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

Thank you for standing by, and welcome to the Temple & Webster Group Limited 2023 Full Year Results Investor Conference Call. [Operator Instructions] Participants viewing on the webcast are reminded that they can advance the slides themselves using the right-hand side of the player. I would now like to hand the conference over to Mr. Mark Coulter, Chief Executive Officer. Please go ahead.

Thanks, Homi. Good morning, everyone, and thank you for your time. I would like to begin by acknowledging the Traditional Owners and Custodians of the Country throughout Australia. I'm joined today by our CFO, Mark Tayler; and together, we will be taking you through FY '23 and our plan for the future. Please see the investor deck for more detail. We knew coming into the 2023 financial year that it was likely to be challenging, following on from 2 years of COVID impact to trading periods. However, we also recognized early on that we needed to adjust our strategy as customers began feeling the pinch of rising interest rates and cost of living pressures. For the year, Temple & Webster delivered a strong result with revenue of $396 million, with the business returning to growth in Q4. Its positive momentum has continued into the new financial year and the business is back to double-digit growth, and we are seeing growth in both first time and repeat customers. The headline takeaway from today is that we still see significant growth in our core business. The market opportunity is large. We can look to other markets such as the U.S. and U.K. to show us where we're headed, and we have the financial strength and operational advantages to accelerate our market share. Page 3 of the investor deck details our key performance indicators for the year. While active customers were always going to fall given we were cycling the COVID-impacted period of FY '22, we still managed to retain around 90% of our peak customer numbers. Revenue per active customer continued to increase, up 6% year-on-year. This increase was driven by an increase in average order values, which benefited from mix shift towards less discretionary items such as furniture. We were also able to pass on most of our inflationary pressures in our cost base, particularly around shipping. Marketing return on investment is holding despite inflationary pressures, which provides headroom to increase our brand spend in FY '24 and FY '25 to drive market share. Our focus on growing organic traffic has also begun to take shape. For example, initiatives aiming to boost SEO authority have delivered a 50% improvement in ranking for most of our targeted keywords. Orders from repeat customers now make up 56% of total orders. While the conversion rate has slightly dipped since the high [ intensity ] of COVID, we still have the leading conversion rate out of the Australian large retailers dedicated to the home. One of the key drivers of our strong conversion rate has been the deployment of our iOS and Android apps. And by the end of FY '23, we had 536,000 lifetime downloads of these apps. These apps are demonstrating higher conversion rates, greater customer lifetime value and higher customer satisfaction. One of the drivers of our increase in customer satisfaction and NPS has been the launch of our scalable asset-light T&W delivery service now in multiple metro and regional markets throughout Australia. In the past 10 months, we've completed over 70,000 deliveries through the service with a high NPS of 70%. The T&W delivery service operates at a lower cost, reduces product damages and ensures faster delivery time by eliminating touch points within the traditional delivery networks. So where to from here? While we're the leading player online retailer in a market that is poised to grow substantially over time. The Australian Furniture and Home market is worth around $19 billion, but only about 18% of that market has moved online currently, compared to the 27% to 28% we see in markets such as the U.S. and U.K. Our sites are firmly set on exceeding $1 billion in revenue over the next 3 to 5 years. This growth will mostly be from the core, but we also want to diversify our revenue base. We believe the scale will firmly entrench our competitive moats around range, brand, data, artificial intelligence and technology. To do this, we will be focusing on 5 key strategic priorities. Firstly, becoming the top-of-mind brand in Furniture and Homewares. As you can see on Page 6, Temple & Webster currently ranks seventh or eighth in unprompted awareness for furniture and homewares among Australian shoppers. Furthermore, 78% of Australian furniture and homeware shoppers have never visited our website. We also know that customers are most likely to switch brands during tougher economic times as they seek value, and [ media ] rates are likely to be the most efficient. As such, we believe now is the time to build our brand equity and salience to gain market share. In FY '23, given the strategic importance of brand and direct traffic, we focus on building out our internal and external capability, including adding a Chief Marketing Officer, and we're marketing city with an out-of-home brand test campaign in Q4. In FY '24, we will be launching our first multichannel, multicity above-the-line campaign. As the business scales, so will our marketing budgets, allowing us to keep adding brand with its points with the goal of becoming the top-of-mind brand in the category over the next 3 to 5 years. As set out on Page 7, we want to give thanks to having the best range in the country, a site with an incredible range of high-quality products and at great prices, which cannot be found anywhere else. To do this, we want the majority of our sales to come from exclusive lines. These products include our private label products to give you those imported under the Temple & Webster brand; exclusive drop-ship products, for example, those designed by Temple & Webster but sold by drop shippers; and made-to-order products. This will involve growing the share of revenue from these products from around 40% in FY '23 to our goal of around 70% over the next 3 to 5 years. Our exclusive lines of greater margins, which allow us to more competitively price these products, we also have the ability to value engineer these products, allowing us to offer on-trend quality -- quality products at even better prices. We will be investing in this area with more data science, product development capabilities and offshore sourcing teams. Importantly, our goal is still to retain our negative working capital model under the strategy using the mix of inventory models. Thirdly, as an online-only business, we are well placed to benefit from the frankly, revolutionary potential of new technologies such as AI. In FY '23, we increased our investment in our R&D partner, Renovai is that an Israeli AI start-up that is disrupting the way customers shop our category and helping to drive higher conversion rates in customer engagement. Our dedicated internal AI team is looking at how we implement AI technology across all of our customer interactions and internal processes. Early initiatives include using generative AI to power or presale product inquiry live chat. We've also used AI to enhance product description across more than 200,000 products. This has led to an increase in conversion, product added to cart and revenue per visit. In FY '24, we are targeting using AI for all first-time interactions, logistics routing and exception handling, pricing, promotions and recommendations. As we get larger, photos the size of our data lake, having more data points on Australian furniture home buyers than any other business will help the accuracy of all predictive algorithms that we use across the business. For example, our personalization algorithms. Our fourth strategic goal is to aim to significantly decrease our fixed cost as a percentage of sales over the coming years. Given we do not have physical store costs, our fixed cost base will naturally be leveraged across a greater scale, significantly reducing our fixed cost percentage as our revenue increases. Also most areas in our business can be and will be materially disrupted by AI. For example, care, operations, but also functions or product development tech, and of course, back office. We are already making early wins and reduced our customer care and operations overhead as a percentage of revenue from 3% in FY '22 to around 2.5% in FY '23. In FY '23, around 16% of our revenue base was from our growth players outside of our core B2C Furniture and Homewares business. This included $38 million or around 10% of the group revenue from our B2B customers and $23 million from the home improvement category or around 6% of group revenue. Our 3- to 5-year plan is to have more than 30% of the group revenue from the -- and new growth players. This will diversify the revenue mix of the group and also allow us to gain further leverage of our fixed cost base. Our growth players leverage core capabilities of the group, and they also significantly increase our TAM. For example, the B2B market is a multibillion-dollar, highly fragmented market, while home improvement adds around $20 billion to address the market. The B2B division has been structured to provide a full-service offering to business customers, including a newly established design and project division responsible for design, procurement and installation of large-scale projects. The B2B division is targeting the accommodation, residential and SME office market this year, while sales specialists focused on the specific requirements of each sector have been added. Ongoing design and sourcing of the commercial-grade product offering to service these industries will result in large-scale range expansion in FY '24. In FY '22, we launched a pilot that to build as an entry into the Australian Home Improvement market. We assembled a dedicated team and developed a brand across core categories such as bathroom and kitchen fixtures, flooring and lighting. Importantly, this range was replicated on templeandwebster.com.au, the mothership site. As mentioned, these efforts delivered revenue of $23 million for the year, of which 80% fill the main Temple & Webster site. Now this is a great outcome as it shows the Temple & Webster brand can stretch into adjacent categories, which, to be honest, we were a little worried about before we went to the sector. And this was reflected lower marketing, acquisition costs and higher conversion rates than the build. We are still very bullish about the home improvement category and have made the decision to focus on the Temple & Webster brand as a single brand across furniture and homewares and home improvement. This will allow for easier cross-sell and marketing to our existing customer base, and allow us to redeploy the build team and marketing budget to Temple & Webster. Going forward, we will continue to build out our high-quality range. And excitingly, we'll also be trialing our first private label range around bathroom fixtures which are landing is hard. I'll now hand over to Mark Tayler to take you through the results in more detail.

Thank you, Mark, and good morning all. I'm going to start on Page 14, which highlights the group's profit and loss results for FY '23. So look, to achieve revenue growth in '23, look, there's always going to be a challenge given the prior comparison period, which was significantly impacted by strong e-commerce demand due to COVID lockdowns. However, we're very pleased with the full year revenue of $396 million and the business returning to revenue and market share growth in Q4 of FY '23, which were driven by both growth in repeats and also our first-time customers. Importantly, against the tougher consumer environment, we continue to deliver positive cash flows whilst maintaining investments into key growth areas such as home improvement and achieving profitability within our stated 3% to 5% range, reflecting the flexibility and resilience of our business model. We increased our private label share of revenue to about 30% and maintained favorable positions with suppliers with over 90% of non-private label promotions now fully funded by suppliers. We also improved our delivered margin position from 30.2% to 30.8% for the year. Contribution margin levels were strong at close to 16%, largely driven by delivered margin gains and focusing on proven high-return digital marketing channels with a minimal brand investment spend in FY '23. Our staff costs reduced as a percentage of revenue in the second half versus the PCP as we leverage our previous people investments and as we start to see the benefit of AI-led improvements, in particular across our customer care team. Our adjusted EBITDA result was in line with FY '22 despite the revenue shortfall. You can see this was up substantially in the second half of '23 versus 2022 because of stronger gross margins and the leverage I just mentioned. Our full year EBITDA result of 3.7% was within our stated 3% to 5% range with EBITDA for the second half of '23, up 80% versus the second half of FY '22. This results -- the full year results included an investment of $3.2 million in building out our home improvement offering as part of our strategy, as Mark talked to, and we'll leverage this investment heading into FY '24. So Page 15 highlights -- really highlights the strength of the group's balance sheet and the cash flow generative nature of the business. Cash increased from $101 million to just over $105 million, primarily driven by cash from operations and the benefits of the group's drop ship negative working capital model. We continue to manage our inventory levels well with our negative working cap, able to fund further private label investment, and we expect this dynamic to continue during our 3- to 5-year plan, as Mark outlined earlier. We invested some of this cash in growth CapEx and a further $600,000 in our Israeli start-up, Renovai. Renovai is an important part of our AI strategy to enhance the customer experience, but also to improve cost efficiencies in the group. We also commenced a $30 million share buyback in April, which is ongoing, with 2.7 million shares bought back at a total cost of $12.3 million to date. We will continue to -- with our buyback program and continue to assess market conditions and prevailing share prices. So before the share buyback program and the additional Renovai investment, we generated free cash flows of $17 million for the year. We are in an enviable position with the strength of the balance sheet. We're in a position to fund both organic and also inorganic plans, whilst maintaining the buyback program. In terms of our M&A intentions, well, they remain unchanged. We continue to assess opportunities with a stronger focus on our growth players relative to our core furniture and homewares business. We're ready to execute on the right transaction should have meet our return on capital criteria and also strategic hurdles. Look, the business has never been in a stronger position. We have room to deploy funds in support of our growth plans, but we will do this in a disciplined way, remaining profitable at all times. So now turning to Page 16, which sets out our financial profile for '24 and '25 and also reiterate our longer-term financial profile. So as Mark has stated, we are returning to our growth strategy as a category disruptor. FY '24 and '25 will be focused on accelerating our growth and market share gains through executing on our strategic priorities. With over $100 million of cash in the bank, no debt, our strong balance sheet gives us the flexibility to take advantage of what is a once-in-a-generation opportunity to grow more rapidly which will rebalance our earnings profile in the near-term, but then get us to our longer-term goals more quickly. FY '24 and '25 will include an additional 2% to 3% of revenue invested into marketing spread across brand and performance channels to increase awareness and grow our market share faster. We'll also be investing in our current future growth plans to diversify our revenue mix and increase our total addressable market. These growth [ plays ] allow us to gain operating leverage in our fixed cost base by leveraging our people and our platforms. BAU EBITDA margin will be between 3% to 6% for FY '24 and '25 before the above-mentioned brand investment. We expect EBITDA margins to start incrementally building from FY '26 towards our longer-term EBITDA margin of over 15%. This will be driven by increasing scale benefits with suppliers, more private label and exclusive orders, improve logistical efficiencies and, of course, the benefits from our investments into AI. Additionally, over time, we also expect repeat customer orders to grow to over 80% of our total business, which will run at a lower marketing costs. And as we know, repeat customers are a lot cheaper to reengage than it is to acquire new customers. Importantly, 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. Going forward, we expect the relationship of revenue to wages to become less linear as opposed to the variable nature of this line over the last few years as a result of growth investments. We firmly believe the longer-term margin of over 15% is achievable. And some data points to support these aspirations. Firstly, this is on the lower end of what we typically see in our category in terms of profit margins as a category -- as a relatively high-margin category. Secondly, we have run EBITDA margins much higher than where we are today. For instance, we ran a 9.2% EBITDA margin for the first half of FY '21. And this period was assisted by positive market conditions, no doubt, but it was achievable very early on in our life cycle. And lastly, as a management team, we have a history of executing on what we set out to achieve, which is evident in the performance of the business over the recent years. So look, we have learned that the path to our Northern Star of becoming Australia's largest furniture and homewares retailer is never direct and always differs to what you might predict. We incorporate this into our everyday thinking with agile forecasting and having adaptive mindsets. We have a lot of confidence in our plan and firmly believe pushing harder in our growth now will be of a significant benefit to our shareholders. In terms of some housekeeping metrics to assist in modeling out TPW, I'd call out the following in respect of FY '24. Expect [ D&A ] to come in between -- well, expect D&A to come in around $6 million; CapEx between $2.5 million to $3 million; and an effective tax rate of around 30%. Thank you, all. I'll hand you now back to Mark.

Thanks, Mark. So as previously mentioned, the positive momentum from Q4 has continued into the financial year. Trading year-to-date is up 16% versus the prior comparison period. This growth is being driven by first time and repeat customers. Now while the situation is plus out there for many Australians, we believe we are well-positioned to manage these short-term headwinds and gain market share faster and more efficiently. We also believe that the value we offer our customers through our beautiful products at great prices is a winning proposition in times like these. Our strategy is a category leader capitalizing on a once-in-a-generation industry disruption remains unchanged. 3 to 5-year strategic plan we've outlined today is an important step on our journey of becoming the largest retailer of furniture and homewares in Australia. We believe that becoming the top-of-mind brand in the category; having the best and exclusive range of products; developing market-leading capabilities around technology, data and AI; lowering our fixed cost percentage; and diversifying our high-growth revenue base will establish Temple & Webster as the main brand for buying products for the home for generations of Australians. One final piece of news. As part of ensuring we've set up for success, we reviewed the structure of our executive team. We've added, as I said before, our Chief Marketing Officer, [indiscernible]. [ Joanna ] is an experienced cross-channel marketer who has worked in e-commerce for many years, including roles in the hard competitive market of online travel. Tim Charlton, who is running our supply chain team has been promoted to Chief Operating Officer with a particular focus on growth. In addition to logistics care and operations, Tim will take on group strategy, trading commercial and any new growth players. And lastly, Kate Perkins, who leads our furniture and homewares category management and sourcing teams has been promoted to Chief Merchandise Officer. In this role, Kate will be responsible for all products we sell across the group, including home improvement and any new categories. As always, I'd like to say a massive thank you to the Temple & Webster team. Your commitment, adaptability and resilience are as inspiring as ever. We wouldn't be able to fulfill a vision of making the world a more beautiful one room at a time without you. Thank you, and we'll now take any questions you may have.

[Operator Instructions] Your first question comes from Ben Gilbert from Jarden.

Just interested just around the July trading update because it looks like some of the web traffic coming to know it's not perfect at all when you get some half the picture, but it looks like it's been much stronger through July and August versus that update. How have you seen things like conversion, customer engagement? Obviously, it's a great result the trading. But just trying to understand and marry up the delta between the 2 web traffic versus the number you have [ part of price ]?

Thanks, Ben. Look, I think it's important to say, first of that, I know all of you look at similar web, like it's [ viable ], it's not viable. It's is an indicator of trends. It's a panel methodology, which doesn't take into consideration different sources of traffic. Obviously, has no real understanding of conversion rate by tropical AI. So it's a guide, but it hasn't matched up our internal data for quite a while. Having said that, it's showing high growth in traffic. And yes, traffic is growing quite strongly. Conversion rates holding. We are seeing a little bit of deflation in our AOV as people shift to more high-value items, and we're passing on better value through higher promotional activity, et cetera. We were always expecting that. But when you look at traffic times conversion rate times AOV, the net result is still a really positive result. And look, 16% up year-on-year -- as such not -- whatever we do, it's never enough. We are still in a retail recession. I would say it's one of the best results of retail in our category that you'll see. And the comps actually get easier as the year goes on. So look, the fact that we've started 16% for July and August half-to-date, we're really happy with. And we think actually the path gets easier as the year plays out.

No, congrats. It's a great result. I wasn't trying to take that away at all. Just the marketing investments next year, again, I think it makes a lot of sense in terms of accelerating top line given the balance sheet position. And just a couple of things as came on is one, how you saw the results from that out-of-home campaign that you did through particularly in New South Wales, and that's obviously given you confidence to this nationally. Can you give us any color on how that impacted brand awareness, et cetera? And then secondly, just on your return on investment from marketing. I noticed sort of customer acquisition costs are steady year-on-year. Are you starting to see those coming down because we're in a bit more out there in trade, there's more inventory coming on obviously [indiscernible] is opening up. Do you think you'll start to see that ROI lift on marketing as you move further through into '24 as just some of the costs come down?

So out-of-home -- look out-of-home, [ around ] July. So we're still in the post-campaign analysis period of that campaign. It's -- just to set expectations that were city only and out-of-home only. So kind of goes against a lot of the marketing law of having cross channels because really you want to make sure people see your brand multiple times during the campaign because that's how memory structures work. However, having said that, it still led to an incremental increase in orders in Sydney, has still led to an increase in brand search, quite a significant increase in branded searches in Sydney for the campaign. So positive. It's really combining that trial with our previous out -- brand trial. So we have been on TV. We know TV works for us. What we have taken those learnings and our new CMO have done is design a campaign, you'll see play out through the financial year, which is cross-channel. So TV, at home, into audio even social, et cetera. And you'll see the Temple & Webster brand play out over the year. That's not just going to be a brand campaign for the sake of it. It does tie into a retail campaign. So definitely we want to go to the campaign is to drive incremental sales brand when it is a little bit of a vanity metric. We don't just want to have the most low known brand as people are not buying. But clearly, the campaign is going to be designed with a very clear ROI. And we will be in market October -- October, November 1 this year. So that's the out-of-home. In terms of CAC and the marketing ROI. I think CAC is kind of a function of how much we spend as much as anything. Yes, we do expect there to be deflation in PPCs across the year as conditions get tougher and competitors pull back marketing spend. However, if that will be offset with us by us going harder and pushing for more incremental customers. So I think there's a little bit of swings around about in that. Also, these channels we're talking about, and we know from our experiments are more expensive. It's harder to draw a straight line to the ROI. So we do -- we are forecasting our CAC to go up as we go into these channels. But that is kind of -- that's implicit in our market investment, which has been split out for you to see, which is that kind of investment in our brand and brand awareness over this year and next year. We firmly believe now is the time to do that. It's never going to be during that downtime. Marketing gets more efficient. We know from research that customers switch brands during this time. So things are great, you go to your trust -- tried and tested brands and you don't really care. When things are tough, you start actually caring about every dollar. So things are market private label growth. But also in our category, sure, you may go out and have a look at a sofa in a store, but you'll do that extra bit of research. And now interestingly, a category like sofas and chairs is growing really strongly. So we know people still need furniture. We know they're going to be looking at value. We are cheaper than a lot of our off-line competitors. We do have a great value. We do have high-quality products at great prices. Now is the time to let the rest of the country know of our offer.

Your next question comes from Rachael Harwood from Macquarie.

Just first question just around market share. I mean you spoke to increasing market share, but do you have any sense of how significant these share gains have been and how you're seeing the competitive environment at the moment?

Well, to counter -- I mean, obviously, we don't have full visibility into our competitors' revenue numbers, or not all of them yet. But definitely, if you look at being back similar [indiscernible] what I said before, we are taking share of our competitors. If you look at the NAV online sales index, that actually contracted in May and June, and we were up. You look at ABS data, we've actually been in the retail recession for the last 3 quarters. And our category is down, and we're up. So definitely, you can look at revenue for the category and traffic category and that points to market share gain.

Yes, understood. And how are you seeing the competitive environment at the moment? Are you noticing any additional discounting or any changes there?

I'm a consumer, like everybody else, seems like whole [ world is on sale ]. But I think, look, that's stated retail practice. I think it's -- when things are tough, you want to make sure you're seen as a site for good value. And Temple & Webster is no exception. We will be running more promos. We'll be shouting about the great deals we have. That is just good retail practice. When things improve, as the cycle kind of plays itself out, then you'll see that kind of promotional message to decrease. I think it is a more primary heavy environment, but has been for quite a while now. And we're still growing at 16% year-on-year in that tough environment. And so obviously, our proposition is having cut through.

Understood. And just a question on AI. I mean, obviously, you're expecting to get some good leverage out of the AI, but how should we think about the cost savings just in FY '24 and '25?

Yes, I'll have a crack on that one. Look, it's interesting. So we did some analysis not too long ago. We worked with all of our different departments. And really looking at what sort of impacts AI could have on individual areas. And the response was probably more than what we we're expecting. So there's areas clearly where you can see that benefit, and we're already starting to see that benefit to areas such as customer care, for instance, we're seeing some material benefits already. But if you think about all the different elements of our business, all of our fixed cost base are people in an office, doing things. So I think there's a big opportunity, whether it's back office, whether it's marketing, whether it's content, we're not -- we're not looking at doing big restructuring, anything like that. What we're saying is we can redeploy people onto more value-add activities. And a lot of [ front ] work we believe can be picked up -- can be picked up by AI. And it's -- we're anticipating anywhere from 20% to 80% across different departments of how much -- how influential AI to be. So look, time will tell. It's going to take some time for us to -- for this to play out. But I think we're in a very good position. And I think we've got a very good head start relative to a lot of our peers. And I think our business is not to going to lend itself to being disrupted, if you like, by AI because of our -- and if you compare us to an offline retailer, for instance, where a big part of their fixed cost base are people in stores and leases of those stores. And we can't AI that, unfortunately. So I think the ability for us to take our fixed cost base and elements of our variable cost base as well and for AI to -- I think we'll reap some pretty material and meaningful benefits. We're already starting to show some benefits in '23. I think '24, we'll start to see even further benefits.

Your next question comes from Aryan Norozi from Barrenjoey.

Just the first one for me, just on your comments around comps getting easier throughout the rest of the half. So I mean if you look at July, August last year, you're cycling a 20% decline. And then the comps actually got better or got tougher. You finished the first half '22 revenue down 13% versus down 20%. So can you just elaborate on how -- why you think the comps get -- a year as you progress to the half, please?

Yes. Look, I think when we look at kind of the year playing ahead, year-on-year is one factor, but it's also how the year plays out from a seasonal flighting perspective. So we kind of look at month-to-month growth rates and how does that track versus month-to-month growth rates over history. So that's how we kind of know that last year. Q2, we came off the boil a little bit historically. And I think a large part of that was what we did, which we talked about at the half results. We knew the half -- first half is going to be tough since we focused on a lot of the bottom line improvement. So we looked at our cost base more tightly. We cut back on marketing a bit. We're really focused on the profitability. And Q2 was a good quarter from a [indiscernible] perspective. But it did hurt the top line and is it a little bit cumulative if you pull back marketing, then you actually have less first-time customers, then therefore, you have less repeat. So we're up against that -- what we did last year. So that's why we're feeling a bit more confident about that.

So the extra marketing investment that you called out in addition to BAU, has that -- I mean, in July and August, are you tracking at that sort of fully loaded marketing costs? Or like the 16% growth is basically running at 12% marketing to sales and that will build throughout the rest of the half?

No, not. We've opt out digital performance a little bit, but actually, the bulk of that investment will be the brand campaigns I'm talking about, and they're not in market until October, November.

Okay. So it's fair to say that, that 16% throughout the rest of this financial year, particularly the first half, will actually yield or increase or accelerate as you progress, as you sort of spend more money on that marketing piece. Is that a fair comment?

Our hope is, of course, that we keep doing better, but we're not putting guidance out around that number. We're pretty happy with how the year started. And so I'm confident by the year.

Last one, just one on fix costs. I mean, your wage costs, excluding customer service, grew 2% year-on-year on second half -- in second half '23. So really good performance there in terms of cost control. How do we think about your wage cost growth into '24 and '25? Just -- I mean is it going to go back to sort of the high single-digit growth rates? Or this AI piece going to drive to sort of low to mid-single digits?

Yes, it's a really good question, Aryan. Look, I think TBC, I think, is the answer. Obviously, we'll have some inflationary costs coming through in '24, wage increases off the back of '23. But look, I think our message to the market is we should start to be seeing that linear sort of relationship between our wages line and our revenue line, but that did really start to separate now. And I think if you look at the '24 -- to '24 numbers, we're certainly not expecting material increases in that wage line. So I think any growth that we're seeing from that line will be far outweighed by the top line. And like I said, really breaking that mix going into '24, '25 between revenue and the wages. But certainly, we don't have any large plans to be doing big staff increases in the near-term or in the longer-term. If you look at -- if you look at the pack that we got -- that we set out today, it's very clear that we think that we can leverage the existing resources and also leveraging the FY '21 and FY '22 investments that we made as well. And then overlaying some of the benefits of AI as will certainly help that going forward as well.

And even on the buyback on the 30th of June, is that just because of blackout periods? And should we expect that to resume? Or just...

Yes, that's right. Yes. So we can't trade in a blackout period. So from 1 July through to today, potentially, or tomorrow, I should say, the buyback -- like I said, we'll continue to assess the market conditions and prevailing prices. But it would be our expectation that we would continue with that buyback.

Your next question comes from Ivana Ye from Bank of America.

So the first one probably around marketing spend. I feel like the customer acquisition costs still remained at a rate level, and the percentage of marketing spend or new customers is lower. So just wondering to expect to remain this level? Or are you going to reaccelerate depending on acquiring new customers in FY '24? And then the second question, probably around [ buying opportunity ]. Just wondering, are you looking for the buying investment in the logistic capability or you are still focused on like investing in the technology customer, customer base or side sort of things?

So let me take the first question, which is the marketing. I mean the -- as repeats grow as a percentage of the base, there is a cost to [ reacquire ], but significantly less than the cost for the first-time customer. Given the focus is on growth and we see a lot of opportunity in first-time customers, you definitely should see a great proportion of our spend going to first-time customers. So that definitely will switch. As I said, in terms of CAC, as we go into more expensive channels, I'm still expecting some inflation in CAC, but our economics means that we can cope with that. In terms of logistics buying, I think your question is are we going to do something like the [indiscernible] purchase that is not on our horizon. We definitely have an asset-light model. We don't believe that we need to own logistics. We like the flexibility of having multiple partners. We like the fact that our model isn't about -- our business model isn't about utilization of space, which is hard in a variable growth business, both in really, really high and really low, logistics gets tough. So definitely, our strategy is to maintain a third-party logistics network. Now that doesn't mean we're not going to be exercising more and more control. For example, the Temple & Webster delivery network is a third-party-run network. They are contract trucks run by a third party. We just -- we define which orders go on which trucks on what day, and then we have a whole bunch of SLAs in the back. Now that means that we get some cost savings because we're paying for a truck on a day as opposed to on a parcel, but we're not paying for a whole fleet. So it's still quite -- actually quite a lot of variable because it's -- we can define many trucks in the network, but it means we have much, much tighter control over customer delivery times, customer experience. We can do things like day-of-choice delivery. It reduces the damage rate, et cetera. So that's the model we like, where we have more control over the fulfillment experience, both in warehouse and the delivery part. However, it's not on our balance sheet. And the risk of utilization rates being off is not our stake. So the answer is no, we're not looking at acquisitions [indiscernible].

Your next question comes from Chami Ratnapala from Bell Potter.

Congratulations on the results firstly. Just on the brand awareness, I did not see it on the deck. Just wondering what it's tracking like to at the moment. And I also wanted to follow up on your point on customer switching brands and the benefit of billing customers. We've seen the more reason sort of a traffic seeing good cross visitation from other brands to yours? Is this evident in your customer-related data at the moment? And anything you can talk to?

Sorry, I got your first question, which is brand awareness, but can you repeat your second question?

That's correct. So the aided brand awareness, what is it tracking sort of at the moment? And also on the switching brands, are you seeing any cost visitation benefits coming from other brands to yours within customers?

Got it. So in terms of brand awareness, we normally disclose our brand -- aided brand awareness at the half. But it's been tracking up as we're doing more out-of-home. I think -- look, I think the more important metric that we're focusing on is actually now unaided. That's what's been disclosed in the investor deck because that's a true more read on are you the top of mind. So when you ask someone when you think of furnishing homewares, what brands do you think about. And so you can see in that chart that we have quite a long way to go to actually become the top of mind. Now that's going to take time. It is also going to take brand investment. But as I said, the unaided -- the aided brand awareness is still tracking up and above our levels that we disclosed before. In terms of switching, you can see definitely in similar what you can see some of the traffic overlap with us versus some of our competitors in the off-line -- the off-line overlap is increasing. So it used to be, definitely, we would have more -- we'd focus more on the online retailers of the competitors. But increasingly, it's more the off-line competitors. That's from anyone to IKEA to Harvey Norman. So you can see that overlap, which is good. So I think I don't have any -- it's impossible to predict that customer would have gone into an offline in particular of offline retailer and then now has come to us. But I would say revenue growth and our share growth is coming at the expense of the offline channel.

Your next question comes from Wei-Weng Chen from RBC Capital Markets.

Just a couple of questions from me. Just the first one on -- I guess, you guys are targeting a bit of a different sales mix. I'm just wondering how we should think about inventory risk as you execute on that strategy?

You want to take that one?

Yes. So look, I think probably a few points with this one. I think the first point would be in the last 6 to 7 years where we've been slowly building out our private label range, we've never had an issue from an inventory perspective, whether it's an aging profile, whether it's a week of cover. And I think that goes to the processes that we've got in place to ensure that if we are seeing problematic lines, that we exit those problematic lines pretty quickly. I think secondly, if you look at the process that we go through to acquire inventory, so where we take a position on inventory, we essentially take small [indiscernible] and [ small bets ]. And if that bet plays off, then we order some more and we order some more and we order some more. So we're testing and learning all the time. I think a lot of the things that we're doing in terms of AI and our ability to forecast better now is certainly helping that scenario as well. So if you look at the history in terms of our improvement and our increase from a private label perspective, I think you can see historically that we've been able to manage things pretty well. In terms of the go-forward position, we're in an enviable position where you've got the benefits of the negative working capital model, essentially funding the investment in private label. Now clearly, we've got aspirations to be growing that private label component as we move towards our goal of over 70% exclusives. But a lot of that will be driven by both private label and drop ship. So how that mix actually plays out in the medium-term and the longer-term, TBC. It could actually be more weighted towards drop ship, which would mean that the inventory risk is not a void because of that model, or it could be more skewed towards private label. And clearly, we've got the balance sheet to support that. And clearly, we've got the benefit of the drop-ship model to support that growth as well. So I think we need to continue to assess. And I think as we continue to build scale with our drop-ship suppliers, the ability for us to leverage those relationships and leverage that consistency in revenue growth for that supply base will put us in a really strong position to be negotiating really strong outcomes. And some of those outcomes will be exclusive lines, which we're seeing at the moment. The number of suppliers now that are providing a lot of exclusive lines to us. And what that means is we're getting the benefits of those exclusives without having to carry the inventory risk. So I think historically, we've been very strong. How that makeup or the breakup looks going forward, TBC. But we've got rigorous processes in place to ensure that we don't have any owned inventory risks.

Yes. Okay. Great. And then just on the $1 billion target in 3 to 5 years, sorry if I missed this in the presentation slide. But just wondering how you're thinking about this. Is this like an aspirational sort of stretch goal? Or do you kind of see a clear pathway there? And I guess, a management incentive directly tied to achieving this goal.

So I think -- I think it's a very clear path for us, but obviously, I'm a little bit biased. I think the stretch is probably built into the -- or aspirations built on the timing. So if we execute flawlessly and things work in our favor, it will be close to 3 years. If it takes a bit longer, it will be close to 5 years, and hence, the growth rate will change. So I think it's in the timing we've built into that flex. Management incentives. So I mean we disclosed our STI, our KPIs for our management team, executive team. Revenue growth is a big one of that -- a big part of that. And the growth rates will align to -- the growth rates in the target to align to this goal. I'm very much incentivized to grow the business and deliver shareholder returns. I'm tired of the hit to everyone -- to all of our shareholders. So this is -- we're all very much aligned to build Temple & Webster into a much, much, much bigger business.

Yes. And then just last question for me on that $1 billion target. Is this -- would that be considered long-term when you're talking about long-term margin targets and all of that? Out of $1 billion, would you anticipate that your EBITDA margin would be [ like 15% ]?

Look, what we're saying is that the $1 billion, the 5 strategic priorities, which we think will set us up for success for the next generation Australian shopper, which is top-of-mind brand, having an exclusive and the best range in the country, having leading capabilities around data AI, having a fixed cost base reduced and its growth plays, that are our strategic moats. We want to focus on getting the $1 billion to really firmly entrench those strategic moats because that is the stance the Temple & Webster for a long time. At that point, then we're going to switch into margin optimization, profit optimization. So you'll see, from that point on, we will head towards the long-term margin target.

Your next question comes from Scott Hudson from MST.

Most of my questions have been answered. Just on the build. Am I right in understanding that, I guess, that The Build brand and website will be, I guess, ending now and you'll just be focusing purely on Temple & Webster?

So from a home improvement category, definitely the brand that we'll be focusing on is Temple & Webster. And look, it is the actual ideal outcome for the group. Having 2 brands going up to 2 categories is always going to be complicated, but it was a hypothesis that maybe if we make a second brand to go after a different category, but our hypothesis has been proven wrong. I'm a scientist. I've [ science degree ]. That's fantastic. Hypothesis is wrong. We've actually got definite learning, which means we can focus on Temple & Webster. It's much, much easier from the go to market, from a marketing, from a customer care and logistics, from -- you name it, it's easier to focus on a single brand and in one platform. That's great. And we have now a site which can sell furniture and homewares and home improvement. In terms of The Build itself, as a site, it's a fully functioning site with everything set up. I don't think we'll turn it off straight away. We may use it as a testbed to deploy some of AI kind of more crazy ideas. It could be -- we could do more radical things of a range. We're reserving the right to play with it as a fully functioning site. If you -- in a few months' time, you're taking to build.com.au, it will probably still be live. But from a customer proposition and where we're putting our marketing budget and where we're putting our team, the focus is on Temple & Webster.

I guess just in relation to that, I thought my understanding sort of when you launched The Build is that some of the success around -- or part of the elements of success in that market would have been a gaining share of the trade market. How do you sort of think about that, I guess, in the context of now sort of reshifting that investment back towards the Temple & Webster brand?

So the trade costs are always going to be Phase 2. We're a B2C business predominantly. Phase 1 was always going to be get our range right, develop the B2C proposition, make sure we can fulfill. It's easy to say let's switch on home improvement, but we have to work on how to palletize ship pallets. Tiles don't come in satchels. They come on pallets. So we have to work out how to do that. The project management design, customer care expertise. So we've put all our efforts into the B2C bit. That is going to be the primary focus for a little while. Trade cost is always going to be Phase 2. I mean we have already trade customers, interior designers, decorators, people working space builders, developers on the furniture and homewares. We don't see why we couldn't extend that into home improvement. Again, if we can't, for example, and we really need a dedicated site, potentially the -- we're leaving the door up to maybe one day, [ resurrected ] build. But we -- everything we've seen suggests that if a customer is okay, buying tiling, flooring, vanities, bathtubs from a furniture and homeware site, then why wouldn't someone in the industry? So we think Temple & Webster is still going to be okay.

Okay. And then just on the potential M&A front, are you seeing any increased opportunities given, I guess, the retail downturn? And can you sort of suggest where you -- talk to where you're more likely to deploy that capital, whether it be on to sort of the second and third growth horizons or on sort of the main part of the business?

Yes, look, I think if you go back to what I was saying earlier. Really, it remains unchanged in terms of what -- how -- where our focuses are. Obviously, we're in a pretty enviable position in terms of the balance sheet and the cash generation of the business. But in terms of M&A, I think, look, the core business itself is in a pretty good position. We've got probably the best team and the best platforms. For us, it's really about growing that brand awareness for the core business, but certainly for the growth horizons in particular, home improvement and B2B. That's been our focus for a little while from an M&A point of view. And I think that will -- including technology as well. Clearly, we've been investing in AI and our Israeli team at Renovai. But certainly, the second and third growth horizons that we've spoken to today would lend itself more towards inorganic activity relative to the core business. So yes, look, obviously, we're always having conversations with a number of different parties, and we'll continue to assess that. But always, as we do any form of capital investment, we're going to be very rigorous in terms -- and disciplined in terms of how we allocate that capital. So if the right opportunity comes along and it meets our return on capital and strategic hurdles, then we're ready to go.

Your next question comes from Tim Piper from UBS.

Sorry, I jumped on this late, so I might have missed some of this. But just first question on the inventory position at June. I think previous commentary was you had a pretty strong level of value-focused inventory landing in the fourth quarter. You've probably sold through most of that given the momentum in June, July. Expectations around inventory planning at that price point over the next 6 months, given macro conditions and consumer demand at the moment.

Tim, yes, look, we will certainly continue to be investing in that part of the range. We had a lot of entry-level and value-end products dropping in Q4. And we've seen really good sell-through. And you can see with the ending inventory position relative to '22, it's actually lower than the '22 position. So -- so yes, we've got a number of -- we have a lot of stocks landing in the first half as well and certainly orientated towards that more value end of the market.

And just the sort of the sequential change in sales momentum across May and then into June, July, pretty clearly. I mean, so did you provide any comment around sequentially how the margins sort of changed through the half, particularly into the back end of the half on the back of that?

No, look, we haven't put any commentary in terms of -- look, to be fair, we try not to get too granular in terms of month-on-month profile in terms of profitability because it's -- things can change, and obviously, there's seasonality that comes into the mix as well. But I think the takeaway is if you look at the performance, if you look at the delivered margin performance and the contribution margin performance in the second half relative to FY '22, you can see that pretty much every metric has improved. So then that is in a period where we're returning to growth as well. So those metrics set us up well heading into FY '24.

Okay. And just sorry, just one quick last one. On the delivered margin in the second half sort of either year-on-year and half-on-half. Can you give us a rough sense around the basis point tailwind contribution from lower freight within gross margin?

Yes. Interestingly, we're certainly saying international shipping prices. They're probably normalizing now. But certainly, in the second half, there was a material level of deflation coming through essentially back to pre-COVID levels, anywhere from sort of USD 800 to USD 1,000 for a 40-foot container, which is relatively in line. The question will be whether or not that trend continues. My sense is things have probably bottomed out from an international shipping perspective. That's a similar sort of story that what we're seeing from the factory gate as well for product prices. So we saw a big period of inflation during '21, '22, then a period of deflation coming through in FY '23. And it looks like things have kind of normalized now, and that was off the back of lower demand coming out of Europe and the U.S. So it feels like both the shipping and also the cost prices, they're pretty much now landed in a similar position to where they were -- where they were pre-COVID. So I think that's going to be the sort of the trend going into '24. Certainly, that persisted the delivered margin. We're able to pass on a lot of those inflationary pressures on to consumers and maintain a good level of business performance. But also those deflationary we've been passing on some of those deflationary opportunities as well, which has helped us get back into growth in the -- in Q4. I think the other thing, too, which I noted on Page 14 of the deck is part of that margin growth, yes, part of it is private label. So we've seen a bit of an increase in private label, which runs at a higher margin. But actually, the drop-ship component of the business has stepped up in terms of its margin profile, even more so than private label. So really starting now -- because of our scale, we're really starting to get some strong benefits and negotiate really strong outcomes with our suppliers. And one of the metrics that I put on that page was the fact that over 90% now of the promotions that we're running from a drop-ship perspective are actually funded by our suppliers. So I think as we continue to increase our scale point with our drop-ship network, those dynamics generally improve.

Sorry, just on Slide 7, FY '23, that chart on the left. So how much percentage of your revenue now is from sales? Sorry, what percentage of sales do you hold inventory on now in the business?

About 30%, Tim. So about 30% of our sales are private label sales.

It says private-label imported is 40%. [indiscernible] exclusive and then there's third-party branded, which is drop ship, that there's some within that third-party brand which you're holding inventory on that, right?

That's right, yes.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Coulter for closing remarks.

Thank you all for those questions. Hopefully, everyone is excited about Temple & Webster's future as much as I am. With earning on the headline takeaway message that there is still much growth in our business. The market opportunity is large. We know where we're headed, thanks to the U.S. and U.K. And we have the financial strength and operational advantages to accelerate our market share gains, which we are already seeing today. Thanks, everyone.

That does conclude our conference for today. Thank you for participating. You may now disconnect.