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

Thank you for standing by, and welcome to the Temple & Webster Group Limited 2022 Full Year Results Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Coulter, Chief Executive Officer. Please go ahead.

Good morning, everyone. Once again, it gives me great pleasure to be presenting Temple & Webster's annual results, this time for the financial year '22. I'm joined this morning by our CFO, Mark Tayler, and we will be taking you through the investor deck uploaded to the ASX this morning. To begin, I would like to acknowledge the traditional owners and custodians of country throughout Australia. We acknowledge the Gadigal and Wangal people, as well as other First Nation countries we operate across. We pay our respects to Elders past, present and emerging and to all Aboriginal and Torres Strait Islander people. Temple & Webster has delivered another set of strong results with record revenue of $426 million, which is 31% up last year and 142% on a 2-year period. This equates to a 55% 2-year CAGR, which is the way we prefer to look at it given the turbulence of the COVID impacted years. The EBITDA result of $16.2 million is up 38% on a 2-year CAGR, and at 3.8% of revenue is at the high end of our stated 2% to 4% range. This result included an investment of $1.7 million into our new home improvement site, The Build. These results demonstrate our continued ability to deliver profit and cash flow despite volatile macro conditions in the second half. We remain the largest online pure-play retailer in our category. We are profitable with attractive cost [ per ] unit economics. We have a very healthy balance sheet, and we have a large total addressable market ahead of us. Before I get into the details of the year, I would like to take a step back and give you a summary of where we are at. We are a stronger business with a larger growth runway than we were 12 months ago. However, everyone is aware of the challenges businesses are facing around the world: supply chain headaches, inflation, interest rate rises, and in our case, a shift away from discretionary spend on the home to categories such as travel as the world opens up again. We are not immune to such challenges, which are largely external and out of our control. What is in our control is our management of margins, the speed of our investment into longer-term growth areas and the general management of our cost base. As a result of our more prudent management choices, we have upped our EBITDA margin guidance to 3% to 5% from 2% to 4%. Even with the top line volatility now we are lapping COVID lockdowns. Again, it is after our investment into The Build. You can see on Page 3 that this is not exactly a new strategy. Since Mark and I took over the reins in FY '17, our communicated strategy has been consistent. We want Temple & Webster to take advantage of the once-in-a-generation shift from offline to online. However, we also want to deliver profitable growth. Our business model can deliver durable sustained growth at attractive unit economics, generate cash flow to self-fund investments, maintain a conservative capital structure and deliver improved margins. While FY '21 was clearly an outlier given the speed the market grew, allowing for outsized returns, you can see that the trend line is relatively consistent. We also have a long-term plan to optimize profitability, which Mark will take you through shortly. Ultimately, the fundamentals of our business hasn't changed. The market opportunity hasn't changed. Our strategy hasn't changed. And importantly, our aspirations haven't changed. While there will be periods of above and below trend growth, our long-term North Star is for Temple & Webster to be a much, much bigger business. We know we have significant untapped growth potential in online market penetration and our market share. And we're adding new addressable markets such as home improvement and B2B furniture, which will allow us to grow further. And we are comfortable that our business model and market will create significant operating leverage and a highly profitable business down the track. For those new to the Temple & Webster story, our [ 1-page ] strategy is set out on Page 4. We want to be known for having the best range in our category. We want customers to see us as the place to go to for quality products at affordable prices. We want to inspire people to make their homes more beautiful with the inspirational content and services. We want to create an exceptional customer experience at every step of the journey, from browsing to accepting a delivery. And we want to achieve all of this with a strong foundation of data-driven marketing, world-class technology and exceptional execution from our team. Now some of the highlights for the year included revenue growth was driven by an increase in active customers, up 21%, as per Page 5. And revenue per active customer was up 6%, as per Page 6. This revenue per active customer growth was a function of both growth in average order values and the repeat rate, and is the eighth consecutive quarter of growth of this metric. Speaking of which, repeat customers now make up the lion's share of our orders, which goes to the quality of the cohorts we've acquired over the last few years. While we saw some inflation in our cost of a first-time customer, our very strong customer economics has partially offset that customer acquisition cost increase. The net effect is that our marketing ROI, which we measure as the delivered margin dollars an average customer makes divided by the cost of acquiring that first-time customer, remains at around 2, which we consider is still quite high, especially for an e-commerce company. Our conversion rate trend continues to be positive. And while the entire business has conversion rate at a KPI, some of the larger initiatives that we prioritized during the year are set out on Page 7. The first of these is the continued integration of our Israeli technology partner's tools [ start-up Renovai ]. Renovai is a start-up in which we've invested and is one of the few companies we have found building sophisticated tech tools in the interior space. The mood board, which you can see on this page, is actually AI-generated, and takes into account the product a customer is browsing, the customer's browse history itself, and then it suggests the appropriate cross-sell products based on the look, style, interiors taste and budget of that customer. So far, around 20% of our traffic is seeing this tool, and we have plans to penetrate the other 80% by extending the tool's reach into other categories and rooms. We have increased our investment in Renovai, which gives you an indication of the results of these initiatives and aligns with our strategy of differentiating our proposition partly through technology. This year, we also accelerated our enhanced product page by creating more images, videos, 3D assets, better product information descriptions, room enhanced copy, and dimension data. The result is significantly better product pages for our bestsellers, which will drive conversion rate for these products. Customer obsession is built into our DNA, and as a cofounder-led business, remains a key priority. After a turbulent couple of years dealing with domestic and global disruptions in our supply chain, the good news is that we're back to our target for our NPS, with FY '22 ending close to our target of 65% and FY '23 well on the way to achieving our stretch target of an NPS of 70%. Note, this score would put us in the elite camp of world-class retailers. And we continue to invest in our teams, technology and processes to allow us to manage growth and deliver these outcomes. Now while there is much growth left in the core B2C online furniture and homewares business, by the time the business [ meets ] the next growth horizon, it's almost a truism to say it's too late. It is with this mindset that we have set up 2 independent teams to chase the growth [ play ] set out on Pages 9 and 10. This year, our Trade and Commercial, which is our B2B division, grew 39%. This is despite some sectors such as the commercial sector experiencing significant disruptions due to the pandemic and lockdown. B2B now represents around 8% of our total business with considerable potential to grow. The key areas of focus were the development of partnership packages for high-value builder-developer customers, including display designs, furniture packages and marketing and selling incentives. Home improvement is the newest kid on the block, and revenue associated with these categories grew 61% across the year. As a quick refresher, the Australian home improvement market is worth around $26 billion, of which $16 billion is relevant to our business. Currently, this market lags furniture and homewares in terms of online penetration. However, we believe we'll see similar market dynamics to those we're already seeing in furniture and homewares. This includes a shift to online shopping as the channel of choice for shoppers who have grown up buying everything online and are now buying, decorating and renovating their homes. To further capitalize on this opportunity, we launched a new online-only store for the home renovator, The Build by Temple & Webster, which is thebuild.com.au. This site leverages our core technology platform, our digital marketing expertise and data capabilities. The Build features an initial range of more than 20,000 products across 40 categories. Our goal is for it to become Australia's first-stop shop for all things DIY and home improvement. I'm sure many of you are wondering how The Build is going. Well, it's early days, and we only launched for trading during May. However, we're seeing very encouraging signs. For example, it is growing at a rate significantly faster than Temple & Webster did in its first year. Of course, we know a bit more now than we did 11 years ago. While we do not want to get in the habit of putting out guidance specifically for The Build, we have included our estimated first 12-month revenue of $10 million to $15 million to show its initial strong take-up. Before handing over to Mark, I'm very excited to announce our new headquarters is on track and is ready to be deployed or moved in during the first half of FY '23. This has been quite the labor of love and has been a project in the works for many years. Managing a high-growth business is easy on paper, but practical questions such as where is everyone going to sit need answers. At the moment, we are operating over multiple sites, and our new office consolidates our entire city team into a single building. We have secured a cost-effective long-term lease at a site in the Inner West and have multiple options to expand both in time and space. Critically, we were able to redesign the office to take advantage of our new flexible working arrangements. Our current operating rhythm is that the entire office is in for a few days a week. As such, there are lots of breakout spaces, creative hubs and communal areas to encourage in-person meetings, along with a fully specced office to allow the hybrid office of the future. I'll now hand you over to Mark Tayler to take you through the numbers in more detail.

Thank you, Mark. Good morning, all. Yes, very exciting about the new office. Look, I'm going to start on Page 13 of the investor deck, which highlights the group's profit and loss results for FY '22. So look, pleasingly, we have been able to deliver on what we set out to achieve, being above-market revenue growth, positive cash flows and investment into key areas and new growth opportunities, and profitability within a 2% to 4% range, all of which we delivered, plus more. So starting with revenue. As Mark mentioned, revenue for the year was up 31% for FY '21 and up 142% for FY '20, which equates to a 55% 2-year CAGR. This revenue growth was driven by both active customer and revenue per active customer growth. Now in the face of some inflationary pressures and slowing consumer demand during Q4, we took some swift action in the following areas. We focused on improving delivered margin levels, negotiating better outcomes with suppliers and increasing pricing points where there are opportunities to do so, whilst remaining super competitive. We focused on proven ROI marketing channels, which ensured our 12-month marketing return remained stable. And the substantial step-up in people during FY '21 and the first half of FY '22 enabled us to slow some of our longer-term investments in the second half to ensure profitability metrics remained strong. This was evident with Q4 being higher in terms of profitability in Q4 and FY '21. These actions helped deliver an EBITDA result of 3.8%, which is at the high end of our stated 2% to 4% range, and this result was inclusive of an investment in The Build of $1.7 million. Now one question Mark and I get asked quite often is, what is a sustainable and achievable long-term margin profile, which is a difficult question to answer given where we are in our life cycle. We've always answered this question pointing to other retailers, usually larger, more mature players in our category, and reference the type of margins they do, which invariably shows a category that is relatively high margins, both gross and bottom line margins. Page 14 of the deck attempts to put a bit of meat on the bone here by pointing out the areas we think leverage will materialize and the reasons why. So firstly, margins. Now over time, yes, competition will become stronger in our category, no doubt. But we firmly believe the benefits of scale, making our logistical model more efficient, and the benefits of increasing private label and potentially made-to-order as a percentage of revenue, far outweigh these potential competitive dynamic changes. Also, we know as we scale, our marketing spend as a percentage of revenue should come down in percentage terms as more of our orders come from repeat customers as opposed to new customers, knowing repeat customers are a lot cheaper to reengage than to acquire new customers. Also, over time, the brand component also of our marketing spend should become more fixed as opposed to variable as we scale. We should also see some good leverage coming through in the merchant fee and customer care lines as we increase efficiency and automation in the care area and also leverage our scale with our payment providers. Our fixed cost base will be a key area of operating leverage in the coming years. We know Temple & Webster can drive much larger revenue with existing resources, much higher than where we are today. And the recent step-up in people will certainly help this equation. Now going forward, we expect the relationship of revenue to wages to become [ almost ] linear and to become a true fixed cost as opposed to the variable nature of this line over the last few years as a result of some of the growth initiatives or growth investments. This year is a longer-term margin of over 15% in the longer term, a margin profile which we think and we believe is achievable. But most importantly, these are longer-term targets. And the one thing we have learned is the path to our Northern Star, or our vision of becoming Australia's largest retailer of furniture and homewares is never direct and always differs to what you predict. We incorporate this into everyday thinking with agile forecasting and having adaptive mindsets. Now Page 15 highlights the strength of the group's balance sheet and the cash flow-generative nature of the business. Cash increase from $97.5 million to $101 million, primarily driven by cash from operations and the benefits of the group's drop ship negative working cap model. These inflows were offset by further investment in inventory to support our private-label aspirations; investment into our Israeli start-up Renovai, taking our ownership percentage to just over 30%; and fit-out costs of our new head office in St Peter's, consolidating multiple office spaces into one, as Mark mentioned. Now one of the other questions we may get -- or we do get is what are we going to do with the surplus cash that we have on the balance sheet, which is a really good question. Look, firstly and most importantly, the cash balance provides us with balance sheet strength heading into FY '23. This position, coupled with our capital-light business model, enables us to navigate potentially difficult conditions, which may challenge traditional business models. So we think having a strong balance sheet into FY '23 is vitally important. Secondly, this position provides us with flexibility to fund our organic growth initiatives, which may be more capital in nature. And thirdly, it provides us with a strong position to consider attractive acquisitions. Now in terms of housekeeping metrics to assist in modeling out TPW, I'll call out the following in respect of FY '23: Depreciation [ and ] amortization to come in between $4.5 million to $5.5 million; CapEx to come in between $2.5 million to $3 million, which is a little bit higher than historical levels due to the final payment of the fit-out; and an effective tax rate of around 30%. Thank you all. I will hand you back to Mark.

Thank you, Mark. Now while FY '22 was a strong year, we believe it's just a fraction of what we can achieve, as the online market for furniture and homewares continues to grow. In Australia, the market is worth around $16 billion to $17 billion, of which only around 15% has moved online. This is well behind other markets such as the U.S., which is around 30% online penetration with significant growth ahead of it. And as we've already mentioned, we are also continuing to expand our activities in B2B and home improvement, and this increases our total addressable market to more than $30 billion. While the underlying tailwinds of the structural shifts in retail will help our growth for many years, we also believe there is a significant opportunity to increase our market share. Online retailers around the world are now overtaking their offline peers to become some of the largest retailers in their categories. Page 19 is a new page that we have added this year. It is a reminder that not all categories are created equally. We are well aware that some investors have questioned the long-term sustainability of e-commerce companies, especially as many companies have returned to loss-making after the COVID sales bump. 11 years ago when my fellow cofounders and I were scoping Temple & Webster, along with the general love of the category and the gap in the market, we looked at the fundamentals of the furniture and homewares market. While having higher average order values and better margins than many other categories is an obvious benefit, some of the other benefits are not immediately apparent. This includes much of the categories sold under the retailer's brand as opposed to branded goods. This allows for better differentiation and a bigger role for margin-accretive projects such as private label. The logistics around bulky goods is hard, both moving goods around and into the country. This reduces the level of competition, and there is a reason that Australia has some of the highest margin furniture retailers in the world. We believe these dynamics will ensure the long-term sustainability and profitability of Temple & Webster. Our flywheel and growth strategy are set out on Pages 20 and 21. Given the consistency of these pages, I'm going to skip them and go straight to the trading update on Page 22 to give more time for questions. In response to the FY '23 cyclical headwinds, and as we've already said, we've accelerated some of our margin optimization and cost management programs. As such, I'm going to reiterate that we're upgrading our EBITDA margin percentage guidance for FY '23 from a range of 2% to 4% to a range of 3% to 5%. Importantly, this profitability range is after our investment into The Build, which demonstrates the increasing operating leverage of the core business. Unfortunately, the timing of lockdowns during FY '21 and '22 will make year-on-year growth comparisons volatile during the first half. And we were expecting a bumpy start in new financial year. This can be seen with July trading down 21% year-on-year and August (to 14th) trading 17% down year-on-year. Really importantly, though, this trading is actually ahead of our internal estimates. And looking at month-to-month seasonality and how the business is currently [ flighting ] across the last few months, we are confident of a return to double-digit growth during FY '23 once we finish lapping COVID lockdowns from the year before. If this happens as we are forecasting, then with the work we've done around our cost base and margins, FY '23 should be more profitable than FY '22 even with this top line volatility. We remain committed to our profitable growth strategy. We're confident to have the people, platforms, brand and business model to achieve our North Star of becoming Australia's largest retailer of furniture and homewares. Our results also reflect the incredible resilience of our team and the determination to keep delivering beautiful solutions to our customers, no matter what the pandemic throws at us. This has contributed not only to the growth of our business over the past year but to bringing happiness into the lives of hundreds of thousands of Australians who have bought our products. I'd like to say a huge thank you to the Tempster team for their energy, passion and drive. We will now take any questions you may have.

[Operator Instructions] Your first question comes from Tim Piper from UBS.

mentioned and then also then the outlook...

Sorry to interrupt you, we were not able to hear you. May I request that you repeat your question from the beginning, please?

Can you hear me now?

Yes.

Okay. Sorry about that. Thanks, Mark. The first question just around the shift towards profit margin maximization in the near -- or optimization, sorry, in the near term. I mean when going through that strategy, is this in reaction sort of to what you're seeing in terms of the cyclical headwinds? I mean if we sort of work our way down the P&L, it kind of assumes that fixed cost growth is static from here effectively. So are you through sort of the headcount expansion, et cetera?

I wouldn't say -- look, I think it's a good question. I wouldn't say we switched into profit optimization. I think that chart that Mark Tayler put, which is long-term margin aspiration, profit margin aspiration of 15% plus, that is when we're into profit optimization. I think what we have been doing for the last couple of years is be very clear that we think that this is a generational change in shopping behaviors. And we wanted to make sure we were investing ahead of the curve so that we could win those customers as they come online, whether that be through fixed cost investment or marketing or anything, investment in Renovai, et cetera. I think we've made -- and you can see that in our fixed cost base, it's stepped up over the last couple of years quite significantly. And if we hadn't actually made that step up, our profitability this year would look better. But we did make that investment. We're quite clear. We updated the market in terms of what our new profit guidance would be, which to give us the leeway to make those investments. I think what we're seeing now is though, is that yes, we've slowed some of the hires. Yes, we're taking maybe a little bit of a longer-term look with initiatives like The Build. But you're seeing natural leverage as we take advantage of those fixed cost step-ups over the last couple of years. Our marketing, we just redeployed to the channels we know better, which are the digital ones. So away from some of the longer-term brand, some of the more expensive ones like brand and social. That is naturally improving our kind of ad costs and our efficiency of marketing. We've always stated that we want private label to be a bigger part of the business. That has a higher margin profile. So basically, just what we're doing and just being a bit more prudent around kind of what we're doing. You're seeing -- we're seeing that natural operating leverage increase. We're still investing. We're still hiring to The Build. We're still adding resources, but just at a much slower rate than we had before. But it is that natural kind of benefits of the operating leverage in a technology business that we're starting to see and will play out this year. But I wouldn't say we switched into optimization. We're still about growth. It's just there is natural operating leverage coming from [ the model ].

Okay. Got it. And you mentioned July, August sort of ahead of internal estimates. Any sort of sense you can give us on the cadence of the return to double-digit growth in terms of timing?

Well, as we said in the announcement, I mean, we look ahead, we kind of know like at our size and the month-to-month seasonality in June to July, July to August, et cetera, gives us a relatively good prediction about how the rest of the year is going to go. That's why when we look ahead, we know we will pop out into a double-digit growth during the year. We're relatively confident on that. And really, as we said in the announcement, we need to finish lapping COVID. Melbourne was in lockdown still in October. So it's kind of the next few months and the start of this year will be volatile, but we will -- as soon as we pop out, we're pretty confident on the growth part.

So like second half FY '23?

We're saying during this year. But as I said, the lockdowns ended this half. Last year.

Okay. Got it. Just one last one and then I'll jump back into the queue. Just around cash flow from here. I mean obviously, now sort of down year-on-year, negative working capital is sort of nice when you're growing. Are you sort of expecting a cash drag as you cycle some of these comps? You're obviously paying tax -- cash tax now as well. How are you thinking about cash flow into the next half?

Yes. Good question, Tim. Look, now I think there's -- as always, there'll be overs and unders, right? So per our comments, where we're saying we're going to be profitable. So obviously, that's going to have a positive impact. The negative working capital model does unwind once things go negative, but we are seeing a return to growth throughout this year. So if it's say -- if it's a flat year, for instance, then obviously, that won't have much of an impact in terms of cash flow. It really has to be significantly negative for a sustained period for it to start really dragging on the cash flow. So we expect this year to be cash flow positive, and we expect future years to be cash flow positive as well, even with some of the investments that we're making in inventory and other assets as well. So we want to maintain that cadence.

Got it. Sorry, last one, promise. Just quickly on margins. Obviously, the guidance looks like you're assuming that gross margins will rise through '23. Is it -- is it possible to grow gross margin through a tougher macro?

Look, I think it is -- Tim, I think a lot of the work that we're doing around optimizing pricing points -- we're taking a very close look at all of the promotions that we've been running, and there's definitely a little bit of leakage there in terms of some of the promotions that we've been running. And we're definitely seeing -- which has been interesting over the last sort of couple of months, we are definitely seeing some suppliers leaning into us in terms of trying to clear some stock. We've got direct inventory feeds into all of our suppliers. So we know what level that they're sitting on. And some of the promotional support and some of the COGS that are coming through at the moment are telling us that suppliers are definitely using us as a channel to be clearing some of the inventory. So I think you're going to have some inflationary pressures keep persisting, I would assume, throughout FY '23. But I think there'll be some offsetting factors as well. And you've got to also remember, we haven't really been optimizing margin to date. It's been more about revenue growth. So there are certainly some opportunities from a pricing perspective, particularly on the private label, to optimize margins further.

Your next question comes from Aryan Norozi from Barrenjoey.

Just my first one, please. Just around the expected investment for The Build in FY '23. I think a few months ago, you called out about $80 million of investment in total. Is that still the case for FY '23, please?

Yes, so one of the things that we said, Ary, in May of this year was it was going to be a circa 10 million investment over the course of '22 and '23. So obviously, there's been 1.7 come into FY '22. There's been a bit of working cap investment there as well. So not all of that $10 mil is OpEx. What we've said was around 20% was inventory or working cap, 80% was OpEx, which essentially implies a sort of $5 mil to $6 mil investment in FY '23. And when we say investment, we're talking about the net loss that, that business will be running during this period. So all the numbers that we're talking about today include that investment. However, the one thing I would say is it's more than likely, given the conditions that we think will present themselves in FY '23, and as Mark mentioned, we will more than likely take a slightly more prudent approach to the investment profile in FY '23 of The Build. So it may actually come in a little bit more than what we initially put out.

Yes. Okay. So just to reiterate, $5 million to $6 million of OpEx investment in FY '22, which is basically the loss The Build will run, and then it might come in a bit lower given you're taking a bit more of a prudent approach. Is that right?

That's correct. In fact, I'd be pretty confident to say it would be coming in lower than that. Yes.

Yes. Okay. Cool. And then just in terms of -- I mean how do we think about it in terms of -- your revenue was about $426 million in fiscal '22. Moving into fiscal '23, at what point does the 3% to 5% margin, EBITDA margin target not work basically? So what is revenue [ made of for wide ] before you guys actually that operating leverage takes over sort of the cost management? Trying to see the sensitivity as to what -- when this margin actually declined and at what revenue point.

Yes. Look, it's a good question. Look, at the end of the day, no one knows how FY '23 is going to play out. But I think the key thing for us is ensuring that we've got a number of levers up our sleeve to react to whatever conditions present themselves. So by us essentially freezing the fixed cost base in this initiative by slowing those longer-term investments, it does give us an opportunity to use those levers throughout FY '23. And those levers that we usually talk about are above the contribution margin line. So delivered margin. So we talk about what we can do from a pricing perspective, from a promotional perspective and also from a marketing perspective as well. So we've got levers above the contribution margin line that we can push and pull based on those conditions that are in front of us. And that will help us sort of get back to the profitability levels that we're looking to achieve in FY '23. But essentially, by slowing those longer-term investments, it does give us some leverage there to push and pull based on condition.

Yes, perfect. And last one, or second to last one. Just the bridge between FY '20 to '23 EBITDA margin. So what -- the biggest driver of that will -- should we basically assume your marketing as a percentage of sales remain pretty similar year-on-year and all of the growth -- or all of the benefit will just be fixed costs. Is that fair?

From '22 to '23, was that the question?

Yes. Yes.

Look, I think there'll be a couple of components. And most of those components will sit above contribution. So I think what we're seeing at the moment by optimizing margin levels, we are seeing a higher delivered margin coming through. And that is both on the product side, by leveraging the supplier base that we have and extracting better terms from that supplier base of working hand in glove with them. But it's also on the freight side as well. So our team has done a lot of work in optimizing our inbound freight, but also our localized logistics as well to help drive an incremental margin level there. And I think also we have dropped our marketing spend, or our ad cost levels, a little bit given the environment that we're in. So those 2 factors there should actually drive our contribution percentage, which is actually a few points higher than where we've been trending. And then essentially, you take a fixed cost base with a little bit of inflation there, and that's kind of how you get back to your numbers.

Perfect. And last one, just the new headquarters. So when -- how much of the -- I mean, you're obviously paying rent on that cost -- the rent cost goes through -- [ will be dest ] through the EBITDA line. What is the total rent cost -- annualized rent cost for that business? And when does that actually hit the P&L or the cash flow statement, please?

Look, it's -- yes, you're right. So that will sit under EBITDA. And none of those rent costs are coming at through the moment because we haven't moved in yet. So those rental costs will come through. And essentially, those rental costs for FY '23 will offset a number of facilities and office space that we have at the moment. So we're operating out of a number of offices and a number of warehouses that have our studio where video content, photo content is shot and so forth. So essentially what we're doing, we're consolidating all of those different leases into one site, which will have a number of benefits. But there will be some -- in the short term, there will be some costs where there will be some latent space because this facility is being built to facilitate us as a much, much larger business. So certainly, there'll be a little bit of extra space there in the short term. But over the course of the coming years, that will start to fill up pretty quickly. So the lease cost there, yes, there'll be a slightly higher lease cost, but it is consolidating a number of existing leases.

Yes. So the net lease cost increases, I mean, is it $2 million, $4 million or $5 million? What -- is there a magnitude you can provide us, please?

No, no. It's much less than that. It's much less.

The next question is from the line of Grant Saligari from Credit Suisse.

A couple of questions, if I could. Just first on your conversion rate chart, Page 7. Are you able to give me the average conversion rate for the second half '22 and second half '21? It's just a bit difficult to get that off the chart.

We haven't disclosed conversion rates by half, this is the chart that we put in. You can kind of -- just look at the peaks and troughs, though, and you'll get a sense of the increase.

It looks like it -- okay, so [ on live board ] it looks like it's up about 10%, if I sort of look at those periods. So if I'm way off, let me know. The other thing I noted was the average customer growth was about 20%, so I guess in the second half, so I guess what I'm trying to do the maths on is how you get to a revenue increase of 16% in the second half.

Sorry, can you repeat your question?

Well, it looks like the conversion rate's up, let's go -- you haven't disclosed a number, but eyeballing the chart, about 10%, let's say, thereabouts. It looks like your average number of active customers are up about 20% and revenue was up -- revenue was up 16% second half on second half. So I'm just trying to work out -- it implies revenue per active customer fell in the second half, I guess.

No, I mean the conversion rate relates to traffic as opposed to active customers. So how we get to active customers is, we go your -- how much traffic do you get, what's the growth in traffic times your conversion rate. Now if traffic has fallen, because of lockdowns or whatever, then conversion rate will make that up. And that then ends in another number of customers. Then obviously, you have some of those customers repeating. So they're not unique customers. So that doesn't relate directly to the active customer number. And then -- but to get to the revenue, you times basically your active customer growth times your revenue per active customer growth. And that will get to the revenue. But you can't necessarily link conversion rates directly to active customers.

Okay. We'll do it another way. Then active customers are up about 20% and revenue was up about 16% in the second half. Does that imply revenue per active customer was down?

Well, active customers are a full year 12-month customers, yes. They're not half.

Okay. Well, maybe the direct question, was revenue per active customer down in the second half, or up?

Revenue per active customer, you can see, is by quarter on that page. So you can see that's been growing over the quarter. On Page 6. Page 6 is by quarter.

Yes. No, it just doesn't seem to reconcile with your revenue figure. But anyway, I might take that offline. And just a second question, if I could.