Booktopia Group Limited (BKG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Booktopia Group Limited Full Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. David Nenke, CEO. Please go ahead.

Good afternoon, and welcome to our FY '23 financial results presentation. My name is David Nenke, and I'm the CEO of Booktopia. I respectfully acknowledge that I'm joining today from the lands of Eora Nation. On behalf of Booktopia, I would like to acknowledge and pay my respects to the custodians of country throughout Australia and recognize their continued connection to land, waters and cultures. We pay respects to their elders past, present and emerging. Before we begin the call, I'd like to remind you that the statements we make on today's call are covered by the disclaimer contained in our public documents. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties, including those contained in our public filings with the ASX. The company disclaims any obligation to update any forward-looking statements that may be made or discussed during this call. Finally as a remainder, everyone on the call will be muted for the duration of the call, but following our presentation, we'll be providing ample time for any questions you may have. Page 2. Joining me on the call today are the Booktopia Group Chairman, Peter George, and the group's Chief Financial Officer, Fiona Levens. On Page 3, our mission, FY '23 has been a year of transition for both Booktopia, but also for the Australian online retail industry. Despite the challenges, we have continued to channel our focus on the customer, considering their experience with us, and how we create a journey that delivers to or beyond their expectations. We have a clear strategy and a unique set of advantages that enable us to deliver on our mission of providing Australians with the best book buying experience. The combination of our single product focus, our data, capability and heritage, both differentiate and define us. Page 4, the FY '23 metrics. The results for the financial year '23 were not what we wanted. Against the backdrop of consumers returning to pre-COVID shopping behaviors, particularly noting the rise in customers returning to shop at physical stores and the economic climate that has led to cost of living pressures for consumers, the results for the year have fallen short. But it should also be noted that this is the first full financial year since lockdowns were enforced, when the company was well positioned to capitalize on the consumer demand. As such, this has been the first year to ascertain what the new normal looks like for us. We remain significantly up on our pre-COVID performance. With that in mind, our FY '23 revenue of $197.6 million is 19.2% higher than the FY '20, which was $165.7 million, while the average customer spend is 20% higher than the same period. Fiona will talk about the key financial results in more detail, but I wanted to highlight a few of the key FY '23 figures. As reported in the FY '22 annual report, the company committed to a move to a new customer fulfillment center, we will call it CFC from here. This transition was a key strategic priority during FY '23. I am pleased to report that we are now fully transitioned to the new facility and are operational. I'd start with this apart from wanting to call out its completion, but also as it has impacted much of what we did in FY '23 and also underpins our FY '24 strategy. On a revenue basis, FY '23 was down 17.9% on FY '22. We will talk more about the underlying quarters, but I did want to highlight the 5-year CAGR of 12.1%. This is important as we try to look at the overall trends of the business. While much has happened in this time, the 5-year CAGR helps to normalize where we are. The CFC wages per unit are up 37.4% year-on-year. Impacting this number is not only the efficiency -- inefficiency of our old CFC due to capacity issues, but also the transition running multiple CFC locations. Our average order value has increased 4.9% year-on-year and 8% over the last 5 years. Our average customer spend over the last 5 years has also increased 8.3%. Page 5. Diving a little deeper into the FY '23 performance. The revenue performance was down 18%. Firstly, the FY '22 number does contain some of the upside in revenue we experienced through COVID lockdowns. In FY '23, we also reduced our inventory levels from $17.3 million on 30 June, '22 to $13.4 million on 30 June of '23. This was in results for us preparing for the CFC moves. This, in conjunction with difficult trading conditions, impacted both revenue and earnings for FY '23. As we announced earlier this year, the group implemented a number of cost rationalization and margin optimization measures to help manage these economic headwinds with the reset of our cost base. These initiatives helped improve the gross profit unit economics from $7.65 in FY '22 to $7.85 in FY '23. We have forecasted these initiatives will contribute to an improvement in earnings in FY '24 by at least $12 million. Once again, I want to highlight that we have fully transitioned to the new CFC and are operational, and with the working capital injection, we are well positioned to optimize the important Christmas season. Page 6. The FY '23 revenue mix, we had 4 distinct channels. The Consumer Trade segment defined as traditionally everyday Australian customers who come to our booktopia.com.au and angusrobertson.com.au websites. This segment makes up 60% of our sales revenue. The consumer academic who frequents the same 2 websites that are purchasing academic books. They may be across all levels and grades from primary school to university textbooks. They represent 21% of our 2023 sales revenue. The sales revenue for both of these segments were down in FY '23 on FY '22. The third segment that comprises 16% of our sales revenue is the business, government and education sector. Last year, this represented 11% of our sales revenue and the FY '23 growth on FY '22 is 13% year-on-year. Page 7. Before I hand over to Fiona to take you through more of the financial details, I want to once again highlight how we are adapting to the ever-changing and challenging economic climate. We have and will continue to implement cost rationalization and margin improvement measures. We have consolidated our logistics operation into one single modern facility, which will reduce costs and improve efficiencies. We have raised capital to improve our financial position as we execute for Christmas 2023. And with the appointment of the 4 non-executive directors, including Chair, we are focused on execution and delivering for customers. I will now hand you over to our Chief Financial Officer, Fiona Levens.

Thanks, David. As David mentioned, no business enjoys seeing results that are down year-on-year. But I believe it is our response to these challenges that will determine the course of our future growth. Talking to Slide 9 now. Establishing our new customer fulfillment center has been a core focus for us in FY '23, forming part of our strategy to drive operational efficiencies and reduce direct labor costs. Unfortunately, a consequence of this is the upfront investment required in the capital allocation of resources to build this new facility and create all of the new systems and processes to deliver a successful, long-term operation. With that in mind, we have utilized significant additional labor to prepare for and move our inventory to the new CFC. This has contributed to the increase of $0.62 per unit in the direct labor costs that we saw in FY '23. In addition, simultaneously operating out of multiple fulfillment centers, coupled with space and layout constraints at the old CFC also added to the increase in direct labor costs in FY '23. With an investment of $12 million in the new CFC, we are expecting productivity to improve and labor costs to substantially reduce to an average of $1.06 by half 2 of FY '24. But despite revenue being down 18% compared to the prior year, there were a number of positive indicators. Gross profit per unit was up $0.20 or 2.6%, and this was off the back of the margin optimization strategy that was implemented in February of this year. We also saw a 4.8% increase in the average order value from 75.6% to 79.3%. While the average annual customer spend decreased slightly 5.6% or just $0.81. However, given the current household budget pressures, we are encouraged that this has only been a small decline. Our future marketing activity will also place a greater focus on a broader customer acquisition strategy and bolster retention plans to support our engagement with the existing customer. The revenue decline was largely driven by a reduction in volumes, which, to an extent, was expected when comparing against a prior period that saw elevated demand during COVID lockdowns. We reported at half 1 that revenue was down 15% compared to the prior comparative period, and while there was hope that we might have done better in half 2, results were disappointing with revenue being 21% down on the prior period. This was partially due to continued soft trading conditions as well as the sell down of inventory in preparation for the transition to the new CFC and the impact of that transition had on our customer shipping promise. For a large part of half 2, we displayed a customer shipping promise that was not at our optimal delivery time frame of 1 to 2 days. This impacts conversion rates and hence, sales and revenue. The completion of the new CFC will see a return to this optimal shipping promise, which, in turn, will improve conversion rates and therefore, sales. While overall revenue from our consumer business was down 24% compared to the prior period, revenue driven by our national sales team was up 12%. This represented 19% of total revenue in FY '23. This team continues to focus on primary and high school engagement, increasing the number of schools purchasing from Booktopia by 25% to 7,100 schools in FY '23. Revenue remains 53% above pre-COVID levels in 2019, which represents a healthy 4-year CAGR of 12%. This provides us with a great platform to build as we seek to take advantage of the boom in reading and book sales, which followed from COVID lockdowns and develop a steady trajectory moving forward into FY '24 and beyond. We'll skip over Slide 10 and move on to Slide 11. Despite favorable improvements above the gross profit line, the unit economics were largely impacted by the increase in advertising spend and the higher direct labor costs in the CFC. The increase in advertising spend on a per unit and on an overall basis is reflective of the market conditions that faced all e-commerce businesses as we emerge from COVID. Competition has intensified post COVID with many omni-channel players wrapping up their online offerings. In addition, physical retail stores saw a significant resurgence. With more players in the market, competition intensified, platforms have become more saturated and the demand for and pricing of advertising have surged, putting a squeeze on the optimal ROI. We found ourselves like many others in a situation, which requires a delicate balance between allocating larger portions of our budget to paid advertising to reach our online customer, while simultaneously striving to refine our advertising strategy to identify the most effective channels, audience segments and ad formats. This level of spend on a per unit basis is projected to moderate in FY '24 to pre-COVID levels. We have combined direct labor costs and merchant fees in the other variable cost line that you can see on the slide. The increase of $0.55 per unit or 26% is entirely attributable to the increase in the direct labor costs associated with the CFC. As noted earlier, this increase stems from the operation of multiple CFC sites and the preparation and transition to a new CFC. As a result, our unit net margin for FY '23 decreased by 20% or $0.87 per unit. We do, though, expect to see a significant turnaround in this result in FY '24 as we realize the labor savings stemming from the operation of the new facility. Moving on to Slide 5 -- I mean 12. I've largely addressed most lines in the P&L. However, there are a couple that warrants further explanation. Employee expenses have reduced by 9% or $3.5 million in FY '23. This is despite direct labor cost [ 47% ] or $1.1 million higher than last year. Employee expenses associated with office staff have, in fact, reduced by $4.7 million or 20% compared to the prior year. And this is because we've annualized the impact of the June '22 redundancies and absorbed the savings that were captured as part of the company restructure that we actioned in February of this year. Other income and expenses have reduced by $8.3 million, noting that $2.7 million of this relates to one-off benefits that have resulted from the revaluation of the liability associated with the ACCC matter and the sale of the Welbeck investment. The remaining $5.5 million reduction in cost is associated with abnormal legal and consulting fees that were occurred -- that were incurred in the prior period FY '22. We have reported a statutory EBITDA loss of $3 million and an underlying EBITDA loss of $4.6 million. The movement of $10.8 million compared to last year's underlying EBITDA of $6.2 million can largely be attributed to the decline in gross profit off the back of reduced revenue. I can now take you to Slide 13. We strategically and gradually reduced inventory during the year as we edged closer to the date of the move from Lidcombe to the new facility in Strathfield South. We ended the year on inventory of just over $13 million, which was $4 million down from our FY '22 closing balance. Inventory will gradually start to build over the coming months as the new CFC wraps up operations, and we prepare for the intake of Christmas stock. Our customer advance payments has increased by $2.5 million as we have faced temporary delays in shipping out product while in the transition phase to our new CFC. The cash balance was completed during the year as funds were reinvested in our new facility and associated systems. Property, plant and equipment decreased by $5 million despite adding $9.1 million of new assets to the ledger. This was mainly due to the acceleration of depreciation on assets that were not deemed suitable for the new CFC or had reached end of life. And finally, we added borrowings of $12 million to our balance sheet, consisting of the $7 million trade finance facility and a $5 million unsecured loan from AFSG, which has subsequently been reduced to $3.4 million following a debt-to-equity conversion approved at the AGM on the 16th of August. Our negative net asset balance of $14.5 million was partly caused by the derecognition of a $10.5 million deferred tax asset stemming from our accumulated tax losses. In view of the past 2 years of tax losses, we consider this prudent, but they remain available for us to use and once the business returns to generating consistent positive net profit, this asset will be reinstated on our balance sheet. To summarize, before I hand back to David, FY '23 delivered unprecedented challenges, which presented considerable financial implications. However, we are now confident that despite the short-term adverse impacts, we are now in a much stronger position to capitalize on the opportunities in the market over the longer term, and we look forward to delivering profitable and sustainable growth in the years to come. Handing back to you now, David.

Thank you. To give an update on -- trading update and outlook, Page 15. To provide some more context around the impacts of the cost saving initiatives, I would like to highlight a couple of key ones for FY '24. The CFC labor costs will decrease from $2.27 per shipped unit down to $1.20 in FY '24. This $1.20 is for the full financial year. The advertising and marketing costs also provide opportunities for optimization. We increased our unit spend in FY '23, and we are now focused on improving our efficiency in FY '24. The intent is to deliver high levels of customer engagement, satisfaction and increased levels of website traffic connecting the Booktopia brand to a broader audience than it has before. This year, we will better utilize our owned and earned marketing as well as make improvements in our spend efficiencies in paid. We will also see the financial year impact of the office employment cost reductions with the total annual spend going from $23.8 million in FY '22 to $17.9 million in FY '24. Page 16. The EBITDA outlook. Finally, let's turn our attention to the year ahead of us. We believe we have all the building blocks in place to return the business to both profitability and growth. We have stability of senior leadership. The cost base has been rightsized to support where we are today. The new CFC is operational, which will reduce costs as well as support our growth aspirations. We forecast an underlying EBITDA of $13.5 million in FY '24 off the back of volume growth, cost reduction initiatives as well as the CFC improved costs and efficiencies. In summary, the year ahead is about focusing on the basics, the website, ensuring we have the right inventory, providing customers personalization to make their shopping experience easier and offering unique selection for the Australian and New Zealand readers. Delivering on these basics is imperative to deliver on our mission of providing the best book buying experience. I will now turn it over for questions.

[Operator Instructions] There are no questions at this time. I'll now hand the conference back to Mr. Nenke for closing remarks.

Thank you. I'd like to thank you all for joining us and your interest in Booktopia. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.