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

Thank you for standing by, and welcome to Temple & Webster's First Half Results Call. [Operator Instructions] Please note that slides for today's webcast are user advance and can be managed on the webcast player. I would now like to turn the conference over to Mr. Mark Coulter, Chief Executive Officer. Please go ahead.

Good morning, everyone, and thank you for joining us today. I'd like to begin by acknowledging the traditional owners and custodians of country throughout Australia. I'm joined by our CFO, Mark Tayler; and together, we will be taking you through our first half FY '24 performance. Please see the investor deck for more detail. Now we are exceptionally pleased with the first half performance. Temple & Webster delivered a record half with revenue up 23% to $254 million. This was in the face of some of the tougher headwinds to our category we have seen. As cost of living pressures impact house budgets, shoppers increasingly are searching for quality products at affordable prices. And it is clear our range and value proposition is resonating with Australians during this time. In particular, the second quarter of the financial year saw revenue growth of 40%, thanks in part was a strong Black Friday and Cyber Monday sales period. This positive momentum has continued into the second half with trading up 35% year-on-year in the half to date. Our EBITDA result of $7.5 million for the first half, up year-on-year even after a prior market investment gives us confidence to continue investing in growth to take further market share. The online market in Australia remains underpenetrated, and we are demonstrating to continue to take share even when the overall market is down. We are in a strong financial position and well placed to build a strategic mode around range, brand and tech capabilities. We remain committed to our goal of hitting $1 billion in sales in 3 to 5 years while remaining profitable. Page 3 shows our key performance indicators for the half. As you can see, our result was driven by growth in both first-time and repeat customer orders, which has led to record active customer numbers. In fact, just recently, we've crossed the 1 million active customer market for the first time. Marketing return on investment was in line with expectations given our increased brand investment for the half, the slight drop in revenue per customer reflects a decline in average order value as customers seek more value in a tough environment. However, we're continuing to see a shift towards less discretionary and higher ticket items such as financial. We still have the leading conversion rate out of the Australian large retailers dedicated to the home and have maintained our strong customer satisfaction levels as we scale. This is in part supported by the ongoing rollout of our asset-light T&W delivery service throughout Australia. As reflected on Page 4, our sites remain set on exceeding $1 billion in revenue over the next 3 to 5 years. We're the leading pure-play online retail and the market that is poised to grow substantially over time. While we see the most significant growth from the core furniture and homewares business, we also want to diversify our revenue base and focus on our adjacent growth plays, which will benefit from leveraging the core capabilities of the group, while adding scale. Page 5 reiterates our vision of being famous for having the best range of the country and highlights our specific 3- to 5-year -- 3- to 5-year strategic goals that we set out in the FY '23 results in August. Turning to Page 6. In line with our first goal of becoming the top mind brand in the category, in October, we launched our first major multichannel above-the-line brand campaign across Sydney, Melbourne and Brisbane. The campaign has shown promising early results, including a significant increase in our share of branded searches and direct traffic as well as incremental orders and first-time customers. As many on the call may have seen, this campaign is centered around Imagine - reinforcing Temple & Webster's role in helping our customers imagine and then achieve a more beautiful home within their budgets. The campaign consists of 3 bursts spread across FY '24, and we will continue to invest in other direct and organic traffic channels and optimize our existing marketing mix or AI and data-driven strategies. Our second goal of delivering the majority of revenue from exclusive products is laid out in more detail on Page 7. We've added over 500 new private label products during the half, our higher-margin private label contribution remains steady, given stronger-than-forecasted future growth, which did see a substitution to drop ship products given our owned inventory levels. We continue to focus on exclusivity with our key drop ship partners, which allows for more of the catalog to be differentiated, exclusive to us and maintained a big opportunity for higher-margin initiatives. This half, we've also established an internal industrial design function with 3 industrial designers. We're exploring a number of tools, including using AI and data-led product design. As many will know, data, AI and tech is a key customer differentiator for us and we are building market-leading capabilities to drive further customer conversion as well as cost base efficiencies. Page 8 highlights some of our recent initiatives. This half, we trained the whole of the company on AI with the deployment of an internal AI assistance, which we call PEARL to help day-to-day task and workflows. We also added more customer service use cases and now around 30% of all customer engagements are handled by our online chat bot Sage. As shown on the chart on Page 9, we're progressing well against our goal of significantly decreasing our fixed cost as a percentage of sales as we scale. A lower fixed cost percentage allows us to pass the cost base benefits to customers through better pricing promotion and over time, will lead to margin benefits as operating leverage translates into bottom line profitability. Lastly, looking at Page 10, we continue to build our future growth plays in order to diversify our revenue mix. I'm pleased to report the B2B of which we -- Trade and Commercial division grew 23% in the first half, contributing 9% to group revenue. We invested in targeted brands and marketing efforts over the half within growth factors such as accommodation. The Home Improvement division achieved $14 million in revenue and an 18% growth rate, which was a strong result as we were focused on only 1 site during the half versus 2 in the prior comparison period being the build in Temple & Webster. Pleasingly, we were able to reduce our ad cost by 15% due to this focus. We successfully launched a private label collection of tapware and other categories such as ceiling fans, cabinets and vanities are in development. We also developed the delivery capabilities of fragile bulky groups such as stone vanities, ceramic sinks and bathroom mirrors. The first half performance in our B2B and Home Improvement division shows the Temple & Webster brand can stretch into adjacent categories. which gives us confidence in continued investment in this growth phase. Page 11 sets our flywheel. Scale helps each of strategic priorities with the bigger picture marketing budgets, more data for product and customer predictions or leverage in the fixed cost base. Now before I hand it over to Mark Tayler to run through the financials, I'd like to take a moment to talk to our news this morning on Mark's intention to transition to another role within the T&W Group. This role will be focusing on Investor Relations and the group's broader growth strategy. On behalf of the Board of my fellow cofounders and the T&W team, I'd like to extend our thanks to Mark for his exceptional contribution and commitment over the past 8 years as CFO. Mark has helped lead T&W through some incredibly demanding period. He's been an instrumental part of our success as we've grown -- come 1 of Australia's largest online retailers, and he has been a great business partner to myself. The business has never been in better shape, and it's great that we still get to benefit from our insight and knowledge of the business and has given us time to make sure we find a great CFO. So thank you, Mark. And over to you for financial results in more detail.

Thank you, Mark. I appreciate that. And let me address it as well. Look, it has been almost 8 years as CFO of T&W and yes, look, I can honestly say it's been an incredible journey. I had the privilege of helping lead an amazing and passionate team, as Mark said, through really some of the most challenging periods that can be turned out of business and off the back of these challenges emerging as one of the leading players in the category has been really rewarding, and I'm very thankful for the journey that we've had together. But thankfully, and excitingly, I'm not going anywhere. I get to continue my journey with T&W, looks just in a different role, focusing on a range of different growth initiatives, both organic but also inorganic. Really looking at ways we can leverage what we've built and leverage our strong balance sheet. As Mark mentioned, I'll also continue to manage the IR road map. We've got a great story to tell, and I'm passionate about getting the word out about how much of an investable proposition T&W is, both locally and also internationally. So very grateful to be handing the keys over, so to speak, at a time when T&W is literally in the best position it's ever been. But to reiterate, I'm not going anywhere, and I'm really excited for the next journey with T&W. So turning to the results. I'm going to start on Page 13, which highlights the group's profit and loss results for the half. Our growth strategy as a category disruptor is clearly paying off. We've reported a strong half performance with revenue of $254 million, representing 23% growth on the prior half, which was driven by growth in both repeat and first-time customers. As Mark mentioned, the growth rate for the half was actually 25%, if you exclude accounting adjustments may one being timing impacts relating to deferred revenue. Improvement in gross and delivered margins were driven by improved shipping recovery and mix gains as customers shift spend into lower discretionary and potentially higher margin categories such as bedroom, dining and also living room furniture. The margin -- the strong margin performance sustained our contribution margin, which was higher year-on-year in dollar value, even after the brand investment of $3 million an ongoing uptick in digital mining spend. And importantly, our fixed cost as a percentage of revenue were down year-on-year as a result of measured fixed cost investments being essentially outpaced by revenue growth, which is in line with our stated goal of producing fixed costs as a percentage of revenue to below 6%. Our first half FY '24 EBITDA dollars were actually up 3% year-on-year, with an EBITDA margin of 2.9%, which is at the top end of our core year guidance. Page 14 reflects our strong financial position and as our balance sheet continues to grow given the cash-generative nature of the business for the closing cash balance of $114 million and no debt. This was primarily driven by cash from operations and the benefits of the group's overall negative working capital model. And we continue to manage our inventory levels well with our -- with the negative working capital model helping to fund further private label investment, and we expect this dynamic to continue in our 3- to 5-year plan, as Mark talked earlier. Our current balance sheet position can fund organic and inorganic plans, also with optionality to return surplus capital to shareholders in the absence of more accretive options. Turning to Page 15, which sets out our financial profile, the year '24 and '25 and reiterate our longer-term financial profile as we've stated before. These '24 and '25 are really focused on executing on our strategic priorities to accelerate our growth and market share gains. Our financial position is allowing us to push hard by investing an additional 2% to 3% of revenue into marketing over FY '24 and FY '25, which is being spread across brand and performance channels to increase awareness and grow market share faster. We're also investing in our current future growth plays to diversify our revenue mix and increase our total addressable market. These growth players allow us to gain operating leverage in our fixed cost base by leveraging our people and also our platforms. Our AI capabilities will continue to be a focus to enhance the customer experience, but also to improve cost efficiencies as well. And we expect this to materially disrupt our fixed cost base longer term. Our strong financial position 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. As I mentioned, the first half FY '24 EBITDA margin of 2.9% is at the top end of our full year guidance. We expect EBITDA margins to start incrementally building from FY '26 towards our longer-term EBITDA margin of over 15%. And this will be driven by increasing scale benefits with suppliers, more private label and exclusive products, improve logistical efficiencies and leveraging brand investments to drive down longer-term digital marketing costs as a result of repeat customers and of course, the benefits of our investments into AI. For modeling purposes, please expect the following. So CapEx coming between $2.5 million and $3 million for the year, depreciation and amortization between $5.8 million and $6 million, and an effective tax rate of between 35% and 38% as a result of timing differences relating to employee share permits. Thank you all. I'll now hand you back to Mark.

Thanks, Mark. So as previously mentioned, the positive momentum has continued into the second half of the financial year, with the half-to-date being up 35% versus PCP. This growth is being driven by first time and repeat customers, and as I said, has led us to cross the 1 million active customer mark this month. That means that our amazing range, growth value proposition and incredible service has resonated with 1 million Australians in the last 12 months. Now while the situation remains tough up there to many, 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 for our business products and our prices is a winning proposition in times like this. Our strategy as a category leader, capitalizing in a once-in-a-generation industry disruption remains unchanged. Our 3- to 5-year strategic plan is an important step on our journey of becoming the largest retailer of furniture and homeware in Australia. Once we reached the $1 billion in annual sales, we believe our strategic moats around our range, manual, data and AI capabilities, our fixed cost base and diversifying a high-growth revenue base will be firmly entrenched and established T&W or Temple & Webster as the main brand, the byproducts and the home for generations to come. The group's $30 million on market buyback will continue to improve shareholder returns in the absence of more creative opportunities with 4.2 million shares bought back at a total cost of $22.3 million to date. We remain committed to our longer-term goal of becoming Australia's largest retailer for furniture and homeware. As always, I'd like to say amount of thank you to the Temple team, your commitment, adaptability and resilience are inspiring as ever we wouldn't be able to distill our vision of making the world more beautiful [ one room in ] time and value. Thank you, and we'll now take any questions you may have.

[Operator Instructions] Your first question comes from James Wang from Citi.

Congratulations on good results and strong trading update. And Mark retirement as CFO. So firstly, I want to start off around the better alignment between what we've been seeing in web traffic activity and the trading update. So would you put this down to better conversion rates when customers visit templeandwebster.com maybe is because of a better range within the sched? Or is it more down to targeting more efficient mix of marketing channels, please?

I can't speak to the alignment between independent off-the-shelf practice reporting on our own revenue. I think there will be periods where it probably correlates more stronger than others. I think in terms of -- what we're doing with the traffic when I get to see, then yes, of course, everything we're doing, whether it be better ranging or tighter promotions, better UX and site, more payment options, there's a whole bunch of things we're doing, which improve conversion rate, and how we measure that is the A/B test everything to understand like-for-like. Now overall conversion rate depends as much as kind of what consumer sentiment does versus what we do. So it's hard to distant individual initiatives in the overall conversion rate. But you'll have to trust me when I say we're doing a lot of with team to improve conversion rate. In terms of traffic mix, actually, during the half, we did the brand campaign. And so we saw a massive uptick in channel like our direct channels and branded search. They tend to be -- when you get those big spikes, they're less qualified because they are people who may have seen the ad and then checking out the site and then hand back for purchase later. So I don't think it's necessary that our traffic mix is tighter than it was before. If anything, the more we do brand and the more we do these big campaigns, the more you'll see an unqualified customer-based landing site. However, as I said, that's been offset by all the work we're doing to improve conversion rate.

And my second question is around marketing spend. So one of the slides, you mentioned a healthy annual budget for brand awareness around $30 million to $50 million once you hit that $1 billion revenue target. So in the context that the $40 million that you spent in the first half of marketing. And how should I think about marketing spending to the second half? I mean are the ROIs and marketing sufficient to warrant spending at the same level? Or is there kind of an acceleration of spending in the second half, please?

Yes. So we did kind of to say that the market of the brand spend is at a 3 bursts. So first one was in November-December, and the second burst -- burst 2 and burst 3 are in the second half. So you can roughly think of a brand spend being double than it will be in the first half given the timing of those burst. So but we run the business to an overall ad cost as well. So I don't think you should see a higher ad cost than it was in the first half, but just it should -- it will probably be weighted towards brand a bit more as we do more brands.

Your next question comes from Edward Woodgate from Jarden.

Congrats on results, and also congrats to Mark too, I guess, for the time as the CFO. Just quickly, so can you just provide some more color on the trading update? So it's obviously clearly very strong. How did the comps evolve, if any particularly in the last couple of weeks? Has it been getting stronger or weaker?

I mean, firstly, we shouldn't be saying congratulations. I mean, he is still staying in the group not that he is leaving, he is just changing role. So no congratulations, he is not going anywhere people. But in terms of the trading update, so there are periods, it's hard. We don't really talk about weeks because there's timing difference in terms of promotional periods near the year and stuff that we do and also kind of the more into wide things. So definitely, we look at a longer period is more indicative. So there will be periods of faster growth in the last 6 weeks and slower growth, but we actually think 35% is a good -- is the best indicator of how we're trading right now.

And then just on customer care costs and AI and the opportunity there. So -- just regarding the timing of those cost decreases, have you seen the full benefit of that? Or if you annualize those, so we see a little bit more benefit in the second half? And can you just provide some more color on what's next in the pipeline?

And Tayler, I don't know if you want to crack that. I mean, essentially -- I mean we treated variable care cost. So some -- obviously, as we bring on initiatives throughout the half, then they will be analyzed as they move forward. There should be some benefit. And also we're doing a whole bunch of other stuff to increase contact to an ultimate goal of much higher. And the vision for service function like customer care is that we will still have a customer service team focusing on really tricky problems and also the really high-value customers and also treating our care function is much more of a revenue generation necessarily a problem resolution function. So if you have design problems or we can cross-sell and up-sell or help our customers who made it a bit more help using our care team as opposed to necessarily where's my order. I think the 30% we've done today should actually be much higher. Now that will take a little bit of time as we roll through. But the short answer is yes, the annualization of those benefits will mean there's a bit better in the second half. And if we continue the rate we're doing, it should even be better than it was.

Yes. I think it's a good summary, Mark. The only thing I'd add there is, previously, we have spoken about the number of first-time contacts being handled by AI to be materially higher than 30%. We've spoken about numbers closer to sort of 70%, 80%. As Mark said, that will take a bit of time. But certainly, but our aspirations are that the majority of our first-time contacts with our customers, majority of that would be handled by AI, but it will take a little bit of time to get to that point.

And then I'll just ask 2 quick questions and jump back in the queue. So the refund rates replacement costs are down what over that. And then just also your RevPAR was down slightly. Was that saying equally across your repeat and new customers? Or was one say with new customers down a lot more than the others?

Yes. Look, in terms of the refund provision, we don't actually disclose the number per se, but there's been a lot of work that's going into particularly with the logistics and operations in the care team to really into the customer experience around setting the right expectation with the customers, a lot of work that's going into packaging to ensure that there's less damage. And certainly, there's been a lot of work actually with our carriers to improve the way in which they're handling our product as well. So you start digging into the next level down, and a lot of that is around quality. And it's around damage in transit, which has been the key driver of getting that refund and replacement costs down. But look, still a long way to go. There's still some opportunities there. What was the second part of the question?

The revenue per customer. So look, I think -- I'll jump in there. There's no real skews between particular customer cohorts. It really is the drop in AOV across the board, the slight drop in AOV across -- well its actually getting better by the way. We have been experiencing headwinds to AOV, Average Order Value for quite a while now as people are looking for more value. And you're seeing a lot of retailers talk about price migration and people negotiating discounts on the floor for placement TV, et cetera, I think it was the commentary this week. I think -- so we have had that headwind for a little while. It has been getting better. And some of the things that we're doing also improving that, for example, rolling out complementary items for cross-sells throughout which we accelerate over the half. But yes, it's primarily the AOV drop, which has decreased the revenue back to customer.

Your next question comes from Rachael Harwood from Macquarie.

Just a quick follow on, I think, from the last question. Your gross margin and delivered margins are up year-on-year, and you mentioned decreased refunds, but just going forward, do you expect these benefits just to continue and have these higher margins?

Rachael, look, I think so. Look, we always look at delivered margin and marketing as a couple of levers that we can push and pull relative to the conditions that are in front of us. So if we're getting better results by having less promotional activity and funding a bit more marketing spend and that's delivering more contribution dollars than -- that's the strategy. If we think price sensitivity is super high, then potentially we reduce prices and potentially reduce the marketing spend as well. So there's always a push and pull between those 2 areas. The good thing is, from a refunds replacement perspective, is, yes, I do think that is more of a permanent position. In fact, I actually think there's still a lot of room to go there to further improve that. As a category, the overall percentage is still relatively low. We're talking below 5%. So it's not like there's multiple, multiple margin points there. But there's still some opportunity to be improving that -- to be improving that rate.

And your customer acquisition cost is up a little bit year-on-year, but is this just a function of that additional marketing spend? Or is there something else driving that?

Look, I think it's in large part due to the increase in brand spend, which we have been flagging for a while that it is going to be more expensive. They are more expensive channels, and there is a longer payback. So we were expecting that cash to go up. The other thing, as part of our overall growth strategy, we are going hard, and that's in all our channels, including our bread and butter digital performance channels. Obviously, the more you spend them more aggressively, you try to acquire costs incrementally as customers more expensive than the last. So we have been expecting our cap to go up as we kind of pursue this more aggressive growth strategy. I mean the good thing is the ROI, the blended ROI is still pretty good, 1.8%. Most retailers would love to have that, and that's even with us spending ad cost of 16%, which is the highest it's been for a very long time. And even after the spend, we've actually increased our EBITDA dollars in our actual dollars. So yes cap has gone up, but as expected.

Yes, understood. And I guess just a follow-on from that, just around that brand awareness. Can you maybe just give us a quick update how that's going? Is there a specific channel sort of working really well? And are you noticing any kind of change in the customer demographic as a result of this?

So look, in terms of specific channels, that's actually what we will -- now that we've done the first one, we -- many of you may know, there are -- the core media mix modeling basically -- essentially big data tools, which allow you to optimize your media mix by channel. And that's how you start to get understanding of what channels work. Given the integrated campaign, for example, in Sydney, we were hoping you may have seen an ad on TV, you saw maybe an ad in the bus shelter or you may have seen an ad in -- you heard in your favorite podcast, that -- the goal of the campaign is you have multiple touch points from multiple convenience sort of trying to change your memory structure and vision audio and if you remember the brand. Isolating individual channels in that is incredibly difficult because you're trying to get multiple touches. However, the tools such as media mix modeling allow you to start optimizing budgets by channel so that you get the most correlate results in brand awareness or order uplift versus your budgets by channel. We've only done burst 1. We're now in the point in burst 2 and burst 3 to start actually implementing those tools. So I'll be able to answer that question more at the end of the year, which is which channel has worked best. But definitely, in terms of the overall campaign, as we've seen in the results, we've seen a significant increase in dealer-branded searches and direct traffic through kind of cause analysis. We've been seeing an uplift in orders and new customers. So the campaign looks like it's working. It's very early days here, we've only been on burst one. It's same campaign to. It's all about imagine, the same creative this time around. So it's early days, but everything we're seeing says that it's working.

Your next question comes from Tim Piper from UBS.

So can I confirm you said in the first half, $3 million of that [ 41-odd ] marketing was the brand investment. Is that right? So there your marketing was $38 million.

Yes, that's correct, Tim.

Okay. Can you give us a sense on where CAC is right now, January or the second quarter? I mean [ $82 ] is a trailing 12 months. So the last 6 months have been higher than that [ $82]. Where is it kind of tracking? Or maybe can you give us a bit of a cadence in CAC between first quarter and second quarter? Because obviously, the revenue growth rate accelerated significantly in that second quarter and revenue picked up a lot. Like how much differential was there in the CAC there?

Look, we don't go into that much detail and we don't necessarily want to get into that much detail either about CAC per month because it is an annual marketing calendar. There will be periods we're in market with the brand campaigns like there was in half, and there'll be periods we're out. And that's the same this half as last half. So there were periods where we were growing very strongly. We weren't on air yet and we were in the market. And we were pushing the digital marketing costs higher, and there are periods where it was blended. So I think actually the blended CAC is a better way to look at it because -- as I said, there'll be months where the marketing mix changes quite dramatically from period to period. I think, look, the one thing I will say, which is really important to note is that the growth -- this was the Sydney, Melbourne, Brisbane campaign. And yes, building a brand awareness and diversifying our market mix is a strategic goal, and we are going to do it, and it's something we're focusing on it. The rest of the country was growing really strongly as well outside of -- and that we weren't on TV or out-of-home in these markets outside of Sydney, Melbourne and Brisbane. So this growth isn't just because of the brand campaign. The brand campaign has definitely helped and supported, but actually, our growth is coming from around the country in pretty much every market. So I think, yes, it's important, but I don't think we should get too focused on the brand campaign, if you know what I mean.

Okay. Yes, that all makes sense. Sorry to harp on the marketing. Just follow-ups to that BAU marketing costs for the half is sort of 15% of revenue, and you've guided to 12%, '24-'25, but obviously, the brand is only running at 1% so far. So the brands will lift up. Is it fair to assume that an extra 1%, 1.5% in brand, which is a longer payback, is going to see the BAU marketing percentage come from 15 down to 12 or 300 basis points?

Yes. What we're saying was BAU doesn't mean channel. Don't confuse BAU with -- BAU is just digital and everything outside of digital is non-BAU. Essentially, BAU is we think actually longer term. And we've got businesses and we've had periods like 11% kind of cost is announced to kind of make sure you're still acquiring customers, you're still kind of reengaging your -- engaging customers, and we'll do a steady growth. However, during this period, where we want to actually get to $1 billion as quickly as possible and we've set ourselves the goal of that target growth range, we actually want to spend more than what we think is the more sustainable level, including in our performance channels. And so the 15%, what you're saying of nonbrand is not what we think is BAU. That's a more aggressive performance spend as well. It's a spend that we wouldn't and haven't traditionally done. Yes, it's cost money. However, it has actually delivered a business, which is one of the fastest growing businesses in retail in Australia and actually increased profit dollars as well. So we think the strategy is a sound strategy, but it is more than we would normally spend. Normally, we have the discipline of first order profitability. However, even with this kind of spend and being a bit more aggressive on our digital, there are some channels even in our performance and digital channels, which we relaxed that constraint to be more 12-month profitability.

Got it. Point taken. Maybe just -- sorry, one quick last one. The revised repeat order numbers, what are we comparing now against what you used to report? And then -- can you confirm maybe what the second half '23 numbers were just so we can get a feel for sort of the half-on-half sequential in these -- some of these metrics in the business?

Yes, Tim, it's Mark here. Yes, we -- as we will go into the reports for this half, we could see that the column for new customers was actually fine. And these are all orders, by the way. So these are orders from both repeat and new customers, but we did recognize that the repeat column had been somewhat understated. Now the overall shape doesn't actually change. But what it does mean is in the previous periods, that the repeat percentage was a little bit understated based on what the orders -- repeat orders in terms of relative to total orders. So the second half, obviously, will come out at the end of mid-August as part of the full year results. But like I said, the overall shape doesn't change, but there was a bit of an understatement in terms of just that repeat column.

Your next question comes from Chami Ratnapala from Bell Potter Securities.

Congratulations on the results for [indiscernible] Mark and Mark, and good to hear that Mark is not going anywhere. Just quickly 2 questions from me, if that's okay. Within the OE, I mean, could you talk about how that has shifted? The OE has shifted customers and shift their spend to the high-margin categories. And maybe any guide you can give on how much of these products are now part of the total product mix.

Yes. So the same trend we've seen for a little while where customers, there's 2 counteracting forces. One is a shift to less discretionary categories such as furniture. The more customers are buying for example, coffee tables than they were before compared to a decor item, like a mirror. However, within the counteracting forces that within that, customers are buying cheaper coffee table than they were before. And partly, that's our promotional activity, coffee tables are actually cheaper, but it's also kind of product selection. Now they kind of counteract each other. And the net result is what you see here. In terms of kind of what the mix is. So when we first listed Temple & Webster, we were talking about furniture and homeware has been kind of more like 50-50. Now it's more like 65% furniture, 35% homeware. So there's been quite a big shift towards furniture over the last few years.

Perfect. And then secondly, in gross margins, how has that margin or the product margin performed for the drop ship side and obviously your private label?

Chami, look, both have been performing well, to be honest. There's obviously a small differential between private label margin and drop ship margins, which makes sense given the fact that we're -- the inventory risk and we're holding that inventory. So there's obviously distribution costs that are associated with the private label, but look, both are performing well. We've continued to see really strong promotional support from our drop ship suppliers continuing to fund over 90% of our promotions, our drop ship promotions. And we continue to see more deflationary pressures from a factory perspective, where we are sourcing than inflationary pressures. So on both of those fronts, the trend is good.

Your next question comes from Aryan Norozi from Barrenjoey.

Just a follow on from Tim's question for the repeat customer numbers that have been revised. In the appendix, you've given the historic but you haven't given second half fiscal '23 repeat customer orders. Can you please provide that so we can just look at the trend, please?

I'm happy to provide that. That number was incorrect, though. That's why we haven't provided it. So that number that was -- that has been reported was actually incorrect. Hence, why we didn't report that.

Okay. So the fiscal year '23 number was correct last -- in the last [ presentation in August ]...

Yes, yes.

Okay. And then am I correct in saying like based on everything you said in the Q&A time at the start, like a lot of the delivered margin uplift you've seen is sustainable. And that's just giving you more ammunition to spend on paid advertising, which was about 15-odd percent versus 12% that you target. And that's continuing. So the key difference of today's result is basically you've got more ammunition to acquire customers because you've got more margin to play with, basically, and the revenue growth will be stronger for longer. Is that a fair comment?

That's pretty fair...

Yes, I think it's a fair comment. Look, I'll go back to my previous comment, though, which is we continually assess and look at both of those lines as levers that we can pull to drive growth. But what we're seeing at the moment in terms of cost -- more cost deflation than inflation coming through, some of the positive trends that we're seeing in terms of our refund replacement costs. A lot of the work that we've done from a shipping recovery as well, where we're just a lot smarter now in how we're pricing shipping to customers to ensure we're extracting as much margin as we can and as much recovery as we can. We don't actually make the margin on shipping, but we try to extract as much recovery as we can whilst not impacting conversion. We're just doing that a lot better than -- obviously, there is a bit of a mix impact and a mix improvement or mix gain from where customers are shopping, what categories, customers are shopping at the moment. And these are -- these will continue to be key categories for us going forward. So look, it's -- let's see how the second half progresses, but I'm not seeing anything at the moment that would tell me it would be materially different.

I think it's really -- I think it's -- sorry, I think it's a really important point, though. The easiest way to grow is to slash prices. That's literally the easiest way to grow. However, that's not sustainable. And we're -- yes, we're trying to get to $1 billion and get there as soon as possible because we want to entrench our strategic moats and we think scale helps everything. We want to make sure in the next 3 to 5 years for the next generation of shoppers. And so we are investing in brand awareness, investing in our ability to get to [indiscernible] and growing as fast as we can. But we do want to do it in a sustainable way. And just slashing prices and destroying our gross margin and delivered margin by giving away our margin is not sustainable because eventually, we do -- we will be switching into profit optimization. So I think for our growth to come from an increase an improvement or increase in marketing and ad costs, it goes to sustainability of the business because we've been able to live in these growth numbers without reducing our gross margin. Delivered margin, in fact, have increased. So it is a very important point to note.

Great. And just on the buyback, which you're going to start doing again, like buying back stock at $3 or $4 and now the stock is at $10, close to $11. Like how do you think about capital allocation, how much direct to the buyback? It sounds like M&A is probably going to be more of a focus area with my transition in your role. So like how do you guys think about that, please?

Yes. Look, it's a really good question. And look, you're right, Ari, that will definitely be more of a focus for me in terms of capital allocation. And in particular, inorganic, we're seeing a lot of opportunities out there. So for me to have a bit more bandwidth to sort of go after these opportunities. I think it's a good thing. And when I look at the best way for us at the moment in our stage of our life cycle, the best use of capital provided the deal makes sense and we can execute on them, it's not overly disruptive, would be inorganic. But look, we're in a very enviable position, right? We've got $140 million of cash. We're profitable, we're growing with a negative working capital model. In terms of the buyback, we do envisage the buyback will continue as we've stated. We still believe the share price is still trading below fundamental value. But like this buyback doesn't impede our ability to execute on our organic and inorganic plan. So if something more accretive comes up, then obviously, we can pivot. But at this stage, we foresee it continuing.

Great. And the fixed cost guidance, like 10% of -- sorry, 11% to 12% of sales as a target. You've done about 11% now and growing your revenue by 35%. So why don't we see -- why shouldn't we see operating leverage from the fixed cost line in second half '24, FY '25? And what are you spending there to 35% of fixed costs on?

Yes. We've still got some investments to come through in the second half in terms of people. And obviously, there's annualizing some costs from the first half of the hires that come through in H1. But your point is valid, which is longer term, we definitely see that fixed cost line. The growth in that fixed cost line, the -- separating itself in terms of the growth profile there relative to revenue in each half. And each year, you should be seeing the dispersion of those 2 lines kind of separating further and further and further. So that will be driven by things that we're doing on the cost base around AI and making our cost base more efficient. But it doesn't mean we're not going to be investing. We will be continuing to be investing. We've added 15 to 20 head count in this half. And we're still able to reduce our fixed costs as a percentage of revenue. So even with that investment profile that we're envisaging over the coming 5 years or 4.5 years now, we our plans -- provided where we're growing between that 20% and 36% range that we put out there, which is a 3- to 5-year plan. If we're in that area, we're playing in that area, we'll be managing our investments and managing our fixed cost base to be hitting that overall target per that year 5 point.

So the last clarification, the 30% of orders coming from like the inbounds coming from AI, your chat bot, and you mentioned 70%. What's the difference [indiscernible] or 70% of your target?

No. So what we've said is, ideally, what we'd like to see over a period is 70% to 80% of the first time a customer is contacted or messaged or communicated with, with any of our customers that that's done using AI rather than a human being. But like I said, that will take a little bit of time, but we're certainly making good progress.

And it's 30% today.

It's 30% today. That's right, yes. Yes. You can say the good thing is that's leading -- it's great to say these things, but it's also leading to cost reductions as well. So if you look at our customer service and merchant fee line in the P&L in FY '24 relative to '23, even with 23% growth, that line was actually down. So you can see that, that's translating to cost savings already.

Your next question comes from Owen Humphries from Canaccord.

Again, well done. Straight down the fairway with beats. Just to understand, I noticed you said that you've added 500 private label products in the period. Can you just talk through how many of you had -- is there a special mention there because it is a strategy that you guys are going to employ around an inventory investment going forward?

Thanks, Owen. I'm not so good in sporting metaphor, but I assume that's a good one. I think in terms of private label, we mentioned it because it is a key focus on -- the focus is to get as much of our range by revenue as exclusive to Temple & Webster as possible. Now it's a journey. It is -- this is of all of them up there with the brand awareness will take time. And it's a mixture of both increasing the share of the business in private label and exclusive some drop ship -- from drop shippers. To increase the share of the business from private label, we need to extend the range. Yes, obviously, our private label sales, we want to funnel as many sales as possible into them, so they are a high -- worthy SKUs. Really to take the percentage of the business that's private label from 30 to 35 or 40, we need to increase the range and the breadth of categories that we offer, private label products in, and within a category -- the breadth of range within the category. So that's why we mentioned it is part of that strategy to increase private label. We are going to do it slowly and actually we thought we were going to move the dial on private label at the half. And so we ordered more than we've ever ordered before, and then we had an amazing Q2 ahead of forecast. And actually, we didn't have the inventory to keep up to move that percentage. So even keeping up the 30% was a great result and our private label actually beat its budget. So that's the sort of the dynamic that we're working with. We don't want to go crazy. We're not going to be ordering -- doubling our inventory or tripling our inventory overnight. That's not how we do things. We will take -- we'd prefer for it to take a bit longer and not make any seeming mistakes or end up with massive excess inventories like get sorts of trouble that way. So we will do it more steadily. But yes, we mentioned it specifically as it's as part of our strategy to increase the share of private label.

Got you. Okay. And just around the promotional aspect of your -- the margin uplift was aided by the promotional activity being funded by your suppliers, is that steady state? Is that expected to be ongoing? Or is that a particularly hard given the macro is a bit tougher?

Look, I think just given where we're at with our suppliers and the relationship we have, we are increasingly an important partner to them and that importance is growing over time as we're the fastest-growing channel for our suppliers. I don't think it will move against us. I think actually that dynamic of we're a great sales channel for them, and we expect them to be a great partner for us. And our growth is their growth. I think that dynamic and that relationship is now here to stay. So I don't think it will revert.

Your next question comes from Scott Hudson from MST.

A couple of quick questions. Firstly, just in terms of the comps for the second half. I understand this time last year, you're probably like in Omicron [indiscernible] were down sort of mid- to single digits. Could you just give a sense of how the comps look through the remainder of the half?

Yes. Look, the half should be okay. I think we were -- revenue growth improved over the half this time last year, but given where we're starting and the number of customers we've acquired over the last 6 months, we're feeling pretty good about the half.

And then just in terms of the -- I guess the return on the investment in the marketing, is it coming through at a better rate or higher than expected relative to maybe expectations back in July, August?

Are you talking specific with the brand campaign?

Or just the marketing spend.

I mean we run -- so the performance is run to a cost target. So that's actually what we set. We set the ROI, and then we run it to that. So the ROI is basically is what we've set in terms of digital. In terms of brand campaigns, as I said, it's early days. Our early read on the campaign is that it has met its incremental sales targets and -- at its targeted customer acquisition cost. That's an early read. We need more data, more work on it because we've only had burst 1 into a cumulative campaign. So I'm not putting out a firm, yes, it's met our ROI targets. But it looks like it has. But we need to run burst 2, do more work on it, run burst 3, and then we'll give a more full update at the full year.

Okay. And then I guess just in terms of the sort of commentary maybe around the AGM that suggests that the margin profile in the second half is maybe going to be a little bit lower than first half given the uptick in the brand campaign. Is that still your expectation? Or is it sort of the investment at sort of 16% of revenue and overall spend? Is that kind of more where it should land for the second half, and that's the savings you're getting out of the delivered margin contribution?

Scott, it's Mark. So look, I think -- I'll just -- I'll take a step back, which is we'll continue to monitor, obviously, the environment. And if we're continuing to yield strong delivered margins, that will more than likely be put back into the variable component of our marketing spend being the digital spend with the ultimate goal to be in between the 1% to 3% range. And when we say 1% to 3%, obviously, if we're targeting somewhere around about that sort of 2%. Now you can't land on exact percentage. That's why we give a range. But essentially, we're working back from those parameters, which is between 1% to 3%, and we grow as fast as we possibly can within those parameters.

Okay. And then lastly, just on M&A and not to turn your water on your new role, Mark. But I mean, the business is obviously performing particularly well. Is there sort of anything that draw the need to, I guess, look beyond the sort of current capabilities? Where do you feel like you be falling short or need to improve given, I guess, the strength of your performance?

Look, I don't think it's about falling short. And I think it's -- I think it's about -- we've got a goal to grow as fast as we can. So if there's further opportunities to be doing that, and we can do it in a sustainable way, strategically and financially for the right reasons, and it's not overly distractionary to the business. So whether that's organic or inorganic, we should be doing that. So the focus for the business and the thought process hasn't changed, which is if there's a capability that we don't have or want to build on that will accelerate our growth, and like I said, won't be too distractionary, the deal makes sense, then we'd be silly not to take advantage of that.

And then just, I guess, on the -- taking a third growth horizon, some improvement in B2B, is that still the more likely areas where you're looking to invest in nonorganic growth capital?

Yes, I think that's right. I think they are probably the 2 areas that the overall mothership in terms of B2C furniture and homeware is clearly doing very well, and the business is set up and set up very well and it's taking its rightful position in the market. But certainly, home improvement and B2B more nascent relative to the mothership. And certainly, there's some opportunities there to accelerate both.

Unfortunately, that is all the time we have for questions today. I'll now hand back to Mr. Coulter for closing remarks.

Thanks, everyone, for your time this morning. As you can see, another strong result from Temple & Webster. I think, though, however strong this result has been, I think it's important to remember that the online market in Australia is still underpenetrated and is likely to grow for many years to come. That's -- if you look at the U.S. and U.K., it's just every 4 years, we catch up to them. So look, we've ended our 2024 calendar year. As Mark Tayler, said it's the strongest position we've ever been in. We're well placed to build our strategic moats, and we remain committed to our goal of hitting $1 billion in sales in 3 to 5 years. So thank you again.

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