Booktopia Group Limited (BKG) Earnings Call Transcript & Summary

Welcome, everyone, to the 2023 Annual General Meeting of Booktopia Group Limited, and thank you for joining us today. My name is Peter George. I'm the Chairman of Booktopia Group Limited, and I will chair the meeting today. I've been advised by our Company Secretary, Alistair Clarkson, that we have a quorum and as the time is now well past midday, I declare meeting open. First, let me introduce Booktopia the Board of Directors and some of our senior management. On my far right, Tony Nash, Non-Executive Director; next to him, Paul Welch, Independent Non-Executive Director; and on the screen is Stephen Ezekiel who is also an Independent Nonexecutive Director who unfortunately can't be physically with us today and is attending virtually. On my left, David Nenke, our Chief Executive Officer; and we have Fiona Levens, our CFO; and Alistair Clarkson, Company Secretary and General Counsel [indiscernible]. The agenda for the meeting today is set out in the Notice of the Meeting and will follow the notice. First item on the agenda is to receive and consider Booktopia's 2023 annual report, along with the opportunity for shareholders to ask questions and make comments about the business of the meeting, the management the company or the company generally. Booktopia's auditors are also present today to answer any questions relevant to their role as auditor's of the company. We will then address 6 ordinary resolutions and 1 special resolution previously circulated in the Notice of Meeting, which -- dated 23rd October 2023. I will discuss the voting process for all the resolutions after the meeting. Before we get to the consideration of the reports and the resolutions, I would like to share a few words on our performance over the past financial year before handing over to David Nenke, our CFO, for a more detailed summary. So as the 2023 calendar year draws to a close, it's fair to say that it has been and continues to be a challenging year for Booktopia and retailing in general. As I shared in the annual report, results for the financial year ended June 2023 have been below our expectations that we set at the beginning of the year. This has been fueled by a difficult trading environment, increasing economic challenges putting pressure on consumers' discretionary spending. The company's revenue for the financial year was 18% to $197.6 million, part of this was attributable to customers purchasing habits following the end of COVID restrictions. Transition to our new Customer Fulfillment Center had a major impact for the financial year in terms of revenue and cost. Amongst other things, revenue was impacted as inventory levels were reduced to facilitate the transition between sites, which led to increased shipping time and a reduction in sales. Costs, as you would expect, were exacerbated by running multiple sites in that transition period. While the company reported an after-tax loss of $29 million, a large component of this were noncash account entries which included the derecognition of tax losses of $10.4 million and $7.2 million of accelerated depreciation on the Lidcombe assets. Although on the balance sheet, the tax losses will, of course, be available to be used in the future. Underlying EBITDA was also down significantly year-on-year, as you would expect from having reduced sales and increased costs. From a revenue perspective, Booktopia remains significantly ahead of pre-COVID levels as demonstrated by the 5-year compound annual growth rate of 12%, and the company is doubling down on the opportunities that we see in the market moving forward. Our biggest focus in the FY '23 year was the development of new CFC, which is now up and running in South Strathfield. This was an extremely complex project from start to finish and required significant management focus, effort and capital to help complete it. The capital raise of $9.3 million back in July was an important milestone in ensuring the investment into the infrastructure would deliver on its business objectives. David will talk further about this shortly, including the impacts on financial year just ended and the foundations that have been set for the financial year 2024 and beyond. Great focus has been placed on realigning the business to ensure it is up -- it is set up optimally for success with the necessary level of overheads. Work continues to ensure the company is operating in the most efficient and effective way in line with the current and projected revenue of the business. The initiatives in place will have a tangible positive impact on our financial year '24 results. Some comments briefly on the current financial year. So with the transition to the New Fulfillment Center, we had forecasted this would impact performance in the first quarter of the FY '24 year both in terms of revenue and EBITDA, and this is reflected in the results to date. We're also cognizant of the continued challenging trading and market conditions, as I mentioned earlier, which has curtailed our revenue expectations. As we head into the festive season, the second quarter of the financial year is traditionally the busiest sales period of the year. And this week is an example of that today being Black Friday getting into Cyber Weekend which has become one of the biggest annual seasonal retail events in calendar. As such, while we're in the midst of this critical time, it's too early for us to form a view on whether the downturn that we experienced in the first quarter can be recovered over the course of the year through various revenue and cost initiatives being undertaken. We'll continue to monitor this closely, and we will report to both shareholders and the market when some clarity is obtained. The significant effort undertaken to transition operations between multiple sites and develop new future-proofed infrastructure is crucial. There were large costs incurred in both financial resource and capital allocation and allocation of stock associated with these tasks. This body of work has had a significant impact on business operations and as a consequence, the financial performance over the last 2 financial years. However, it's important to note that these costs largely being incurred as one-offs and should not have a material impact in subsequent financial years, allowing the business to move forward without carrying an ongoing burden. These operational investments, while providing short-term challenges, will give the company a much better foundation to move forward and to operate with much greater efficiency. Additionally, and despite the tough market conditions, there are a number of initiatives the company is actively exploring to set itself up for the future with the intent to seize market opportunity. We are cognizant it's a difficult period now but we are cautiously optimistic in our strategy for the road ahead. I'll now hand over to David, who will provide further commentary on the business performance. Before I do, on behalf of the Board, I'd like to welcome David to his first AGM as CEO. And it's worth noting that David was only present for less than 2 months of the FY '23 year. And in the 6 months that he's been in his role, he's already made a big contribution to the business direction and guiding the forward trajectory. He will talk further on current trading, business, strategy and outlook. David, over to you.

Thank you, Peter. Firstly, as this is my first AGM as CEO, I want to express my heartfelt gratitude to the exceptional team at Booktopia for their dedication and hard work throughout the year and relentless pursuit of excellence, which I've seen since I've joined. Despite the rapidly changing landscape and numerous internal and external challenges, our team has remained focused on delivering an outstanding book-buying experience for our customers. This commitment to excellence is what will ultimately secure Booktopia's long-term success. I also want to express my gratitude to our Board, our customers, shareholders and partners for their unwavering support. Now I'd like to set the scene for where Booktopia stands as a business to expand on Peter's earlier points. Like many retail businesses, especially in the e-commerce sector, we need to keep up with constantly evolving demands of our industry and respond to changes in consumer behavior. We are continuing to make operational and efficiency improvements to maintain our commitment to customer satisfaction. We continue to develop programs to attract customers to our site and to convert those visits into sales. We are also implementing cost rationalization and margin optimization measures and have consolidated our logistics operation into 1 modern facility to reduce costs and improve efficiencies. We've also raised capital to strengthen our financial position and focus on execution and delivering on our customer commitments. Trading conditions in the first quarter of the financial year remain volatile with various economic challenges affecting businesses and consumers. For example, the Australian book market, which according to BookScan, grew 4% in the first quarter of calendar year 2023, has experienced a 7% year-on-year decline for the July to September '23 quarter. We are acutely aware of the challenges that the market presents us, but we have a strategy in place with contingencies built in to find new ways and means to generate demand and deliver an uplift in product sales revenue. As we have covered in our Annual Report and in previous market updates, the transition to our new Customer Fulfillment Center has been a key strategic priority. For a number of months during the financial year 2023, we were managing 3 separate sites, 2 existing sites in Lidcombe and Enfield as well as the new site in South Strathfield. This meant increased costs, particularly labor and rent during this time, which impacted our financial year 2023 results. CFC labor cost per unit increased to $2.27, substantially above the cost in the previous year of $1.65. The new site is now fully operational in time for the demand increases during the peak festive period, which commenced this week and will continue for the next 3 to 4 weeks. Achieving this feat did not come without its challenges and some were greater than anticipated. However, we remained on time and budget for delivery. I'm very proud of the work from our team and close business partners. A transition of this magnitude is never easy. And for most of the team, this was their first experience at such a significant capital project. The costs we have incurred in the process of building a new facility have not been insignificant, but these have all been necessary upfront costs, and we now look ahead where we have a facility operating at greater efficiency with a reduced cost per unit shipped. This will have a positive impact on our EBITDA results in years to come. Together with the challenging macroeconomic environment and soft book market, the move into the Customer Fulfillment Center had knock-on effects across a number of operational aspects. This impacted our sales revenue and EBITDA performance in Q1 2024. Most notably, this included a significant reduction in inventory levels, which as previously mentioned, had an impact on sales. We have since rebuilt inventory back to levels required to meet demand. We had incorporated most of these impacts into our plans for the year. For the first quarter of financial year 2024, revenue was down 29% compared to last year, and underlying EBITDA is down from $1.5 million last year. We are already seeing greater efficiencies and an increased capacity to manage higher volumes of orders to expedite customer deliveries, which were 2 key business objectives that we sought the facility to deliver. These key business objectives support the business future plans in line with our mission to provide the best book-buying experience for our customers. Our customer feedback is positive and our current NPS scores have increased and are now higher than the same time last year. While it has been a difficult first quarter, we are laser-focused on maximizing impact for the remainder of the financial year. As Peter mentioned, Q2 is naturally a very important quarter for us with Cyber Weekend, which officially kicks off today with Black Friday, along with Christmas sales. In fact, the next 3 weeks are our busiest sales and shipment weeks for the year. This sale period will provide us with a barometer for the performance for the rest of the financial year. For the festive season, we have invested in providing greater levels of inventory getting us back to the levels we need to ensure we have plentiful supply of popular products during this period. We are also investing to generate demand by optimizing our paid advertising spend, improving the search engine optimization for our website and continuing to create promotions that resonate with our customers. We continue to be cost conscious and are continually reviewing our performance and identifying where and how we can further increase efficiencies. We are particularly concerned with the negative growth in the book market and difficult retail environment. As we prepare for the second half, we have completed a further business review, which has identified further savings to our cost base across our business operations. These savings are in addition to the $12 million projected in improvements in earnings in FY 2024 we previously shared. We will share more details on this in due course. As we look ahead, our commitment to bring customers first remains unwavering, whether it's ensuring the quality of our shipped products or providing personalized recommendation to reduce decision anxiety, we will always strive to deliver the best outcomes for our customers. I mentioned in my closing remarks in the Annual Report that the year ahead is about focusing on the core elements as well as going back to basics, focusing on our website, inventory, brand, personalization and providing an unparalleled destination for Australian and New Zealand readers. Our mission is to provide the best book-buying experience and delivering on these basics is crucial to achieving that goal. There is significant potential for the business within the book and wider gifting market and we are supremely focused on the opportunity at hand to move the business forward into a position which will set the foundation for a prosperous future. I will now hand back to Peter.

Thanks, David. And I'll now move to formal consideration of the matters for meeting today. Notice of Meeting dated 23rd of October 2023 was circulated to members, and I'll take the Notice of the Meeting as read. I note that anyone watching this meeting by the Google link may only watch today's meeting and not ask questions or vote. Only shareholders attending the meeting in person can ask questions or vote at the meeting. For those of you attending the meeting in person, when you registered you would have been issued with an attendance card. Only those with the yellow card can vote at the meeting and only those with the yellow or blue card can ask questions at the meeting. I will put each resolution to the meeting for questions or comments and then put the resolution to a poll. I appoint Link Market Services as Returning Officer, and I declare the poll open. I also confirm I will vote all open undirected proxies in favor of each resolution. Please complete your voting card when I ask you. Results of the polls will be declared and released to the ASX and made available on the company website as soon as possible after the conclusion of this meeting. I'll now move to the business of the meeting. First item is to receive and consider Booktopia's 2023 annual report, along with the opportunity for shareholders to ask questions and make comments about the business of the meeting, the management of the company generally. Booktopia's auditors are also present to answer any questions relevant to their role in the company. Today, we'll put to shareholders 6 ordinary resolutions and 1 special resolution that were previously circulated in the Notice of Meeting. To summarize, the first 6 resolutions are ordinary resolutions, which refer to the reelection of Board members, which includes Paul, Stephen and myself as directors, approval of the remuneration report, the appointment of RSM Australia Partners as auditor and approval to issue securities under the long-term incentive plan. Finally, we will also vote on the renewal of proportional takeover provisions as a special resolution. Resolution 2 has been withdrawn as has been previously advised following the resignation of Abigail Cheadle as a Director. Please note the Board is not considering a replacement Director position at least in the short term. The 2023 annual report contains the financial report, Directors' report and the Independent Auditor's report. Financial statements have been approved by the Directors and audited by Deloitte. This item of business does not require a vote, shareholders or their proxies may comment or ask questions about the financial statements and reports or about the management of the company. Shareholders may also ask questions of the company's auditor, Deloitte, in relation to the conduct of the audit, preparation and content of the audit report, accounting policies adopted by the company and the independence of the Auditor in carrying out the audit. I will take the reports as read.

Before I take questions from the shareholders here, there has been a question provided in advance of the meeting. This question related to the reduction in shareholder value over the last 3 years and how shareholders can have confidence in the current Board and senior staff. And to this, I would say, this is a new Board being elected by shareholders at this meeting with their experience outlined in the Notice of Meeting, along with the new CEO reported this year with a wealth of experience in online retailing. I would like to take any other general questions or comments about the reports or for Deloitte. Are there any questions or discussion on this item?

If there are no questions, I'll move to the next item of ordinary business. The first resolution of the meeting is for my election as a Director of the company as set out in the Notice of Meeting. As this is for my reelection, I will now ask Paul to chair the meeting for this resolution.

Thank you, Peter. Information about Peter George is set up in the explanatory memorandum into the Notice of Meeting. In considering the appointment of Peter, I would like to highlight the experience Peter has as an Independent Nonexecutive Director and public company executive with extensive background in telecommunications, media and corporate finance. The Directors, with Peter George abstaining, recommend you vote in favor of this resolution. Before we move to questions and the vote on this resolution, I advise the meeting of the ballot proxies received prior to the meeting, which are shown on the screen. Are there any questions relating to this item of business? If there are no questions, I now put the resolution as displayed on the screen to the meeting. And I will now hand back the role back to Peter.