KMD Brands Limited (KMD) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us. Today, we [Indiscernible] significant progress we've made with our next Level group transformation in our first year of execution. My name is Brent Scrimshaw, and I'm the CEO of the group, and I'm joined on this morning's call by Carla Webb-Sear, our Group Chief Financial Officer. We'll be talking through the presentation lodged on the NZX and the ASX this morning and unless otherwise specified, all financial numbers are in New Zealand dollars. I'll begin with an executive summary of today's announcements before Carla takes you through the financial detail of our results, and I'll provide a more comprehensive update on our next level transformation progress when we finish -- and then we finish with a trading and outlook update. So turning to Slide 4. And FY '26 was a year of significant change for the group, and today represents an important milestone on our journey to creating a stronger KMD brands. At our Investor Day, in September 2025, we launched next Level, our 3-year turnaround strategy created to unlock the full potential of our brands and return the group to sustainable profitable growth after several years of disappointing performance. I'm pleased to say that we've made significant progress against each of our objectives in FY '26. All 3 brands delivered sales growth. We improved gross margin, reduced operating expenses as a percentage of sales, significantly increased underlying EBITDA and completed major technology and operating model initiatives that the group can leverage for further efficiencies and sales growth. Now while we're encouraged by the progress made, it's important to acknowledge that this is only the first year of next level. We've created a business with clear priorities and greater alignment across the group, which provide us with confidence as we enter FY '27. Moving on to Slide 5. And as a management team, we've worked hard to build a high-performance culture, and I'm pleased to report that we've delivered -- that we have delivered a number of tangible and positive outcomes that have moved the business forward in FY '26. We reset the product road map for each of our brands, accelerating innovation and seasonal flow and enhancing our performance position within each brand. We also completed the implementation of a number of major technology platforms, whilst delivering $27.5 million in cost savings, exceeding our original target. And importantly, we've become leaner and more efficient through improved inventory optimization and a reset of our operating models in the U.S.A. for Rip Curl and in Europe for Katmandu. Moving on to Slide 6. And FY '26 demonstrates that our next Level strategy is already translating into measurable and positive financial outcomes. Group sales for the year increased by 6.5% or more than $60 million in additional revenue to $1.053 billion. Gross margin improved by 120 basis points to 57.7%, reflecting our product mix changes and improved marketplace management execution. Operating expenses as a percentage of sales improved by 110 basis points and underlying EBITDA also increased 138% to $42 million. Most importantly, our improved profitability was achieved while strategically investing in future growth and strengthening our operating foundations. There's still significant work ahead, but the progress achieved during '26 confirms our path forward. Our brands continue to build deep consumer connection. Our categories remain attractive, and the potential in front of us is significant. So now I'll hand over to Carla to take you through the financial results in more detail.

Thanks, Brent. I'll now talk to Slide 8 and walk through the group profit and loss for FY '26. On our statutory results, including the adoption of IFRS 16 leases. The comparability, the impact of IFRS 16 has been excluded from our underlying results as well as one-off restructuring costs, impairment, Software-as-a-Service accounting and notional amortization of customer relationships. Statutory EBITDA was a loss of $323.6 million. On a like-for-like basis, EBITDA was $42 million. Total group sales, as Brent referenced, was up 6.5% year-on-year, with strong growth achieved in both the direct-to-consumer and wholesale channels. Growth was also supported by the appreciation of the Australian dollar compared to the Kiwi dollar, and on a constant currency basis, total group sales were up 1.7%. By brand, Katmandu continued momentum with strong D2C sales growth through the year in both Australia and New Zealand. Rip Curl sales growth was supported by U.S. and European summer sales and growing online channel momentum through H2, along with the appreciation of the Aussie dollar relative to the New Zealand dollar group reporting currency. Oboz grew year-on-year driven by growth across wholesale and online on the back of new product and investment in the online platform. Gross margin increased 120 basis points above last year to 57.7% with strong second half performance driven by improved sourcing and import costs, disciplined markdown management and inclusive of $8 million of tariff refunds received at the end of the year. Underlying operating expenses at constant currency reduced by 0.2% despite continued inflationary pressure globally. The year-on-year impact of currency movements on the group can be seen in Appendix 3 of the results presentation. Underlying EBITDA increased $42 million from $17.7 million last year. representing, as Brent mentioned, the growth of 137.7%. Underlying EBIT improved to $7.5 million compared to a loss of $18 million in FY '25. On a statutory basis, the group reported a loss after tax of $414.4 million. The FY '26 statutory result includes a $462.7 million intangible asset impairment of all 3 brands. This one-off noncash item does not impact the day-to-day operations of the business and as such has been excluded from underlying results. In reference to the company's trading update in July, sales in the last 2 weeks of the year were particularly strong, aiding the group to deliver sales and EBITDA results above the guided range from the trading update to the week ended 19th of July 2026. Drawing your attention now to Slide 9 and looking more closely at quarterly sales trends over the last 2 years by brand. You can see from these sales charts that quarterly sales results have been mixed, reflecting global market conditions, albeit on an overall improving trend. Rip Curl continued to grow despite softer consumer conditions in the second half a more challenging wholesale market in Europe. Kathmandu delivered strong growth across every quarter, finishing the year with the fourth quarter of 9.4%. The growth. For Oboz sales accelerated as new products were launched and wholesale performance improved. Online sales accelerated with e-com sales up 30% year-on-year in the 5 months following the Shopify launch. Quarterly growth was influenced by product and shipment timing with Q2 benefiting from the earlier shipment of new season product, creating a corresponding impact in Q3. As flagged, Q4 returned to strong growth as forecast with 4 winter 26 product launching in market. Turning to Slide 10. Digital remains one of the most significant long-term growth opportunities within the group. Online sales grew 9.6% during FY '26 and now represents approximately 15% of group direct-to-consumer sales. Growth was strong across all 3 brands and supported by continued investment, including the migration of Rip Curl and Oboz onto the Shopify platform and a successful trial of Ship from Store. Both of these investments paid immediate dividends and sales uplift, and we'll continue to do so into FY '27, evidenced by early FY '27 sales results. Moving to the group balance sheet on Slide 11. We Group inventory balances reduced for the full success year. On a constant currency basis, inventory for July 26 was $240.3 million. The reduction was driven by a net 10 less stores, the wet suit factory wind down and delays in handing over goods due to weather induced port conditions. In terms of aged inventory and mix, Inventory obsolescence provision represented 1.5% of gross inventory, 70 basis points below July 25. The group announced prior to year-end, the planned divestment of the South East Asian manufacturing facility with a phased production wind down and scale up at a third-party facility over the next 12 months. The intention is to realize value from the sale of land and buildings and working capital release. The land and building has been reclassified as held for sale on the balance sheet. Intangible assets reduced at July 26 due to a $463 million impairment charge across all 3 brands, goodwill and brand assets. The impairment reflects the group's year-end intangible asset impairment assessment, assessment, which involves forward-looking assumptions and the exercise of judgment. In making the assessment, the Board took a conservative view having regard to the current macroeconomic environment, expected trading conditions and the company's market capitalization. The impairment is a noncash accounting charge and does not of itself affect the company's cash flow, banking covenants or day-to-day operations. Right-of-use assets and lease liabilities reduced during the year, driven by a reduction in store network. Interest-bearing liabilities included the impact of the weakening New Zealand dollar year-on-year with a constant currency impact of $7.4 million. Moving to Slide 12. Net working capital as a percentage of sales was elevated in July 26 compared to the prior year due to lower trade and other payables as a result of changes in phasing of payment timing as part of overall trading term negotiations with selected suppliers. Pleasingly, stock turns improved from 1.65x at July '25 to 1.76x at July 2026. The -- the group had a net debt position of $48.1 million at July 26 and an improved leverage ratio of 1.2x following the equity raise compared to 3.3x in the prior year. The group updated the market in July, estimating a net debt range of approximately $63 million to $66 million at the end of July '26, and was expecting net debt to be higher due to changes in phasing of payment timing and investment in additional working capital to secure inventory ahead of potential supply chain disruptions. The better-than-guided net debt position was driven primarily by better-than-anticipated trade in late July and all expected tariff refunds being received ahead of close. Moving to Slide 13, which provides a walk of net debt from July '25 to July '26 and a maturity summary of the group's facilities. The group refinanced its existing syndicated debt facility on the 26th of June 2026, with a new facility term of 2.5 years, providing the group funding through the first of October 2028. The new facility continued to build on the company's previous sustainability linked loan structure includes a $43 million tranche maturing on the 30th of June 2027. The total facility as at 31 July '26, and was $195.1 million. The group confirmed that it complied with all banking covenants as at 31 July 2026. The new facility includes an additional working capital component that was unavailable until key milestone covenants were met. Subsequent to Balance Day, the group provided lenders with an independent review report on underlying forecast to satisfy the FY '27 and FCCR covenant milestone and subsequent to year-end, the multi-option syndicated facility increased to a total facility of $205.2 million. Turning to Slide 14, cash flow. Net loss after tax of $414.4 million includes the impact of restructuring payments as well as noncash impairment charges. In April 2026, the group completed a $65.5 million equity raise to strengthen its balance sheet and liquidity position, generating $61.9 million net of costs. Changes in net working capital cycle have impacted cash flow year-on-year, and management remains focused on driving positive operating cash flow by reducing inventory and net working capital into FY '26. No dividend was declared in the current year as a result of operating performance. Moving on to Slide 16. Kathmandu sales grew 11.1% year-on-year to $402.3 million despite a net reduction of 4 stores. Stronger H1 sales momentum continued into the second half with growth in all quarters and Q4 pleasingly, as we've mentioned, closing at 9.4% year-on-year. Kathmandu had strong sales across both Australia and New Zealand. And on a same-store sale basis, including online, Kathmandu sales increased 8.2%. Online sales increased by 9.6% to $57.1 million, comprising 14.3% of direct-to-consumer sales. Kathmandu's gross margin decreased 40 basis points year-on-year due to product mix change and a focus on selling through aged inventory in the first half and managing competitive promotional intensity during that period. Second half gross margin delivered 60 basis points improvement year-on-year despite being impacted in the fourth quarter by unseasonally warm weather on the East Coast of Australia. Underlying operating expenses reduced year-on-year on a constant currency basis, improving operating leverage following a strategic cost reset and ongoing cost discipline. Pleasingly, Kathmandu returned to positive earnings in FY '26, and underlying EBITDA was $16.1 million up from an EBITDA loss of $1.3 million in the prior year. Turning to Slide 17. Rip Curl total sales were up $3.6 million -- sorry, 3.8% year-on-year, apologies there, aided by the year-on-year movement in exchange rates used to convert global sales to New Zealand dollar reporting currency. On a constant currency basis, Rip Curl total sales were down 1.2% year-on-year. Wholesale sales increased 5.5% with particularly strong demand in Europe. Within the direct-to-consumer channel, online sales delivered an increase of 9.1% to $45.5 million. Direct-to-consumer total Rip Curl branded store sales, excluding Ozmosis, was 5.4% with U.S. retail sales highlight and European summer sales strong. Ozmosis is a regional multi-brand Australian retail chain owned by Rip Curl since 2011 and has been referenced separately in the commentary this year. On a same-store sale basis, Rip Curl branded stores, excluding Ozmosis, increased 1.3%. Same-store sales for Ozmosis were down 5%. Gross margin increased 110 basis points as a result of favorable channel mix and strengthening exchange rates across key markets and input costs. Underlying operating expenses down year-on-year on a constant currency basis were benefited by the cost reset program helping to offset growth investments. Despite continued cost pressure, Rip Curl delivered underlying EBITDA growth of 12.2%. Now to Slide 18, Oboz. Oboz total sales were up 3.8% year-on-year, supported by strong product, improving wholesale performance and continued online growth. Online sales recorded year-on-year growth of 11.8%. Wholesale sales increased 2.8%, with growth led by new product introductions, seasonal flow and strong at-once sales. Gross margin improved 730 basis points, reflecting favorable channel and product mix plus onetime tariff refunds of $4.3 million. Operating expenses were tightly controlled with improved operating leverage versus last year. Collectively, these FY '26 results demonstrate that all 3 brands are continuing the group's turnaround. I will now hand back to Brent, who will give an update on next level transformation.

Thanks, Carla. A lot to get through there. I'm on Slide 20 now, and we'll provide some further detail on our progress over the last 12 months. A year ago, we outlined a number of proof points for the delivery of our next Level strategy, and I'm pleased to say that we've delivered significant progress against each of those proof points. On growth and profitability, as you've heard this morning, we delivered 6.5% or $60 million in revenue growth. We reset the strategy of each brand, led by our renewed commitment to improving our product through innovation. We restructured our cost base and refined our strategic growth investments whilst over-delivering on our cost savings target of $25 million. We also acted swiftly to close underperforming stores whilst delivering a step change in store profitability across both Rip Curl and Kathmandu, and I think there's still additional opportunity to capture in FY '27. Whilst there's further work to do on inventory productivity, we've continued to improve throughout the year with inventory now at a 4-year low. We also conducted a business review of non-core assets across the portfolio, and I'll provide some more detail on that later this morning. Each of these initiatives are deeply interconnected components of a broader transformation program that aims to create a simpler, more efficient, more profitable and more agile KMD brands for the future. So on to Slide 21, and this is just a high-level reminder of our next Level strategy and the key deliverables over the next few years. Our brand and product-led offense is committed to delivering iconic and distinctive product franchises that refresh each brand and are compelling for consumers at the point of sale. Data-driven insight process and the introduction of AI tools enable our teams to simplify our business, make better, more informed data-led decisions with a focus on working capital optimization, supply chain consolidation and integrated business excellence. In short, we're committed to creating a business that consistently delivers sustainable profitability and shareholder returns. So let's dive a little deeper now at each of the brand's strategy and their FY '26 scorecard, starting with Kathmandu on Slide 22. For Kathmandu, FY '26 was all about creating and delivering what we call product distinction, product that's resonating with consumers, and is now driving the significant growth momentum Kathmandu has delivered in the first year of its turnaround. At the heart of this is the return of the XT Series, which reinforces Kathmandu's leadership position in authentic outdoor gear together with a sharper seasonal product offering and improved storytelling at retail to create consumer excitement. A reengineered digital platform as we've spoken about click and collect and ship from store enablement, together with some selected strategic price increases and a more sophisticated marketplace management program also positively impacted the year. Lastly, as we mentioned at the half, Kathmandu's international strategy was reset to a distributor-led business model and that we see scaling from H2 in FY '27. So just to click further and look at some fundamental metrics that underpin the transformation of Kathmandu. And I think it really provides some further insight into the health of the Kathmandu brand. and in specific unit economics that underpin its most recent success. In terms of brand demand and basket quality and despite flat in-store traffic, Kathmandu delivered positive increases in conversion, units per transaction and average transaction value. Also, each of the focused categories in the business grew, including the largest category of insulation. So the improvement in each of these retail metrics together provide confidence in the continued turnaround of the Kathmandu and, of course, the consumer response to our new product and growth initiatives. On to Slide 24. The Rip Curl team has also made significant progress to transform the Ripka brand for the next generation. Earlier in the year, we relocated global product creation teams to head office in [Indiscernible], and we reset the entire product line plan for Rip Curl with a reduction of more than 2,000 SKUs versus FY '25. The result is really just coming to market now. It's the new search series collection of product, which launched only a few weeks ago with encouraging early sell-through. And we're also proud to announce the next month's global launch of the biggest innovation in [Indiscernible] and I think the last 25 years coming to market for the first time this Southern Hemisphere summer. Lastly, we returned our North American business to profitability, which was an immediate priority for management as we quickly identify the need to rightsize the cost base and to balance our footprint between the mainland and Hawaii appropriately for future growth. Moving on to Slide 25, and the Oboz strategy is, again, centered around a commitment to core product innovation. A fast-tracked entry into the trail running category to impact the market earlier than was originally planned. And for the first time, Oboz actually created a brand-new category. It's called [Indiscernible] a collection from the extensive vault of heritage products that celebrate Oboz unique trailblazing connection to the Bosman Trail and Yellowstone, and that will also introduce the brand to a new younger and style conscious consumer. Moving on to Slide 26 and our shared service functions have also been restructured in FY '26 as true growth enablers for each of our brands, providing deep functional expertise with maximum efficiency that our brands can leverage for growth. The online channel remains one of the largest growth priorities for the group, and whilst there's more work to do, as you can tell from our results, we've made significant progress in FY '26 by reengineering the group's digital capabilities. After several years of planning and capital investment, major milestones were also completed in technology and systems with Rip Curl moving on to the group ERP platform, Day 365, and together with Dayforce for human resources management. This completion now provides a consistent and stable platform across the group to leverage in '27 and beyond. Our focus is also about improving overall inventory management, as I've mentioned, together with its mixed productivity. We trialed the introduction of AI technology to help improve our forecasting, buying, replenishment and allocation process, and this has allowed us to improve availability for customers whilst reducing working capital intensity. Our objective is to continue to improve inventory turns as we've done in FY '26 with the right mix of stock position to drive stronger returns on invested capital. FY '26 has also been a year of action. We made significant and deliberate changes across the group to immediately reshape the group's cost base while at the same time recognizing that we need to invest in a responsible way to fuel future growth. We committed to a $25 million savings target in FY '26 and ultimately delivered $27.5 million of savings, whilst moderating our strategic growth investments to maintain flexibility and focus on returns. The reset of our cost base was required to mitigate cost and inflationary pressure and importantly, to responsibly self-fund our strategic growth agenda. It was important to do both at the same time. The cost savings delivered in '26 were driven from a number of initiatives, including organizational restructuring, store network review and the reset of businesses in international markets, as I've mentioned. The next level plan initially identified $15 million of the savings target to be reinvested in FY '26 for growth over the short to medium term. We committed to this being a staged approach to reinvestment and at the half year as a result of the equity raise and subsequent rapidly changing geopolitical and consumer market conditions, we reviewed our plans through this stage-gated approach to investment and paused on certain initiatives to focus on near-term ROI. The realized net savings of FY '26 after reinvestment of $8.7 million allowed us to offset baseline cost inflation on a constant currency basis. Moving to Slide 28, which provides a summary of the ongoing fleet optimization program. And again, I'm pleased to report that we've significantly improved the quality of earnings across the entire fleet and in particular, at Kathmandu. FY '26 also completed the launch of 4 next-generation flagship stores in Sydney for both Rip Curl and Kathmandu, Melbourne and Kathmandu's hometown of Christchurch, representing the Pinnacle experience of our store segmentation strategy. The FY '27 store plan continues to focus on continued reduction of exposure to lower returning locations and rightsizing the store network, along with improving sales density across the fleet. And so just moving now to our FY '27 trading and outlook. Direct-to-consumer same-store sales, including online, year-on-year on a constant currency basis for the first 7 weeks from Monday, July 27, to Sunday, September 13, and 2026 seasonally nonsignificant trading period are Kathmandu plus 7.4% year-on-year, supported by strong growth in New Zealand and online channels. Rip Curl plus 1% year-on-year. Rip Curl brand stores plus 4% year-on-year and Ozmosis multi-brand stores, minus 12.1% year-on-year. Rip Curl brand stores grew across multiple geographies and online, while Ozmosis multi-brand stores experienced some difficult trading conditions due to some product assortment challenges. So in terms of outlook, the group remains focused on delivering continued performance improvement in FY '27 when compared to prior year. And so group FY '27 guidance is as follows: sales of between $1.055 billion and $1.075 billion. between $52 million and $55 million; capital expenditure of between $15 million and $16 million. The Kathmandu sales momentum is expected to continue with seasonally relevant product flow and enablement of online fulfillment. Rip Curl sales are expected to benefit in H1 from the first deliveries of next-gen dined product into the market in time for the Australian peak trade. And Ozmosis remediation plan is currently in place, including the closure of 5 underperforming stores. Rip Curl and Oboz wholesale order book is consistent with prior year, with ongoing management within a dynamic shipping environment. Group gross margin expansion is anticipated to benefit from FX hedging already in place and strategic price increases. EBITDA reflects revenue expectations with a further $10 million of annualized cost-saving initiatives already underway to mitigate inflationary pressure. These cost initiatives for FY '27 were taken to ensure the business maintains its EBITDA growth trajectory in a challenging global consumer operating environment. The group continues to focus on the optimization of its store network, as I've mentioned, as part of the -- next Level integrated marketplace strategy. Capital expenditure is reduced as technology projects moderate and targeted store CapEx is prioritized. Depreciation is expected to be in the range of $40 million to $41 million. And so lastly, to the business review and the conclusion of that review and its outcomes. K&B Brands has made significant progress in strengthening and simplifying the group, as you've heard, and the Board remains confident that disciplined execution of the -- next Level strategy provides a clear pathway to improved performance and shareholder value as demonstrated by the FY '26 operating performance. As part of the comprehensive business review initiated in May 2026, the Board has considered the group's portfolio its capital requirements and a range of potential value creation opportunities. The review was undertaken with independent financial advisory from Deloitte and Barclay & Co. and legal advice from Chapman Trip. The review was conducted objectively and without a predetermined outcome. The review resulted in actions to simplify the group and enhance its financial flexibility. These include decisions to invest the group's manufacturing facility in Southeast Asia. The group also tested external interest in Rip Curl's multi-brand retail chain, Ozmosis. No proposal for Ozmosis us most emerged that offered greater value than continuing to rationalize the chain and improve the profitability of the remaining store fleet. The review also included a commitment to ongoing cost reduction, as you've heard, through the immediate offshoring of select group shared services. Throughout the review process, the Board has received and considered a number of indicative approaches from external parties and has determined that further engagement with a limited number of those parties is appropriate. Consistent with its responsibility to shareholders, the Board will assess whether any proposal could deliver greater value than continued execution of the group's next level strategy. The approaches are indicative, nonbinding and incomplete and no decision has been made, and there is no certainty that any proposal or transaction will result. This engagement does not change the group's strategy priorities or day-to-day focus. Management remains focused on delivering the FY '27 next level plan, improving profitability, generating free cash flow and reducing leverage. The Board will continue to support the execution of the strategy while carefully assessing any credible alternative that may deliver superior shareholder value, and update the market in accordance with its continuous disclosure obligations. And so to conclude, in summary, FY '26 was a year of a turnaround. We made a number of deliberate and meaningful changes across the group, and we expect to see increasing benefits over time from the product, marketing and capability changes implemented during as new product ranges, particularly for Rip Curl, begin to impact consumers, brand storytelling is reset, and we transform to a more modern and agile brand portfolio. As we move into FY '27, our focus has immediately shifted from resetting the business to the sustained and relentless execution of our initiatives to create long-term shareholder value. There's still significant work ahead, but the progress achieved during the last 12 months confirms our part for. And so with that, I'll now conclude and return to the operator, and Carla and I would be pleased to take any questions that you may have.

[Operator Instructions] Your first question comes from the line of Kieran Carling with Craigs Investment Partners.

First question is just on your outlook commentary. I appreciate that you're in the process of closing stores, but at the midpoint of your guidance for '27 to about 1% sales growth, down from 5.7% in the second half of '26. Just looking at your Q4 exit run rates by brand that looks on the conservative side, so can you just run us through what's feeding into the assumption in terms of same-store sales expectations by brand and make a few comments on what trends you're seeing by geography for Rip Curl?

Yes, I think -- Kieran, it's Brent here. When you think about, obviously, the performance that we've just posted in FY '26, I think the confidence that you referred to really comes from the actions that we've already taken, both in terms of delivering those results, but also the impact that we see and assumptions we've made around material improvement in the business as you look into FY '27. As we just talked about, clearly, we have delivered significant underlying EBITDA growth. We do have momentum in trading, as you have outlined, we've already taken action as it relates to $10 million worth of gross cost savings towards the back end of FY '26. We have some further clarity around margin tailwinds with a pricing strategy in place and of course, understanding a little more about hedging and the impact there. So I think what I would suggest is that we're confident in our future performance. Clearly, there is significant uncertainty in the macroeconomic environment and to some degree, that differs by market. And in some cases, it remains challenging. But from our perspective, we have outperformed the market despite a number of headwinds that we faced in FY '26. And we believe that with the decisions and changes we've made, particularly around product, store profitability and a focus on optimization of inventory that we can continue to deliver that in FY '27.

I'd probably just add, Kieran, keeping at it at -- so Kieran, I was just going to...

Yes, sorry, I [ don't ] understand that, but your guidance implies sort of 1 -- just over 1% sales growth, which seems conservative.

So Kieran, that's where I was going...

Can -- your thoughts on where the slowdown will occur?

Yes. So I guess what I can say is our guidance assumes the consumer environment remains challenging. Hence, why you're seeing a bit of a moderation in that growth. We obviously report 7 weeks, but it's -- as we point out, nonseasonal and a small period within the greater scheme of the guidance for the year. You're correct in terms of picking up on some of the drivers around that in terms of the sales line is also the impact of the store closures, which will obviously impact the top line. And it's our -- it's our best estimate within that range, given we've also seen the benefit of currency in the '26 results, which we've clearly pointed out and its management's estimate across a globally diverse group in terms of our best estimate of the revenue range as a result of the exposure within the different currencies within our portfolio.

Right. So it's sort of clearly a challenging consumer environment still. So I guess just another question on your guidance. I'm trying to triangulate your comments. So based on what you delivered an OpEx level in FY '26 you did $27 million cost out, OpEx still grew by 4%. You're targeting cost out of $10 million for the year ahead, but your EBITDA guidance seems to imply quite a significant lift in gross margin. for FY '27. So against a challenging consumer backdrop, can you just help us understand what level of gross margin expansion you're expecting and where that's going to come from?

We haven't specifically guided to that today, but you have picked up correctly, Kieran, that the key drivers within that EBITDA guidance are the sales growth, as you've pointed out. There is, as we've also put within the commentary additional gross margin expansion assumed through our call outs with some sourcing initiatives, the FX benefits that we already have in place with our hedge book. And as Brent has referenced some pricing actions that we've already been putting underway. So they are driving what continues to be our belief in gross margin expansion. And then to the point you made, we come off the back of having delivered cost savings in 2016 and have continued to challenge ourselves around that cost base with the further annualization of additional cost savings to get to that EBITDA position. The other thing I probably would just reinforce is Obviously, we're getting the full year benefit of store optimization, and we're getting the full year benefit of cost savings executed in '26, which gives us a better run rate from that prior year.

And also the full year benefit of pricing decisions made at the half in FY '26 annualizing in '27 in addition to other strategic price increases for the full year.

But clearly, inflation continues to be a pressure point. And so we make all of these comments around savings in terms of the context of inflationary pressure, which we're continuing to like everyone is managed.

Okay. But I guess just at an absolute level are you expecting OpEx to go up or come down over the year ahead compared to FY '26?

Well, I think I'll go back to -- we've given you the component parts of that. Gross margin expansion is absolutely part of what we said, that growth trajectory. And obviously, OpEx is a function of growing EBITDA is something that we continue to actively manage.

Right. Okay. And then maybe just a final question then on your balance sheet. Obviously, you came in slightly ahead of your July guidance. But this time last year, you were steering the market to a net debt of under $40 million by year-end. I guess, where you've landed and factoring in the equity raise earlier this year. you've missed that original guidance by over $70 million. Can you just help us understand how a missive that size occurred and give us a steer on where you see net working capital and debt trending over the year ahead?

So I do acknowledge that we have missed that target and that the guidance we've also provided in July for working capital to land with net debt is in a particularly dynamic environment for us. I mean we can pull out the component parts, which I've tried to do in the commentary today. And clearly, as a percentage of sales, it's more elevated at July '26 than we had anticipated. I guess the component parts of that is that we do continue to be encouraged by what we can see and have called out around inventory quality and our stock turns. But the timing of our payments profile, which you can see within payables, and we've provided a bridge within the cash flow have driven the delta in terms of that position from what we've guided to where we landed. I mean, obviously, we continue to focus on wanting to work towards a lower working capital investment position and supporting more cash generation in '26. And we do believe we've got levers to do that. But to the extent that we've provided guidance, it's very much been around continuing to target we had reinforced earlier, a comment of getting our net debt below 0.5x by the end '27, and that's what I guess I continue to remain as our target.

Your next question comes from the line of Paul Koraua with Foresight Bar.

I might just pick up from wear left off there. And just specifically about that payables balance. And so I think 1 of the concerns is after raising the money, the supplies shorten those terms, so they don't fund the inventory. And I guess my question is, is that payables balance going to be reflected in better margin as you get better pricing shortening your supplier terms? Or is this a little bit of the price is not willing to fund the inventory as much more.

A balance of both, but I guess I go back to reinforcing that our gross margin assumptions within that outlook assumes a benefit pulling through. flagged both in terms of pricing of our input costs as well as our FX hedge book. So I think you've picked up on the component parts of the commentary yourself in the question.

Okay. And then maybe just further on the balance sheet. So $40 million net debt, I think one of our concerns was around the maturity of the $40 million tranche at the end of this financial year. Considering your working capital strings are quite large in this business. Are you still comfortable in how you traverse that over the next 12 months? And could you maybe give us a little bit more color on how that is going to look?

So the confirmation is we are comfortable. We continue to work towards, as we flagged very clearly that tranche that's going to be maturing at the end of '27. We obviously also have, as we flagged the commentary around further capacity that was unlocked as a result of going through the review with our lenders. I mean I guess I'll reiterate. We continue to have the support of our lenders to continue to fund our working capital position. And I'm really pleased to be able to provide the update today, which we worked hard to do with our lenders in terms of being able to give comfort and confidence that, that facility had been unlocked because we flagged when we first announced there was a component of it that wasn't. We've gone through that process. And we've -- obviously, the other side of it, got the full $205 million of capacity. We still ultimately how we're targeting towards delevering. So I think at this point, I can just reaffirm we continue to feel comfortable with the covenants that we've negotiated. And also acknowledging we do have seasonality in our business, and we do have right now a fairly dynamic moving environment when it comes to just the timing of inventory leaving the ports, which we flagged, but the business is one lever. We're working on multiple levers here, and we continue to remain very confident in both being able to manage within our facility and continue to meet our covenants.

Awesome. And then maybe just on the tariff refunds you guys received, $8 million. Now that seemed like it was a surprise that it come in before the balance at end sort of reflected in that debt position being lower. But it was obviously booked through the COGS line. And so is the read that the actual underlying EBITDA here was slightly worse than what you guys were looking at. I don't know if you booked that $8 million COGS.

So it was a bit of a balance when it came to -- it wasn't -- when I say it's not a surprise, we'd obviously disclosed what we were anticipating in terms of the tariff refund. And the team have been very proactive in lodging the -- but given it's a new process and one that no one had undertaken, we had to work on a conservative basis of not knowing when those funds would land. And so we considered that we were going -- we flagged that we were going to be going through that process and claiming it, but the timing of it was out of our control, and it was pleasingly received or within the close of the fiscal period, but that was not within our control, and it was quite an unusual process. So we had no other basis to estimate when it would land.

The only other thing I would add there is just...

Your guidance -- so I was going to say, the only other thing I would add there is, obviously, it's a dynamic market with the introduction of tariffs, the uncertainty around tariffs. The team at both Oboz and at Rip Curl as it relates to the United States. -- took immediate action and made a number of decisions to offset any of the specific impact of those tariffs as best as possible. Obviously, color spoken to the timing of that. But the pleasing thing from my perspective was the demand that you saw in the fiscal '26 even with increased price as 1 component of offsetting a potential tariff given the uncertainty of the situation. Obviously, everybody was in the same position and no one had really clear ideas about what that might do to demand. And both for Oboz and Rip Curl, we continue to see strong demand even after that action being taken.

Yes. No, that makes sense. I guess the point was in July when you set the guidance, whether you had baked in any tariff refund in that number in your EBITDA guidance or if -- the full year result was supported by the $8 million you got refunded.

We had assumed a portion of it, but we couldn't assume the realistic extent. And then we also, as I highlighted through the commentary day, had some particularly strong trading conditions in the last 2 weeks, which again was not within the guidance range that we had assumed.

For Kathmandu?

Yes.

Okay. And then maybe just last one on the strategic review outcome. Now obviously, there's a few offers in there that you guys have had that you are looking into a little bit further. There was a comment around the board is going to decide whether it's the value it provides us greater than continuing on executing on the current plan. I guess the question is at what point, if at all, does the market get informed about what these offers might look like, noting that the market might have a slightly different opinion on what the fair value for this business is to maybe what the Board does.

Yes, I think as we've disclosed this morning and we're not going to go into more detail around it, yes, there has been indicative opportunity come to the Board, and that's a process that's ongoing. Of course, at a particular time when the Board feels inappropriate aligned with continuous disclosure, we'll update the market. But for today, there's no further color that we can provide around specificity within those conversations.

Your final question on the phone comes from Harrison Elliott with Jordan.

Just to talk a bit about the Appendix 7. I think you had your FY '28 targets on there. Given FY '25 was 4% EBITDA margin, then 5% in FY sorry, FY '26 was 4%. And if I take the midpoint of your FY '26 guidance, -- how -- what are you guys thinking when we go to that 10% target for EBITDA margin if it's going 4%, 5, 10. Is that a bit of a jump?

I think we continue to remain focused on what we provided in terms of '27 guidance. But clearly, we're not walking away from this 3-year ambition. So it continues to be something that we're targeting, and we're looking to continue to get momentum from '27 to '28 in an effort to work towards those targets. And to the extent we get a little bit further into '27, we'll continue to update the market. But I guess I go back to these intentionally within that time frame, and we're continuing to guide specifically in '27 with more guidance and building out towards that '28 view.