Booktopia Group Limited (BKG) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining us at the Booktopia First Half FY '22 Results Briefing Session. To commence proceedings, we will start, of course, by acknowledging the Cadigal people of the Eora nation as the traditional custodians of the country we are presenting to you from today. We recognize their continuing connection to the land and water, and thank them for protecting this coastline and its ecosystem since time immemorial. We pay our respects to elders past and present, and extend that respect to all First Nations people present today. There'll be 2 of us presenting. My name is Tony Nash, and I'm the CEO, and one of the founders of Booktopia. I'm joined by Geoff Stalley, our Chief Financial Officer. The plan is to run through the slides we have produced, summarizing Booktopia's results for the first half of FY '22. We have plenty of time for questions. So please send them through, and we will address them at the end of the presentation. Let's turn to Slide 4. If there's a delay with your slides. I'll just keep talking. I know that sometimes with these systems they do delay, just catch up, and we'll stay on track I'm going to call out some of the top line numbers for you. For those of you that I have met before, you'll know that I'm a genuinely positive person. Growing Booktopia taking from a $10 a day budget to the size it is today doesn't happen by being a pessimist, so I can assure you that. But there are some numbers in here, quite frankly, that are not as spectacular as we were expecting. So I'm not only going to call out the positives, we need to talk about the numbers that didn't hit the mark. In particular, we didn't make as much profit as we set out to do. But in saying that, we've made a lot of headway in the past 6 months. Geoff and I will take some time to give the results a lot more color. We want you to get a clear picture of Booktopia's critical mass, and what numbers are one-off costs in H1 and where we've been investing in for our future. I will say 1 thing now that we are starting to see the coronavirus appear in the rear-vision mirror rather than a bug on the windscreen, we're really looking forward to the next 6 months and beyond. Okay. Starting off with the green. We continue to experience solid double-digit growth in ship units and revenue, and you'll see on following slides that gross profit is up as well. And quite frankly, all of the growth percentages fell in the right sequence, shipping more units that delivered an even higher uplift in revenue with an even higher uplift in gross profit, means the extra revenue is more profitable above the line. Let's look at one of the red flags. Wages were up in our distribution center. We're in one of the LGAs where we were in the strictest lockdowns in Q1. When 1 person had to isolate, our whole team had to isolate. Thankfully, touch wood, in all of this time, we haven't had 1 transmission in the workplace. We've had positive cases outside of Booktopia during Delta, and even in the building during Omicron and each one was dealt with properly. You may think and feel that we're past the virus. But even today, Omicron and health restrictions are still in place in the Booktopia workplace. For example, we still have each shift going home 15 minutes early before the next shift starts. And the next shift starts 15 minutes later than it would normally do to create a 30-minute buffer, so no one crosses paths. Just because we've vaccinated and a lot of the restrictions that are behind us doesn't mean we haven't stopped taking care of our people. This all comes at a cost, and we are really looking forward to returning to normal operations and making every minute as productive as it should be. Back to the green, average order value continues to grow quite nicely. And the most important number I've been watching over the past few years is our average spend per active customer per year, and that continues to grow. For those who have been watching us since the IPO presentation, you'll remember that in FY '18, that number was actually $85 per year. By FY '20, it was $111. FY '21, it was $126 per year and 6 months into FY '22, it continues to grow and is now at $130 per year per customer. You'll see we're verging on taking 2 orders per year per customer, whereas just a few years ago, it was really just over 1. My challenge to the team is how do we get that number to 3 orders per year? These are people who trust us, and keep coming back. It's the cheapest marketing of all. Back to the red. And the all-important measure of any business, we have EBITDA coming in at half of FY '21's result. It's definitely not what we were aiming for. Absolutely not. We've had many years of growing EBITDA. Growing EBITDA means you have to focus on what's below the line as well as above. So we take -- we took a good look at everything that was happening below the line in the last month or so. The Board, myself, the executive and the whole leadership team have sharpened our pencils and put a laser focus on costs for the remainder of FY '22. Please understand, I have been running my own companies now for over 25 years. I've been through this before. Sometimes, you just have to tighten the belt a little bit so you can get back on track, and we're doing that right now. We haven't stopped investing and planning for growth, not at all. We're simply challenging everything below the line to ensure we extract as much profit as we can moving forward. Moving to Slide 5. We summarize the stated play here. The main point on this slide is the bottom section about focusing on costs. There are 2 types of costs, ones where we have to expense them in that year and others will be get to add them to the balance sheet and expense them or depreciate them over time. You all know that. So when other companies say, we're investing in the future, sometimes we get to load them on onto the balance sheet and depreciate them, and a lot of the time, we're investing in the future by fully expensing them in that financial period. Quite often, that is around building your team to help you navigate the future growth. You'll be pleased to hear we've absolutely invested in our future by hiring people in the first half. When the Delta variant hit, and continued to disrupt, we regrouped and decided to pause that tub of investing for the moment. There are many messages we are delivering today, but the one we are currently laser-focused on is our P&L expenses because that's the most important 1 of all. Moving to Slide 6. Some of you may only be attending a Booktopia presentation actually for the first time. So we have a slide here to give you a quick recap. I won't go through the highlights on the left, you can look at those later. If you look at the graph on the top right, you can see that over the past several years, the book industry has continued to grow. Interestingly, in 2015, Booktopia's revenue was $50 million, and the market, in the meantime over those years has grown by around $270 million. And if you have been putting our revenue over a similar period, you will see that Booktopia's contributed significantly to that growth story. The graph at the bottom right is illuminating the penetration of e-commerce in Australia. Prior to the pandemic, 2022 was on track to be 13% of all retail sales. During the roadshows for the IPO, a lot of people were talking about e-commerce sales like it was a tsunami. In fact, I still get that kind of comment or question, where the kind of the water inundates the land and then after the tsunami, it returns back to the shoreline where it once was. The pandemic and e-commerce is the complete opposite. It's been more like -- and if we were to use the Japanese metaphor, still like a bullet train. It's just shot us further down the track than we were going to get there in the organic way before the pandemic. And by 2024, the experts are now saying e-commerce in Australia will be 24% of all retail sales. To shed further insight on those percentages, the USA is already at 21% of all retail sales, and the U.K. is at 35%. So Australia literally is just in lag with those markets. I'm going to hand over to Geoff.

Thanks, Tony. And as Tony introduced earlier, my name is Geoff Stalley. I'm the CFO of Booktopia. And just moving on to Slide 8, which is a summary of the results and the KPIs, and consistent with the typical information that we provide each time we report. On the left-hand side is a revenue growth graph and chart, showing how we've experienced over the past -- showing our experience over the past few years. And in fact, for most of our 18 years, it has been fairly consistent revenue growth. It's pleasing to see at the half year '22 that we're just reporting on is more in revenue than the entire year for FY '19. Now calling out some of our key metrics on the right-hand side, and we'll go into more details for a number of these on following pages. As Tony said, we have shipped 4.7 million units in the half, and have grown each of our key revenue metrics, pleasingly. GP remains strong. However, the costs in our DC were not where we want them to be, and we're impacted by a number of factors that will go into in some later slides. Consistent with our customer obsession mindset, however, we did control our marketing spend to maintain our customer promise. As a result, and as Tony has outlined, our EBITDA was not where we wanted it to be at $4.1 million or 3.2% of revenue. Now let's spend a little bit more time on some of these key metrics. Moving to Slide 9. Our key revenue drivers are strong and growing, both at the average order size and at the average customer spend. Together with the growth in units, we ship leads to a good growth in gross profit and gross profit margin. I'll now hand back to Tony to delve into more detail of some of our revenue drivers.

Thanks, Geoff. Let's go over to Slide 10. Looking at the slide on the left, how good is that? The bottom line is the spend from our new customers over the past 6 years. And the top line is our spend from our existing customers. We steadily win over new customers. And as time goes by, we continue to get them to spend more with us. The 2 graphs on the right are particularly interesting. The top one is our trade book sales, and the bottom one is our academic sales. You can see that the top line shows the significant step-up in February and March of 2020 when the pandemic hit. And in 2021, we never went back down. It's a perfect example of the difference between the tsunami theory and the Japanese bullet train one, I was talking about earlier. It was definitely a bullet train. So what's going on with academic. We've quoted on this -- we've called in this slide, we're a dominant player in the tertiary textbook market. The universities and colleges were significantly disrupted, international students weren't able to come to Australia. So the tertiary book market actually never really had the uplift that the pandemic brought as people were turning to e-commerce. So that uplift is actually still to come. The only other thing I would like you to consider is when you overlay those 2 slides of trade and academic, you can see that we are busy many times of the year. Most book shops are making haywire with some change from October to December for the Christmas period, whereas Booktopia is on the go all year round because we focus on trade and academic book sales. Let's go to Slide 11 and 12, it's a 2-part slide, Q1 and Q2. The orange line is our marketing spend as a percentage of revenue, and the green bars are our increase on the previous corresponding period from the previous year. The first 6 months of FY '22 was pretty clunky. Marketing was on, marketing was off, marketing was on. Revenue was constrained because we had disruption in the distribution center. These lines and bars actually normally smooth, and in alliance. It's a great graphical representation of on how out of balance everything was. If you are ever thinking of investing or starting an online store, if you want a nice rhythm, that's when more profit drops to the bottom line. External factors did not assist us in the first half. Over to you, Geoff.

Thanks, Tony. And moving on to Slide 13. It marries up with the revenue discussion that just been outlined by Tony, and gives a picture of what has happened across some of our key cost areas of the business. As we've already outlined, gross profit margins were and remained strong and growing at both the overall and the per unit level. Our distribution costs, however, were not where we wanted them to be, and we're impacted by a number of factors, not just over COVID. COVID lockdowns did result in additional costs as we navigated labor shortages and work to ensure the safety of our teams. But as I said, it wasn't the only impact. We ingested additional inventory as we had outlined in our prospectus, and we added -- which added activity to our DC teams. We set up an additional distribution center in South Strathfield, and we introduced robotics into our Lidcombe distribution center, all of which, whilst necessary to support our future growth, resulted in additional costs to our distribution. We did deliberately, however, control our marketing costs to and forego revenue to live up to our customer promise. Now moving to Slide 14. We provided a bridge between EBITDA from the first half of last year and the half year this year. So starting on the left-hand side, and adjusting last year for IPO costs to make it a comparable number, we start with an $8 million EBITDA for last year. Our increased revenue on last year delivered an increase in gross profit margin. However, we did have additional employment costs. Employment costs are made up of 2 parts: additional DC costs, or distribution center costs, of approximately $1 million, and the cost of strengthening our management and the teams around them to support our future growth, was the overall employment cost increase. Advertising costs were similar to last year, where we controlled our spend during that period as well due to lockdowns in various parts of Australia. Between the 2 dotted lines, we've called out costs that we believe are non-reoccurring, distribution costs associated with the lockdown and legal and consulting costs associated with M&A activities. The resultant EBITDA on the left -- on the right-hand side, sorry, was a $4 million -- $4.1 million, and therefore, the bridge between last year and this year, hopefully is explanatory for everyone on the call. Moving now to slides 15 and 16. They outline our P&L, cash flow and balance sheet in a little bit more detail. I won't spend a lot of time on each one of these, but I do want to highlight a few aspects of the business, and particularly on the first slide, Slide 15, our cash flow. Out of positive operating cash flow, which includes a substantial increase in inventory. We did invest in CapEx and new leases, our new distribution center, and we did purchase 25% of the Australian operations of the global Welbeck Publishing business. On our balance sheet, on Slide 16. Inventory growth and continued debt-free balance sheet are probably the key highlights here. More details can be found in our financial statements, which have now been lodged with the Australian Stock Exchange. I will now hand back to Tony.

Thanks, Geoff. So Slide 18. We've talked about a number of these already, but let's just recap. We are laser-focused on everything below the line, while we're continuing to grow the top line at our usual rate. I think all businesses and workers are hanging out for a normal way of life again. We've all learned firsthand the impact that lockdowns and the pandemic can have on families, businesses and industries. It's more disruptive than we could ever have imagined. But as they say, what doesn't kill you makes you stronger. Nothing is close to the truth for those businesses that have been profitable and growing in the past 6 months. Seriously, congrats to all business leaders who have navigated these past 6 months, and are continuing to power along hats after all of it. Just calling out one of the bullet points here on this slide. Right now in the Booktopia leadership meetings, we've got a close eye on the universities and colleges. The tertiary academic season is starting to take off, but the timing is different to most years. It's later this year. [ It will ] result across the country were later for some reason this year. In New South Wales, we were 4 weeks later than last year. Therefore, textbook buying has actually been delayed. But back to the big picture. Our focus is to do one thing, and do it very well. We sell books physically and digitally. And our mission is to be at the very core of the book industry, and we're on track to do that. And as the CEO and founder of Booktopia, when I think back to the massive years of growth, I know we've made more progress in the past 6 months, and perhaps our financials may foretell on paper. So that's it from the slides and the presentation. We're now ready to take questions.

[Operator Instructions] Your first question comes from Wayne [indiscernible], an Private Investor.

Back in December, you announced some proceedings by the ACCC. And you can see just looking at a graph how about 1/3 has been knocked off the share price since that announcement. So a couple of questions about those proceedings. Are they civil penalty proceedings? Or are they criminal proceedings? And secondly, you really need to resolve these. What are you doing to resolve them? For example, have you approached the ACCC to offer a voluntary enforceable undertaking?

Thanks, Wayne. Great question. We were definitely expecting a question on the ACCC, as you can imagine. We are working with the ACCC and cooperating with them and with our lawyers. And at the end of the day for me personally, and this is Tony speaking, like we are and have been for 18 years, obsessed about our customers. So any situation where we can be alerted where that our customers are not being taken care of in the manner that we expect. We always say, let us know as soon as possible. And that is why we have been on the front foot with them and working through any issues and resolving anything that needs to be done so we can get back on track. It's, of course, still an outstanding matter, and that's why it's with our Board and our lawyers and the ACCC. We're working through it right now. So I think that's the best I can say in terms of our feelings about the whole thing, and we want to move on.

Are they criminal proceedings or are they civil penalty proceedings because the consequences are quite different and the way it's approached might be quite different too.