KMD Brands Limited (KMD) Earnings Call Transcript & Summary

Good day, and welcome to the KMD Brands Limited 2023 Full Year Results Conference Call. Today's conference is being recorded. Kindly note that there will be no online submitted questions taken. Only audio questions shall be taken for today. For those who have questions, please dial into the audio line at Q&A time. [Operator Instructions] At this time, I would like to hand the call over to Michael Daly, CEO and Managing Director of KMD Brands. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us for today's presentation of KMD Brands financial results for the 2023 financial year. My name is Michael Daly, and I'm the CEO and Managing Director of the group. I'm joined on the call by Chris Kinraid, our Group Chief Financial Officer. We will be talking through the presentation lives on the NZX and ASX this morning. Unless otherwise specified, all financial numbers are in New Zealand dollars. Today's presentation will begin with the full year highlights. We will then discuss the group's financials, brand results and will conclude with trading update and our growth outlook for FY '24. I will begin with the 2023 financial highlights and achievements of the year and namely our biggest milestone, reaching over $1 billion in sales for the first time, a milestone that we're very pleased with in our first full year of uninterrupted trade post pandemic. Drawing your attention to Slide 4 now, all of our iconic brands grew sales with the group, Rip Curl and Oboz achieving record sales delivery growth of 12.6% on the previous year. Gross margin remained resilient, increasing 20 basis points to 59.1% of sales. Improved direct-to-consumer channel mix, wholesale pricing and international freight costs offset currency headwinds. As a result, underlying EBITDA was up by over 15% year-on-year to $105.9 million. Statutory NPAT was $36.6 million, while underlying NPAT was up 8.6% year-on-year to $43.3 million. This year, our dividend declared will return over $42 million to shareholders at $0.06 per share. Moving to Slide 5 now. Another year of significant milestones that delivered on our group strategy. I'm going to start with Lead in ESG because I want to express how proud this makes me as CEO. Earlier this year, we announced our Group B Corp diversification. This was and is a significant achievement for our business as complex as ours. We are one of only 45 listed companies globally to be able to call themselves a B Corp. As a reminder, B Corp is a business that meet high standards of social and environmental performance, accountability and transparency. B Corps envision a better economic system where businesses can benefit people, communities and the planet. This really aligns with our group's vision to be the leading family of global outdoor brands designed for purpose driven by innovation, best for people and planet. Hello. Sorry, we got cut off there. Are we back on the conference call?

You're back on, sir.

And live?

You are live.

Excellent. Sorry about that, we were cut off unfortunately. I'll start back at Slide 5 there. So moving to Slide 5, another year of significant milestones, delivering on our group strategy. I'm going to start with Lead in ESG because I want to express how proud this makes me as the CEO. Earlier this year, we announced our Group B Corp certification. This was and is a significant achievement for a business as complex of ours. We are one of only 45 listed companies globally to be able to call ourselves a B Corp. As a reminder, B Corp is a business that meets high stands of social and environmental performance, accountability and transparency. B Corps envision a better economic system where businesses can benefit people, communities and the planet. This really aligns with our group's vision to be the leading family of global outdoor brands designed for purpose driven by innovation, best for people and planet. In addition to this, we had our science-based targets approved by the science-based target initiative, meaning our climate goals are aligned with the Paris agreement. We're proud to say we also continue our journey of sustainable finance, announcing in May an extension of the sustainability metrics to our entire debt facilities, NZD 310 million. We completed the refinance of our syndicated debt facilities with a 3.5-year facility consisting of a AUD 240 million multi-currency revolving facility and a NZD 54 million multi-currency revolving facility. We were also commended for our efforts in integrated reporting, which will aim to improve on this year with our second annual integrated report out this morning. You'll see that we've included a lot more information to really give you a deep dive into some amazing work the group and brands have been doing. Moving to operational excellence, KMD Brands continues to work on leveraging operational excellence with our underlying EBITDA margin improving by 0.2% of sales year-on-year. Softening consumer sentiment in the fourth quarter impacted the FY '23 results. However, our strategy remains unchanged as we continue to target an underlying EBITDA margin of 15% of sales. We are continuing to grow scale across brands to maximize the efficiency of our overhead spend. As an example, our portfolio approach to lease negotiations in Australasia achieved an overall reduction in net costs across 63 lease renewals. Jumping across to Elevating Digital, Club Rip Curl launched in Australasia and has grown to over 220,000 members so far, delivering over $30 million in member base sales, a significant achievement having only launched this year. E-commerce was also a big focus for us. Kathmandu launched French, German and Canadian websites to support the brand's international launch. Not to be left behind by any means, Oboz grew online sales more than 350%, as we continue to see direct-to-consumer become part of the brand's multi-channel strategy. We also worked on innovative ways to safeguard our brands. With the rising counterfeit sites and online scams, we invest in security systems to mitigate IP infringement to protect our customers. We've also made some key appointments in the digital space with soon to be announced Chief Digital Officer and a Chief Information Officer to accelerate delivery of this key strategic pillar. Both of these appointments have been in market during FY '23 and those executives will be announced in the first half of the new year. Finally, to our milestones this year against our pillar of building global brands. This year was a big year for KMD Brands and our iconic brands. Rip Curl continued its trajectory to be the ultimate surfing company in all that they do, delivering a new wetsuit that is unlike anything that's ever been brought to market before. Almost itch-free and therefore, the warmest wetsuit on the market, the Flashbomb Fusion brings together 50 years of product innovation, something that no other brand has the potential to compete with. Kathmandu appointed its next CEO, Ms. Welch, coming from Crocs where she had many leadership roles across many business units, living and working in multiple markets. Megan brings extensive global brand and product experience, making her the ideal leader as we continue to grow the Kathmandu business and expand our global presence. And finally, Oboz, a brand with extraordinary potential. This year, we launched a new category for the brand, the high-growth fast trail category. It's early days, but this should see Oboz expand it to appeal to a broader set of customers, existing customers and grow our market share. Moving to Slide 6, we've had many highlights from our iconic brands this year, but I just want to call out 3 that really stood out and they're representative of the positive direction we are heading in. As mentioned previously, we launched Club Rip Curl at the start of the year. It's a world-first loyalty program that brings together all our consumer targets for repealing one program that rewards them for their passion, all things surf. Members collect rewards for everything from making a purchase to logging an afternoon surf, which they can do via their search GPS surf watch. Club Rip Curl attracted over 220,000 members to date, contributing over $30 million in member-based sales to the business. For this winter, we also launched a revamp of Kathmandu's iconic insulation franchise, the Heli jacket. The Heli R is made almost exclusively from like recycled materials. It's more packable, 25% lighter and just as warm as the original Heli. What makes this unique is another first for the ANZ market this time, a digital ID sown into every jacket. Customers can scan the code to learn about the design and manufacturing process, the factory the jacket was made in, materials used, care instructions and repair information. And finally, we launched the new category for Oboz, our first foray into the popular fast trail category. Oboz launched a new Katabatic range this year and we've seen a great response so far. What's great about this is that's a natural brand extension for Oboz and one that provides a new growth pillar for the brand, the aim being to attract new customers and grow market share. Moving to Slide 7, you can see how we are progressing towards our short- and medium-term goals. Underlying EBITDA as a percentage of sales improved by 0.2% from 9.4% of sales last year to 9.6% of sales in FY '23. While our first 3 quarters were strong, softening consumer sentiment in the fourth quarter and the warmest winter on record in Australia impacted the FY '23 underlying EBITDA margin result. At the end of today's presentation, I will provide more detail on our specific plans to achieve 15% underlying EBITDA margin. Looking at working capital as a percentage of sales, we were able to reduce this to 19.9% of sales in FY '23, as we made progress to normalize our inventory levels following supply disruptions caused by the pandemic. We achieved significant inventory reductions this year with Kathmandu and we intend to reduce our investments in Rip Curl wetsuits and Oboz footwear by the end of FY '24. We believe our goal of reducing working capital to 18% of sales is very achievable in the next 12 months. Moving to our medium-term goals, with Oboz still recovering some supply challenges, Oboz achieved record sales of over USD 60 million in FY '23. We are on track to achieve our target of USD 100 million sales. We're considering opportunities to further grow the North American wholesale customer base, online growth opportunities, category expansion by Fast Trail leveraging the group's footprint to expand the brand in Europe and Australasia. In terms of regional growth opportunities, North America remains a key market for Rip Curl. Rip Curl is top 3 brand in other regions and there was a real opportunity to grow the brand's top 3 status in the North American market. In FY '23, Rip Curl North America sales grew to NZD 142.8 million and we aim to hit a target of approximately NZD 200 million in sales in the medium term. In terms of Kathmandu, we have the medium-term goals of both reinforcing market leadership in our home ANZ market as well as executing the international growth opportunity for the brand with Megan now leading Kathmandu into execute on these objectives. Kathmandu currently has 158 stores in ANZ. And as we see customers return to pre-pandemic shopping behaviors, we see an opportunity to ramp up our retail store count to 200 stores, focusing on suburban and regional shopping center opportunities in Australasia and Australia specifically. Kathmandu continues the journey of growing internationally with this year seeing the launch of new websites in France, Germany and Canada and initial wholesale deliveries to select European and Canadian wholesale partners. We're currently in a test and learn base for Kathmandu with these wholesale partners and we continue to leverage the group's operational footprint and existing relationships to learn consumer product and channel preferences in each market. As Kathmandu expands into Europe, North America and beyond, our soft target for international remains NZD 100 million. I'll now hand over to Chris to take you through the financials in detail.

Thanks, Michael. Drawing your attention to Slide 9, we will now go through the group's profit and loss for the full year of FY '23. As Michael mentioned, we achieved record sales this year of $1.1 billion in our first full year of uninterrupted trade since the pandemic. Our group sales increased overall by 12.6%. We delivered strong sales growth from all brands in the first 3 quarters with both Rip Curl and Oboz achieving full year record sales results. Cost of living pressure softened consumer sentiment in Q4. We experienced warmest winter on record in Australia, impacting Kathmandu sales, as the brand cycled its best-ever winter trade season last year. Our statutory results include the adoption of IFRS 16. For comparability, the impact has been excluded from our underlying results as well as the emotional amortization of Rip Curl and Oboz customer relationships and one-off restructuring costs undertaken in FY '23. Statutory EBITDA was $200 million in FY '23. And on an underlying comparable basis, EBITDA increased by 15.1% to $105.9 million. Gross margin remained resilient, increasing by 20 basis points. Improved from direct-to-consumer channel mix increased wholesale pricing and reduced international freight costs, offsetting currency headwinds. Operating expenses were maintained at 49.5% of sales despite the softened sales performance in the fourth quarter. Noting that the prior year also -- prior year operating expenses benefited from $12.2 million of one-off COVID-related assistance. Pleasingly, second half operating costs are largely comparable year-on-year. And in addition, support, office and wetsuit factory restructuring was undertaken in FY '23 with a $4 million one-off cost excluded from the underlying results. In FY '23, the group included higher funding costs due to increased funding rates and additional investment in working capital. Moving to Slide 10, FY '23 was the first full year of uninterrupted trade since the acquisition of both Oboz and Rip Curl, and we're proud that the foundation put in place during the pandemic has helped us reach the milestone of over $1 billion in group sales. In FY '23, we achieved the growth in all 3 of our -- strong growth in all 3 of our brands and all of our key geographies. Rip Curl grew by 8.3% to achieve another record sales results, while Kathmandu continued its second phase of its recovery post-pandemic, growing by 10.6%. Oboz sales recovered strongly from last year's supply constraints growing by 61.8%. We are seeing consumers return to stores with retail store sales up 17.5%. This had an impact on online sales, which normalized, although still significantly above pre-pandemic levels. And despite a challenging wholesale market, group wholesale sales grew by 11% as Oboz sales recovered. By region, Australia and New Zealand sales grew by 9.6% and 12.5%, respectively, cycling lockdowns, COVID-related lockdown in the first quarter of last year. North America grew by 24.4% with Oboz sales recovery and Hawaiian stores capitalizing on the return of international tourism. Europe sales grew by 5.6%, and the Rest of World grew by 11.2% with strong tourism-based growth in Thailand. Moving on to Slide 11, again, we're pleased to say that consumers are returning shopping in our stores. Our omni-channel offering provides customers the choice of in-store or online shopping. As I touched on briefly in the last slide, while online sales have moderated, the channel remains significantly above pre-pandemic levels with compound annual growth rate of 11.4% since FY '19. Kathmandu delivered almost $60 million of online sales in FY '23, comprising of 14% of the direct-to-consumer sales. Rip Curl delivered almost $35 million online, about 10% of direct-to-consumer sales and Oboz delivered a $5.6 million of online sales, a 366% increase on last year. Moving on to our balance sheet, Slide 12, we are in a very good strong -- a very strong balance sheet position with low net debt and significant funding headroom and improving inventory levels. The inventory balance has reduced to $290 million as at July '23 and net working capital as a percentage of sales improved to land below 20%. Kathmandu made further progress in the second half to reduce inventory levels, which are now around $37 million lower than a year ago. Rip Curl and Oboz continued to focus on reducing working capital as we transition away from the inventory build in wetsuit and footwear. Goods in transit component of the FY -- July '23 inventory balance is circa $10 million below last year, indicating an ongoing commitment to reduce inventory levels and future season purchases. In terms of aging inventory obsolescence provision represents 1.7% of gross inventory on hand, 20 basis points below July '22. At July -- 31 July, 2023, the group had a net debt position of $55.7 million, with significant funding headroom well over $200 million. With disciplined capital management, our short-term target is to reduce the net debt leverage ratio close to 0 by the end of FY '24. Turning on to Slide 13, our positive operating cash flow reflects a full year of uninterrupted trades in FY '23. The Directors declared a final dividend of $0.03 per share, not franked or imputed. Combined with the $0.03 per share interim dividend, this brings the full year dividend declared in respect of FY '23 to NZD 0.16 per share, matching last year's record payout. The record date for the final dividend will be 1st of October 2023, and the payment date will be the 20th of October 2023. Just to note, you should expect future dividend declarations to more closely align with the group's first half/second half earnings weightings and the resumption of franking credits in the future for Australian shareholders. Moving on to slide to the brand and jumping straight to Slide 15, on to Rip Curl, we're pleased to note again that Rip Curl achieved a record sales result with total sales up 8.3% to $581.5 million. The results are underpinned by strong direct-to-consumer sales, particularly in Australasia following the lockdowns last year plus the return of international travel to Hawaii and Thailand. Same-store sales grew by 8% with consumers returning to shopping on stores as many have also reported. This will also mean online sales have normalized significantly above pre-COVID levels. And since FY '19, the sales have grown at a compound growth rate of 20.1% per annum. Online sales in FY '23 totaled almost $35 million, representing 10.6% of DTC sales. The wholesale channel showed resilient despite softening wetsuit demand from record highs over the last 2 years. Gross margin increased by 60 basis points as a result of improved channel mix, increased wholesale pricing and a reduction or easing of the international freight costs. It is worth noting that FY '22 operating expenses included the one-off benefit of $7.5 million from COVID assistance. Moving to Slide 16, Kathmandu. Kathmandu total sales increased by 10.6% to $422.2 million. Australian sales grew by 7% in FY '23. Kathmandu's largest market saw sales grow strong in the first 3 quarters, recovering well from the COVID lockdowns in the previous year. Cost of live pressures softened consumer sentiment in the fourth quarter, Kathmandu's key winter season. Australia experienced the warmest winter on record as Kathmandu cycled its best-ever winter performance last year. Cost of living pressures -- moving to New Zealand, where sales grew by 13.1%, supported by the return of domestic and international travel. International sales of $2.6 million included the first deliveries to select new wholesale customers in New Europe and Canada, as the brand continues its test and learn phase in these international markets. Online sales normalized at $58.8 million, as customers returned to shopping in stores, representing 14% of DTC sales. Online sales remained comfortably above pre-COVID levels and have grown from FY '19 at a CAGR of 5.4%. We saw total same-store sales, including online increase by 8.5%. Gross margin increased by 100 basis points as Kathmandu continued to carefully moderate the historic high-low pricing model. And finishing up on Slide 17, Oboz. Oboz sales grew by 61.8% to almost NZD 100 million. Wholesale sales recovered strongly from last year's supply constraints and we've been navigating a tricky U.S. wholesale market. We benefited from a commitment to diversified sales channels, delivering strong online sales growth of over 350% and increasing the mix of higher gross margin direct-to-consumer sales. Gross margin increased by 270 basis points from the online -- improved online channel mix, increased wholesale pricing, new product introductions and the easing of freight costs. We continue to invest in brand and product teams to optimize the brand for growth and accelerate Oboz's international expansion. Brand momentum remained strong with new category expansion and success in online performance continuing to indicate a significant growth opportunity for the group. I'll now hand it back to Michael to talk through the outlook.

Thanks, Chris. On Slide 19 and drawing your attention to our strategic priorities, we believe our strategy is working and remains unchanged. We will continue to build global brands with continued design, development and launch of market-leading innovative products for the outdoors. Rip Curl is aiming to grow market share in the North American market by executing wholesale and omnichannel opportunities. With our new Kathmandu CEO, Megan Welsh now in place, she will be focused on growing international sales, while maintaining our market dominance in ANZ. Oboz will continue its journey to expand internationally with Europe and ANZ, the key geographies of focus. Elevating Digital is an area that will be ramped up significantly. Kathmandu has launched Out There Rewards, which some of you might have noted, launched 2 weeks ago. It's a revamped version of the summer clubs. Out There Rewards will incentivize members to get outside and experience nature but also connect our target more closely with their local stores. We will also be appointing 2 key executives, a newly created Chief Digital Officer, who will focus on digital strategy and innovation across the group and the expansion of the Chief Information Officer role. With this, we will increase the momentum and continue to deliver the best experience to our customers by focusing on loyalty and personalization. We will use the power of the group to leverage operational excellence across our brands. With significant progress made this year, we'll continue to work towards reducing our working capital. We have a commitment to improve our underlying EBITDA margin and I'll take you through our plan to do this on the next slide. This year, we made extraordinary progress on our pillar to Lead in ESG. We will continue the fantastic momentum here with a commitment to increase our responsible material content across brands, reduce our emissions in line with the Paris agreement and further explore commercializing circular business models. Moving to Slide 20, our brands continue to use innovation to set the path of success in a competitive market. We have recently launched some exciting initiatives, including the North American and European launch of the Rip Curl Flashbomb Fusion wetsuit. This innovative product has been received well in Australasia and we look forward to seeing it launch in the Northern Hemisphere. Just a couple of weeks ago, we launched Kathmandu's highly successful loyalty program. Similar to Rip Curl, the program awards members for engaging in their passion, getting outdoors. Loyalty members, historically have accounted for circa 70% of total sales for Kathmandu, with members typically spending circa 20% more per transaction than non-members. So, a revamp and innovative new program and what has become a competitive market for rewards is just what we need to continue to deliver in this space. And finally, the Kathmandu Trailhead Stretch rain jacket, Kathmandu's most versatile raincoat yet, waterproof, windproof, breathable and now with mechanical stretch fabric. The main fabric is also made from 100% recycled polyester. This is a great functional jacket at a great price point, a key addition to the rainwear range. Turning our attention to Slide 21 now, we want to step out the path to our goal of a 15% underlying EBITDA margin. We have set specific targets for our brand CEOs and group executives and their respective teams aligned to our growth strategies. Firstly, we have already taken action to right-size our cost base, including a restructure of our support offices and our wetsuit production facility. Further normalization of marketing spend has occurred across each brand and optimization of our retail labor spend has also been completed. We'll continue our work to improve operating leverage, including targeting specific synergies in supply chain, systems and finance and continuing strong discipline and the consolidation of our purchasing power across the brands. We have to expand our gross margin by continuing the consolidation of suppliers and implementing production efficiencies. Reducing freight rates is having a positive impact, rationalizing SKU counts to improve overall inventory management and continue with the Kathmandu strategy to carefully moderate the historic high-low pricing. Finally, each of our brands have specific opportunities to reset the parts of their business that are operating below historical levels, including Kathmandu's opportunity to return the key winter season to historical levels and the ongoing recovery of travel, Rip Curl's opportunities to benefit from a reset and global wetsuit demand supply post pandemic and Oboz opportunity to return to historical levels of operating margins, leveraging the investments made as the brand continues to grow in North America and globally. And finally, at Slide 22, I want to take you through a brief trading update and our outlook for FY '24. Group sales for August were down 6.4% from last year. We've seen the Kathmandu year-on-year sales trend in the fourth quarter of FY '23 continuing to August, albeit overall sales levels are consistent with pre-pandemic levels for this time of year. So far, we have seen good momentum in direct-to-consumer sales for Rip Curl and Oboz. In terms of our outlook, as I've said throughout this briefing, our strategic plans remain unchanged with key executive appointments in the areas of the Kathmandu CEO, a Chief Information Officer and a Chief Digital Officer to accelerate the execution of our key strategies. We have several new store opportunities with at least new -- 8 new stores already committed in the first half of this year. Our outlook for margin is supported by excess supplier capacity in the market, reducing international freight costs and improving channel mix towards direct-to-consumer offsetting short-term FX impacts. We aim to continue our progress towards achieving our target of a 15% underlying EBITDA margin with a rightsized cost base in place. We also expect the ongoing reduction of working capital to drive strong cash flow growth generation as we work towards our working capital target of 18% of sales. Despite the challenging consumer sentiment, we are well positioned with positive tailwinds from the continued return to travel, innovative product launches in the pipeline and the continued outdoor lifestyle trends post pandemic. That's all for the presentation today. We'll now throw it to questions. Back to the moderator.

[Operator Instructions] We will take our first question from Margaret Bei with Forsyth Barr. And Margaret Your line is open, if you could please check your mute button, we are not getting a response. And Margaret, are you on the line? I am not hearing a response, so we will move to the next question. We'll go to Kieran Carling with Craigs Investment Partners.

Can you hear me, okay?

Yes, we can, Kieran.

Just first one from me. Obviously, gross margins are holding up due to channel mix, wholesale pricing and reduced freight costs. But can you just touch on where you're at with the moderation of your high-low pricing model for Kathmandu and what you're seeing in the current promotional environment, I guess, for both Kathmandu and from competitors and maybe some of your expectations for gross margin going into FY '24?

Yes. Look, in terms of the Kathmandu high-low moderation, we're happy with the progress we're making. I think as we've outlined previously, that wasn't something that we would be looking to do by the click of the fingers, an instantaneous change. It's one that we're progressing a change over a number of years. We're really happy with the progress, how that's progressing and it shows in our underlying margin and we expect that to give us continued tailwinds as we move forward over the next couple of years for the Kathmandu brand. In terms of the broader market, yes, we're definitely seeing a market that is quite aggressive on price. You don't have to go too far into malls to see that. That said, there's plenty of brands holding margin discipline and pricing discipline. Look, we'll continue to do what we've always done. We don't typically want to use price as a lever to drive sales as our principal strategy. We want to use innovative products and loyalty programs and personalization to drive people to buy our products and that will be our key focus. We'll focus our, I guess, markdown strategies based on distressed inventory or inventory that we have excess of and continuing to take that approach, we think, is the right approach, and that will also just continue to ensure that we see margin increment as we move forward. As we mentioned on the outlook slide, we do think there's quite a few tailwinds for us in terms of margin that we mentioned. That said, we know that the Australian dollar and the New Zealand dollar in particular, have been kept pretty hard against the U.S. in recent times. We do hedge forward so that does give us some certainty, but there is certainly some downside in margin that can occur in those countries, which only represents about 60% of our sales. So, there can be some downside there in the margin. So, we're not hiding from that, but we think at this point in time, the tailwind should offset that. And similar to this year, we'll be looking forward to some slight margin increments as we outlined in the path to 15% slide.

And next one, you've talked about a challenging wholesale market, particularly in the U.S. Can you just elaborate what you're seeing there and perhaps what your expectations are for the year ahead for Rip Curl and Oboz?

Yes. I think it's -- we mentioned the U.S. specifically, but certainly, I wouldn't necessarily say it's just U.S. and it's a continuation of what we noted 6 months ago. What we're seeing in the market is that everybody, including ourselves, is looking to reduce inventory. Everyone is obviously nervous about what the economic conditions are moving forward. So, no one wants to take risk in this market. So, most companies out there are actively reducing their working capital levels and particularly inventory. And so with that, what we're seeing is a lot of wholesale accounts, not looking to take too much risk on their forward buy. So, we are seeing some moderation of forward buys on the wholesale market pretty much across all channels and all geographies. Nothing too drastic, just that continued risk management by those wholesale customers and you don't have to go too far into any other announcements of other larger brand operators like VF or others to...

And this is the conference operator. Mr. Daly, are you there? [Operator Instructions] Thank you. And please go ahead, Mr. Daly, are you on the line?

Yes, I am.

Okay. Please go ahead with your -- please proceed with your response.

Our strong cost discipline must have extended to our phone provider. Sorry about that, everyone. Yes, as I was just saying, yes, in terms of the wholesale market, we're definitely seeing wholesale accounts around the world, take some risk -- sorry, reduce their risk by reducing working capital. That's -- seeing now forward order profile soften. But as I mentioned 6 months ago, what we'll see with that softening of forward orders is in-season buying being quite strong. We think trade out there and as evidenced by our direct-to-consumer channels, underlying trade is still relatively okay. There are still consumers that are willing to spend and we're seeing that with our B2C. And so the overall business is okay. We're just seeing the forward buys come down a little bit as people look to moderate down their inventory levels. And that just means our in-season buying for wholesale will increase as we move forward.

Anything further Mr. Carling? I'm not hearing your response. We will go to our next question. We will go to Mark Wade with CLSA.

Can we start please -- can you hear me okay?

Yes.

Fantastic. Can we start with the loyalty programs. You've already launched the Summer Club as Out There Rewards and Club Rip Curl in full flight. Can we explore what the aspirations are there and how meaningful they could become for the business?

Yes. Look, we think it's really important in today's day and age to engage with our consumers. We are trying to appeal to the lovers of the outdoors. And as you see, with both of those programs, we have interactive elements with our programs, encouraging people to go out and serve, encouraging people to go out and enjoy hikes and be rewarded for that. So certainly, from our links back to our vision and our purpose as KMD Brands, which is really important to us. So look, we're excited by the opportunities. We've mentioned, obviously, some of the initial results in Rip Curl. Really, the key I guess, output or key driver commercially from this is we think that there's a great opportunity for both of our key brands there with Rip Curl and Kathmandu to increase the frequency at which consumers come to our stores. As we know, Kathmandu historically is known as a travel and winter brand. And historically, Rip Curl is known as a surfing and beach brand. And with that, we have relatively low frequency of shops within our stores and online. And we think that with a robust loyalty program across both that we can encourage those consumers to come back to us and drive increased frequency, which we know and our initial results tell us is going to drive some good commercial results. So, we're certainly very encouraged by the work that's been done. A lot of work done in the last couple of years to get them right and we're happy with the first results we're seeing and certainly looking to not to stop there, those plans will continue to evolve and expand in the coming years.

Yes. It seems like there's a lot of upside. I mean, the Summer Club got to 7% of sales, 2.2 million people in the past, and that slipped a little bit from those highs and Rip Curl is coming off a -- just getting started. So, like the...

And just driving that frequency is going to be really important. So, rewarding consumers to come back to us driving that increased frequency is certainly going to translate for us and all our models and all the work that we've done to support the fact that it's going to certainly drive some good commercial results. So, it's been a key part of our Elevate Digital strategy and it's really great to see up and running. Still got some work to do. Rip Curl is only currently available in Australia, New Zealand and online in the U.S. So, we really want to expand that across to other global markets as well. So, job is not done, but certainly, initial results are really promising.

And lastly, on the offshore ambitions for the Kathmandu brand, that still feels there's a fair bit of water to go under the bridge, you are at $2.6 million in sales against that target of $100 million. Can you explore some of the -- you mentioned that you're still in the test and learn phase, what's working well, what needs to happen to really lift that up again?

Yes. Look, it's certainly for us, [indiscernible] as I think I've mentioned to many was only anticipated to be in the [ mid-single ] sales. We never anticipated to go straight over the gate into the tens of millions. And we're still very much in that test and learn soft launch phase, wholesale and online. Look, in terms of our internal targets, given the broader economic environment we face, we're actually pretty happy with the number, not necessarily the gross number itself. But in terms of what we're doing and only dealing with select accounts, we're happy with where we're at, given what we're focused on. Moving forward, obviously, the path to 100 looks pretty steep from here in what is a challenging economic environment. We sort of -- we still think we have very strong aspirations and certainly European and Canadian soft launch will probably over the course of the next 6 to 12 months go to a proper launch strategy. Look, if anything, given the broad economic environment, we probably won't push too hard just yet. I just mentioned how wholesale accounts are looking to destock. It's probably not the greatest time to be pushing hard on that wholesale. But probably just means our broader plans are not held back. We're going to continue to ship and so forth, but the outlook for the next 12 months is a little bit more challenging. So, we'll just continue that test and learn phase, make sure we refine what we're doing. Obviously, we've got a new CEO on-board, who is very passionate and experienced in international markets. We'll let her have a chance to put her thoughts into the strategy and then we'll ramp up from there as we get deeper into the 2024 calendar year. So, we're certainly sticking by our target, maybe achieving it in 5 years, might be a little bit ambitious, but as we said, we first put the target out there. We're not too worried about the actual time line, we're more talking about the aspiration and wanting to get a sizable chunk offshore and that intent has not changed.

And just to clarify, Michael, the subsidiary -- new subsidiary in Italy, is that anything to do with this? Or is it like stores or is it unrelated?

No. I think that was just associated. Previously, we've opened a store for Rip Curl in Italy. So to open the store there, we had to have a legal subsidiary. Previously, we were just shipping wholesale and online to that country.

We will take our next question from Marni Lysaght with Macquarie.

Michael and Chris, can you hear me?

Yes, Marni.

I have a question, just looking kind of through the results first half, second half. So, I guess there's been a 20% basis drop in the second half of gross margin. And I appreciate obviously with seasonality in your business, the [ CRDB ] cost base are obviously a little bit lower in the second half versus the first half. Can you kind of just, first of all, drive us through -- walk us through gross margin drivers for the second half, given it's down a bit over the second half? And just the cost base going forward? Like can we extrapolate the first half/second half split moving forward? Because just to kind of refresh us of how much of the restructuring benefits are in that and does that annualize next year?

Yes. So, a couple of points in there. So, in terms of our first half/second half margin, we always typically skew higher Northern Hemisphere in the second half and North America operating margins are lower for us than Southern Hemisphere operating margin. So in terms of margin and also Oboz business, its gross margins are lower than apparel gross margins because of the footwear nature. And obviously, with that also being North America. So we do skew, I would say, moving forward, our first half gross margins will always be higher than our second half gross margins purely on that the split of the geography and the weighting of Oboz in the second half. So that's certainly not unexpected. And to be honest, I would say that's going to be an ongoing trend and it's certainly always been the trends on a Rip Curl front, just some history there. That's on the margin. In terms of cost of operating, yes, look, certainly, we did some work in the latter half of the year on cost base like I'm sure all companies did. We mentioned in the past the 15% EBITDA slide that sort of annualized cost savings from that, you'll see that in that bar chart, there is a number there that we give, which is effectively around $15 million, $16 million that we have effectively already enacted that will underwrite cost reductions or cost efficiencies as we go into FY '24, and we've been pretty transparent in that path to 15% slide. I think I've covered all your points there. Was there anything I missed Marni?

Yes. And just to kind of maybe delve more into the -- I appreciate there's like different mix shift in half by half. But was there any impact of elevated promos over, say, the fourth quarter driving that slight decline in second half GP margin year-on-year because we're well aware of Kathmandu and a warmer winter?

No, nothing. Margins in the second half were as we expected. To be honest, our promotional activity was not too different to the prior year. Yes, nothing I would specifically called out. I wouldn't say that we were more aggressive in pricing in the second half of this year versus last year. As I mentioned earlier, we're effectively looking to as much as we can just focus on markdowns on excess inventory in parts of the business, we're looking pretty clean at the moment on the Kathmandu side, as you would have seen, circa $40 million reduction in inventory during the year and most of that was done in the first half because you saw that trend that we already had in the first half of last year. So yes, nothing I would specifically call out, Marni. It's definitely an active market in terms of markdowns, but we're only playing in that space to deal with problem inventories. We're not using it necessarily just to drive volume.

And just one last one for me. It's just about, I guess, how we think about CapEx moving forward? I mean, you've called out you want to add 8 new stores. Could you maybe give us some color on what brand is going to see the most store rollout, the location? And I guess, the way we think about CapEx has been low-30s to mid-30s this year and the year prior, so...

Yes. No change in that range. We feel very comfortable with that range with that money. We're probably spending a fairly similar amount across both Kathmandu and Rip Curl in terms of our retail rollouts. The rollout in Kathmandu very much focusing more so on Australia, given we've already got to see high penetration in New Zealand. The store rollout for Rip Curl focusing on all markets. As I mentioned earlier, we've just opened a store in Italy. We've got stores opening up in Australia and the U.S. as well. But certainly, that will be all done within our current range of capital and there's been no change with our expectations there.

And we will take our next question from Bianca Fledderus with UBS.

Sorry, it's Guy here. Can you hear me, from Jarden.

[Operator Instructions] And Bianca, your line is open. Please go ahead.

So my question is just on net debt. So, net debt came down quite a bit from the first half, which is pleasing. Compared to FY '22, it is up around $50 million. And then looking at your finance expenses, they were up $10 million during this year. So, I was just wondering if you can touch on that because that does seem like a reasonably large increase given the increase in debt.

Yes. I mean one target, there is a bit of FX noise about a couple of million on that. So, just with eliminating some [ under-funding ] and FX movements for those balances. So that will change year-on-year, but that should be a little bit of that. And also just the average debt throughout the year. Also, we have a working capital cycle Bianca where the bottom periods typically are in that last quarter. And our peak is typically around November working capital for the group. So, it's just a bit of that phasing with a blended increasing of the debt cost of debt throughout the year. We expect it to be lower year-on-year as we might have that same impact of some unrealized effects and then lower average net debt through the year.

And is there any color you could provide on what sort of interest rate we should assume for FY '24?

Interest rate, sorry, I missed that part Bianca.

Yes, yes, interest rate for FY '24.

Yes, FY '24, I mean we typically our base rate plus funding cost is somewhere around 6%.

And then just on your August '23 trading update, that points to an improvement on pre-COVID levels, which is pleasing. Could you provide an update on the first 2 weeks of trading in September and how that compares to pre-COVID levels for each of those 3 brands?

Yes, typically, we won't give any more than what we've given for the update, but largely the trends are pretty consistent with that trading update. If anything the warmer weather especially helps Rip Curl the same, those conditions quite hot already in Australia, which we haven't had actually with Rip Curl's acquisition. So that should give us some good tailwinds on a hot summer in Australia for the Rip Curl brand.

And then just following on from that. Just geographically, could you talk about which countries are most challenged at the moment with regards to consumer sentiment and sales and which ones are performing best?

Yes. Look, I think what we've seen now that pretty much the way that sort of probably started somewhere around the U.S. went through to New Zealand and U.K. is now pretty much in most markets, I'd say. So, I don't think I'd necessarily call out any one particular market as being worse or better than others. I'd say we've seen indicators of softening consumer sentiment now in pretty much most markets that we operate in. So obviously, there's some that are either in recession or technically close to recession, but I'll leave that to the economists. But from our observations, we've seen enough indicators to say that there's general softness in consumer sentiment across the board now.

[Operator Instructions] We will take our next question from Guy Hooper with Jarden.

Sorry, guys, can't hear you at the moment.

[Operator Instructions] We will move to Margaret Bei with Forsyth Barr.

Hopefully, you guys can hear me this time?

Yes, Margaret, we've got you.

Success. Okay. Just a couple of questions from me. The first one being that I noticed in terms of the dividend that you've announced, the final dividend, given you have basically a net cash goal for July next year, feels kind of surprising that you would announce such a high final dividend. Can you sort of talk us through your assumptions and maybe whether that's a reflection of your confidence in cash flow over the next 12 months?

Yes. Look, obviously, we discussed that at length a couple of different factors there. One factor is, as we mentioned in the announcement that moving forward, we will probably look to rebalance our dividend to be more in line with our earnings flow. So that probably -- if you look at our earnings, we are more a second half earnings than we are first half. So, we probably look to rebalance that. So, we had that in mind or making the decision. Also, we flagged in the presentation a fairly good high confidence that our inventory levels are moderating. We've done some hard work on the Kathmandu brand and our inventory levels for Rip Curl and Oboz are really specifically in certain areas where we were previously having supply chain challenges. So, we're very confident of them moderating. So with that, we're expecting a little bit like this year, a bit of a positive permanent out of inventory, which obviously gives us some strong confidence on cash flow that's coming forward over the next 6 to 12 months. So, they are probably 2 of the key factors that we considered when we decided to continue with a $0.03 for the final. And obviously, we'll reassess that as we look at our first half/second half earnings as we move forward with the interim decision in another 6 months' time.

My next question is just around -- in terms of what you're seeing in competitors, do you sort of get the sense that they're struggling with exactly the same headwinds? Do you feel that you're doing better on a relative basis? Is there any, I guess views from the management side in that respect?

Look, I mean it would be too hard for me to judge. To hard for me talking across all markets, all competitors, all brands. Look, all I would say is that we obviously monitor what all brands are posting and to sit here, having all of our brands deliver positive sales results for the last 12 months for us is a good positive. And we're comfortable with where we're at and really just focusing on our own brand, to be honest with our own performance. Obviously, as we've mentioned with the August trade update and obviously, with the performance we saw in Q4, we've got some parts of our business that are trading not as well as other parts of the business, specifically Kathmandu selling puffer jackets in this unseasonably warm weather is somewhat challenging. So look, overall, we're happy with where we're at. We don't focus too much on what our competitors are doing. But the fact that we're continuing to grow across all of our 3 brands gives us confidence that we're on the right path.

And at this time, there are no further questions. Mr. Daly, I will turn the conference back over to you for any additional or closing remarks.

No, that's all from us. Thanks, everyone for their participation and apologies for us for dropping out to us. Hopefully, next time, we'll have some better dial-in connections. Have a great day.

And this concludes today's call. Thank you for your participation. You may now disconnect.