Edited Transcript of TPW.AX earnings conference call or presentation 28-Jul-20 12:30am GMT

Aug 23, 2020 (Thomson StreetEvents) — Edited Transcript of Temple & Webster Group Ltd earnings

Aug 23, 2020 (Thomson StreetEvents) — Edited Transcript of Temple & Webster Group Ltd earnings conference call or presentation Tuesday, July 28, 2020 at 12:30:00am GMT

Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director

Ladies and gentlemen, thank you for standing by, and welcome to the Temple & Webster Full Year Results 2020 Conference Call. (Operator Instructions) Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Mark Coulter, Chief Executive Officer and Managing Director of Temple & Webster. Thank you, sir. Please go ahead.

Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [2]

Thanks, Christian. Good morning, everybody, and thank you for your time today. Once again, it gives me great pleasure to be presenting some terrific results this morning. We have uploaded an investor deck onto the ASX, which myself and Mark Tayler will be taking you through.

The headlines are: full year revenue was up 74% year-on-year. However, this growth accelerated across the year, with the second half finishing up 96% versus pcp and the final quarter up 130% against the same period last year. Our EBITDA grew to $8.5 million, up almost 500% from a full year profit of $1.5 million in the year before. So you can really start to see the operating leverage in the business model, which Mark will take you through in more detail later. Finally, our cash flow’s at $38.1 million, June 30. And note, this excludes the proceeds from the recent $40 million raise. So a very healthy balance sheet.

On Page 5, you can see 2019 market numbers from Euromonitor. Firstly, we operate in a large market, which in 2019 was valued at $14.6 billion. And it should include — it said — it’s important to note this includes home improvement categories and appliances such as our core furniture and homewares market. Secondly, you can see on the right that Australia still lags behind the U.S. and U.K. in terms of online adoption of category. So we know that there’s a lot of market growth ahead of us just if we catch up with those other markets. Importantly, this means that our market should still grow even in the face of tough macroeconomic conditions, which Australia and the rest of the world may be facing, which probably will impact the chart on the left, but to be more than offset due to the shift from offline to online, which is the chart on the right.

Page 6 explains why the shift is happening. One of the main reasons is that people who have grown up buying every online are now entering into the time of life where their homes are more important. This trend has been accelerated by the COVID pandemic and obviously the people’s inability to shop offline. Now while it’s impossible to predict what happens in the future, we believe at Temple & Webster that habits are being formed right now. So there’s a lot of people shopping for online. They’re having a good experience and they believe that they’re experiencing the benefits of that channel. So that if that plays out, we believe that there is a — there will be a permanent acceleration of the adoption of online shopping.

Page 7 sets out a simple strategy. It is quite simple. We want to have the biggest and best range in that category. We want have everything you want or need for your home. We want to be a source of inspiration and the place you go to when you want to make your home beautiful. That’s really important for our brand. And lastly, we want to have the best delivery experience and customer service, so there’s no reason not to come back. That strategy, a very simple strategy based on those 3 things is, we believe, is working.

Page 8, you can see, is our active customers growth, which grew 77% year-on-year. Really pleasingly, our active customers up to almost 500,000. In fact, we crossed the 0.5 million mark recently. That’s 0.5 million customers who have bought from Temple & Webster in the last 12 months. Great news is it’s being driven by first time and repeat customers, which is the chart on the right. So that kind of goes to our philosophy of making sure we look after our customers, give them a great experience, and then they will naturally repeat.

Page 9, you can see the customer metrics. And what’s great is in the face of that growth, they stayed really strong. So our 12-month marketing ROI is still at 2.6x, which means our marketing budget has been deployed profitably. Our conversion rate is still growing in the face of significant increase of traffic and usually conversion rate moves opposite to traffic growth. In this case, we’ve been able to grow our conversion rate in the face of huge traffic growth. Revenue per active customer dipped a little bit in the last quarter, but that is essentially because the business reweighted towards our lower average order value consumers away from our higher AOV business customer. Even though, we saw a very small dip, so it’s been really great to see these metrics hold in the face of such significant growth.

The good news is, on Page 10, you can see that we are growing our market share even as our competitors take online more seriously. So as you can see on the chart on the right, the NAB Online Sales Index (sic) [NAB Online Retail Sales Index] suggests that our category grew around 50% during the month of April and May, with an average of those two months, while we grew more than 130%. Now I believe the reason why this is happening while we’re gaining share is that we continue to feel the benefits of being market leader, and Some of those benefits are set up on the diagram on the left. We are forging closer relationships with our suppliers as we become a significant part of their business. That allows us to obtain stock security, that allows us to get better terms and exclusivity on new product ranges, for example. We are making bigger and bigger investments in the technology and data, brand awareness and increasing our private label product range, and we can produce more content by adding more studios and creative resources. In effect, what’s happening is the bigger we get, the better and stronger our custom proposition becomes, which is a virtuous cycle. And we feel that virtuous cycle’s playing out, allowing us to grow faster than the market.

Now no surprise, but you — I’m sure you can all appreciate that the half was very busy. On Page 11, our primary focus — or one of main focus was really making sure the business could scale during these unprecedented times. We worked hard to ensure our key vendors are stable. We buoyed our buying teams, work with our onshore and offshore suppliers to secure stock. We added almost 100 people across the business, mostly in customer care. And note, you won’t see that in the fixed cost line because we variablize that cost that comes out above the contribution margin. We recognize that our customer care costs do scale with revenue. And as we’ve — we are increasing revenue in such a rapid rate, we’ve also had to increase our customer care to make sure we’re meeting those customer standards that we put on ourselves.

We’ve also had to do it while we’ve all moved to work from home, both onshore and offshore. So our full team, both in Australia and Manila, is working from home. And lastly, we raised $40 million to secure our balance sheet, which also provides some flexibility to act on strategic plays as they develop.

In all the numbers in this deck, and they’re all pretty good numbers, I’m most proud of the chart on the right-hand side of this Page 11. It shows that even though we did everything I just said to ensure we could keep scale, we also significantly improved customer satisfaction, which is running at record levels. And you can see that in the NPS chart on the right. We actually could have even grown faster during the quarter. However, we chose to prioritize the customer experience over short-term revenue growth to ensure the customers who are trialing online shopping for their homes for the first time have a great experience with us. Because it’s our theory that if a customer has a great experience, they will come back. We really wanted to make sure we didn’t drop the ball this quarter.

While scaling of the business was pretty challenging, we also kept pushing ahead on our road map. Page 12 gives you a few things that we worked on during the half. We actually finished our app. The app has been approved by Apple, but we deferred the launch to this quarter and that should be coming out actually in the next week or 2, just so we could ensure that we could keep maintaining the customer care contacts that arose, and we didn’t want to launch it during the really busy period that was Q4. But the good news, the app is done, ready to go, and it looks great.

We also completed our data integration with all our major freight carriers, which doesn’t sound like much. However, it’s a really important initiative because essentially, what it does, it allow us to have full end-to-end visibility of where all our orders are. So we know when they’ve been picked up — when they’ve been packed by the supplier, when they’ve been picked up by the carrier, when they reach the carrier’s depot, when they get crossed off into a different depot, when they’re on the truck or at the customer’s home. We can notify our customers, we can proactively complete the problem resolution. So it’s a really important initiative, and that’s one of the things that’s been driving our NPS.

Lastly, we completed a small investment into a AI-based interior design company, and we’re working on the first product with that. That will be a AI-generated room idea. So the collection of products will be generated on the fly by AI based on the products you’re looking at. So that’s very exciting, and we’ll be launching that this half.

Our Trade and Commercial division grew a healthy 68% year-on-year. And that’s despite a pretty tough Q4 when many businesses pulled back on their capital spend. Over the half, the team worked really hard. We launched our first full-service offering in Queensland. That full-service offering includes preparing design concepts, it includes installing and assembling their actual product, and then lastly, we go in and we style the space. So there’s full end-to-end solution, and we’ve launched that in Queensland. So now we have that service in most of the country.

We also launched sector-specific teams. We’ve organized our Trade and Commercial team into sector-specific team. For example, one of those teams is our developer team. And you can see from the products on the right, which they’ve launched, so display a home staging package and apartment staging package. We believe that having that vertical focus allows us to better meet the clients’ needs and also ensures we have the right products for that vertical because we really understand that vertical.

So look, in general, it’s been a very busy year, very, very busy year, but also very productive, and I’m very proud of the team that we’ve been able to achieve what we have while working from home.

Page 14 is a 1-page strategy. It hasn’t changed much. It’s pretty simple. We want to keep improving our range, adding depth and breadth across our core, but also growing into adjacent categories. We want to grow our private label range, which is a whole bunch of strategic benefits. We want to expand our digital capabilities. We have a lot of data, and we’re collecting a lot of data. We want to — we want to continue to use that data to further our market leadership, push things like personalization.

Our aided brand awareness pre our TV pilot was around 35%. We want to get to national brand status, so more than 80% of brand awareness. By the way, this is aided brand awareness. We, obviously, will continue to spend most of our marketing budget through our digital channel. However, we will be trailing above the line media. For example, last quarter, we took advantage of some cheap TV rate to launch our first proper free-to-air campaign. It was a TVC in Sydney, Melbourne, Brisbane and a national Foxtel campaign. We’re in the process of evaluating the success of that campaign. If it worked, we’ll do more. If not, we’ll try other platforms. So we’ll update on that. One of our key pillars, as I said, for — 3D inspiration. This year, we’re increasingly turning to 3D. So we’re adding resources and tools to make use of a 3D model library, which we’re building out, as we speak. We’ll continue to improve our customer care team through better training and platforms. And we want to add more delivery options such as after hours and weekend delivery to continue to improve our offering. And of course, we’ll continue to build out our Trade and Commercial division, which we see as the second pillar of our growth, along with our B2C. And we’re investing in the team, the range and the service proposition to keep bringing share of the market.

Note also the recent raise has allowed us to consider not only our organic strategy in these pillars, but also inorganic, where it makes sense, and we’ll continue to look out for opportunities that make sense.

Finally, I want to thank the Temple & Webster team for a huge year. They’ve been flexible, adaptable. They’ve worked incredibly hard and — to ensure really that we can keep servicing Australian customers during these really challenging times. And it’s — I’m really proud of the team to — that we’re doing our bit to make sure Australian homes are set up during these unprecedented times.

So a great year. I’m very proud of the team. I’ll now hand over to Mark Tayler to take you through the results in more detail.

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Mark Tayler, Temple & Webster Group Ltd – CFO [3]

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Thank you, Mark. Good morning all. So if you turn to Page 16 of the deck, this page really sets out we think how the group strategy will essentially translate into financial results, both shorter term and longer term. Shorter term, it’s all about keeping the foot on the pedal and continuing to drive above-market revenue growth to maintain, but ultimately, win the online market for furniture and homewares in Australia. As consumer preferences change and more millennials are making up more spend in our category, our focus will continue to be on customer acquisition and building the Temple & Webster brand to ensure we are growing faster than our peers.

This strategy will, however, require a level of reinvestment into longer-term growth plays, such as our B2B division and our mobile app. But also make some capabilities that will deliver strategic moats around our business, such as technology and data and personalization, whole delivery experience and growing our private label ranges, as Mark mentioned earlier.

However, I think the key takeaway and what we’re sort of seeing in the business is that the shorter-term earnings growth will likely be driven by revenue growth and leveraging our fixed cost base as opposed to shorter-term contribution margin percentage gains. Longer term, we will continue to benefit from online market penetration in a more mature market with the focus then shifting to growing bottom line profitability by leveraging our scale, smarter pricing, more personalized promotions, increased brand awareness and become more disciplined — or becoming more disciplined in terms of our fixed costs and investments. However, I think it’s safe to say we are some years away from operating in a mature online market for furniture and homewares in Australia.

Turning to Page 17 of the deck, which summarizes the group’s profit and loss results for the year versus the corresponding period last year. Noting both periods include the new leases accounting standard, AASB 16, although the impact of this standard is relatively immaterial for our business. As Mark noted, revenue for FY ’20 grew 74% year-on-year. However, it was ultimately headlined by the rapid increase in revenue during the COVID period throughout Q4, with revenue growing 96% year-on-year for H2 and 130% for the fourth quarter.

However, look, I think it’s important, and in fact, it’s very important to remind everyone that the business was growing very strong pre-COVID, over 50% year-on-year, which is much faster than the market and that of our peers as well, whilst maintaining very similar economics. I think it’s very important just to remind everyone of that.

Delivered margins, which are our gross margins after fulfillment costs, grew 76%, slightly higher than our revenue rate, mainly driven by some lower distribution costs relative to last year. Marketing spend as a percentage of revenue increased year-on-year, primarily driven by the Sydney, Melbourne, Brisbane, free-to-air TV and national Foxtel campaign, which was run in May and June, which was a pilot and result in ROIs are currently being calculated. Contribution dollars grew 67% to $27 million, with contribution percentage remaining within our internal range of around the 15% mark. Pleasingly, fixed cost as a percentage of revenue continued to reduce, coming in at 10.5% of revenue versus 14.5% versus last year, highlighting the benefits of our online business model. And as a result, EBITDA for the year grew 483% to $8.5 million or $9.4 million, excluding noncash share-based payments.

Turning to Page 18. Look, I won’t spend too much time on this page. But look, it reiterates that our high-growth strategy is continuing to translate into operating leverage and earnings growth, with fixed costs as a percentage of revenue decreasing by 25% despite investment into core capabilities such as tech and data, mobile app, Trade and Commercial, private label and our logistics teams, as we discussed earlier. Importantly, that operating leverage and positive EBITDA results are translating into positive cash flows as well, which are on Page 19, with a positive cash flow year of $24.6 million and an ending cash balance of $38.1 million and no debt. This balance excludes the proceeds from the recent placement that was undertaken in early July.

The positive cash flow result was driven by both EBITDA and the group’s cash flow positive business model, noting a full balance sheet position will be presented as part of the fully audited accounts due out mid- to late August.

And pleasingly, as outlined on Page 20, the trends we’ve seen of late have continued into July with revenue growth tracking at levels we experienced throughout the fourth quarter. We will provide, as we usually do, actual quarter-to-date revenue growth rates as part of the audited account, as mentioned earlier.

So all in all, the business is in — it’s in really good shape. It has a very strong balance sheet, customer metrics tracking really well and some very strong momentum as we enter FY ’21.

I think we’ll open it up to some questions, Christian.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question today comes from the line of Tim Peter (sic) [Tim Piper] from Royal Bank of Canada.

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Timothy Piper, RBC Capital Markets, Research Division – Analyst [2]

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Tim Piper from RBC here. Congrats on the strong update today result. Just a couple of questions. Just firstly around your average order value and revenue for customer metrics. Can you just help us understand a bit better there? It looks like the revenue per customer is down a bit, so is average order value through the second half. Now you commented you’re sort of reweighting to lower AOV customers. Can you just give us a sense in terms of product and customer mix there? Are you seeing a greater growth rate in homewares categories? Or are you seeing new customers spending a bit less on average?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [3]

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No, it’s not that, Tim. It’s the — the customers are looking pretty similar. In fact, AOV in the B2C side is up, if anything. But it’s more the percentage of the business coming from B2B is lower because these are average numbers because the B2C has taken off. So you’ve got AOV in the B2B side, which is significantly higher than the customer, obviously, given the type of order they do. And so as the percentage reweights towards the B2C, you will naturally see the average revenue cost will come down a bit.

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Timothy Piper, RBC Capital Markets, Research Division – Analyst [4]

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Okay. So it’s actually a mix between B2C and B2B?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [5]

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It’s a mix between the customers, exactly. Yes, exactly.

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Timothy Piper, RBC Capital Markets, Research Division – Analyst [6]

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Okay. So you’re saying that average order value and revenue per customer within B2C has actually increased through the second half?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [7]

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A little bit, yes.

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Timothy Piper, RBC Capital Markets, Research Division – Analyst [8]

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Okay. And just drilling down in terms of your customer acquisition costs and the return on that cost for the B2C business then, does that mean that your actual ROI and CAC’s improved? Obviously, it looks to have stepped down a bit through the second half. What’s it looking like in B2C there because most of that marketing is obviously within the B2C segment rather than B2B?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [9]

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Well, CAC is actually also doing [certainly well]. We just did the TV pilot. So one of the reasons why it stepped up a little bit in this year was because we spent that money on TV, and that has a longer payback. Everything is broadly consistent, as Mark said, it’s pretty consistent between the years.

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Timothy Piper, RBC Capital Markets, Research Division – Analyst [10]

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Okay. Okay. And just second question around your suppliers. Do you have a bit of an idea where they’re sitting in terms of inventory level? Obviously, we’ve gone through a period of high demand, which remains the case. Do you have an idea on their inventory levels as it stands now in terms of meeting continued demand?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [11]

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Yes, we do. I mean we get real-time inventory feeds from many of our suppliers and pretty much a lot of big ones. So we understand what the inventory position. We’re working with them. We’ve been working with them for months now on forward forecast and giving them now what we think we’re going to do. So they’re ordering to those forecasts. We’ve obviously been supplementing that with bumping up our own orders of private label. That’s the stuff that we obviously can control. We’re pretty confident that we have the stock to maintain high-growth rates.

The beauty of our model is, of course, we’ve got hundreds and hundreds of suppliers. We’ve actually seen quite a lot of substitution already between suppliers, things will go out of stock, then customers will buy another product. Sometimes a more expensive product as well. It’s not necessarily a subsiding down. They’ve been subsiding up. So we think the inherent flexibility in our supply chain, plus our — just — we have a pretty big category management team. So we have the ability to work with each of our suppliers, our main suppliers, on forward forecast, plus the combination of a private label division just growing really strongly, means that we have — we’re fully comfortable about our stock position.

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Timothy Piper, RBC Capital Markets, Research Division – Analyst [12]

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Okay, sure. And just around the concentration in new suppliers, has that changed much over the past 6 months? Like your top 50 suppliers?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [13]

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No. If anything, what’s happened is that our concentration has got less. So we’ve had more spread across our supplier base, as I said, due to that substitution, of things coming out of stock. The standout has actually been our private label division. So that has been growing faster than anyone else. So it’s actually nudged over that 20%, into the range of 15% to 20% that we talked about, it’s actually kind of just nudged over 20%. So it’s been growing pretty quickly. But in terms of the other — the spread, it’s actually a bigger spread than it was before.

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Timothy Piper, RBC Capital Markets, Research Division – Analyst [14]

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Because I mean, you guys have outperformed most of the rest of the market, so you’re becoming an increasingly important channel for your suppliers more so now than ever. How are you going to leverage that position? I mean, gross margins, pricing, can you share some marketing costs around with your suppliers and things like that? Are there channels you’re looking at there?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [15]

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Tim, you should come and run our category management team. It’s great. And you can negotiate for us.

Yes, all of the above. Obviously, we want to make sure we’re looking after them, and they’re growing with us. But as we grow and we become a bigger part of the business, we will be looking for, whether it’d be better terms in the form of volume rebates or contribution to marketing dollars or exclusivity on certain products, whether that’d be our best sellers or their new ranges, for example, particularly some of our suppliers with exclusive deal or their new ranges. And homewares and furniture can be quite a trend business, that’s quite handy. We work with them on product development. So we’ll share data on what products are working, and what colors and materials, et cetera, so that we can actually design products and have exclusivity again on those products. So yes, you’re right, as we get bigger, we are increasingly the bigger part of their business. But we think it’s a win-win. We are a great sales channel for them. They’re a great partner for us, and I think the — it’s mutually beneficial.

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Operator [16]

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The next question comes from the line of Aaron Yeoh from Goldman Sachs.

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Aaron Yeoh, Goldman Sachs Group, Inc., Research Division – Equity Analyst [17]

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Congrats on a good result and a great start to the year. Just a couple of questions for me this morning. Just firstly, with regards to the marketing expenses in June, and obviously, you’ve highlighted the TV campaign. I mean, it does look like it’s kind of run rating it twice the amount it was sort of run rating in the prior months. Just wondering with the amount that’s spent on TV in that period, is that just purely reflect the campaign in June? Or is that like a lump sum payment that reflects a campaign that covers several — the next couple of months?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [18]

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I mean it was only a really June campaign. It was 2 days of May and then the full June month, so pretty much the entire spend was in June.

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Aaron Yeoh, Goldman Sachs Group, Inc., Research Division – Equity Analyst [19]

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Right. And I guess, if you guys do decide that TV is a good way to go, is it fair to assume that, that June run rate is kind of the run rate we should be expecting into this fiscal year?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [20]

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I don’t — look, I don’t think — I don’t think we want to answer that question because we do need to evaluate with the campaign, how it’s performed or if it’s successful. I mean, if the ROI is there and the customer payback is in a short-enough period, then yes, we should be spending more money on it. And all it will really do is up the ad cost in the short term, but if the payback’s right, then over the longer term, it will kind of average out. But we’re still evaluating whether the campaign was a success and whether we want to spend more money on TV. I mean, obviously, TV is one of those media mediums that you really want to make sure you’re not wasting a lot of money. So we’re doing a lot of work on attribution modeling, looking at it on a cohort basis. So basically kind of a time stamped basis post the ad spot. We’re looking at on a channel basis to see if we can see any uplifts on baseline, looking at geographic basis to see if we can look at any uplift on control areas. You see it all together and you’re trying to best guess, but we’re still in the process of working out whether it even worked. I don’t want to be putting in people’s minds that we are going to be a heavy TV advertising if that’s not going to happen.

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Aaron Yeoh, Goldman Sachs Group, Inc., Research Division – Equity Analyst [21]

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Yes. Fair enough. And I guess, obviously, there’s not too much you can comment. But I guess, say, if you were to proceed with it, I mean, do you expect that sort of ROI to hold at this sort of current level? Or I mean, any sort of guide with regards to marketing as a percentage of sales?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [22]

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Well, TV — look, TV’s going to be more expensive. TV is not a cheap medium. And it is really the — above-the-line is different to performance. So we are very much a performance marketing company in terms of how we think and how we breathe. Performance marketing, you get your ROI straightaway, and you can see it 1 day, 1 week, 30 days. TV is always above-the-line kind of brand campaign. You are putting your brand in a customer’s mind who may not be in market, but when they do come into market with furniture and homewares over the next 3 months, 6 months, you’re top of mind.

Now by definition, that means you’re incurring the marketing cost now for the sale in the future, which is going to play havoc with your ROI costs in the short term. But what you need to assess it on is on our cost of customer. So does the customer cost, is it — does it still hold the equation? So is it 2.6 ROI, is it a 2x ROI, that’s still pretty good. Even the 1.8x ROI is pretty good. But we have to think of that equation. At this stage, we’re saying, we don’t want to do — we don’t want to advertise and only campaign, which does not have a positive ROI, in a reasonable payback period. So we are looking at TV in a maximum of 180 days, really 90 days is what we want to see the payback on. Now that’s — some will say that’s too short. TV should be looking 12 months. That’s not in our DNA. So if we can’t see the payback within 90 or 180 days, we won’t go forward with TV.

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Mark Tayler, Temple & Webster Group Ltd – CFO [23]

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It’s Mark T. here. Just to add to that. It is a bit of an accounting quirk, but there was a large amount of deferred revenue at the end of the financial year as well. So obviously, with the June campaign running, it was generating revenue throughout June and there’s a component of that revenue that you can’t actually recognize in your account until that revenue has been — until the products have been received by the customer. So what you kind of see in the June numbers is all of the marketing costs, but not all of the revenue being reflected. That revenue will actually be recognized in July. So it’s a bit of an accounting quirk in terms of having to defer some of that revenue, but it will throw out the percentages a little bit.

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Aaron Yeoh, Goldman Sachs Group, Inc., Research Division – Equity Analyst [24]

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Great. That’s good color. And just with regards — sorry, go ahead.

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [25]

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I was going to add, Aaron, I think it’s also worth noting that, unfortunately, I mean, hopefully, there’s no TV execs on the call, but I’m definitely in the guilty until proven innocent mode of TV. So my default is that TV doesn’t work, it has to proven. My marketing team has to prove to me it is working. So a high bar.

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Aaron Yeoh, Goldman Sachs Group, Inc., Research Division – Equity Analyst [26]

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Yes. Fair enough. That makes a lot of sense. And just with regards to the July trading, strong numbers that you’re sort of talking to, do you think you’ve had any benefit from the lockdowns in Melbourne?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [27]

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Well, we don’t — I mean, obviously, we don’t have the word of a benefit due to the lockdown. I think customers who can’t go to the shops because they’re locked down will naturally turn to online at a higher rate than other places. And let’s just say that.

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Aaron Yeoh, Goldman Sachs Group, Inc., Research Division – Equity Analyst [28]

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Yes. That’s fair enough. And then just on cash flow, very strong cash flow performance as well. Clearly, the negative working capital model’s working. Have there been any changes to the payment terms of your suppliers that might have also benefited you just during the period?

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Mark Tayler, Temple & Webster Group Ltd – CFO [29]

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No. No changes, Aaron. It’s been very stable in terms of the payment terms with our suppliers. If anything, we’re paying them a little bit quicker than previously just to ensure that we can give a little back during a really good period. So certainly, no sort of one-off benefits that are hitting that cash flow. It’s a combination of a few things. Obviously, there’s earnings there — there’s earnings growth, EBITDA growth. Obviously, the benefits of the negative working cap model do tend to present themselves quite well when you’re in a high-growth period. And the other thing is, like I said, the deferred revenue, again, because you’re not recognizing all of that revenue in your P&L, you are receiving the cash upfront. So again, it is a bit of a benefit of the online model and the negative working capital model.

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Aaron Yeoh, Goldman Sachs Group, Inc., Research Division – Equity Analyst [30]

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Yes. That makes sense. And then just a last question with regards to digital and better leveraging the data and the business. MC, could you perhaps give us a bit of color around, I guess, what you’re working on or areas where you can better leverage the data that you have on your customers and perhaps what investments that you’re making to get to these outcomes?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [31]

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Yes, sure. I mean, essentially, I mean, all data, people say data and big data and machine learning and things like that. All it really is, is prediction. So the more data you have, the better you can make predictions because you’re basically narrowing the statistical window. We’ve been collecting a bunch of data on our customers for years now. We use a customer data platform called Tealium, and we also collect all the QuickStream data. Essentially, anything you do on our site, we are tracking you. We’re tracking even when you hover over things or when you click a filter, we are storing that information on you. What that allows us to do is a bunch of things. One is — I mean the obvious one is marketing. So we can try to predict your next purchase or your next category of purchase. And therefore, in your e-mail marketing comms or your Facebook ad or when you arrive on our site, we will show you that product or that class of products to try and get you to buy that.

But it also extends beyond marketing and beyond trying to be on customer acquisition and engagement to things like inventory forecasting. So we’re in the process of building ourselves — we couldn’t find anything off-the-shelf, but a machine learning, AI-driven forecasting tool. So we can take our page views, our conversion rates, our — how many times the customer has come back to the same page, to try and get a sense of the demand for the products. And importantly, what that demand may have been if the product hasn’t sold out, so that when we forward order — when we put our orders in, we actually can order with more confidence. I mean, there’s just a couple of things, essentially, how we’re doing it. As I said, we’ve invested in a platform called Tealium. We’re adding resource to the team, both e-marketing and across the business in data. We’ve got a whole strategy and a whole piece of work at the moment to kind of fully bring all our data together and then build interesting use cases on top of that. So we actually see, as I said, we see data as a — one of our natural advantages over competition because the more data you have, the more accurate your predictions can be. So if you get better in data world, and that’s another advantage of being market leader.

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Operator [32]

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The next question comes from the line of Callum Sinclair from Macquarie.

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Callum Sinclair, Macquarie Research – Analyst [33]

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Just a couple for me. I guess, it’s already been covered but — and appreciate you’ve provided commentary around the revenue growth rates in July. But can you just talk to the qualitative indicators you’re seeing maybe around reorder patterns from the recent customer cohort and how that compares to previous cohorts?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [34]

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Yes, sure. I mean, as I said, we didn’t say this time around, but I said — we said last time in the raise announcement, the raise doc, the good customers that are being — coming online at a moment, they’re buying our normal category. So it’s not like it’s just — it’s a home office. They’re buying furniture, and they’re buying bedroom furniture, living room furniture, dining room furniture and they’re buying our homeware categories as well. The good customers, they are having a great time, so the NPS is good. They’re repeating really strongly. In fact, they’re the strongest cohorts we have had in the recent Temple & Webster history. So we’re quite happy with the customers that we’re acquiring during this phase. And I think it’s also — I think, maybe it’s because the customers that are coming on and trialing online for the first time may not have experienced online before, and have been pleasantly surprised. Quality is actually pretty good. And it’s pretty good — and I can’t believe it’s as good to the price. And as it happened, the delivery was fast. Contact servicing resolution was good. They’re being pleasantly surprised by the experience and therefore, repeating to a great extent. So I mean, sure, part of that may be COVID, but I think a large part of it is driven by NPS. And we’ve done correlations for and we know that our repeat rate is almost perfectly correlated to NPS. So the more — a bunch of other things, but one of the things that’s correlated, too, is NPS. So the better we do on customer satisfaction and the better we do on ensuring customers have a good experience, the more likely they are to repeat. And we knew that a forward experience, but you can see in the cohorts that we’re acquiring now.

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Callum Sinclair, Macquarie Research – Analyst [35]

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Okay. Great. And obviously, the higher NPS, maybe just as an extension to that, maybe help understand if there was a specific driver of that other than just the customer cohort, given its increased while demand has accelerated in this environment. For example, has delivery times improved or is it just incremental improvements maybe across the business that are adding up to a higher NPS?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [36]

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So I mean one of the biggest things we did during the quarter was launch that delivery tracking service I talked about. That’s really good. So if you order now — in fact, for the first time ever, I’m getting feedback from customers and brands that are buying and some of them were saying , maybe you’re overcommunicating in terms of delivery, which is I’d much prefer to be on that end than the under communicating, but really, is you get notifications now in SMS and e-mails the whole way through. So we’re keeping you constantly informed about how your delivery is progressing.

That’s (inaudible) one, we’ve done a lot of work on improving quality of our drop shippers. We’ve actually even taken off a bunch of suppliers during this period, which we just didn’t think were keeping up with our quality standards and our delivery standard to have actually improve the range and the quality of the supplier base. We have put on 160 something — more like 180 across the business, but most of them, as I said, was in care. So we added a truckload of more agents to make sure our customers are getting speedier resolution and speedier contact time and faster resolution. So I think there’s never one thing in retail, but I think it’s a whole bunch of things which are adding up to better customer service.

I also think that things like some of these pandemics, what they do is they kind of separate the pack. So those who were strong beforehand gets stronger because they’ve already got the foundations in place. Those who were — had a pretty shaky business before, it’s only going to get shakier because what it’s going to do is put the business under strain. We were already pretty much fit coming into this crisis. And I think that is shown in how we’ve been able to adapt and really lift our game to ensure that we can scale, but also improve our customer service and things like NPS and customer satisfaction are always relative. Customers are thinking to himself, did I have a good experience vis-à-vis somebody else? Customer — no, no one thinks in absolute. So we’ve been able to give a good experience and keep customers informed to make sure things are delivered and ensure our quality is maintained probably better than our competitors. And so that kind of relativity is also coming out in our NPS.

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Callum Sinclair, Macquarie Research – Analyst [37]

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Great. And maybe just on that competitive point. Obviously, with the investments in AI and the mobile assets being released, I guess, where do you expect to see the benefit of some of that investment? Thinking around whether it’s sort of primarily drives upside conversion rates over time or market share gains if online competitors struggle to keep up with the sort of developments that you’re releasing.

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [38]

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Yes. I think — I mean, firstly, it’s worth saying that everything we do is a test, everything we do. I mean I don’t have any answers. I have guesses and informed guesses, but those informed guesses need to be proven through rigorous A/B testing and data. So even our app, for example, we’ve put a lot of effort into it. I think it looks great. I think it kind of makes sense given the take-up of mobile shopping. We know that we’ve — our competitors, both in our space overseas and other players and other categories in Australia, have had success through shopping apps. So you kind of put it all together and go, okay, well, best guess is an app should work. But we don’t know that. We don’t know whether Australians will want a furniture and homeware shopping app. We don’t know whether actually there’s not a big enough demand to justify the development resource towards it. We don’t know if customers will come back on the app. But our theory is that if we can get customers install the app, it reduces the marketing cost required because we’re already — we’ve got real estate on the screen. We can send them notifications and therefore, we can get engagement higher. It’s a faster, more beautiful experience, so they may increase the basket size. Conversion rate is correlated to speed. And as we can do things like pre cash, and so it can be much faster than a mobile site, website. So for a bunch of reasons, we think the mobile will — a mobile app will improve our cost metrics. But as I said, it’s a pilot and an experiment to see. And we’re going to attract the cohort of mobile app customers versus comparator group and see what happens.

Similar to the AI bit, our theory is that if we can make on — shopping to your home easier and it is a hard process. You ask anyone and most will have no idea where to begin. Kind of know what they like and kind of think to a magazine feature which they — which kind of inspires them. But actually recreating that or having the confidence to buy things is really — is a hard process. So if we can make shopping — the shopping experience easier for people, allow them to see products together that they like on the fly, then we think it will improve conversion rate and actually improve AOV as well because they will buy more. But it’s time-consuming do beautifully created lifestyle shots for everything in the studio. So an AI solution that can do it, using the data, using what you tell us, using your traffic behavior to actually intelligently suggest products, which not only work together but match your style, we think that it should work. But again, we will test a lot of different iterations, and we’ll keep refining and we use an A/B testing platform today. So we’re constantly running tests to see what works and what doesn’t. And the winning variations, we’ll put money into.

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Callum Sinclair, Macquarie Research – Analyst [39]

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I might just slip one last one in. You’ve been quite open about looking at both organic and inorganic investment opportunities to drive longer-term profitability. But I guess how flexible would the level of investment be in either of those avenues based on growth rates over the next few years?

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Mark Tayler, Temple & Webster Group Ltd – CFO [40]

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Yes, I’ll take that one. Yes. Yes, I will. Look, it’s — I think it’s important to note that, look, the proceeds of the placement obviously give us a lot of flexibility in terms of being able to execute. And not just execute, but execute quite quickly. It’s one of the things that we have seen historically that there’s been some really good opportunities out there. And if you’re not ready to go, then those opportunities can fall by the wayside pretty quickly. So it’s good in that sense that we can act and we can act quickly, and the balance sheet is there. Not only the balance sheet, but obviously, there’s really strong script value there as well. So we’re in a very, very good position from a market perspective to be executing on deals if they make strategic sense.

But I think it’s important to note that it’s certainly — our core strategy at the moment is certainly about focusing on the core business. We’ve got very good momentum. We’re in really good shape. And for us, it’s more about looking at things that we can do to bolster the mother ship essentially, add capabilities to the business. We’re not going to be too prescriptive as to what a deal structure may look like or a size or a quantum or anything like that. But it’s going to be more about as opposed to bolting on, say, other brands, other retailers, for us, it’s more about how do we add strategic capability to the business that will help us not only continue to grow, but also things to help break down some of the barriers of buying online. And I think the interior design tool that we’ve made a small investment into are those sorts of things that will really help break down some of those barriers. So look, it’s — certainly, there’s lots of opportunities that are out there, but we certainly won’t be rushing into anything if it doesn’t make strategic sense.

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Operator [41]

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Your next question comes from the line of Owen Humphries from Canaccord.

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Owen Humphries, Canaccord Genuity Corp., Research Division – Senior Industrials Analyst [42]

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Obviously, I’m late in the conference call, so I’ll be relatively quick. Just on the COGS, percentage was pretty flat during the period. You talked about volume benefits. Are you guys passing on these volume benefits to your customers at this stage?

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Mark Tayler, Temple & Webster Group Ltd – CFO [43]

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Yes, we are, Owen. That’s exactly right. So we’re certainly seeing — we’re actually seeing a lot of benefits in both the product COGS, but also the shipping COGS as well. As we’re growing, we’re starting to see a lot of those scale benefits coming through both in terms of COGS, but also support in terms of some of our promotions. Our suppliers are now funding a lot of our promotions at the moment. So instead of banking some of that additional support that we’re getting, we’re actually passing that on to the customer. And we’ve been pretty consistent with that message for some time now, that not to be expecting large-scale margin improvements coming through gross margin and delivered margin because we do — now is the time for us to be capturing as much of the markets as we can and passing on some of those benefits. Longer term, obviously, that’s in a more mature market. We’ll be looking at ways in which we can improve all of those percentages above the contribution margin line. Yes, for sure, we’ve been passing on a lot of those benefits to the customer to lower both product pricing and also shipping pricing as well.

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Owen Humphries, Canaccord Genuity Corp., Research Division – Senior Industrials Analyst [44]

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And just lastly I know it’s 11:30, but just on the understanding, is there any innovation that’s happening around delivery or logistics in line with Australian prices, which I understand you guys use, that helps you speed up the delivery times? Maybe just talk around average delivery times today and any innovation that’s happening on that side.

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [45]

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I mean, I wouldn’t call it innovation. It’s probably structural innovation. But I mean, I think everyone’s aware, the Australia Post is under a bit of strain. It’s having record days. They publicly say that every day is a Black Friday for them. Black Friday is one of the biggest — is the biggest shopping — online shopping day of the year. So they’re having — and they’ve put on extra depots and night shifts and weekend shifts and everything else to get around it. Look, it’s not bad. It’s still pretty good. Our NPS for Australia Post customers is still higher than it used to be. So it’s not like it’s terrible. But in terms of what we’re doing to make sure Australian Post customers are having a good time, we’re very — we’re quite close to Australia Post. In fact, my Co-Founder, Adam McWhinney, sits on their advisory council. So we’re giving them feedback constantly. But also, we have the ability — we have — we use a shipping aggregator to basically route kind of freight based on various metrics that we can specify, whether it be cost of service, (inaudible) et cetera. So we also have the ability to shift some of the Australia Post volumes to other carriers, and we will do that where we’re seeing particular problems with the Australian Post network. So as I said, it’s not really innovation. It’s more kind of competitive tension, I guess, if anything. But we are staying very close to the Australia Post situation.

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Owen Humphries, Canaccord Genuity Corp., Research Division – Senior Industrials Analyst [46]

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Well done, guys. It’s strength from strength for the last 3 or 4 years.

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Operator [47]

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Your next question comes from the line of [Leo Kanino].

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Unidentified Shareholder, [48]

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Great growth. I’m a personal investor, and I also run additional marketing e-commerce. So I’m kind of just curious because I know the channel’s quite well, and I work in the space. I want to better understand the different channel rollouts or ROI, and where the spend is going towards.

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [49]

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Yes. We deliberately don’t — firstly, nice to meet you, and thank you for the support. But first — secondly, we don’t — we deliberately don’t disclose ROI by channel. Yes, and I’ll tell you why. But I can tell you, most of our spend is digital. And yes, you can guess that where the channel — where our bigger sources of spend go. So obviously, channels like Google AdWords, Google Shopping are important for us. But we are also seeing good results from paid social. So Facebook, not only as a brand tool, but also as an acquisition tool with retargeting through Facebook. We are using Instagram increasingly as well to retarget you on Instagram with products, and that’s worked quite well. We use the [creos] et cetera, and after that to kind of — to track you on the Internet, like everyone else. We have a big e-mail database, so we use that for life cycle marketing. And obviously, then we had our organic search where, if not the largest, definitely out there in terms of organic search traffic. And then obviously, we have the direct traffic that they will come directly to us.

So that’s our main sources. But you run every channel to its own ROI, its own ad cost, even CAC, and kind of all adds up. We try to have a discipline, and we have the — well, we do have the discipline, but we want every first order to be profitable. So we will spend up to the amount of margin dollars in a first order to ensure it’s still profitable because our theory is we’ll then repeat and cohort tracking and everything else, that’s upside. If you can make sure your customer profit in the first order, you’ve got a healthy business and then everything else is cream.

So that’s kind of — that gives you a sense of how we split our marketing. But as I say, we don’t just disclose channels ROI — because also a lot of people get hung up about channel mix. My view is much more holistic, which is — provided a channel is meeting an ROI and provided a channel like the cash makes sense, then we should be spending unlimited amount really. There shouldn’t be a constraint. Now that may skew it between free and pay and everything else. But as I said, holistically, if we think about it, we keep our first order profitability target, the ROIs will change on a given month.

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Unidentified Shareholder, [50]

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And just to elaborate further, I find that pay channels like social, Insta, Shopping, Adwords tend to cap out at a certain level until you start experiencing diminishing returns with your rollers. Have you hit that capacity yet? Is there room to grow pay, would you say? And also, with organic like the way we normally look at a client’s market share as we understand exactly how many impressions there are for that industry, so for your — for furniture and homewares, I think there’s about 6 million total impressions for organic. Are you taking like a full market approach in that channel?

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [51]

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Yes, we do. And that’s why I say we’re up there, if not, because I haven’t got that marketing impression share on me. But I do know, pretty recently, we were #1 based on public data as well. So that’s all public if you look at market impression shares, we were definitely #1 and such. In terms of caps or ad caps, yes, obviously, every channel, the more you spend, it becomes a diminishing curve. By average, that’s just how it works, right? There’s — each incremental customer that comes from our expenses. That’s the chart you play with, right? And you just — and essentially, as you know, you keep optimizing that curve. You keep innovating your usual spend. We’ve tied our customer data on-site to our AdWords account, for example. So now we know we can make differential bidding based on kind of what customer behaviors, all that kind of stuff that you keep kind of improving the curves — or shifting the curves up. But yes, of course, around that curve. And then when you do something and the curve shifts up, and that’s how marketing works.

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Operator [52]

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The next question today comes from the line of Sam Haddad from Bell Potter.

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Sam Haddad, Bell Potter Securities Limited, Research Division – Industrials Analyst [53]

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Congratulations on the excellent results. I’ll be very quick. Just on the contribution margin. Just around your comments around focusing on contribution dollars. Should we expect the margins to stay stable at around these levels? Are you still targeting that 15% mark? Just to clarify that, please.

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Mark Tayler, Temple & Webster Group Ltd – CFO [54]

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Sam, look, we’ve always said around 15%. So we don’t want to be too prescriptive in terms of exactly where we think it’s going to land because we’re using those levers, as Mark sort of pointed to in terms of marketing, we’re using those levers every single day to come up with the best outcome. So what we’ve been seeing of late is actually running a slightly lower contribution margin. Pre-COVID, it was driving a much higher revenue growth rate, but the actual contribution dollars was a far better outcome. And that ultimately is all that matters, right, is what’s the contribution dollar outcome as opposed to the percentages.

So what I was alluding to — or what I was talking about when I was talking about earlier was shorter term, no, I wouldn’t be expecting any material gains in terms of those — our cost base above the contribution margin line. I think there will be continued reinvestment back into the customer proposition around shipping, around product pricing, around customer service, improving our customer service teams, all those sorts of things. So what that will mean is there won’t be any material improvement in terms of percentages above the contribution margin line. But what we’ve been seeing, and what we think makes strategic sense is not to have a big bloated fixed cost base. And we’re seeing in our business that we actually don’t need that to scale. The things that scale with revenue, we variabilize. So I think that’s where you’ll start to see the operating leverage. That’s where you’ll start to see the earnings growth is actually the fixed cost as a percentage of revenue continuing to track down. And that will be a result of the revenue growth, which will be driven by that reinvestment activity into pricing and promotions and shipping and so forth.

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Sam Haddad, Bell Potter Securities Limited, Research Division – Industrials Analyst [55]

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And with your fixed cost base, what level of sales can that support before you’ll need to reinvest on those items?

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Mark Tayler, Temple & Webster Group Ltd – CFO [56]

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Look, we’ll always be reinvesting. But the reinvestment level will be at a lower level to what the revenue growth will be. So we’ll always be reinvesting back into the business because now is the time to be capturing the market. When we talk about fixed cost, it’s predominantly people. So whether it’s people into our B2B division and having consultants, industry experts out there, talking about Temple & Webster and selling Temple & Webster, whether it’s in our logistics teams, whether it’s in our private label teams, whether it’s in our technology teams, data teams, we’ll continue to be investing into those teams. But we’ve got planned investments for this financial year, but those investments should be at a lower level to what the revenue growth rate can be.

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Operator [57]

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There are no further questions on the phone at this time. I’d like to hand the conference back to today presenters. Please continue.

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Mark Coulter, Temple & Webster Group Ltd – Co-Founder, CEO, MD, Customer Experience Officer & Director [58]

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Thanks, Christian, and thanks, everyone, for your time today. Great questions. And once again, really pleased to be presenting some great results in some pretty tough time. Thank you.

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Mark Tayler, Temple & Webster Group Ltd – CFO [59]

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Thanks all.

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Operator [60]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.

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