Articore Group Limited (ATG) Earnings Call Transcript & Summary

Thank you. Good morning, everyone here in Australia, and good afternoon for our U.S. investors. This is Paul Gordon, Company Secretary for Redbubble Group. Welcome to this investor call in relation to Redbubble Group's COVID-19 response and business updates. With me on the line, I have RB Group's Interim CEO, Martin Hosking; and CFO, Emma Clark. The key information for today's update is in the ASX announcement released to the market this morning. Please note that the financial information in the release and in the upcoming call are from internal management reports and have not been subject to audit. Martin and Emma will now speak, and then we will open up the floor for questions and that the session is also being recorded. Before we start, I would like to call your attention to the safe harbor statement regarding forward-looking information in our ASX release. That safe harbor statement also applies to this investor call. Now I will pass on to Martin.

Thank you, Paul. Hello, everyone. We truly are in unprecedented times. A few months ago seems like several lifetimes. From all of us at the Redbubble Group, we hope that you and your loved ones are in good health. Our thoughts are also with the frontline workers who are doing their best to keep us safe. As the situation unfolded, our top priority has been the health and safety of RB Group's employees and the broader community. We took early precautions to transition our workforce to remote work on March 10. Across all 4 offices, our teams have demonstrated remarkable flexibility and adaptability in how they have moved to work from home. There has been no discernible adverse impact on business operations, reflective of the systems and infrastructure that we already have in place. RB Group's operations and supply chain is globally diversed and localized in our core geographies. There are existing redundancies from diversification even within those geographies. To date, both the business operations and the supply chain remain robust with no discernible disruptions. The majority of our fulfillers are continuing to operate normally, and there are no issues with blank inventory supplies at this stage. Shipping carriers also remain in operation. Of course, we continue to monitor the external situation closely, especially in the group's larger markets such as the U.S. and have enhanced contingencies to ensure continuity of supply. As the situation continues unfolding, we are also keeping a close eye on the demand side. Sales have fluctuated since the second week of March. However, the diversity and resilience of RB Group is evident, with sales holding up relatively well. While retail demand outside of RB Group is much lower, consumers are having to shop more online, and our product suite and fulfillment network position us well to meet this demand. Emma we will speak more about what we are seeing on demand and the prudent cost-control measures that we're undertaking to preserve cash. Outside of COVID-19, the Board and the executives have been focused on the strategy required to drive growth and further actions to ensure that resources are aligned. These decisions have not been made yet. And we are very -- we'll very carefully consider them in the context of the broader economic environment, our business performance and with regard to our commitment to both employees and the wider community during this time. In addition, the search for a new permanent CEO will also be deferred until later this calendar year. I'm committed to serving the company for as long as it takes. I also want to take the opportunity to farewell and thank Richard Cawsey, who retired as Chair from the Redbubble Board yesterday. Richard was among our first group of investors in 2006 and has served on the Board for 10 years. I have deeply valued his leadership over all this time. I also want to welcome and congratulate Anne Ward as the new Chair. Anne has served on the Board for the last 2 years, and I look forward to continuing to work with her. In addition, a new independent nonexecutive director is expected to be appointed to the Board in coming weeks. Before passing on to Emma, I want to reiterate that the underpinnings of the business are strong, and we are refocusing the strategy and operations to ensure we can sustain the business and thrive through the COVID-19 situation so we are best positioned when external circumstances normalize. The current situation is unprecedented and remains rapidly evolving in RB Group's core geographies. We continue to keep a close watch, but all in all as the owner of 2 online businesses with a well-diversified global supply network, we are resilient and well positioned to handle the current circumstances. Teams across RB Group are continuing to work through -- work together, enabling artists and partners, consumers and fulfillers to connect. The group is also maintaining its strategic focus across the key areas that are critical to marketplace growth and capturing the business' long-term potential. Over to Emma.

Thank you, Martin. Likewise, to echo Martin's comments, I hope you have all been keeping well. Our teams are now in their fourth week of working from home, and things are still running very smoothly thus far. I could not be more impressed with how everyone has taken to the new mode of working and how teams are staying engaged and productive. Prior to coronavirus appearing, Redbubble Group's quarter-to-date year-on-year marketplace revenue growth had been stronger than the December 2019 quarter. From the second week of March and coinciding with the spread of COVID-19 globally, we began to see changes in demand. Daily performance has fluctuated. However, overall we have seen modest sales contraction over the past 3 weeks. In the past few days, we have seen some improvement, which underscores the unpredictability of forecasting business impacts in the current environment. To date, the fluctuations in demand have been of a similar level at both the Redbubble- and TeePublic-branded marketplaces. The extent of the impact has also been fairly consistent across core geographies and product categories, which is to be expected given the extraneous nature of the situation. The group is currently benefiting from strong currency tailwinds, especially as the AUD has lost significant value against the USD in the past few weeks. It is, however, important to note that some of the FX benefit will be lost as we go down the P&L because there are also a substantial amount of expenses in U.S. dollars. However, we are less exposed than other sectors to the restricted and reduced people movement and social distancing measures. And however, there does remain ongoing uncertainty as to the duration and impact on consumer sentiment and behavior and therefore its flow-on impact to Redbubble Group's trading over the coming months. Given this, we consider it appropriate to withdraw our guidance of expecting to grow operating EBITDA year-on-year and achieve positive free cash flows in financial year 2020. As at the 31st of March to date, Redbubble Group is maintaining a solid financial position with a cash balance of $31 million with 0 net debt. Given current business performance and the measures that we are taking, the group does not currently anticipate raising additional equity or debt funding. We are prioritizing a number of tactical opportunities to reduce our cash burn whilst maintaining ongoing business operations. Firstly, the cash component of the nonexecutive directors' remuneration will be reduced by 20%. Secondly, Martin's interim CEO remuneration will also be reduced to $600,000 per annum, with an additional $300,000 per annum payable at the Redbubble Board's discretion based on his achievements in key results areas. His remuneration will also be further impacted by another item that I will cover shortly. We have implemented a hiring freeze on all new staff across the group until further notice. We are reducing or have halted all discretionary spend across the group also until further notice. And lastly, all Redbubble employees will be encouraged to move to 80% hours and pay wherever possible, so a 20% reduction on our employee cost base. The Redbubble executive team, including Martin, will also move to take a 20% pay reduction but will remain working full time. As Martin has previously mentioned, further cost control measures may also be considered in the coming months to ensure that resources are aligned to driving growth and reflective of the situation. We do recognize that the situation is fluid and evolving. We are closely monitoring the macro environment and the business signals that we're seeing. We're also controlling the levers that we can and have a firm idea of the things that we need to do to preserve cash. We have been decisive in taking early measures against COVID-19 impacts, and we continue to respond and manage our actions in an agile and pragmatic way. Further market updates related to the situation will be provided as appropriate. Thank you. We will now open the lines for some questions.

[Operator Instructions] Your first question comes from Tim Piper from Royal Bank of Canada.

Just a question. Is it possible to quantify the top line performance in March? I mean you sort of -- it looks like the FX has about a 10% tailwind in the first few weeks of March, so going by your comments of constant currency versus floating, is it fair to assume that in constant currency sales are down sort of 10% circa over those 3 weeks?

Thanks, Tim, for the question. In terms of with -- so first thing to say about -- because I know everyone will say, "Give us the numbers." We are still actually on the 31st of March. We close on Pacific Standard Time, so we're actually still 7 hours away from even stopping sales for the 31st of March. So our quarter is not closed. So that's why this is a business update and not a financial update. We will have a financial update as scheduled on the 28th of April, and that's where we will have all of the numbers for everybody. In terms of the sales impacts, I mean the way to think about it, so your point on currency conversion is correct. As I said, the sales before corona were effectively tracking better at the consolidated level than the prior quarter in terms of year-on-year growth. That's both on constant and on floating currency. In the time since the second week of March, when we've seen fluctuations in demand, we have seen a lot of the growth go out of the business for that period, if we're talking from a year-on-year perspective, but as we said, a lot of that, and to your point, has been cushioned by the AUD falling also during that period against the U.S. dollar. So on a floating basis, we're better than on a constant currency basis quite a few more percentage points than what you would normally see, but we do not have the final numbers yet.

Okay, okay. Got it. And just second question, just around priorities now for the second half. I mean at the half, things like SEO, social marketing, customer experience, new product launches were called out as priorities for the second half. Just with the current situation, how do you see this now near term? We -- are you going to be more conservative? Have some of those priorities now changed while this situation goes on?

Yes, I'll take that question. Thank you very much. We are -- as we've highlighted, the Board and the executives are looking at the strategy for the company and alignment against that strategy. We're not -- it's not anticipating and it's not looking at anything dramatic. It is focusing. I think this is a time of focus. And it's particularly a focus on the fundamentals of the flywheel, what causes the flywheel to generate growth. And as we've looked at that, it comes down to a relatively small number of things. And particularly in our dialogue with TeePublic, clearly their flywheel is continuing to be strong, while the Redbubble one had not. And so we're certainly drawing some lessons from that. It does come down to a relatively simple number of things and which we identified some of the key ones. So an effective SEO strategy is certainly an effective way of ensuring those customers who are going to or have the potential or are actually loyal have a good experience. And it also does come down to developing and ensuring the core relationship with the artists is strong. So it's not about any dramatic change, but it is about focus and ensuring that we're doing the smallest number of things which have the most impact. That's particularly critical at this time. I will say as well, of course, that we are prioritizing strategic initiatives which can drive GPAPA growth relatively quickly, those including the way in which we're bidding and the search engine marketing which we're doing, the way in which we are responding per -- on e-mail and making sure that that response is appropriate for this situation. And we are seeing that the -- in the context of the total situation which -- that people are looking for the sorts of things which Redbubble is and the Redbubble Group create and produce -- or the artists create and produce, I should say. We don't create and produce anything, clearly, but the artists create and produce. So having -- bringing that meaning is -- people were looking for that. And so that is something which we're driving through tactical measures as well to engage with the artists and make sure we're engaging with the customers on stuff which they are looking for.

Okay, sure. And just one final quick one. You mentioned that sales performance across the categories have been generally similar. Is there anything more specific you can talk to there? I thought maybe some categories like homewares, artware, artwork, et cetera might be outperforming some more discretionary sectors such as apparel. I mean is -- what are you seeing there?

Yes. I'll pass to Emma.

So I'll take that...

And...

[Audio Gap] where they have been very, very strong for a period of time now, about 6 months. Those trends still continue. When I'm talking about the impacts, I'm talking really about the impact that coronavirus has had, which I know is your question as well, which is has it been disproportionate amongst our categories. And the answer is simply no, not at this stage. So when we're seeing the modest contraction, we've seen that sort of equally across all categories. And when we're seeing the recent strength, we've seen that equally across all categories as well. So it doesn't appear to be that people are more or less likely to buy a t-shirt in the current circumstances, for example.

It is -- just as we're talking about product, is worth noting that we're -- even though people are working from home, we're able to launch a new product, which is the pins, which are showing the potential, the strength of the business. They're performing well. I also just am aware that I may have got cut off when I was talking about the supply chain. The point was the point which was actually made in the release. The supply chain is solid and with high degrees of resilience and redundancy. And so we're not seeing any major issues in the supply chain, just so people got that point.

Your next question comes from Grace Fulton from Goldman Sachs.

I just wanted to sort of drill down a bit more on Tim's initial question and your comments around the performance since sort of second week of March. You mentioned that sales have shown modest signs of contraction, so at a group level you've had modest negative growth. Could you maybe just talk a bit more about the -- how it's been between the 2 marketplaces? Because obviously, in the second quarter, Redbubble was substantially lower than TeePublic. And you mentioned that the quantum of the change has been similar, so just whether like which -- whether Redbubble is negative but TeePublic was still positive in that period.

Thanks, Grace. That's a good question. So when I'm talking about things remaining relatively consistent, it's based off where they are percentage-wise at the start, so it's a relative comment. So what we have seen is -- which, as I said, not surprising given the external nature of the situation. So we have seen both marketplaces impacted to the same degree. So if Redbubble has had a contraction, TeePublic has had a contraction, clearly they're off different growth rate bases, but they've had a similar level of contraction. In fact, it's very, very highly correlated. So when -- what we've seen at one marketplace, we're seeing at the other almost 100%. So that doesn't mean that TeePublic, for example, goes from 80% growth to 0 and Redbubble goes from 0 to minus 5%. It's relative to where they started. So if they've contracted 10% or 20%, they've contracted off their opening positions and points in terms of existing growth rates going into this. Does that make sense?

Okay. So sort of the percentage -- the change in percentage growth rates is essentially the same, but they've started from a different growth rate.

Exactly, yes, exactly.

Okay. Also just in terms of the cash balance, I know you've got the deferred TeePublic payment coming up. Can you just confirm that that's still happening in May? And given the changes in the exchange rates, how large do you expect it to be in Aussie dollars?

So yes, we do -- we are still making that payment in May as per our expectations and agreements. It's USD 5.6 million. In terms of hedging and how we're going to make that payment, we have been accumulating U.S. dollar balances for quite a few months now, so we will actually be making that payment out of U.S. dollar sales that are then -- so there's no currency conversion, so there's been no need to hedge that payment.

Okay. Just also in terms of your comment that you don't anticipate needing any debt or equity funding, could you just sort of talk through how you're thinking about the duration of the disruption? Because obviously that comment is in -- is to extent dependent on how long you expect these impacts to last.

Yes. It's the question for which no one actually has the answer at the moment, Grace. So obviously we say we are currently anticipating not needing to do either of those things, but we do that without knowing how long this is going to go for. We don't have any special forecasting abilities any more than anyone else on this call does about the duration and the extent. What we would say is that the cost measures that we have announced today, combined with the impacts that we're seeing on our business, are sufficient to see us through. Clearly, if sales performance was to degrade or this was to go longer than Christmas, we would need to take further action. And there are further actions that we can take prior to looking at debt or equity raising as well, so we have some further actions that we can take if it does get worse. At the moment, we've simply matched the action to the impact that we're seeing, which does see us through even if it does go on for quite a few months.

Okay. So you mentioned sort of Christmas, so about December this year is sort of where you've sort of worked out that you'll be fine from a planning perspective.

Correct.

Okay. Also just with all the global retail shutdowns, a lot of basically all these retailers are having to move to solely operating online. Have you noticed any changes in, I suppose, pricing pressure and also customer acquisition costs with Google, Facebook prices increasing?

I can take that one. The answer is we've actually -- at the moment, we're finding that customer acquisition costs have been improving slightly. So we haven't seen any increased demand specifically as a consequence of the changes which were made. I would -- one needs to be aware that these are pretty large organizations in general who are not that adaptable. And so we haven't yet seen what you're suggesting.

Your next question comes from John Lewis from Osmium.

I got on a few minutes late, but I guess one of the questions I -- we saw something today that the -- for Google, Facebook, Snapchat and Twitter, that there may be a quite a drop for ad revenue. And I guess one of the questions I have is do you see any opportunities in a tight or constrained market where you could put some capital to work to really drive your business.

Thank you, John. That's actually a great...

It might just work, but I'm just curious what you're seeing there.

Yes. Thank you, John. That's a good continuation from the follow-on question because that's what we have seen, is that, rather than increased demand for advertising, there's actually been reduced demand, and so -- online. And so we are able to take advantage of that. So at the moment, we have been doing so in a very tactical way, making sure that we're responding and we're bidding as effectively and efficiently as possible, driving GPAPA growth. We haven't -- we will continue to be looking at that very closely in relation to balancing out our cash requirements. So we're not looking at moving to what we might consider lifetime value, customer value or something like that given our cash resources, but it does give us room to be ensuring we're building, getting maximum customer -- getting ourselves in front of as many customers as possible. So yes, I think it does create an opportunity for us to make sure that we're taking advantage of the -- what we're seeing at the moment or lower advertising costs, and we are responding to that.

Okay. That's helpful. I saw an interesting report from Cowen that thought that ad revenue might come in 17% to 20% lower for those 4 companies for 2020. So there may be some opportunities on the horizon for you to put more capital to work. I guess it might be too early right now in the cycle, but have you guys huddled up on figuring out where you can go on offense to actually grow the business? I know right now is a period of kind of let's just get our feet underneath us given all these tremendous changes, but I guess one of the questions I would ask, you guys are an industry leader, how do you -- and again, it might be too early. Maybe it's a May or June or July thought process, but what could you do to go on offense here to more meaningfully grow your business? Or do you need more opportunities to think about that?

John, you hit it completely correctly. Right now, we're on defense. You are right. We're responding to the immediate situation. We're trying to understand the immediate situation and make sure that the business is positioned to survive. That's the purpose of this announcement today, exactly what you're identifying and which we've put out there. We are very conscious of the potential reality of the business thriving through the current situation. And we will be -- and we, the executives and the Board, will be looking at that very consistently as we're going through -- as we move from this period through to the next period, but you're quite correct. It is something we support, we are focused on.

Your next question comes from Ivan Ries (sic) [ Ivor Ries ] from Morgan (sic) [ Morgans ] Financial.

A question for Emma. First, on the outflows, normally a June quarter is an outflow quarter from an operating cash flow point of view. And is there any reason why June quarter outflows will be different in terms of the normal -- the -- relative to the scale of the business in the June quarter?

No. So seasonal patterns and cycle trends in that regard still remaining intact. I mean the only obviously massive caveat that I would put over that answer is we have no idea what trading is going to be like over the April-to-June period given what's happening externally at the moment. So forecasting is proving to be, as with all organizations, somewhat challenging, but that being said, all other things there being equal, there is no change from -- in terms of the seasonal trends. So the expectation should be the same as prior year.

Right. Okay. And in terms of relative market shares versus competitors, I just wondered if there's any -- have been any movements in this latest quarter.

We haven't seen anything as yet. Obviously, we don't announce our quarter until the end of April, and presumably most of our competitors are going to be announcing their quarter around the same time. Most of our competitors have not given market updates, so we don't have any particular insight into how they're traveling through this situation at the present time.

[Operator Instructions] Your next question comes from Owen Humphries from Canaccord.

I'll try to be quick here. Just, Emma, on your fixed cost base, your -- if we look at the first half for the group, it was running at around that $37 million mark excluding CapEx. Just with your initiatives, where are we expecting that cost base to now land on a run rate basis?

I haven't actually provided an updated view on that, Owen. Very good question, though. We will provide that at the end of April. What I would say, and you know this as well as I do, that the employee expense base is the largest part of our operating expense base, and therefore, obviously, taking everyone to 20% down on that is going to be a substantial amount. The only thing I would say in terms of devil in the detail is that in Australia we need to request our employees to do that and they need to actually agree and amend their employment conditions. So they do have to sign into it. So we're obviously hoping for a very high takeup rate. And as I said, that will result in a material reduction in our expenses, but we still have to go through that process, which we're doing at the moment.

And I just would also -- just within the theme, just noting the volatility as well. We're not saying how long we're locking in that 20% reduction for at this point. It will depend upon how circumstances evolve over a period of time. So if in the event we see a sustained demand for an extended period of time, we will revisit that. So just be aware it's not something which you can lock into forever.

And given potentially a lower revenue base in the next quarter or 2, what are we doing on the fulfiller front? So if we go through your P&L, we kind of get the top line. From a margin perspective, this talks about the marketing spend. And I'm guessing the lower CAC is offset by potentially a lower conversion rate. So look-through percentage of marketing of revenue is probably flat, but if you talk about your gross profit margins, are you seeing the potential to push through lower pricing with your fulfillers as they take a bit of the pain through this process?

Well, I think, so a couple of dimensions to that answer, Owen. So first of all, our marketplace is also dependent upon the health of all the others that participate in our marketplace. So us doing any kind of pressure repricing and pushing our fulfillers to the wall at a time where they themselves are suffering is sort of a bit like kicking an own goal to a certain extent. So we do balance that off. That being said, there's definitely been more appetite from some partners in our fulfillment network to do some co-promotions. We haven't actually changed our promotion strategy as a result of COVID-19. We have kept with our scheduled set of promotions. And as we said to you previously, we're actually trying to slowly reduce the overall number of promotions that we have. So that remains intact. That's obviously a margin-protective sort of strategy. And in addition to that, as I said, some of the fulfillers are looking at doing some co-promotions with us, which will mean that, hopefully, we get a win-win, which is a bit of better benefit in terms of demand lines for Redbubble, extra volume to the fulfillers and everyone shares in the extra volume. So we're planning on doing that across sort of April and May. So there are definitely opportunities that are coming up through this set of circumstances. And where they make sense financially, we are taking them up and pursuing them, but we're not necessarily going to go out and sort of, for want of a better term, just go out and gouge our fulfillers.

And maybe just a last quick question. If you go across your competitor set that are online, are you seeing any of them act potentially irrationally on the pricing front? Are they lowering their pricing through this time to drive demand?

No. So I mean obviously we're still pretty early in all this, but so far, we haven't seen our competitors like go to lower pricing. We have seen an uptick in promotions online in general, but we haven't necessarily seen people who have got a competing t-shirt like dropping the price of that t-shirt to try and get extra volume. So that being said, it's early. We may see that in the future. We just have not seen that yet.

[Operator Instructions] Your next question comes from Kieran Kennedy from Mirrabooka.

The question I had in mind was just in terms of content partnerships. I guess just a sense of whether you're a reasonably attractive channel for some of those partnerships in a pretty disrupted world and whether that might bring forward some of those opportunities or whether it actually delays them because it's not the sort of demand environment to be launching new initiatives.

I think you've got it, Kieran. Those 2 factors are at play. And at the moment, we're certainly -- we're in the second of those factors. At the moment, people are just responding tactically. How they respond strategically is yet to play out, so I'm -- I can't say exactly how those would play out in the next period of time.

Right, but do you think -- as the dust settles in whatever world we're in over the next few quarters, do you think you're going to pursue some of those conversations?

That would clearly be the hope, Kieran.

[Operator Instructions] Your next question comes from Mark Susanto from Wylde Street Investments.

Just a couple questions. The first one around the move to 4-day week. What do you see is the impact to the business for that?

Yes. Thank you. Clearly, it's a factor which we have taken into account. Just to -- the simple reality is that -- of us as a business is that the flywheel itself drives most activities in the short term that drive sales. So we don't see it having that -- what people are doing on a day-to-day basis has more impact in the medium term than it does in the immediate term, with some obviously noticeable exceptions within the marketing -- in the marketing area. So we don't anticipate the move to a 4-day week will have any impact on immediate activity, combined with the fact, as we have highlighted, we're moving to a more focused strategy. The more focused strategy is designed to drive -- to identify those areas, the least number of things which have the most impact. So our expectation of net-net overall of that is that we will continue to drive -- we'll move towards a higher growth -- on to a higher-growth trajectory by doing a smaller number of things. And the move to the 4-day week is not -- should not be impacting that.

The other comment that I would make is I think we were probably one of the first companies to move to fully work from home and close down our offices. And they -- people have been very, very productive. So when we first moved to work from home, I was a bit worried that productivity would take a hit. That has not been the case at all.

Okay. The other question that I have is I think the announcement around Merch by Amazon pausing or closing -- pausing for the time being. Do you see that having any impact on yourself?

Mark, we -- the -- we -- Merch by Amazon had been seen as a major threat to Redbubble. Over the last 12 to 18 months or probably 12 months, it's become clear that it's much less of a threat, and the reason being is that they haven't attracted the artists. So just like -- you may be aware of the site called Etsy. Amazon tried a competitive product but wasn't able to get traction with, in their case, the craftspeople. In our case, they haven't been able to get traction with the artists, and so it hasn't been a major threat. Their focus has been on sports brands and doing very traditional merch, which is not the marketplace which we play in.

Thank you. There are no further questions. I'd like to now hand back to Mr. Hosking for closing remarks.

And I will be quick because -- I thank you, and I really appreciate your time and appreciate so many people dialing in to this call. So I want to wish everyone all the very best. And may you and those you care about keep well during these times. We look forward to speaking to you again at our scheduled third quarter release at the end of April. So thank you very much, and keep well.