing on growing total memberships and aiming to get that to 1.5 million, we should see sales grow to $600 million of our Linen Lover program, which implies an annual growth rate of nearly 7.5% in the next 5 years compared to the 10% that we've achieved previously. If I move to Mocka, which as shareholders will be aware, had a disappointing year in FY '22. Over the course of the year, its primary domestic delivery partner had to be replaced after failing to meet contracted service levels, which led to many customers experiencing unacceptable delivery times. Separately, isolated product issues in the second half also led to an adverse customer feedback and returns over the course of that period. Now both issues have been addressed operationally, although restoring customer confidence will take us longer. Throughout FY '23, Mocka is focused on increasing that customer confidence through strong execution, restoring gross margins and ensuring a stable supply chain. We also expect to launch a number of brand partnerships over this time that will build the customer confidence, particularly within Mocka's core customer demographic of young families. Leveraging these partnerships and the brand position today will see Mocka be known as the brand that enables our customers to fill their home with design-led value for money product. In effect, the Mocka customers will be able to get that well-designed, functional product for less. We know the potential market for Mocka is significant. And through a more disciplined brand and product strategy, the opportunity to grow Mocka over the medium term is substantial. As we build the brand over the next couple of years, we anticipate Mocka establishing a physical store presence, although the exact format and timing is still to be determined. We obviously understand that our physical store presence would support Mocka's ability to showcase product, allowing customers to interact with the product and build our quality credentials, together with building great brand awareness and deeper relationships with customers. As we have previously communicated, if Mocka were to achieve the same penetration in Australia as it has in New Zealand, there is the potential for Mocka Australia sales to exceed $100 million based on just population size, taking Mocka sales total to more than $150 million. We see this outcome as being very achievable given the size of the market it operates in and the very low market share it presently has. And finally, to our latest acquisition, Focus on Furniture. The group has acquired a high-quality business with strong capability across product, stores and last-mile logistics, which are particularly important, as I said before, for a bulky furniture brand. Looking forward, the growth of Focus will be driven initially by a national store rollout program. The current portfolio of 23 stores, as I said before, is largely Victorian-based with a small reputation across other states. As we compare the overall store portfolio to other national furniture businesses, there is a potential for 50 to 60 stores across Australia. As we think about what complements the store rollout, we see growth opportunities for the brand through category and range expansion, attracting new customers with an enhanced in-store experience and further developing the online channel. Subject to securing the necessary sites, they should see the Focus business doubling by store numbers and annual sales within the next 5 years. And as you can see, the addition of the Focus brand now sees the group have 3 homewares brands that serve different customer segments within the home space. Each brand has a management team who are focused on delivering the day-to-day requirements together with their strategic priorities with support from the group where appropriate. If I move to the business update we provided this morning, and trading in the first 16 weeks of FY '23 remains in line with our plan and is consistent with the guidance we provided to the market in August. The strong growth in sales over the prior corresponding period needs to be seen in the context of the widespread government-mandated store closures which prevailed in FY '22 and the fact that we did not own Focus at that time. However, the current trading environment remains positive with consumers' confidence proving robust in the home category. We have seen like many omnichannel retailers, a significant shift from consumers back to stores from the online channel. This has seen Adairs and Focus on Furniture stores trade well, but it's obviously impacted the performance of Mocka given its pure-play nature. Overall, we expect that rising inflationary prices and increased mortgage repayments due to higher interest rates we'll see a softening in consumer confidence at some time and a more challenging trading environment ahead. However, we believe that the strengths and benefits of our business model will become more apparent as consumers potentially become increasingly value and quality orientated. We target the middle market home category across all 3 businesses and have a strong value proposition in each. We have a large addressable market and importantly, each brand has the ability to directly communicate with their loyal customers. In light of today's trading update and with 8 months remaining in FY '23, as Brett mentioned before, we don't see any reason to change the sales and EBIT guidance provided in August. We are ever coming into an important sales period over coming months, and our final results for the year will be significantly impacted by the outcome of the key sale period between now and Christmas. And with that, I'd just like to take this moment to thank my team who are in the room today. It's a great team to work with. It's a great opportunity to continue to see the great work that they're putting in the hard yards that they do. And obviously, we've got the management team here, but it's not just about the management team in the last 12 months and the last couple of years have specifically seen how important that store network is. And I'm really proud of the business we were able to support those store managers through a period where stores were closed across all brands and that we were able to go out there and look after the people that serve our customers and deliver that customer experience. And what we're seeing now is the loyalty and the benefits we get from keeping that team in place will definitely position us well going forward. So thank you to the management team here, but more broadly to the Adairs and Focus and Mocka teams across all the areas of the business. So with that, that concludes my report, and I'll hand back to Brett.

Thank you, Mark. So with that, we now need to move to sort of the formal part of the meeting. So forgive me for reading a bit of this out, but I'm going to need to. So this is with respect to the notice of meeting. The notice of meeting was made available online to all shareholders and in accordance with the company's constitution, and I'll take the notice as read. In accordance with the requirements of the Corporations Act, the register of relevant shareholdings is available for inspection as shareholders are asked to contact the share registry following the meeting if they wish to make an appointment to inspect the register. Andrew Farrell of Link Market Services Limited, our share register, will act as returning officer. And if there are any aspects regarding voting that you're uncertain about, please speak with Julie or a member of her team. We'll now move to the first item of business. Item 1 is the annual financial report on the screen. The financial statements and reports for the year ended 26th of June 2022, as required by the Corporations Act, have been circulated to shareholders as part of the 2022 annual report, and they're tabled here today for discussion. I now open the meeting for any discussion on matters of particular relevance to the annual financial report for the company or the company auditor or questions for Mark in regards to his presentation or any other questions you may have for the management team. Please note that we'll specifically focus on the remuneration report though later in the meeting. We'll first take questions from those attending shareholders or their appointed representatives, so people in the room, followed by addressing the written questions that were submitted prior to the meeting, in accordance with the procedures that were set out in that notice of meeting. So this is the opportunity to pose questions from the room. So are there any questions from the floor in relation to item 1? Yes?

Good morning, everyone. My name is Mike Robey. Thank you. And I'm from the Australian Shareholders' Association, which is a not-for-profit group, and I'm a volunteer monitor who looks after all the interest of all shareholders, not just members. My question, Mr. Chairman, is concerning your business with China. I mean I really enjoyed your sustainability report, but it did throw up the fact that you are very exposed to China as a supplier. [indiscernible] Mocka, I think it's 93 or something percent, of its products coming from it. And we're heading into a fairly tense geopolitical situation kind of with your major suppliers. So my question is really, how do you go about organizing the Board to actually have relationships with your key suppliers without having to go through intermediaries? And then secondly, what's your take on the future risks associated with basically being so exposed to China. That's 1 question. If I may ask a second one?

Of course.

That's on the sustainability. As I say, I enjoyed your report with very good reading, and you can clearly see in the report that you are keen on it. What, I guess, many companies are doing is starting to make the management accountable for some of the outcomes of that. So [ strange ] put some of their variable payout risk associated with some of the issues that you bring forward in sustainability. So do you have any of the STI or LTI at risk through not achieving your sustainability stuff? Or do you intend to in the future? No other questions about remuneration, but I understand that should come later.

That's correct. Yes. Okay. So let me -- I'm going to get a couple of people here to talk about those issues. So with respect to sustainability more broadly, as you mentioned, we've got quite a piece in the annual report around ESG and sustainability. Clearly, a topic that's of high focus, not just for management teams but for Boards and shareholders alike. So we do take that very seriously. And we do have -- we do -- we have ramped up our focus in this area in particular. So the sustainability team, if you like, Jordan is sitting here actually in the front, report through to the Audit and Risk Committee in this business. So he does report through to the Board, and we do take we do take a view of that. I might just let Mark maybe start with respect to our focus on our suppliers and the reliance on China. So I won't get you to touch on Mark.

Yes. So in relation to our supply chain that's heavily China-based, and you can see across the end that what we're aiming to do is obviously, over time, diversify that to a less specific 1 country. So diversification is key. The last couple of years, it's been a topic of conversation. But equally, one of the challenges has been what we'd like to do before we engage with any factory is go to factories, meet the factories, talk to them, understand what's going on over there. And that, no doubt, has been significantly challenged over the last couple of years due to COVID and the lack of travel. So we expect that we will diversify that supply chain over time. And it is a key focus of us of getting out there. We actually have a team going to Malaysia leaving this weekend. So looking to diversify that supply chain across all brands. And the beauty then of having a group like we do is then thinking about how some of those supplier relationships we have in 1 brand might be able to be accessed by other brands rather than us having to individually go and source them over time. So I think one of the things we all have to acknowledge on the flip side of that is the reason that China is such a big supplier in the space is because they are very, very good at it. They are excellent sort of to deal with. They operate with a view that they meet time lines and deadlines and all the stuff that is very important to businesses trying to run a just-in-time and keep their inventory balances in check and the quality of that product. So that's why what we are committing to is actually thinking about how we diversify that and start to go on that journey, but we need to find the suppliers and the factories and all the other elements. I think it's actually easier in our bulky goods area than it is in our soft furnishings area to actually diversify out of China. We see a lot more of those products being available through Malaysia and Vietnam and India and spreading that risk. Whereas in soft furnishings, often we find, when we look to diversify away from China, we actually run into some issues where we're not comfortable that the workers are going to be treated well enough in those factories or that they're safe enough for us to actually utilize. So often when we start to think about some of the soft furnishings, we've got to balance those issues away from not just thinking how do we diversify away from China, but equally how we're partnering with suppliers and factories that we can be proud of and that we are happy to work with us. So it will be an ongoing focus. There's no quick fix overnight, but it will remain something. And I would like to think that over time, Mike, that you would see that come down as a proportion of the percentage of our product as we look forward.

And Mark, do you want to touch on -- maybe Trent could even touch on this as well, just the leverage against the employees around STIs and how we think about the ESG implications.

So it's a really good question, Mike. So everyone, I'm Trent Peterson. The really short answer is no. In the STI and LTI at the moment, there is no direct mechanic as between the achievement of sustainability, broader ESG goals and STI or LTI outcomes. The more nuanced answer is, firstly, it was directly discussed at both the Board and Rem Committee. So it's an active piece of discussion. It's a real topic. More broadly than that, we actually consulted with our shareholders through the course of our ESG roadshow that we did through the year. I think it is fair to say that the sentiment of shareholders toward that matter was that it's a very good idea in concept, but the application and implementation of it is much, much trickier and that I think there was quite a clear sentiment of skepticism expressed by our shareholders in relation to implementation of objectives that lead to outcomes for management. And I think the most -- a profound observation that was made to me about that was that a number of shareholders would observe that those sorts of targets, in their opinion, are too often met, and that there is a lack of sophistication as to yet around what are the right measures and how do your hold teams accountable for them. So I think we're on that journey, but we are not there yet. The other point that I would make is in relation to the leadership team's STI and LTI participation. There is an overriding discretion on behalf of the Board, that is held by the Board rather, to flex those amounts. And in the event that there was a sustained ESG breach, and it is defined as broadly as that. We don't include a list that we felt warranted an adjustment, and that's the discretion that the Board holds and we would do that.

Thank you, Trent. Do we have any other questions from the room?

Good morning. I'm...

Turn your mic on.

I'm Peter Cooper, a member of team Invest here in Melbourne. My question is in relation to inflation. 2-part question. Firstly, what are your inflation, your expectations and your pricing for the coming year? And if you had to think about your current pricing of vascular regular goods at the moment compared to a year ago, what's the increase of those prices?

[indiscernible]?

Yes. So in terms of the -- if I start with the second part of that question, if I think about the basket of goods, we're pushed through significant price increases across most lines throughout the business. So we've seen cost of goods increase, and we've largely passed that on to consumers in terms of, I would say, between a 6% and 10% price increase in the basket, if you thought about at a total level. And what you find is that's probably higher in lower-priced items, and some of that's just retail price hierarchy in our business versus perhaps a supermarket where you move by cents and the like, we tend to move by price points, you go from $19.99 to $24.99. So that's quite a large price increase when you think about it from an inflationary perspective. So we have priced -- what we think about when we do that is we make sure that we're looking after the gross margin of the business because, obviously, that flows through the model. And we think about it far more in that piece. So I would say, across the board, we've seen 5% to 10% increases in almost every range across the business. We've probably got a few that we would consider everyday low price, and we haven't moved those, but the rest have been moved more recently. As we look forward, I think from our perspective, what we're seeing is that, I think, the bulk of the cost price inflation in terms of goods is starting to subside to a degree. I think the watch out there is the -- obviously, the Australian dollar and the impact the USD might have on that where we are today. As we've said in our announcements today, we're very well covered for FY '23, but FY '24 could become more challenging. But -- so what we're now seeing is cost prices from suppliers starting to relax a little as demand seems to have peaked and they've started to move to the other side and there's a freeing up of production capacity. We're seeing shipping rates come down, which, in some of our brands, Mocka and Focus, make up a much larger proportion of cost of goods sold than in the Adairs brand. But equally, they are also often charged in U.S. dollars. So therefore, we've got this U.S. dollar is probably the biggest risk I see in our cost of goods. Across the rest of the business, I think, we think about more like a 3%, whether that's wage inflation with our store teams, we saw it was 4.7% this year. I don't think that, that goes up again next year at that sort of rate. I think that we're probably more likely to see that come back to a more traditional 3% to 4%. Most of our landlords sort of operate at that 3% to 4% sort of range in terms of an annual increase. And if stores are being renewed often, we're getting a better deal on that. So that probably brings that back towards more like a 3% increase. So I think as you think about all -- and if you think in terms of our business and our cost inputs, labor and rent are the 2 biggest cost inputs outside of our cost of goods sold. So as we look forward, we're sort of factoring in that 3% or 4% sort of increase across those sorts of lines that will see us then re-correlate our prices. But what we've tried to do largely is move those prices earlier and don't move them every 6 minutes and try and put them through now. And we've seen that consumers today are quite happy to have accepted those price increases, which is a positive for the business.

Any more questions in the room? Okay. Well, we might move to the written questions. There's been 4 questions that were submitted prior to this meeting. So I'll just briefly read these out, and we'll address them. The first question was how do you plan to address the collapse of the share price? Can you explain the loss of 2/3 of the value of shares in just 1 year? Again, thank you for your question. As I mentioned in my speech, this is obviously of great importance to us as a Board and a leadership team. We genuinely don't think the current share price reflects the underlying value of this business. And we do believe it should be considerably higher. If that shouldn't be news to you, but we genuinely believe it's undervalued today. We do know that a bunch of institutional investors have been aggressively selling these discretionary retail stocks over the last few months. Again, that's no surprise either. But that's primarily based on broad macroeconomic headwinds, which is mainly related, as we touched on before, to interest rates. So we can see it happening across the board. And discretionary retailers are trading at about 55%, we think, of their 12-month highs. We're down about half as well. So we're about half the high than we were in January. In January, the share price was about $4.19. So we were relatively consistent with that group. There are ups and downs within that group, but they're relatively consistent. Fortunately, we've got a series of brokers that follow their stock. We've got 5 of the brokers have got us as a buyer. We've got 4 as a hold. There was a lot of information there that we are communicating to the market about our strategy. So in terms of how do you plan to address the collapse of the share price, what we're planning to do is exactly what we're doing, and that's addressing the strength and growth of the company. So strategy is clear. We're executing. We've got the right team, and we're pushing forward. So we're going to continue to do that. We need to continue to communicate to the market. This is communicating to the market. And shareholders, obviously, about overcommunicating in these times is important, so we'll continue to do that. But again, it shouldn't be noted that we are not happy with where the share price is today. So I hope that answers that first question. In terms of the second question, how are sales for Adairs, retail, Adairs, online Mocka and Focus for the current period end September 2023 compared to last year? Mark, you've covered this a bit, you might want to touch that?

Yes. I think it has been covered in the business update. But as I mentioned there, obviously, the stores are trading particularly well. Online has probably pulled back faster than we expected, but we've seen that rebound. That customer just moved back to store. So as we noted in there, the business is -- all 3 businesses are trading. Mocka, obviously, is the most impacted with that pullback from online. But overall, the total group is operating in line with the plan that we initially put out and in line with the guidance that we've got.

Okay. Thank you. Third question. Has the situation at Mocka been turned around? And are margins customers and customer engagements back on track? Over to you, Mark?

Yes. I think that was also covered this morning, which is good. So I'm glad that we are meeting what shareholders were thinking about as they obviously received the annual report. But as I said, I think the operational issues are largely now resolved at Mocka when largely they are resolved. We are delivering orders through that supply chain network, the quality issues, product issues of the second half of last year are now behind us. So as we sit there, we're now in the rebuilding the consumer confidence piece and making sure that the brand can continue to deliver. So I think we'll see the quarter 1 or first half of Mocka this year will be tough because it's going up against a period where last year, we had Victoria and New South Wales closed for a large period of that time. So online pure-play businesses tended to pick up a bunch of the sales that were available there. So we're really focused on making sure the business is set up for a great second half, and that's our focus at the moment.