Temple & Webster Group Ltd (TPW) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the first half 2020 results briefing. [Operator Instructions] Please be advised that today's conference call is being recorded. I'd now like to hand the conference over to your first speaker today, CEO and Managing Director, Mr. Mark Coulter. Thank you. Please go ahead.

Thank you, Kevin. Good morning, everybody, and thank you for your time. This morning, Mark Tayler and I will be taking you through the Temple & Webster's results for the first half of financial year 2020. We will be referring to key slides from the investor presentation deck that was uploaded to the ASX this morning. Once again, it's great to be presenting good news. Revenue for the half ended at $74.1 million, up 50% year-on-year. The operating leverage, which we talked about in the last couple of reporting periods, can be seen with revenue growth outpacing cost growth. This resulted in an EBITDA of $2.3 million for the half compared to $1 million in the same period last financial year. We ended the calendar year with $15.7 million in cash and no debt. Page 3 of the deck provides a summary of the half for you. While we are still watchful of the broader macroeconomic and competitive landscape, the good news is that there are early signs the housing market is recovering. This recovery, combined with the tailwind of the adoption of online shopping by consumers now entering the furniture buying year, has seen our active customers grow by 45%. Our revenue growth accelerated at the half and was helped by the increasingly important November online shopping sales period, which has seen retail spend being brought forward from the December period. And it's relevant to note, this shift actually helps online retail given the fulfillment challenges in December leading up to Christmas. We remain the online market leader in the furniture and homewares market sector, which is a big market, at around $14 billion. While we do not have an up-to-date market data on the current penetration of online shopping in our category, it is safe to say there is lots of upside ahead of us. We are also now starting to see the advantages of being the market leader, including forging stronger partnerships with our suppliers and investing in key differentiating areas such as technology, personalization, data and the delivery experience. Now while many of you are familiar with our business model, it is worth reiterating to those of you who are new to the Temple & Webster story that around 80% of our sales do not require us to hold inventory as we ship those orders directly from our suppliers. The remaining inventory, we import and store in our third-party warehouse in Melbourne. As a result, we run a negative working capital model, which allows us to scale without requiring capital. In terms of key news for the half, we increased our range from 150,000 products to over 180,000. We continue to believe in the advantages of depth and breadth of range online. We launched the beta version of our first mobile app, currently being tested by our customers on an invitation-only basis. Our data team was established, including a new Head of Data. This team allows us to further leverage our massive amount of data we track and collect and through initiatives such as personalization across all of our customer touch points. During the half, we also exited the Melbourne pop-up showroom. While the team did a great job and trading was healthy, we decided that now is the time to focus on our main channel. We are leaving the door open to return to off-line at the right time. The next page I would like to talk to is Page 8. Our scale and investment is now allowing us to constantly improve the customer experience in ways both big and small, visible and behind the scene. Some of those ways included investing in the training of our customer care team, including adding dedicated quality control personnel; improving quality -- broader product quality standards across our private label and drop-ship supply base; working more closely with our delivery partners to improve our fulfillment metrics; and improving the pre- and post-order communication with our customers. Together, these initiatives have seen our Net Promoter Score reach record highs. Note that the Net Promoter Score range from negative 100% to a positive 100%. So a score of 60% is actually very good. As you could see on Page 9, active customers grew by 45% year-on-year with record numbers of both new and repeat customers. Pleasingly, our customer acquisition costs and the return on marketing spend is holding steady as set out on Page 10, even as we add these record volumes of customers. A highlight of the half has been our Trade & Commercial division, which grew 75% year-on-year. Over the last 12 months, we've invested in our team's capabilities and our first B2B offline showroom, and these investments are now starting to pay off. We remain bullish around this area, especially with our disruptive proposition based on great value combined with a full turnkey fulfillment solution. As I mentioned earlier, during the half, we released the beta version of our app to a select group of customers. Our goal is to make a more content-rich experience and give our app customers more reasons to open the app. As such, the home page of the app is rich with images, quotes, editorial and shoppable collections. The app shows off our beautiful imagery in stunning high resolution, which loads much faster in the app's native environment. We've also made the favorites functionality prominent with easy access to move forward in the main nav of the app. We are busy working through our feedback from the beta release and are on track for public app store release this half. I will now hand it to Mark to take us through the half financial results in more detail.

Thanks, Mark. Good morning all. Turning to Page 14 of the deck. This page is all about really reiterating what we've been saying for some time now that in the short to mid-term, we will be pursuing a high-growth strategy to take advantage of the structural shift from off-line to online. As consumer preferences change and more millennials are making up more of the spend in our category, our focus will be on customer acquisition and building the Temple & Webster brand to ensure we are growing faster than our peers. This strategy will require reinvestment of operating leverage into longer-term growth plays, such as our B2B division and our mobile app. We'll also be reinvesting operating leverage in the capabilities that will deliver strategic moats around our business, such as technology, data and personalization, delivery experience and growing our private label ranges. Longer term, we will continue to benefit from the continued increases in market penetration. However, the focus will shift to growing bottom line profitability, while leveraging our scale, smarter pricing, more personalized promotions and becoming more disciplined in terms of our fixed costs and investments. However, we are some years away from that. Turning to Page 15 of the deck, which summarizes the group's profit and loss results for the first half versus the corresponding period last year, note that both periods include the new leases accounting standard AASB 16, although the impact of this standard is relatively immaterial for our business. The H1 result was headlined by a 50% revenue growth rate, which was predominantly driven by active customer growth. Delivered margins, which are our gross margins after fulfillment costs, grew 46% for the half, albeit with a slight reduction in margin percentage, which was the result of last year's ship cost increases on bulky freight coming through. Half 1 FY '19 only had a couple of months' impact as opposed to a full half this year. However, in saying this, the delivered margins are still broadly in line with our internal targets of around the 30% range. Marketing spend continues to track around the 11% of revenue range, albeit with significant increases in spend, still predominantly digital at this stage. Contribution dollars grew 41% to $11.4 million, with contribution percentage tracking at 15.3%. However, as I've mentioned, the short to mid-term focus is around growing top line revenue and optimizing contribution dollars. Fixed costs, excluding share-based payments as a percentage of revenue, were down 12%, which included investments into technology and data, mobile app, trade and commercial, private label and also our logistics teams. As a result, EBITDA for the half was $2.3 million. This includes noncash share-based payments. If you exclude these costs, EBITDA was $2.7 million. Page 16 highlights that our high-growth strategy is already translating into operating leverage, with fixed cost as a percentage of revenue decreasing by 12%, which included investments into core capabilities as mentioned earlier, culminating in an adjusted EBITDA percentage of 3.6% for the half. Please note that the full cost of some of these investments throughout half 1 will be realized in half 2, similarly to how H2 or half 2 played out last year. Importantly, the operating leverage and positive EBITDA results are translating into positive cash flows, with a cash flow-positive half of $2.2 million and an ending cash balance of $15.7 million and no debt. The positive cash flow result was driven by both EBITDA and the group's cash flow-positive business model, offset by investments into our private label inventory ranges to fill product and pricing gaps across the various categories. Please note the full balance sheet position will be presented as part of the fully audited accounts later in Feb. So all in all, some really pleasing results across the board, setting us up really well for the second half of FY '20. I'll now hand you back to Mark.

Thank you. So where to from here? Well, Pages 20 and 21 set out a plan to grow our market share in both B2C and B2B segments. That plan hasn't changed. In summary, we want to keep growing and improving our range, including through the use of our private label division. We are a young company, and most Australians have not even heard of Temple & Webster, so we need to increase -- keep increasing our brand awareness. Delivery experience will also remain a key area of focus for us, including expanding our white-glove service whether that be through our brand of service or in conjunction with our current partners. Finally, it's worth reiterating that we are a technology company as much as a retail, so we will keep investing in our platform and digital capabilities, including data, which we see as a key differentiator against our off-line peers and our smaller online ones. This will include making further investments in mobile, augmented reality and personalization. In terms of outlook, this half has started strongly and January is trading and exceeding the half's growth rate of 50%. We remain committed to a high-growth strategy to take advantage of the structural shift towards online. However, we do remain watchful of the broader macro and competitive environment. As outlined by Mark, we will be reinvesting short-term operating leverage as a growth initiative while remaining profitable. This reinvestment strategy supports Temple & Webster's stated goal of becoming the first site Australians turn to when shopping for their homes and work spaces. As always, this result wouldn't be possible without our incredible talented team. I'm very lucky to work with such a great bunch of talented people. Thank you. That's all we have today, but we will answer any questions you may have. Thanks, Kevin.

[Operator Instructions] Our next question in queue is from Tim Piper from Royal Bank of Canada.

Congrats on the results. Just a couple of quick questions. Firstly, around your marketing, it's predominantly still digital, as you stated, but your return on investment and your customer acquisition costs have stayed relatively flat despite you increasing your spend. Can you talk a little bit more -- a bit more about the scope to increase your marketing, both in digital and then maybe the timing of pulling the trigger on some broader channels?

Sure. Thanks, Tim. Yes, look, you're right. And as Mark said, most of our marketing is digital. By far, the majority of our spend is digital. The channels which we're advertising in have broadly remain consistent over the last few years. So obviously, Google is one of the biggest channels for paid search and then the shopping ads, which is the picture ads. We also do paid social, so we do Facebook and Instagram. We're actually seeing really good growth from that site, but the paid social is growing really quickly. Our 3 channels are actually doing really well. So our direct channel is growing strongly. Our SEO is growing strongly. So that's really nice to see. So as we increase our spend, so is our free channel, which has met the overall cost per customer and ad costs remaining relatively consistent, which is a great trend to see. Your question around what's next. Obviously, we want to keep working with the channels which are doing well. So paid social, definitely we want to ramp up and start spending more money on that, which we are. We're still seeing efficiency curves with some of the stuff we're doing with Google, which is good. So we're using more of the data we're collecting on site to inform our bidding strategies on Google, which is creating more efficiencies in the Google space. So we are definitely seeing we've got ways of efficiency left of it -- left in front of us in terms of Google. And obviously, more people are coming into the market, which means there's more volumes to bid on in terms of keywords, so that's kind of helping us as well. In terms of the other channels, probably the biggest one which we talked about for a little while is video. We had scoped potentially even going on TV. I think that's going to be next move, phase 2. The first step in video which we're working on is a digital video strategy. So we're actually working on our property video ad at the moment, which is probably created and produced, which will then run across YouTube and paid social channels, so Facebook, Instagram. We feel that's probably the next horizon in terms of increasing our brand awareness. It's really going after people who are already online and maybe buying fashion or other categories and maybe probably even researching furniture and homewares online but are yet to make that final plunge -- take that plunge and buy online in that category. So we feel the opportunity is getting an ad in front of them while they're on the digital channels, telling them the benefits of buying online, the benefits of buying online at Temple & Webster. And we think that's the easier bridge to get to rather than going after people who may be sitting at home watching TV and not online to begin with. So that's probably what you'll see in the next half, us ramp up our digital video spend, and we'll let you know how that goes next really soon.

Just the next one around your private label products. Your SKUs have obviously increased significantly. I understand sort of, I think, sales have stayed relatively consistent over the past sort of 12 months or so in terms of contribution from private label. There's also just a comment on the cash flow side there around investment into private label inventory. Can you give us a bit of an idea of what that SKU increase looks like in terms of private label? And can we expect increased sales contribution from that product range over the next 12 months or so?

Yes. So the short answer to that is SKU range has gone from circa 600 to over 1,000 because a lot of the SKUs we've added have been on the homewares side. So art, we've added a whole art range, both art range, added a Temple & Webster lighting range. So a lot of the lamps, we sell lamps at Temple & Webster now. Rugs, we've added rugs. So we've added quite a lot of SKUs on the homewares side as well as expanding our core categories of furniture. But in terms of breadth of SKUs, it's mostly on the homewares side. But we have been trying -- and I think that public saves dollars. We always said we'd like to grow the percentage of the business from private label. Unfortunately, we need -- with private label, it does require full placement of inventory and importing does take time. By the time to build the range, you need build loyalty and it does take -- and get shipment and does take time. So when we were doing our budgets in terms of increasing that range, having a private label division around 50% we thought was ambitious. The rest of the business has grown as quickly as it has, the percentage of the business isn't moving as quickly as we'd like. But look, it's a happy problem to have. I think it's -- our strategy of not going too crazy, you're not going too deep in inventory or taking too many risks is the right one. If that means that percentage of the business coming from private label just have to inch up slowly over the few years, so be it. I'm much happy with that strategy than taking too much inventory and wasting our capital.

Sure. Understood. Just one last one. Just around the November, December trading, you mentioned pull forward of sales into November from December. Can you provide some sort of quantum around the seasonality between sort of November and December with that November sales period becoming increasingly important for retailers?

So we don't break down by month-to-month. October, November have always been our peak. So this -- we're not really a gift buying site. But we had noticed we are benefiting from the fact that everyone seems to be doing their shopping in November and taking advantage of the Black Friday sales. And so online, in general, is getting better. Where -- how I like to describe Temple & Webster is we’re the site you come to, to get your house ready for the holiday season. So people are shopping October, November, getting their house ready for Christmas. But the longer people leave to get ready for Christmas, the tougher it is for us to make those delivery times. So any dollar move in November is actually really beneficial for us. Now having said that, December was still a very strong one for us. So we still finished the year very strongly. But we definitely saw a greater spike in November.

And our next question on the phone is from Owen Humphries from Canaccord.

Well done on the very strong results, exiting calendar year '20 (sic) [ '19 ] very nicely. Just if you go to Page 19, on the right-hand side, you've talked about the future phases of growth. You've talked about international expansion, moving potentially into off-line. I know you've got a showroom down in Melbourne, and you said new business lines. Can you just maybe each one of those that you've highlighted, just provide, are you currently selling into New Zealand? Do you have inventory there? And just would -- just go through each one of those growth initiatives that you see taking your business further.

Yes. I mean, unfortunately, Owen, this is going to be a very boring answer for you. But 100% of our focus is now on the left-hand side of the page. So growing our share in those 2 bubbles, both the B2C and B2B Australian furniture and homewares market. We have deliberately and strategically put to the side international expansion. So we did scope New Zealand and made the call which announced last reporting season, made the call to defer that because there's just so much opportunity left for us in Australia, and we don't -- I didn't want a distraction. Likewise, the same decision was made pre our showroom in Melbourne, so we've closed that showroom in December, just passed. The trading is actually going really well. And we had quotes from consultants [ saying ] the dollar per square meter from our furniture and homewares store was actually quite good. So it wasn't a trading issue. It's just a focus issue. I'm a big believer of -- I mean you've heard -- you follow the retail industry, you know the retail industry better than me, but everyone badly use the word omnichannel around. My personal belief from the word omnichannel is it's a bit of [ a per feed ] because if someone is shopping online, they expect on your web presence, your digital presence to be world-class and that has to be best-of-breed in your phone, on your msite or an app, on your desktop, you're not going to give it your -- the retailer a second chance because they're an off-line retailer. The website has to be great. And if I go into a store, I have similar expectations. I need -- I want that store to be best-of-breed. And I think what that means is you can do omnichannel, but you have to be best-of-breed in both channels. And that's really, really hard to do especially for young companies. So we've made a strategic decision to be best-of-breed online. Let's own that. Let's get the experience, the customer experience, to the standard we want. And we've got very high standards for ourselves. Once we feel that we're really, really owning the digital channel, then I think we would look back at the off-line channel. But it would require investment. It would require bringing in people who've done the off-line channel very well. It requires becoming best-of-breed in the skill sets that off-liners do really well, which we don't do. But of course, we can get there. But right now, it's distraction. So international, we've put off. Off-line, we've put off for now. New business lines, I think that's down the track, given the growth in B2C and B2B, in our core markets.

Okay. Good one. And I guess we've been doing the numbers, and I'm guessing Mark is now doing the numbers. If you continue your growth rate for the 12 months, your increase in gross profit after marketing -- well, if I may ask the question, $10 million over the next 12 months. Now just to understand, is there a large expected increase in head count over the next 12 months? Or are we expecting to see some large operating leverage kind of coming through? Just maybe explain your investment profile. I know you've highlighted a number of initiatives. But just explain your head count profile or what to expect over the next 12 months in terms of fixed costs.

Yes. Thanks, Owen. Look, we haven't gone into detail in terms of exactly where the investment is going to go, head count details. And look, we prefer not to go into that level of detail. But what we've been saying for a while, and it's sort of noted on Page 14 of the deck as well, is we will be reinvesting. So whatever operating leverage is dropping down to the bottom line, we will be reinvesting that back into the business. And we've called out a few key areas of the business where we think we can drive not only incremental top line revenue but also some strategic moats around the business. And whether that's in our B2B division and putting on more BDMs into that space, whether it's our private label division, more heads into that space and then investing in the actual inventory itself. We've spent a lot of time, and we've been investing into our logistics strategy. We've got a whole logistics team now in place. We're continuing to invest into that area of the business as well. So I don't think -- we're not going to be too granular in terms of exactly what the head count levels are going to be and things like that. But certainly, whatever operating leverage there is, it will be reinvested back into the bottom line. It will be reinvested back into the business. And we will be running a profitable business going forward, but the vast majority of that operating leverage will be reinvested back into the business.

Okay. Good. And maybe just going through the conversion rates now, they've strongly -- they've improved quite considerably in the last 6 months. Can you just maybe -- gone from 2%, getting close to 3%. Can you maybe just touch on what you've done to the website to improve that conversion -- I know you've cleaned up the SKU range. In fact, you've increased it recently. Just maybe just talk through what efficiencies you've got on the website to get to drive that strongly improving conversion rate.

That's a very hard question to answer, Owen, because everything -- literally, everything we do affects the conversion rate. But let me you take you through some of the biggest stuff. So specifically, if you're talking about what we've done on site to improve the conversion rate on site, because obviously, everything post order also leads to higher repeat rates, et cetera. But let's leave that to one side. Yes, you mentioned we've cleaned up SKU range. We continue to do that and refine our range. We've added a bunch of new products, which also helped, people having more bite of the cherry. We have made sure our pricing, promotional calendar is really tight, so we are competitive. We've done a lot of work around the actual content of the page. So more images, more lifestyle images. We've been trying video in our core ranges. We've done a lot of work on ratings and reviews. You'll notice the amount of ratings and reviews all at the site, and that's going to keep rolling out. We've been collecting tens and tens and tens of thousands of reviews and ratings, certainly helps given the social validation that is necessary online. Site speed, we've been doing a lot of work on the infrastructure behind the scenes to make sure our page loads faster. Site speed is directly correlated to conversion rate. As we grow and we have the greatest financial paths to invest in infrastructure, we've been doing that to make sure the site runs faster. We've added personalization across the site. The home page now looks different for you versus me. I mean that's one of the bigger things we've done over the half.

And our next question in queue is from Sam Haddad from Bell Potter.

Congratulations on the strong results.