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

Thank you for standing by, and welcome to the Temple & Webster Group Ltd 2025 Half Year Results Call. [Operator Instructions] I'd now like to hand the conference over to Mr. Mark Coulter, Chief Executive Officer. Please go ahead.

Thank you, Darcy, and good morning, everyone. Thanks for joining us today. I'd like to begin by acknowledging the traditional owners and custodians of the country throughout Australia. I'm joined today by our CFO, Cam Barnsley, who we welcomed to the Tempster team in September 2024. Today, we will be taking you through our first half FY '25 results presentation, which was uploaded to the ASX this morning. So starting on Page 4, you will see that Temple & Webster has delivered another exceptional result for the half, supported by a strong November and December promotional period. Revenue grew 24% year-on-year to $314 million, driven by both growth in new customers and higher average order values. This has seen our share of the furniture and homewares market grow by 17% to a new peak of 2.9%. This shows we are making great progress towards our goal of being the largest furniture and homewares retailer and the first place Australians turn to when shopping for their homes. Our cost and margin discipline and the ongoing integration of generative AI across the business meant that we were able to deliver this revenue growth with a $13.2 million EBITDA result for the half, which has grown 76% year-on-year and represents a margin of 4.2%. As Cam will talk to, our asset-light and negative working capital model continues to position us well, generating $33 million in free cash flow for the half. We had a closing cash balance of $139 million with no debt, meaning we are fully funded to execute on our midterm goal of achieving $1 billion in annual sales. Page 5 provides an outline of our key performance indicators. This half, we reached a new record of 1.2 million active customers, up 22%. This is in part due to a significant increase in our conversion rate, which reached 3.1%, which is actually higher than the high demand COVID years. This speaks to our range, pricing and site experience, which are all resonating with the Australian consumer. The 12-month marketing ROI for the half was, as expected, lower than historical levels as we continue to invest as per our stated strategy in the more immediate performance channels and the longer-term brand-building channels such as TV and out-of-home. Importantly, even with this strategic investment, our customers remain on average, profitable on their first order, which speaks to the discipline of our marketing team. Page 6 sets out our reasons for why we believe now is the time to accelerate our market share growth. The most important of these is that, as we all know, our industry is undergoing a once-in-a-generation shift from offline to online as the Internet continues to disrupt the entire retail ecosystem. We are already the online market leader of furniture and homewares, and we believe now is the time we can widen that lead. The chart on the left of this page shows our strategy is working with our market share increasing to a record 2.9% of the total B2C furniture and homewares market. Now note to achieve our midterm goal of revenue of $1 billion as set out on the next page, our share of the B2C furniture and homewares market needs to grow from the current 2.9% to only 4.2%. We're firmly on track to achieving this goal. As we have set out before, while we see the most significant growth from the core business, we also want to diversify our revenue base and invest in our adjacent growth plays, which will benefit significantly from the group's existing core capabilities. I'll talk about the progress of these growth plays shortly. Pages 8 to 10 provide an update on the excellent progress we are making towards our strategic goals. I won't go into all these individually, but some of the highlights include that during the half, around 10% of our marketing spend was directed towards the longer-term brand-building initiatives through multichannel campaigns. The media mix modeling work we have done with an external data company has concluded that adding these channels is helping to drive our customer acquisition, and we are now seeing growth in both brand searches and brand awareness metrics. Revenue from exclusive products grew to 45% of total revenue. This includes growth in both private label and exclusive dropship products. Additionally, around 78% of our top-selling 500 products were exclusive to Temple & Webster. This makes our range a key competitive differentiator. As many of you will know, data, AI, and tech are strategic priorities for us, and we continue to build market-leading capabilities to drive further customer conversion as well as cost-based efficiencies. This half, we reached the milestone that more than 60% of all customer pre-and post-sales support interactions were handled by AI. This has meant that our customer care costs have halved in 2 years. We have now also fully rolled out our AI-calculated shipping engine, which has improved revenue per visit by 3%. We've also increased our shipping price accuracy through this initiative by 17%, leading to delivered margin improvements. Now in terms of our growth plays, Trade and Commercial, which is our B2B division, is facing significant headwinds due to the macroeconomic factors and the downturn in the office market. Despite these challenges, the division was able to grow $24 million in sales for the half, up 10% year-on-year. We still remain bullish about the opportunity, which leverages everything we have built for B2C, and we are well positioned for the cyclical improvement of this market. The shining star in the results, though, is our home improvement category, which reached $20 million in the half, up 41% versus the PCP. Now this is only after a couple of years of focus, so it's a great effort. Page 11 goes into more detail about what we are doing in this space. To reiterate the opportunity here, our home improvement category provides access to an additional $17 billion TAM, which currently has no dominant online player of note. It had low online penetration and the margin levels are similar to those in furniture and homewares. Therefore, our strategy is simple. We want to build our product range, provide better prices than our offline competitors and improve our content and customer experience over time to become the dominant online retailer in this market as we've done in furniture and homewares. Our private label range continues to gain momentum. We now sell Temple & Webster branded vanity, ceiling fans, tapware and toilets, which have been performing exceptionally well. Here, you can see a sample of some of our most popular private label home improvement products, which not only look great but offer our customers amazing value. I'll now hand over to Cam to take you through the financial results in more detail.

Great. Thanks, Mark, and good morning, everyone. It's an absolute pleasure to be here to present my first result as CFO of Temple & Webster, particularly given the strength of our numbers for the first half, but also the momentum we're seeing in the business. I'm going to start on Page 13, which provides a high-level overview of our results for the half. As Mark mentioned, we delivered an impressive $314 million in revenue for the first half of FY '25, which is up 24% on the prior corresponding period. This is a record half year revenue result for the business, and we're particularly pleased with this growth rate, especially against the challenging retail backdrop and a furniture and homewares market, which has grown by just 1% over the same period. Our delivered margin of $102 million is up 26% on the pcp and is an improvement as a percentage of revenue from 31.8% to 32.4%. This is a pretty important metric and one I'd like to call out as a strong delivered margin provides us with the flexibility to reinvest into our marketing budgets, but also other longer-term initiatives through the cycle. We were pleased to see our fixed cost as a percentage of revenue decreased to 10.5%. However, the most pleasing result was our EBITDA margin of 4.2%, which is up over 120 basis points on H1 '24. Following on from that, our free cash flow generation of $33 million during the half was up a significant 61% on pcp. Now turning to Page 14, which provides a breakdown of our profit and loss results in more detail. As already mentioned, we've reported strong revenue gains of 24%, driven by growth in both repeat and new customers, an increase in average order values and a positive deferred revenue result for the half. The 26% year-on-year improvement in delivered margin is due to a change in mix towards higher-margin categories such as bedroom, dining and living room furniture as well as growth in our private label range, which we continue to build out. These positives were offset slightly by increased promotional activity, although we do see strong supplier support for these promotions and some elevation in warehousing costs as inventory has increased with higher revenue and higher private label penetration. This strong performance at the DM level was sustained at our contribution margin, which was 33% higher year-on-year in dollar value at 14.7% of revenue. This outcome reflects some of the cost savings we've been able to be realized from our investments in AI for customer service with related costs reducing year-on-year. As Mark mentioned and consistent with the strategy that we've outlined previously, we continued our investment in brand marketing for the half with an investment of $5 million to drive further brand awareness. We've also stepped up performance marketing during the half in an effort to drive further revenue growth, once again consistent with our strategy that we previously outlined. Pleasingly, even after this step-up in marketing spend, our EBITDA margin for the half was 4.2% of revenue, up 126 basis points. Our full year EBITDA margin guidance of 1% to 3% is reiterated despite the H1 margin outcome, reflecting our typical weighting of margin between halves and our strategy to use margin flexibility we have built during the half to accelerate growth in H2. Page 15 sets out our strong financial position as our balance sheet continues to grow given the cash-generative nature of the business. We closed the half with a cash balance of $139 million, noting this cash balance measure now excludes cash in transit with the historic period also having been adjusted for this change. The quantum of this adjustment was approximately $2 million at the end of this half and about just over $9 million at 30 June '24. This capital position provides us with significant flexibility to take advantage of market conditions and execute on our growth plans. We continue to manage our inventory levels well despite higher revenue growth and further private label investments having improved inventory turnover and as we start to grow our portion of exclusive dropship products, which provide the benefit of private label products but without the need to hold inventory on our balance sheet. The group remains debt-free and is fully funded to execute on all organic and inorganic opportunities. Turning to Page 16. The growth in our cash balance during the half was primarily driven by cash from operations as well as the benefit of the group's negative working capital model. Operating cash flow increased 60% on H1 '24 to $35 million. The continued growth in free cash flow, coupled with low CapEx requirements in our business is providing us with significant optionality. Given our substantial cash reserves and expected future cash flows, I thought it would be prudent to start to outline our capital management priorities, which you'll see on the right-hand side of Page 16. As you can see, our short- to medium-term priorities are focused on maintaining a healthy level of cash to manage liquidity, whilst also providing us optionality to invest in organic growth, strategic capabilities, accretive growth opportunities and to return surplus capital to shareholders over time. Maximizing shareholder returns is an important consideration as we think about our longer-term strategy and forms part of every decision that we make in relation to capital investment. Page 17 sets out our financial profile for the remainder of FY '25 and reiterates our longer-term financial profile, which is consistent with what you've seen previously. As a leading online retailer in furniture and homewares in Australia with almost $140 million of cash, no debt, high customer satisfaction levels and a scalable business model, we continue to believe that now is the time to invest in improving our brand awareness. Growing our brand presence will further improve our market position, improve the efficiency of our performance marketing channels and ultimately, the longer-term defensibility of our business. As we've stated previously, our strong financial position has allowed us to invest an incremental 2% to 3% of revenue into brand building across '24 and '25, reflected in our all-in marketing cost percentage of revenue at about 16%. Post FY '25, we expect EBITDA margin to progressively build towards our long-term target of 15% plus, but we retain the flexibility to vary the delivered margin and marketing levers we have to respond to market conditions. We'll update you on our expectations for FY '26 margins at the full year results. From a longer-term perspective, our margin aspirations remain unchanged. These levels will be driven by increasing scale benefits with suppliers, more private label and exclusive products, improved logistical efficiencies and leveraging our brand investments to drive down long-term marketing costs as a result of higher repeat rates. It will also be driven by the benefits of our investments into AI across the business. Thanks, everyone, for your time. I'll now hand you back to Mark.

Thanks, Cam. So turning to Page 19 and to recent trading. Pleasingly, the market share gains and revenue growth demonstrated in the first half have continued into the second. Revenue from the 1st of January to the 10th of Feb this year is up 16% year-on-year despite the challenges of the cost of living crisis. And the February growth rate has actually accelerated to 19% year-on-year. We expect this trend to continue given the easing of comparison growth rates over the half and the ability for us to use the margin flexibility we've already built this financial year. Our current on-market share buyback program remains in place until June 2025, and we reiterate our EBITDA margin guidance for the full year of between 1% and 3%. But most importantly, we remain firmly on track towards our midterm goal of $1 billion in annual revenue. As always, I'd like to say a massive thank you to our Temple & Webster team whose commitment, adaptability and resilience is inspiring as ever. We wouldn't be able to fulfill our vision of making the world more beautiful one room at a time without a great team. Thank you, everyone. We'll now take any questions you may have.

[Operator Instructions] Your first question today comes from Ed Woodgate from Jarden.

Great result, very strong NPAT, and EBITDA [ beat ]. So before maybe getting into margins, just because it seems like you've done a great job there, I think there might be a bit of focus on the trading update. So you delivered 16% growth on a comp of 35%. Just kind of curious if you could give some color on that number. I know that you said it's accelerated more recently, but did you put less performance marketing into the half to date? Was Australia Day weekend a particular drag? Is there anything that you can call out?

There's a couple -- thanks, Ed, and thanks for the question. I think there are a couple of things. I want to start by saying actually how we're tracking is towards our own internal expectations. So I think we're not seeing that there's anything going wrong. Actually, we're doing pretty well given everything that's going on out there. There's a lot of uncertainty in the retail environment. That's both cost of living, but also federal election coming up and Trump and everything else. And I think you won't see too many retailers post these kind of numbers in this environment. So that's what I'd like to start with. In terms of how we're seeing the consumer, definitely those trends that we've seen over the last little while of them being more promotionally sensitive has maintained. So in the first half, it wasn't a consistent 24%. And you know this from our trading updates. We started well and then it slowed leading into Black Friday and then it picked up into the Black Friday period. So you can see consumers are really responding to the most promotional periods. And we kind of make up some of the growth during those promotional periods when that promotional period is the strongest. January has the -- in the beginning of January was the end of Boxing Day sales. So the year started well. But of course, then we kind of out of that promotional period. And actually, in these weeks leading up from the 1st of January to the period we reported to Feb is not our strongest promotional period. So that's why we're expecting actually to make up from the ground as the year plays out. I think that the good thing about us is that a lot of those promotions are supply-funded. So we're able to kind of leverage lean into that promotional calendar without hitting our margins. As you saw in the first half, we could kind of still deliver that promotional intensity and post kind of record margins. So we kind of are expecting that the same similar pattern you'll see. This year, there were some slight tweaks like we had a school went back a year later than last year. So it's not exactly which actually hurts us because people are still on holidays. So I think there are some slight differences between the cadence of the year this year versus last year. But to be doing this kind of growth and then accelerate to February and then the comps easing throughout the year, I think that we're in a pretty good position. We have built that margin flexibility from the first half. So we have quite a lot of levers to pull both in the promotional and price and also marketing. Now having said that, obviously, every retailer in the country is hanging out for an interest rate cut. Some of the banks have already started to move. RBA meeting Tuesday. If it doesn't happen this time, it should happen soon. So any improvement to the macro can only help us as well because that will get the housing market going and people moving again and opening up their wallets because we're starting the easing as opposed to the tough situation that people are in at the moment.

So like outperforming versus peers, potential macro improvements, progress isn't always linear through the half as far as growth and the comps get easier. So I mean, it seems like revenue should probably take care of itself or maybe consensus adjust itself a little bit.

[indiscernible] revenue should take care of itself. So easy as an analyst. Revenue takes care of itself.

But I think the focus might be a bit like what happens with margins. And before we talk to that, maybe just ask a quick question on CAC. So CAC has come down a fair bit. But would you say that -- is that just basically reflecting the brand spend being a little bit of a slower burn? Or is there anything you'd like to call out there? I mean, obviously, sorry, CAC has come up, but your ROI is down a bit.

Yes. Look, I think definitely a big part of that is the brand spend, which we knew as predicted. But we've also said to everyone that we will -- while we've got the flexibility and we do have the flexibility in the margin profile, we have the margin profile to do so, we will invest more in our digital channels as well. So it's a factor of both going -- using that flexibility in our P&L, which we have at the moment to go harder on both the longer-term brand building, which is definitely more expensive and also the more shorter-term performance channels. Now as I said, even with that extra investment, the customers on average are still profitable on the first order. Obviously, that different profitability profiles by channel. But on average, they're still profitable on the first order. And we still delivered a record 4.2% EBITDA margin at this scale for the half. I mean, obviously, you take out COVID years, but this is above our target. So I think that what you're seeing is that we're able to do both, which is really invest in that customer acquisition, which we see so important right now and deliver good numbers. I don't think it's an either-or.

And then so just on the EBITDA margin guidance, can you just talk through why you reiterated that? I mean just given how strong the first half margin was, if we just do some back-of-the-envelope calculations and you say you adopt consensus revenue for the second half or say a lower number of -- in-line with the trading update, it implies that to stay within that margin range of 1% to 3%, even to hit the top end of the range at 3%, you're looking at margins in the second half of like 1.6% to 1.7%. So is that just reflecting that you want to give yourself the flexibility to pull the trigger hard on marketing and hurt your peers? Or how are you thinking about it?

I mean -- yes, you go, Cameron. You go, Cameron.

It's Cameron. I might take that one. Look, I think you're right. The reiteration of guidance really relates to what we've said in the outlook statement today, which is this great half 1 margin outcome has given us the flexibility to ensure that we're able to see an acceleration of growth continue into H2, which means we intend to use our levers, which, as you rightly sort of outlined, price, promotions, marketing to drive that growth but to do that in a tactical and disciplined way as well. It's probably also worth remembering that this is a pretty typical profile for our business where you do see a slightly higher EBITDA margin in first half versus second half. And we do expect some annualization in the fixed cost line to come into the second half. It's not going to be a material driver but it will be there. So there's not an unusual sort of mix, I guess, between the first half and second half of the business, particularly as we see how the year plays out and we adjust our plans accordingly going into the full year.

Your next question comes from Owen Humphries from Canaccord.

Well done again, great first half. I don't think anyone is going to critique that result, so well done. I guess just to go following up from there around the margin guidance. I wouldn't mind just digging deeper firstly around the brand marketing. So in the first half, you did 5%. Your guidance is, what, 12% to 18%. The first half you did, pcp did 3%. We're quite -- we're in mid-Feb. Have you guys firmed up how much you spend -- expect to spend on brand? Is it kind of 12% to 18% seems like the number? How much is committed?

Yes, I'm happy to take that one, Owen. So as you would have seen in the presentation, the results announcement, we spent $5 million on brand in the first half. Now we were probably a little bit later than what we'd anticipated in terms of turning on that brand spend. We were waiting on some of our results from our media mix modeling that we received in September. And that really gave us insights on what channels are working and where we should allocate spend. And then we sort of implemented that in the October time frame in time for the peak period. So we do expect to see an increase in that brand marketing spend in the second half. We haven't committed fully to the number for the half, but we do expect that number to increase. And I think the amount that we spend will be dependent on what we're seeing in market, the balancing performance and some of the sort of macro trends that we're seeing. But I think one of the key takeaways of that work that we did around media mix modeling was that we should be more consistent with the brand investment going forward and that should hopefully then result in leverage of the marketing line into FY '26 onwards.

To add that, Owen, it's a little bit tricky to answer because marketing flexes up and down depending on what is happening out there because the ROI on marketing, yes, it's the return, but it's over the investment and the eye changes quite a bit, for example, we're coming to a federal election and you don't want to be buying media leading up to the federal election, is too expensive. So there may be shifts we wait towards the end of the half, which actually looks better for our promotional calendar. So look, we're not giving firm. We want to spend more because it's working but we don't want to be crazy either and just spend it if it's not delivering the ROI that we want.

Totally get that. But 12% to 18% is the guidance range, the expectation that you will be within that range for the second half.

Well, a little bit more than 5% and 7% gets to 12%, right? So I think we can get into that range even where we're sitting because we have been in the market January and February. It's just where we are in that range...

And just to kind of reiterate, I guess the question is coming at me, and I'm sure other analysts today, is just around the margin expectations. Given where we stand today, I don't think you guys were -- maybe correct me if I'm wrong, we're expecting to knock out a 4-plus percent margin for the first half. Does that kind of put you guys at the upper end of the guidance range as we stand here today?

Look, I think when you take a step back and look at the first half, clearly, a very strong margin outcome. But what we've reiterated in the results presentation was all around giving ourselves flexibility coming into the second half. So if you look at where we might allocate additional spend in the second half, I'm not going to be prescriptive in terms of where that goes. But we obviously have levers at our disposal in terms of price, in terms of promotion, in terms of marketing. And we'll use that in a disciplined and effective manner. We're not going to spend if we don't see an ROI, we don't see a return on that spend. But the margin guidance being reiterated is within our plan at the moment, and that's what we've obviously put forward in the presentation.

Maybe just a last question for me. Obviously, building a moat here around the exclusive product range. The 3- to 5-year target, 70%. You guys are grinding higher now at 45-odd percent, pcp was what 40%. With that increase from 70% to 45%, just kind of understanding how that impacts margins and the products on your -- like does that have a degradation into the range that you guys will offer as you guys tighten the SKU range to be more exclusive, you could say? How does that kind of impact the top line?

Yes. No, it's a good question. I mean firstly, on the margin, it should be a tailwind because the private label and exclusive products run at a higher margin than our nonexclusive for obvious reasons. There's less competition on those products. I think in terms of range, though, it shouldn't limit the range because how we're doing it is essentially, we're growing into that number. So we haven't -- yes, we are asking our suppliers to support us with exclusivity. And if they do that, there are benefits for them for giving us that exclusivity in terms of the support we provide those products on-site and in other customer comms channels. However, it's not like we are going to our suppliers and saying if you don't give us exclusivity, we're taking you off. That's not how we're doing it. It's more the other way. There's a benefit as opposed to a carrot versus a stick. That means the range isn't reducing over time. But what happens as we grow, more and more products fall into the scale point where it makes sense for a supplier to give us exclusivity because of the volume we're doing on that particular product and then they can bring in full containers on that product, give us that product exclusively and then generate enough sales to justify that decision. So I think it's more you'll see there's a natural move. And actually, the biggest growth in that exclusive has been the dropship exclusive. It hasn't even been necessarily the private label, so it doesn't even impact inventory. So you'll see over time, we'll get -- that 45% will drift up as we get bigger, and that's another benefit of scale and more products keep into that kind of exclusive volume threshold.

Your next question comes from Benjamin Jones from JPMorgan.

Another congrats on the fantastic results. Just interested in your view on sort of competition, particularly through that November and December trading period, the feedback coming through that consumers are crowding into those event-driven periods. What did you see from peers and customers around discounting? And how does that play into your decisions around pricing through the period?

Yes. Look, as I said, those trends I started the Q&A with comments around the price sensitivity and the promotional sensitivity of the consumer. I mean that every competitor is facing the same sentiment no matter where you operate in. So I think we definitely experience a high promotional intense half. Pretty much all competitors are on sale at some point for longer sale periods with deep discounts than they normally are. And you can just -- you can experience that as a consumer, just browse around the furniture and homewares shops and invariably, you'll see something at 50% off. I think that's a tough environment to operate in, obviously, because the value proposition that we offer as an online-only retailer without stores running at a low gross margin becomes lower because our competitors are pricing lower, where, yes, we're still doing our promotional cadence. But as you can see, our gross margin is actually -- delivery margin has gone up versus pcp. So we're still maintaining our margins and how we're doing that is getting a lot of suppliers to fund a lot of our promotional intensity in promotional periods. But vis-a-vis, as our competitors' prices come down, the value proposition of Temple & Webster is harder. But at the same time, we're still doing this revenue growth because what it speaks to is no matter how far our offline competitors go, we are still good value. And that's kind of what we've always said that our whole proposition is beautiful products, great quality products and great value. We're unabashedly a mid-market retailer which offers significantly great value, significant value to our customers. So I think it was a tough period. We have to fight, and retailers, you fight every dollar. That's why I laughed at the revenue will look after itself. So we've had to fight and we've upped what the site looks like and we're doing stuff all the time. And no matter when you land on the site, you'll feel like something is going on at Temple & Webster, and that's a deliberate strategy. And as I said, it's been a tough period, but we fought and we've done pretty well. I am expecting as the market goes through the cyclical rebound, actually, what happened is the retailers reduced their promotional intensity because they're getting the sales and they're banking from the margin and make hay when the sun shines. That actually helps us even further because it makes our price proposition even stronger. So I think we're well positioned no matter what the world throws at us.

And then just looking forward into the FX and freight costs, what are you assuming? And what sort of impact can we expect if they sort of hold at current levels, obviously directly through the private label and then sort of indirectly through sort of health of your supplier base and whatnot?

Yes. Thanks, Ben. It's Cameron here. I'll take that one. Look, in terms of freight rates, there's obviously a lot of noise out there around elevated freight rates. We didn't see that having a material impact on the first half results. And the reason for that -- well, there's actually really 2 reasons for that. I mean firstly, as you correctly outlined, only 30% of our revenue is private label where we hold the inventory, and we take the risk on freight. But also, we contract our freight rates 12 months in advance. So I mean that locked-in does give us a bit of flexibility and has obviously helped us in terms of the elevated rates that have been coming through more recently. We are seeing data that suggests those rates are coming down. So I'm not expecting any material increase in freight rates going forward into this half. In terms of warehousing costs, we do see some increases there, reasonably in line with CPI. But as we grow our inventory and our private label spend, we're obviously going to have to keep that somewhere in market, and you will see warehousing costs rise as that private label penetration increases.

And then just one final one, just on the fixed costs that you reported this result. You're obviously making really good progress on that leverage towards that sort of 6% of sales target. Just in aggregate, sort of looks like fixed costs on my numbers are up sort of high teens. Could you just talk to some of the drivers of those sort of cost increases that came through this period versus the pcp?

Yes, sure, happy to, Ben. And I think you're right. So if you look at fixed cost as a percentage of revenue, that's come down. So we're 10.7% in the prior corresponding period and 10.5% in this period. But there's an 18% increase in the fixed cost base overall. Really, if you look back at FY '24, we have been through a bit of a growth period. So we have made some hires, and we did see some wage inflation come through that line as well. So the increase in our head count from '24 to '25 has obviously contributed to that. When we do see CPI-type cost increases across the rest of the fixed cost base as well. But we do expect to continue to see incremental leverage at that line. That 6% is obviously a very long-term target. But I do expect over the next few years that we start to make reasonable progress towards it. But certainly, that's one that's far in the future as we continue to invest in AI and other things to help bring down that fixed cost base.

Your next question comes from Sam Haddad from Petra Capital.

Congratulations on the strong result. I might ask a couple of questions on your growth adjacencies and home improvement is clearly one of the key highlights. And are you at a point now where you feel a bit more comfortable to invest in a bit of inventory? Because I think initially, Mark, you were saying that you like to sort of test the waters before you commit to some inventory because that was -- may have constrained a bit of your sales previously, but now just curious [indiscernible] in that regard.

Yes, Sam, it's a great question. I think -- I mean, the answer is yes and no. So for anything with the sales history and that it sells well with a high conversion rate, then yes, we are investing. So we are doing bigger orders already because we have definitely some of those best-selling products that we brought in would sell out very quickly. So we know now we've got a great product, which looks good. It's great 5-star reviews and most importantly, is at a price point which is very competitive given the type of products out there. So yes, we are already going deeper on the inventory with sales history. But the main goal is actually to broaden the range. So it's not just about the depth of the inventory, it's about the breadth of the range. Now that will still take time. There will be winners and losers. We'll still do as small volumes as possible to test and then build up the history. That's why these things, you can't -- it's not necessarily an overnight turn-on. You grow into a best-selling range. But once you get it, it's a really strong competitive advantage because you've got a big range of 5-star review products and the sales history to have the confidence to import them. So the answer is both. We are going deeper, but we're also still being a bit cautious on the new stuff.

And how far down the journey are you in terms of broadening the range like you've?

We're at the very beginning, Sam, very beginning. We've got a long way to go.

And just on B2B Trade and Commercial. So obviously, it's been moderated given the business backdrop. I just look at the bigger picture, like this business, this adjacency, you probably agree it's a bit less scalable in terms of leverage to your core business. You need to invest in additional people. You called out that sourcing team investment last time in terms of procurement on commercial products and also it's probably a bit more longer lead time to drive customer conversion. And also I think the total addressable market you've discovered is a bit smaller than where you thought maybe 5 years ago. So stepping back, where do you see that business in the broader picture of the group because like home improvement in the core business is powering the growth at the moment?

Yes, 100%. And that's the benefit of having -- I mean, a way all businesses should have a bit of a portfolio. It's a portfolio theory. You can't always predict which parts or initiatives will be the fastest-growing ones. You can only test things in the real world. I think what we're learning, as you said, Trade and Commercial is a bit tougher. It is a bit different. However, it does leverage a lot of our core strengths. So by far, the majority of the revenue by far, actually is customers who have a Trade and Commercial login, who's self-serve through our e-commerce platform, and it just goes through our standard fulfillment channels. So they can be, for example, childcare centers where the office is replacing rugs or chairs within a childcare center, and it's just those orders happening all the time. So they're the perfect kind of B2B customers that we want, and we've actually redirected the sales team to focus on that, to focus on the customers which kind of suits our core machine and we're putting much more effort into the e-commerce and customer acquisition around B2B. So I don't think -- it's not -- what we're learning is we don't necessarily -- we do have this kind of core furniture and homewares and now home improvement machine, which works really well, and we've built market-leading capabilities. What we've kind of learned along the way is let's leverage those capabilities to really go after a B2B customer that suits that. I still think it's going to be a sizable chunk of our revenue, still going to be an important part of that $1 billion target. But if the SKU is a bit more B2C furniture and homewares, a bit more home improvement, and a little bit less than in B2B than we thought a few years ago, I'm okay with that as well. Where the revenue falls, I mean, there's similar margin profiles and it's not going to hurt the economics of the business.

Your next question comes from Tim Piper from UBS.

First question, average order value, I think, looks like it's up 6%, 7% year-on-year. Could you just break that down? I just want to understand sort of customer reengagement metrics. It looks like your repeat orders are about double what your first-time orders is. So what contribution is higher repeat rate or higher repeat orders having on that average order value versus sort of the other drivers that might have pushed it up on the pcp?

Yes. Still -- look, interestingly, still the repeat AOV is not that different to first-time customers. It's a bit higher, but it's not driving the bulk of that AOV increase. The bulk of the AOV increase is really a mix. So furniture continues to outperform the higher-priced selling items. That's the main driver. And then there's a bit of shipping price increase, again, due to mix, but also because we're pricing it more accurately. So they tend to be the major drivers of the AOV increase as opposed to necessarily the mix between repeat versus first time.

And just one on marketing costs. So in terms of your longer-term guidance around margins on marketing costs coming down. As you've kind of gone into brand marketing, has sort of that played out as expected in terms of the cost of re-engaging repeat customers? It looks like the cost of repeat orders in terms of marketing has gone up quite a lot compared to what it used to be. So if we're kind of still thinking about an 80-plus percent repeat order rate longer term, is that margin guidance still kind of where you would expect it to be at sub-11%?

Yes, it is. And the reason why the overall dollars per order has come up, it's definitely first-time customers, but also you get quite a lot of leakage with some of these brand marketing efforts because obviously, you can't stop a repeat customer from seeing a TV ad. We're still quite confident that over time, as the repeat grows, the dollars per -- the ad cost as a percent of sales will come down given that mix. And what we're -- right now, what we're doing is we're still actually -- when we started brand marketing, we layered it on top. Actually, last year, given the tough environment and we had the flexibility, we've actually not only laid it on top, but we've increased our performance marketing spend to go hard because the whole strategy is to gain market share. And yes, the environment is tough, but we still grew 24% and still delivered the numbers we have. So the strategy is a sound strategy. But over time, as conditions improve, we get a bigger installed base, brand awareness comes up, you will see that overall market -- the percentage of spend -- percentage of ad costs come down. Brand marketing is still going to be a big part of it, but we're just going to spend less on the performance channels. So as I said, those costs are going up because we've got our foot down. We're driving as fast as we can.

Yes, that totally makes sense. Sorry, just one last quick one. On the delivered margin, you've kind of talked to the strength on private exclusive and those factors. I think in the operations review in the report, it also calls out a currency impact tailwind there. Sorry, just for my understanding, what's the currency impact playing out in delivered margin upside?

Tim, I'll take that one. It's Cameron. We do have -- as part of our ongoing sort of currency management program, we do have a forward-looking program where we look to hedge exchange rates. So we pay our suppliers in U.S. dollars. So we did see quite a small unrealized gain in FX that came into that line. It's not going to be a material number for the year or anything like that. But there is a small number there. That's one that, obviously, as the currency moves up and down, will fluctuate. It was a slight gain this year, and it was a slight loss last year, depending on where the currency moves.

Your next question comes from Aryan Norozi from Barrenjoey.

Just a few for me. First of all, in the Jan-Feb period where your revenue is up 16%, is it fair to say your EBITDA margin profile or delivered margin profile contribution margins, whatever it is, is tracking closer to that 4% range than the sort of 0% to 1% guidance range for the second half that you've reiterated? So I'm just trying to get a view around does that January-February number reflect you ramping up the investment in marketing or promotions to get that margin lower? Or is that still under the first half '25 margin structure, please?

[indiscernible].

I think maybe just qualitatively, have you stepped up investment in brand marketing -- in marketing and promotions to get within that 16% number? Or is that just BAU how you're running the business in the last 3 or 4 months in that month? I'm not asking for numbers, just qualitatively...

I think -- to be honest, I think if we give -- that is quite market-sensitive. I think we give you direction on how the margins are performing in this period. That is quite market sensitive. So I think we have to kind of call -- perhaps call you on that one.

Sure. And then just in terms of fiscal '26, the market has your margins stepping up from 2.5% to just over 4% EBITDA margins and revenues growing sort of 20%, 22%. Is that level of step-up in margins what you would call sort of reasonable or progressive in terms of how you guys describe it? I appreciate you've obviously reserved the right to reinvest if you see fit. But is that sort of a more steady -- what you would look at as a steady increase?

Ary, it's Cameron. I'll take that one. Look, we'll provide more color on what we expect FY '26 onwards at the full year. I'm certainly not going to comment on consensus at this point. But there are no changes to what we've articulated previously. We still expect margins to incrementally build FY '26 onwards. And the speed and shape of that is going to be very dependent on market conditions and how we want to react to those market conditions. So at this point, unfortunately, not going to answer your question. I think you can understand.

And then if I look at your fixed cost base and historically, like the second half fixed cost as a percentage of sales has always stepped up like about 50 basis points half-on-half. So if you spent, for example, 10% last year, you spent more like 10.5% to 11% in the second half. Is that a pretty good guide because you obviously deferred some of the investments in the first half and do it in the second? Is that a pretty good way of thinking about this year as well?

Yes. I did make the comment around some annualization of fixed costs that will come into the second half. So you're right, we do see elevated fixed costs in the second half typically versus first half, and that's really driven by how we look to execute our game plan for the year and look to see how things are tracking. The split for last year is not necessarily going to be the same this year, but I would suggest that the second half fixed cost line will be up on the first half.

Your next question comes from Joseph Michael from Morgan Stanley.

I just had 2. So firstly, on AI. So some real tangible benefits coming through on the customer care side. What should we expect next in terms of AI on improving conversion, cost efficiencies? What are sort of the strategic priorities for AI from here?

Yes, I guess -- Joe, I think definitely, we're switching into more conversion rate drivers. So the cost side of things, we've made really great progress, as you saw in the announcement. We've been able to halve our customer -- and that's in actual dollars as well, our customer care costs while scaling quite significantly orders and revenue over the last couple of years. So you can see the efforts we've made on AI are genuine. This is not smoke and mirrors. But we've always said, and I said from day one, the main game is not cost for us. We don't have a huge cost base for AI to rip through. I think the answer is the biggest play is always going to be on the top line. So what we're working on at the moment, to give you a bit of a sneak peek is we're working on our first AI-driven personalized sort. So actually, what you see, the order of the products will look different from person to person, which you need AI to do at scale in real time. So working on that. And over the half, that should be in market being tested. So hopefully, at the full year, I can give you an update on how that went. And if that works, we'll continue using AI to personalize the whole site and comms experience.

Just a quick follow-up there. I guess, historically, I've thought that there were sort of diminishing returns in terms of the number of suppliers and SKUs you could have on your website because it just gets harder to search and find products. As you move into this sort of personalized store, does that equation change and you can have much more product and then I guess that kind of reinforces your competitive advantage, particularly versus your store peers.

I mean, look, I take a little bit of an issue with the statement that you started the question with. I think that's a very known shopper view. So if you're not shopping for something, you've got too many choices. If you're in the market and shopping for something, actually, you want to see lots of options because it may take you a while to work out which one you like. And everyone has different materials they're looking for or color or price point or style. There's a lot of different attributes. These attributes vary by class. So table mat, the attributes are important, they're very different to a rug. So I don't think necessarily more -- is the conversion rate killer or in some classes, I don't even think -- I don't think the diminishing returns point is quite big. Having said that, does having a personalized sort, personalized comms, personalized search results, will that surface the products within a large catalog so much better and feel like the first page results to you at Temple & Webster, everything you like? 100%. So definitely, it's a way to navigate a big catalog easier, and that's the whole point. It's a conversion rate driver, so should help customers convert. But I think there is also value in having a large range as well.

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

Just wanted to talk to you about your 4.2% margin in the first half. You had a 1% to 3% target out there for the full year, 4 is obviously significantly above that. Just wanted to know whether that was kind of just how the numbers fell out in a BAU sort of setting. Or did you guys hold anything back to achieve that number, some kind of internal stretch target maybe?

Let me have a crack first, Cameron, and you can kind of step in. I mean from the way we manage the business, we don't manage to necessarily an EBITDA. Obviously, it's something we look at how we're tracking month-to-month. But that's not how we're managing day-to-day. So we're managing the business based on what is our ROI curves per channel, what's our promotional intensity and how much can we get supplier funded. We're constantly testing deeper discounts to see whether that actually adds to the margin dollars versus subtracts. So we have a whole team of category managers and buyers, which are managing the actual ranges and the pricing, competitive pricing. And we have a pricing team, which looks at kind of margin rails and we have an AI team, which is now looking at competitive products and how our best sellers track. And then obviously, we have a marketing team, which is constantly looking at channel optimizations and ROI. The cost base, which is the other part, is relatively stable. We don't -- yes, we went through a bit of a growth spurt where we hired an AI team and for those who have kids, please tell them to become AI engineers because they're over-expensive. So I'd be encouraged -- strongly encouraging my kids to become. So we hired a bunch of expensive people, but that has -- we're not doing that now. And so the cost base is relatively steady or incremental highs here and there. So it does kind of pop out what it is, but we're riding those marketing curves and promotion curves. So it is hard while trying to also protect our delivered margin and gross margin percentages.

Yes. I mean, I guess the follow-up question to that then is delivering substantially in excess of your target in the first half, does that make you naturally more confident in your 15% long-term target? Or does it make you at least more optimistic on the timing of that?

That is for me personally, [indiscernible] has a different answer. But definitely -- I mean I'm a true believer, obviously, I mean, the founder of the business. So take what I say with a pinch of salt. But definitely, when I look through the P&L, I know where scale helps and where we can get to. So you get to 4.1 and then you go well, you've got things like just a few extra points on costs, and as we scale our exclusive products and you just kind of go down, you can all already see a clear line of sight now of 6 and then 8 and then 10 and it just kind of -- you can see where the benefit comes. Look, during COVID, we ran periods which were significantly higher than this. We had an EBITDA half of -- one of the periods of like close to 10%. I think historically, we've shown that we can run a higher-margin business. I think it's important, though, for other people to see that we can still really chase growth in a really tough market, like every retailer saying how tough it is. It's not just me, right? So we're still able to deliver these numbers and still invest this amount of money in marketing and still deliver this growth. And so you can start seeing, well, actually in a more steady market at scale, ad costs looking more like historical averages, gross margins tracking up based on private label, yes, it becomes a lot more achievable.

And maybe as the new guy in the room, it does give me a lot of confidence in our longer-term targets. And as Mark said, we have run periods margins 5% to 10% before. But more so, it actually gives me confidence that we can execute towards that $1 billion target, which is obviously well-known to the market. So I think you're right, it does give me a lot of confidence in how we can execute. And as we balance margin and growth going forward, it gives us that flexibility to respond to conditions.

Your next question comes from James Wang from Citi.

Just a specific one firstly. So you both mentioned some supply support for promotions. Would you say the extent of this has increased over time? And will that increase as exclusive and private label promotion increases as well?

I think -- look, I think suppliers are definitely -- so our key suppliers or all suppliers that we work with are stepping up and supporting our promotional calendar. We have the flexibility in our P&L to be able to tactically add promotional periods on top of that calendar. So you'll see us every [indiscernible], for example, doing a 10% off app only. And now that's a tactical promotion to drive app downloads. But those sorts of tactical promotions usually would be funded by us because it's a specific channel. So I think what you're seeing is a same level -- similar level of support, but we've added some promotions on top of kind of the normal. And again, we're still holding on -- we've actually grown our delivery margin. So it's not hurting the margin profile even with that. I think as we get more plex, as I said, the fastest-growing part of the private label and exclusive area is the dropshipping and so that's the -- and with those exclusive products from those suppliers, we work very closely with them on the promotional periods, the discounts, how we kind of promote their products [indiscernible]. It makes it easier to have those conversations in terms of let's -- let's get a bit tighter on price to drive sales and share that gain.

Thank you. Unfortunately, that does conclude our time for questions today. I'll now hand back to Mr. Coulter for any closing remarks.

Thank you, Darcy, and thanks to everyone for your time today. Once again, it's given me great pleasure to deliver another record set of numbers for TPW. I guess the main takeaway for me today is that our strategy is working. So our market share has reached an all-time high. We've done this while improving our margins. In short, we're in a great position to continue building our strategic moats and accelerate our market share and growth further. Thank you.

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