FY21 Full Year Results Investor Call Transcript

Kathmandu Holdings Limited - Full Year 2021 Results Release

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Company: Kathmandu Holdings Limited
Conference Title: Full Year 2021 Results Release
Moderator: Sheree Dixon
Date: Monday, 20th September 2021
Conference Time: 10:30 (UTC +12)

Operator: Good day, ladies and gentlemen, and welcome to the Kathmandu Holdings Ltd full year 2021
results release. Kindly be reminded that there will be no web questions taken. Only OD
questions shall be taken for today. For those who have questions, please dial in to the audio to
be able to ask questions.

Today's conference is being recorded. At this time, I would like to turn the conference over to
Michael Daly. Please go ahead.

Michael Daly: Right. Thank you. Good morning, everyone, and thank you for joining us in today's
presentation of the Kathmandu Holdings result for the full financial year of 2021. My name is
Michael Daly and I'm the CEO of the Group. I'm joined on the call by Chris Kinraid, our Chief
Financial Officer.

We will be talking to the presentation lodged on the NZX and ASX this morning. Unless
otherwise specified, all financial numbers are in New Zealand dollars.

We'll begin on slide two, which briefly outlines the strengths of our three iconic outdoor active
brands. In short, Rip Curl is among the top three global surf brands. Kathmandu is the leading
outdoor brand in Australasia, and Oboz is a fast growing North American footwear brand for
hiking. We are highly engaged with our loyal and active consumer base, achieving a net
promoter score that exceeds 70. We have 2.1 million active Summit Club members and 44,000
Rip Curl Search GPS watch users. One of our key strengths is the development of purpose
built technical products. Research and development drives our innovation, and we are focused
on using sustainable materials. A leader in sustainability in ESG. Kathmandu was an early B-
Corp adopter and we are working towards extending B-Corp accreditation across all of our

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brands. This year, we also committed to the largest syndicated sustainability linked loan in New
Zealand.

Lastly, we have built a diversified business with global reach. We're employing a multi-channel
approach to appeal to a wide range of customer buying preferences and having both a winter
and summer focus. We appeal to customers across seasons.

On to slide three. Our brands have extensive global reach. With over 3,000 wholesale doors in
North America, over 2,000 in Europe, nearly 1,000 each of Asia and South America. 23 in
Africa, and the Middle East and over a 1,000 in Australia and New Zealand. There are
substantial opportunities to leverage the wholesale networks of each brand to expand our sales
reach.

Turning to slide four, I'd like to discuss in more detail the Group's 2021 financial year highlights.
Total Group sales were $922.8 million, and were up 15.1% on the prior year, and pleasingly
our underlying EBITDA was up 35.9% to $113.3 million, underpinned by a gross margin
improvement of 40 basis points. Underlying net profit after tax for the financial year was $66.3
million and we delivered strong underlying operating cash flow of $93.3 million. We ended the
period with a strong net cash balance of $37 million.

Moving to slide five, I want to touch on some of the key operational highlights during the year.
Rip Curl delivered strong direct to consumer sales. Same store sales growth of 19.2% with
online sales growing by 31.3% Online growth was underpinned by changing consumer
preferences brought about by the COVID-19 lockdown periods.

We’ve successfully relaunched Kathmandu's new brand platform in May, reminding people that
being outside changes us and that as human beings, we are hardwired to be outside. The
relaunch was very well received and pleasingly Kathmandu achieved an exceptionally high net
promoter score of 76. Oboz successfully launched their online store in April, and the wholesale
business is well positioned with double-digit growth in forward orders.

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Moving on to slide six, sustainability is at the core of each of our brands, and I would like to
highlight some notable achievements. In conjunction with our key stakeholders, we completed
an ESG materiality assessment and we committed to the largest sustainability linked loan in
New Zealand. Rip Curl launched a wetsuit take-back program with TerraCycle, and the
business sources our sustainable cotton in line with the Better Cotton Initiative. These are
important sustainability initiatives for the brand.

The Kathmandu brand meets the highest standards of environmental and social performance
as certified by its B-Corp status. We've also upped our efforts to limit climate change by
offsetting our emissions to claim carbon neutrality.

For Oboz, over 4 million trees have been planted since the company's inception, with the
company planting a tree for every pair of footwear sold and Oboz have 95% environmentally
preferred leather materials in the product range.

Moving to our refreshed Group strategy on slide eight, we have been building a portfolio of
global brands and aim to further expand our global footprint as we invest in world class brands
and customer experiences. We will elevate our digital capabilities by investing in Group digital
platforms to deliver a world class unified commerce experience. We will also leverage and
deliver operational excellence to all of our brands across shared Group support functions.

Finally, we will continue to demonstrate leadership across environmental, social and
governance to drive long term value for our shareholders. Given the uncertainties associated
with COVID-19, it is important for us to maintain balance sheet flexibility, allowing for capital
return options and the capacity for future M&A.

Onto slide nine, our strategy focuses on building global brands. Our goal is for Rip Curl to be
the number one surf brand in Australasia and a top three brand in North America and Europe.

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We will be building Rip Curl’s North American presence and see the potential to double the
North American business across our own stores, online and wholesale channels.

Kathmandu is the leading outdoor brand in Australasia, with 2.1 million loyal and engaged
Summit Club members, which we aim to further leverage. There is significant market
opportunity to expand into Europe and North America, and we aim to launch in both Canada
and Europe during FY22. We have an attractive new product pipeline, which includes an
enhanced summer product offering.

Oboz is undergoing the expansion of its product range into adjacent footwear categories, and
we aim to grow Oboz into a US $100 million business in the medium term with growth
opportunities in the recently launched online store and further expansion of the business in
Canada and also Europe, in time.

In Slide 10, with the current COVID situation accelerating a move to online sales, significant
investments have been made to elevate our digital capabilities. Our goal is to increase Group
online sales to 25% of direct to consumer sales in the medium term by enhancing our digital
capability. With this goal in mind, a new Group online platform is being rolled out across our
brands. We also are making further enhancements to our omnichannel foundations, including
making point of sale upgrades to support unified commerce and click and collect functions for
contactless purchases.

We're investing in our loyalty programs, including the launch of our Club Rip Curl programme
in the coming year to leverage our strong consumer following. Furthermore, pricing and
promotions are being enhanced based on data algorithms, and we've developed personalised
consumer contact to encourage digital purchases.

Moving on to Slide 11. We aim to leverage the collective operational excellence of our brands.
Having a target of improving our underlying EBITDA margin to 15% of sales. We also plan to
accelerate cross-brand revenue growth opportunities. The Group has invested over $20 million

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to date on core platforms to support the growth of our brands, and over $10 million will be
invested in FY22.

Investments will be made to optimise our supply chain, efficiently manage our fixed cost base,
collaborate on product innovation between brands and to enhance core systems to unlock
growth potential across loyalty programs and online.

Moving to Slide 12, being a leader in ESG will drive long term value for shareholders. We are
working to extend Kathmandu's B-Corp accreditation across all of our brands. Transparency
and responsibility will continue to underpin everything that we do as we manage our
environmental and social impact responsibly and ethically. We are highly engaged with our
people and our communities, and our ESG strategy starts with the wellbeing of workers in our
supply chain. We are setting science-based targets that align with the Paris Climate Agreement
and our circular business models target a zero waste supply chain.

I'll now hand over to Chris to cover the financial slides.

Chris Kinraid: Thanks, Michael. Statutory results include the adoption of International Financial
Reporting Standard 16. For comparability, the impact of IFRS 16 has been excluded from our
underlying results. The full year of FY21 includes a full 12 months of Rip Curl, while FY20 only
included nine post-acquisition.

As you can see, we've delivered growth across all key financial metrics, underpinned by
exceptional sales performance in both Rip Curl and Oboz. Total sales increased 15.1% to
$922.8 million, while underlying EBITDA increased 35.9% to $113.3 million.

We continue to carefully manage our operating expenses, given the current operating
environment. Our results include the benefit of $7.3 million from rent abatements, agreed with
landlords and the $15 million annualised restructuring and synergy savings implemented during
the onset of the COVID pandemic last year.

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Lease renewals were completed for 14% of the store portfolio, which delivered $1.4 million in
annualised savings.

The result also included a COVID related write down of Indonesian receivables of $2.7 million
and net wage subsidies across Australia and New Zealand of $16.6 million. Depreciation
included $5 million in notional amortisation of Rip Curl customer relationships. Included in
interest costs, were the $2.1 million write-down of underwriting costs related to the Rip Curl
acquisition. These have been excluded from our underlying results.

A future tax benefit of $7 million was also recognised from the recognition of historical US tax
losses.

Moving to Slide 15, we delivered strong sales of $922.8 million, underpinned by 12 months of
Rip Curl ownership. While online sales moderated following 63% growth in FY20, they have
grown at a strong CAGR of 21.9% since FY17, and now comprise 14.4% of total direct to
consumer sales.

Our sales mix is diversifying across brand, channel and region. Rip Curl recorded strong online
sales growth of 31.3%, while Kathmandu online sales normalised from a COVID surge in FY20
to now make up 15.8% of direct consumer sales of the brand.

Given strategic investments made we expect to achieve robust growth in online sales from both
Rip Curl and Kathmandu over the medium term.

Moving to our balance sheet on Slide 16, we are in a very strong position we have significant
balance sheet headroom with $37 million net cash at year end and a current debt facility of
circa $300 million.

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Our long-term leverage ratio target is 0.5x Net Debt to EBITDA. We've managed our inventory
carefully during lockdown periods, and we'll continue to do so in FY22. A strong balance sheet
position allows the Group to ride through any short term COVID related challenges or
supporting growth investments in providing room to pursue further M&A opportunities and
flexibility for future capital management options.

Moving to Slide 17, we delivered strong operating cash flows of $93.3 million despite
challenging conditions.

Moving forward, capital expenditure for FY22 is expected to be around $35 million, which will
support our continued investment in systems capabilities and ongoing brand development.

As a result of the strong performance across the Group, we have resumed paying dividends
following a suspension during FY20. Our Directors declaring dividends totalling 5 cents per
share for the full year, including a final dividend of 3 cents per share. This will be fully franked
for Australian shareholders, however not imputed for New Zealand shareholders.

I’ll now talk through the segment results and performance of each of our brands.

Onto Slide 19 for Rip Curl. We can see the P&L contribution for the 12 months in FY21,
compared to 9 months in FY20. Total sales were 10.5% above last year with sales continuing
above pre-COVID levels in the key regions of North America and Europe during the northern
hemisphere summer season.

Direct to consumer same store sales grew strongly at 19.2% for the 12 months ended 31st July.
Sales through our online channel grew strongly to $33.5 million and now comprise 12.5% of
direct to consumer sales.

Over the past four years, online sales have grown at a CAGR of 44.4%. Wholesale sales were
9.6% above the previous year. Despite a COVID disrupted sell-in in the first half. Order books

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are now significantly above pre-COVID-19 levels, reflecting strong category performance.
Sales are back to pre-COVID levels, even though stores in airports, Australia, Hawaii, Asia,
and parts of Europe, continued to be affected in FY21.

Gross margins have increased as direct to consumer sales are increasing as a proportion of
total sales.

The next two slides focus on Rip Curl product and brand marketing initiatives. As shown on
Slide 20, a key tenet of Rip Curl and all our brands is our technical excellence and innovation,
which allows us to provide the best possible products for our customers. The Icons of Surf
collection is a selection of the most iconic logos in the industry. These products blend timeless
design and bold graphics to create one of the strongest volume driving collections in surf. The
Mirage Ultimate is the most unique and innovative swimwear in surf, tested by the world's best.
The line includes premium Italian lycra that offers support and flexibility with water repellent
glide neoprene panels providing comfort, compression and wind chill reduction.

The surf series includes technical surf inspired products. These products are engineered with
wet dry surf functionality, and hydrophobic materials.

Slide 21 covers Rip Curl key marketing initiatives. The Rip Curl World Surf League title was
decided last week for the first time in an exciting one-day format, which included the top five
men and women in surfing and featured both Olympic gold medallists from the Tokyo Olympic
Games.

The men's title was taken out by Rip Curl athlete Gabriel Medina and the event was a great
opportunity for us to host our key customer accounts and showcase the Rip Curl brand in a key
growth market.

In terms of bringing innovation to the market, the new E7 wetsuit combines our latest stretch
and warmth technologies and will be launched by Mick Fanning and Molly Picklum. The launch

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is taking place this month and will cover digital, outdoor, retail and broadcast channels in the
Northern hemisphere.

Now on to Kathmandu. Slide 23 shows the underlying P&L for FY21 on a pre-IFRS 16 basis.
COVID-19 lockdowns and travel restric tions impacted Kathmandu’s financials, with total sales
declining 17%. In Australia, sales were 18% below last year with 4,700 trading days lost in
FY21.

In New Zealand total sales were 14% below last year, with 400 trading days lost, compared to
2,450 in FY20.

Online sales at $56.8 million represented 15.8% of direct-to-consumer sales and have grown
at 14.3% CAGR over the last four years.

Same store sales were 18.2% below last year. Strong winter launch momentum in conjunction
with the Kathmandu brand relaunch prior to the Australian lockdown resulted in second half
insulation growth compared to the pre-COVID period in the second half of FY19, despite
significant store closures.

Gross margin improved in the second half by 240 basis points. The improvement in operating
expenses included the benefits from restructuring, rent abatements, and wage assistance.
Kathmandu inventory is well controlled and ended the year in line with the expectations.

Turning to Slide 24. We are building a strong, meaningful and differentiated brand with strong
brand awareness in Australasia, where we dominate the category. Kathmandu launched its
new brand positioning during the winter this year to improve the well-being of the world through
the outdoors, celebrating being out there in nature in a fun, spontaneous and inclusive way.
Our customer base is active and highly engaged with a net promoter score of 76, four points
above the level last year.

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We have 2.1 million active Summit Club members, and these members are responsible for over
70% of total Kathmandu sales, and they spend approximately 30% more per transaction than
non-members. We are setting the foundations for Kathmandu brand growth. An integrated
brand campaign was launched in May 2021, which generated 30 million views. We have
relaunched our website, improved the user experience, and we are planning to relaunch the
Summit Club during the first half of FY22.

We continue to lead in product innovation. Slide 25 shows how we're aiming to establish year-
round relevance and excitement. Focusing on the eight months of transitional weather. Our aim
is to ultimately become, in summer, what we are in winter.

Furthermore, we are broadening our customer appeal to reach a younger, more cosmopolitan
consumer. An example is the new Mulga summer range designed with playful characters and
colors, in collaboration with Sydney based artist Mulga. The new SUN-Stopper range launching
in stores now is an example of a new product focus, combining technical innovation while
capitalising on the summer opportunity. The range combines serious chemical free UPF 50+
sun protection with fun colours and easy wearing silhouettes.

Moving on to Oboz, Slide 27, and it shows a strong financial performance in FY21. Sales grew
44.9% on a constant currency basis to reach $78.4 million. The result was driven by a
successful product innovation strategy and a strong recovery following the COVID lockdown
period.
Gross margin was impacted by one off air freight costs of $1.5 million to support key customer
deliveries of winter seasonal sales in the first half. Plus, increased ocean freight costs due to
supply chain congestion in the second half.

We expect gross margins to normalise to historical levels when global supply chain congestion
and related shipping rates return to normal.

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Pleasingly, our forward order book is at its highest ever level, which allowed us to invest further
to support future growth initiatives.

Moving to Slide 28. Oboz has been broadening the appeal of its product range since acquisition
with a series of strong product launches and robust brand activations, underpinning continued
strong growth. The recent launch of the new Oboz online store also provides significant sales
growth potential.

The brand experienced 20% growth in its social media audience during the second half and is
currently involved in a number of exciting social initiatives. These include the Oboz Trails
Experience and the Oboz first ever collaboration with the Black Folks Camp Too initiative, which
launches this month.

I’ll now hand back to Michael to cover the outlook for the Group.

Michael Daly: Thanks, Chris. Moving to Slide 30. COVID continues to impact the global business.
Lost trading days in FY21 due to lockdown restrictions were around 13,000, compared to
15,000 in FY20. Continued lockdowns in New South Wales, Victoria, ACT and New Zealand
will continue to impact our results during the first half of FY22. Trade in airport locations, in
emerging countries such as Brazil, Indonesia and Thailand remains significantly impacted by
COVID, while Northern hemisphere retail stores are managing with staff constraints and
sporadic closures as positive team COVID results arise.

COVID is also impacting our supply chain, with reduced factory capacity stretching lead times,
freight congestion leading to delivery delays and increased freight costs. As we continue to
proactively manage the impacts of COVID daily, our main priority is to ensure the health and
safety of our staff, our customers, and our suppliers.

On to Slide 31, our key priorities for FY22 are to build global brands, elevate digital capabilities,
leverage operational excellence and be a leader in ESG. To build our global brands we’ll

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increase our investment in marketing sustainability initiatives. Importantly, we will be launching
Kathmandu in Europe and Canada and will continue to launch innovative products to capitalise
on growing participation rates in outdoors, beach, and surfing activities.

In relation to our digital capabilities, we’ll be launching a loyalty programme for Rip Curl, initially
in Australia and New Zealand, and relaunching Kathmandu Summit Club. We will also
implement unified commerce capabilities throughout ANZ and re-platform our European online
capabilities.

We aim to increase the use of data insights, analysis and personalisation to drive growth and
to also expand our marketplace presence.

In terms of driving operational excellence, we will put a Group executive structure in place to
build out our Group capabilities. We will align technical platforms across our brands, initially in
Australia and New Zealand. This will involve an investment of circa $10 million in core systems
capital expenditure in FY22.

We are setting clear margin and expense targets to drive a permanent shift to 15% EBITDA
margins as we emerge from the impacts of the COVID pandemic.

Our key ESG priorities are to extend B-Corp accreditation to all of our brands, set science-
based ESG targets and implement the Rip Curl ESG strategy.

Turning to our trading update on Slide 32, Rip Curl same store sales for the first six weeks in
FY22 have declined 12.8% on an absolute basis, however, have increased 3.6% when adjusted
for COVID lockdowns. Kathmandu same store sales have declined 19.9%, but are up 18.3%
when adjusted for lockdowns.

Online sales growth has been strong, up 25.9% across the Group. Pleasingly, Kathmandu has
seen strong sales in regions less affected by COVID restrictions. COVID restrictions are

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impacting suppliers in Asia, and the Group is actively managing supply chains to minimise
impacts. The impact of freight costs on gross margin is expected to be offset by improved
foreign exchange rates. Due to these ongoing COVID impacts, the first half FY22 profit is
expected to be below the first half of FY21. We are encouraged that both Rip Curl and Oboz
wholesale order books are significantly above pre-COVID levels.

In terms of the outlook, all of our brands are well positioned to capitalise on growing participation
in outdoor, beach and surfing activities. We are set to capitalise on opportunities resulting from
the global COVID vaccination rollout as restrictions ease in key growth markets and
international travel restrictions are expected to ease as FY22 progresses.

This now concludes the formal part of today's presentation. I want to thank all of our
shareholders for their support through this challenging year, and for taking the time to join us
on this call. I would now like to open the call for questions.

Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by
pressing star one on your telephone keypad. If you're using a speakerphone, please make sure
your mute function is turned off to allow your signal to reach our equipment. A voice prompt on
the phone line will indicate when your line is open. Please state your name and company at the
tone before posing a question. Again, press star one to ask a question. We’ll now take our first
question. At the tone, please state your name and company before posing a question. Your line
is open. Please go ahead.

Andrew Steele: Good morning, guys, Andrew Steele from Jarden here. The first one for me is just on
the current lockdown restrictions in Australia and New Zealand. A key component of that, could
you just give a sense as to what your weekly loss run rate is in New Zealand and Victoria and
New South Wales at this time of year?

Michael Daly: I’ll pass to Chris for that one.

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Chris Kinraid: Yeah, I mean, it will change in each month, Andrew. And August is still a reasonable
month for Kathmandu. But the circa run rate was between – from the August period is between
8 and 10 million impact on EBITDA after that first month. It reduced a little bit for September
October, but that's the current run rate. So, we’re looking forward to all the stores opening up
in due course.

Andrew Steele: Great. Thanks. And just a little bit more detail on your launch in Europe and Canada.
Please talk to the types of stores that you're going into, the numbers of stores and any sort of
expectation around revenue contribution at this stage.

Michael Daly: Yeah, I'll take that one. Look, obviously early days, Andrew, in terms of launching into
Europe and Canada. The sell in period for the particular season we're aiming is in sort of
November. So obviously being in mid-September at the moment, we're sort of still in the initial
planning phase, I guess, arranging samples and so forth. But certainly, we've had various
conversations with accounts. That includes everything from outdoor specialists to sports chains
to online pure play retailers. And certainly, from so far, the conversations have been quite
proactive and positive. A bit hard to articulate in terms of how many accounts may very well
look to buy into the range because as I said, we haven't actually sold it in and won't sell it in till
November. But certainly, as we've said before, if you look at the broader wholesale account
base for Rip Curl, there's some 14-15% of our top 20 customers that stock both surf and
outdoor. So, in Europe in particular, a lot of the distribution is at a volume distribution. They
typically stock both all outdoor brands, and that includes everything from surf right through to
outdoor. So, there's a lot of potential there as far as overall wholesale accounts, but it's a bit
hard to articulate exactly how many accounts will buy into the range until we've actually had
those detailed meetings.

Andrew Steele: Great. Thank you. And just my last one. It seemed like a good result in terms of rent
saving at $1.4 million, I think it was. If you were to go through that process across your entire
lease space, what would the annualised rent roll look like? What sort of savings would we be
talking about and that are a realistic or achievable outcome?

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Michael Daly: I think [inaudible].

Chris Kinraid: Yeah, I mean, in terms of overall savings, we don't expect that to – I mean, that was
from the negotiations last year and there were some good outcomes. We expect that probably
normalised to some degree over the future negotiations. So, I don't expect – I wouldn't roll that
forward across the whole lease base and extrapolate that saving, Andrew.

Andrew Steele: Good. Thank you.

Operator: Thank you. We’ll now take our next question from Bianca Fledderus of UBS. Your line is
open. Please go ahead.

Bianca Fledderus: Yeah, good morning, guys. First question from me, so you mentioned that the impact
of freight costs on gross margin is expected to be offset by improved foreign exchange rates.
And just wondering sort of what about raw material costs. Do you still see pressure there? And
how much of this can you push through to consumers?

Michael Daly: Yeah, look, we're definitely seeing freight costs, obviously one component of the input
costs, but we're certainly seeing raw material prices increase as well, as you could appreciate
not necessarily across the board. It's typically in certain areas. And to be quite honest, it's
evolving on a daily and weekly basis. So, look at this point in time, there's definitely – I would
say there's definitely some inflation in some areas of raw materials, fabrics and so-forth. I think
at this point in time, we're managing quite well. We've got long term relationships with our
suppliers, which puts us in really good position for all of our brands. And as we've mentioned
with the upside that we expect from foreign exchange, we're not too overly concerned on the
overall impact of margins. But it would be fair to say, it's one that we are watching and managing
on a daily basis. And that's my view today. But that could change quickly, depending on what
happens. Because obviously with the pandemic, as we see on a regular basis, things change
very quickly.

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Bianca Fledderus: Okay. Yeah, Okay. Thanks. And then I guess, second question on your inventory
position at the moment. So yeah, obviously we see those global shipping issues. How are you
sort of managing your inventory and purchasing for the future? And then, I guess on the rebrand
as well? How would you sort of expect the new Kathmandu product may impact your inventory
as it's obviously more colorful products and therefore, I guess possibly increased risk to
managing the inventory, especially at the moment with lockdowns, for example?

Michael Daly: Yeah. So, there's two components to that. As far as our overall inventory, we're certainly
seeing delays in the timeliness of delivery and depending on the ports in which products are
coming out of and into and there's particular ports around the world that are quite congested.
We're dealing with that by bringing forward buys and building into our buying timelines.
Additional time to allow for those freight delays. We can't get it perfectly, of course, but we feel
we've made the adjustments to ensure that we have a free flow of inventory.

And it's important to remember that 12 months ago, we were in a very similar situation, albeit
different. 12 months ago, we were actively pulling back inventory in forward orders because of
concerns of that pandemic. So, we traded through the first half of last year with some
challenging inventory positions. And obviously, we're going to be trading through the first half
of this year with some interesting and challenging inventory positions, but we feel we've made
the adjustments. There are some delays, but overall, we're managing quite well. The one area
that is well known globally where there's problems is footwear. Footwear, particularly out of
Vietnam and other South East Asian countries. That's probably the category of most watch at
this point in time and most under pressure. And obviously, Nike has been very open about
those issues. And I think most footwear brands have.

In terms of the inventory risk with the re-position of the Kathmandu brand and products, look,
it's not something that we're overly concerned about. The feedback that we've had from stores
that are open at the moment with respect to the new colorful summer range - it's been extremely
positive. Certainly, on the Rip Curl side from which I'm from, colour has been a foundation of

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our business for a long time, and I'm an avid watcher of what's happening in North America.
And if you go into their stores at the moment, they are very colourful. So, I'm certainly confident
that that color trend will continue here in Australia. And I think we're going to be well placed
with respect to our inventory in the Kathmandu side.

Obviously, the lockdowns don't help. We will be accumulating some inventory in lockdowns,
but we're just managing our forward inventory purchases to make sure we’ve managed that to
deliver consistent inventory flows and reasonable levels of inventory.

Bianca Fledderus:: Yes. Okay, great. Very helpful. That's all for me. Thank you.

Operator: Thank you. We’ll now take our next question from Mark Wade of CLSA. Your line is open.
Please go ahead.

Mark Wade: Good morning, Chris, Michael. Thanks for taking the questions. I'll continue on the relaunch
of the ”We’re out there” theme in the Kathmandu brand. I mean, how have you found it’s gone
I mean, in terms have being able to measure that. What kind of customer apart from the 30
million views, what kind of responses have you seen to the brand and how have you been able
to manage that?

Michael Daly: Yeah, well, it's obviously early days. The relaunch was only May. And obviously some of
the products associated with that relaunch are just landing in store as we speak for the spring
summer. As I mentioned earlier, feedback overall has been quite positive from our teams, and
that's probably the best indicator that we have initially of the success of that launch. And so
certainly the feedback from our teams, both on the relaunch and the product that is hitting stores
now and is in stores now has been extremely positive. And certainly, our net promoter scores
that we measure in store with customer interactions have all been positive post that
involvement.

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And then on top of that, we manage and watch what's happening on social media. And again,
all of the feedback we've received and the tracking of social measures and analysis are all
positive. I think the number is around about 95% positive sentiment on the rebrand positioning.
So now we're very confident on that reposition and I'm really excited by the pipeline of new
products that we've got coming through. As part of that, we've really rebuilt both our marketing
and product capabilities for the Kathmandu brand over the last 12 months. And the new team
is delivering some exciting things and we're looking forward to seeing how they work in store in
the immediate future and through FY22.

Chris Kinraid: Yes. And Mark, other points – I mean, we also saw during the launch Kathmandu was
trading quite strongly, especially in Australian markets, and that went to launch and went to
periods before the lockdowns hit Melbourne and Sydney. So strong double-digit growth. So
we’ve had some good sentiment and we saw that from the customer base. So that gives us
plenty of confidence going forward.

Mark Wade: Yeah, exactly. Okay. I hope it goes well. And one for Michael. I mean, what part of the
strategy do you envisage will need to be tweaked and what do you think will really stay largely
the same under your healm?

Michael Daly: Yeah, so I mean, the key focus areas I talked to, are certainly the areas that I feel needs
to be a major area of focus for us. I mentioned about building those global brands. Rip Curl, I
guess, is the closest to that and certainly off the back of Rip Curl’s experience and Rip Curl’s
broader geographical spread, really excited by the opportunities that are open for Kathmandu
and Oboz. I guess that's probably where the biggest area of excitement for me is, and probably
the biggest area of change from where we were previously. We have talked about it, but really
internally, this is the first time that we've really pushed hard on it.

So certainly, from my point of view, that's most the most exciting part. We’ve got a lot of work
to do on our digital capabilities in terms of building our platforms in a unified commerce
experience. It's not a key strength that I would call out just yet, but certainly it's an area of major

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focus and major investment at the moment, and we certainly look to work through the FY22
year to look to, our aim is to sort of be best in class in that space over the period. So major
investment as we've outlined.

And then in terms of the other areas in terms of ESG leadership and driving that operational
excellence, I think they are two things that we've done well across our brands previously and
they are, I guess, a continuation of what we've done in the past with some minor tweaks. So,
yeah, in terms of, to answer your question, the two major changes have been really elevating
that focus on our digital execution and then really a push towards making sure that all of our
brands have global aspirations and really looking to do that in a smart, efficient and as much
as possible low risk way. But with these things, you need to make investments for the future,
and that's what we're doing. And as we've stated in the announcements, investing in the brands,
most importantly, is a major focus.

Mark Wade: Thank you. And lastly, the Kathmandu brand, you had online sales fall 30%, a lot worse
than the total brand, down 17%. What were you – I can't remember what you said you put that
down to. Something around, was it just the fact that when stores reopened ...

Chris Kinraid: Yeah, it's just a mix of the big COVID surge last year. So, the percentage of sales, that's
normalised, but on a sort of a two- or three-year basis that’s gone from FY19, it was 11% it's a
stable basis of approaching 16%. And we've got a pretty firm goal of driving it north from here.
But it's a normalisation once we open the stores for trading as well.

Michael Daly: I mean, the thing I'd add is Kathmandu has built up an amazing business appealing to
that travelling outdoor consumer and particularly it's got a loyal base that consistently come
back for those products, for when they're travelling to, whether it's Japan or Europe. And
obviously, with that not happening, those educated consumers looking for that product aren't
coming back online. So, I certainly suspect that's a part of it. And the other part is last year we
tightened up our inventory buys, coming into summer because of the concerns of the pandemic
and the impact on trade. And as a result of that, we just didn't have as much stock on clearance.

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And obviously, the online consumer is a particularly price sensitive consumer. So, if you've got
less product to clear online, you're going to drive less sales. So certainly, that was also an
impact reducing that online volume last year.

Mark Wade: Michael, Chris, thanks so much for those insights. Really appreciate it.

Chris Kinraid: Thanks, Mark.

Operator: We’ll now take our next question from Julian Mulcahy from EAP. Your line is open. Please
go ahead.

Julian Mulcahy: Hi, guys. Just a couple of questions. Firstly, how do you explain like the Australians
sales being so much weaker given the comparable trading days weren't that different from last
year? And also, why New Zealand fell quite a bit given the lost days are way less than last
year?

Michael Daly: You're talking overall there, Julian or specific to the –

Julian Mulcahy: Just the Kathmandu business.

Michael Daly: Yeah. Well, in terms of the Kathmandu brand, obviously, as I mentioned earlier,
obviously the impact of travel and the pull back on the inventory definitely had a major impact
on the Kathmandu brand. There's no doubt about that. They've built a big business appealing
to that outdoor traveller. The positioning of the brand was very much around adventure travel.
And on the back of those border closures, a big chunk of that business disappeared. So the
products appealing to that consumer, so backpacks, insulation, those type of products now,
with the benefit of hindsight, our stores would have been loaded up with tents and camping
gear and so forth. And if it was, our results probably would have been a lot better. But the
unfortunate situation was we'd built a large business around adventure travel, and when that

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adventure travel stops, it does have a very significant impact on our results, which clearly it
has.

And as I mentioned earlier, as far as New Zealand trade there, the New Zealand consumer is
particularly a price sensitive consumer. If you've got less inventory on clearance, there's less
for them to buy. So that again has a drag on your overall performance. That would be the two
key call outs that I would make in terms of my observations. Chris, you've got anything to add
to that?

Chris Kinraid: Yeah. I mean, Kathmandu, I mean, second half was travelling reasonably well. As I said
earlier, we lost as we guided in our June update, the impacts are quite significant on the back
end of June-July, which is the key trading period for Kathmandu. So overall, the circa $22 million
impact on EBITDA for those last sort of six weeks thanks to the lockdown. So, the business
was travelling overall as a Group travelling well north of where we landed, and the lockdowns
extended deeper into July than originally expected. So that's a massive impact when you've
got at some stages over 50% of your store network closed. So that was a big impact overall in
the second half.

Julian Mulcahy: Right. So, there's like plenty more a case of in the result last year, like the comp was
boosted by sort of clearance of inventory and it was a bit cleaner this time around. It's just keep
by -.

Chris Kinraid: Yeah, definitely a whole lot lower clearance, which is a good place to be, helpful on to
margins, but a little bit more clearance this year, but significantly still lower than in FY19. So
that'll help. And we saw in August we actually had more stock and the trading was going quite
strongly until additional lockdowns, especially in New Zealand and Queensland and WA were
trading quite strongly and continue to do okay. So, it's really hard to get a really pure read
thanks to ongoing closures. That's the reality. And July is a big trading period for Kathmandu.
So, it looks like bad timing for the brand.

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Julian Mulcahy: Okay. And with the first six weeks of trading with the adjusted numbers, how many
stores does that actually include?

Chris Kinraid: I mean, I can say right now I've got I think, about 130 stores closed right now. It was
about 150 until the New Zealand level two adjustment, excluding Auckland. So right now, is
about 42% of the network is closed.

Julian Mulcahy: Right. And that's similar to last year?

Chris Kinraid: Was actually worse than last year because Auckland only had a two week period last
year. But we've got Victoria and New South Wales, where last time it was just basically Victoria.
So, the lockdown period for the first quarter is worse than in prior years, which is pretty obvious.
So, I think looking forward to really moving on beyond Q1 and getting retail stores opened up
and get everybody trading. That's what we're looking forward to.

Julian Mulcahy: And just one more, with the launch into Canada and Europe. Is it mainly just backpacks,
wet weather gear or a broader range of Kathmandu products?

Michael Daly: Yeah, really major focus on apparel to start with. There will be some pieces of
equipment, but we won't be going with the full camping outdoor line. We'll start with a curated
range, which will really look to appeal to, I guess, more the apparel consumer than anything.
There will be some pieces of backpacks in there, for sure, but obviously a little challenging to
sell backpacks in the current environment with various border closures and so forth. So more
of the focus on apparel for the initial launch.

Julian Mulcahy: Okay. Great. Thanks, guys.

Chris Kinraid: Thank, Julian.

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Operator: Thank you. We’ll now take our next question from Marni of Macquarie Capital. Your line is
open. Please go ahead.

Marni: Good morning, Chris and Michael. Thanks for taking my questions.

Chris Kinraid: Hi, Marni.

Marni: I just want to understand just the Rip Curl result. So, it looks as though the second half of 21
EBITDA margin came in the realm of 7.4%, and obviously the first half of 21 was particularly
strong. How do we think about – I mean, assuming – the absence of lockdowns, with the
synergies that have come through and the cost measures you've put in place, what's an ideal
EBITDA margin for that Surf segment?

Michael Daly: Hi, Marni, how are you? Look, as we've previously discussed and outlined, certainly, our
longer term aim is 15% EBITDA. We feel that's a sustainable ratio on an annual basis. That
said, the first half always skews to the northern hemisphere, which is a lower margin. And
obviously in this second half that we just saw, we had two impacts. One was obviously the
lockdowns that came late in terms of Australia, which had a negative impact on our result. And
also late in the year, we picked up some doubtful debts with respect to one of our Indonesian
partners. And the effect of both of those is probably looking at a circa 10% at least drop away
in EBITDA in the last month of the year. So, from that point of view, I would say that the 7%
EBITDA you quoted for the second half is on the lower side. You would normally expect that to
be double digits in the second half in the normal year. And therefore, that EBITDA ratio for Rip
Curl would be closer to the 15%. But we're also investing in the brand and investing in long
term growth. We have strong aspirations to build our North American business. So, we certainly
want to invest in our marketing in particular over the next 12-18 months to drive that future long-
term growth. So, yeah, continuing to invest in our brand. So, we see that the EBITDA margin
will only go up from here and certainly tracking towards 15%.

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Marni: Okay. And obviously, there might be some – from what you just said, it implies that the first half
might be just a bit north of 15%, given that there are lockdowns in Australia, there could be a
slight downside risk to that or is it – because I mean, there's just so much exposure offshore a
lot of the weakness in the first half of 22 profitability is probably more skewed to Kathmandu?

Michael Daly: Yeah, look, in terms of the first half with respect to – well, honestly, with the first half with
all brands to give any sort of guidance or detail at the moment would just be remiss of me
because I mean, as of a week ago, I was out of lockdown and a week later, I'm back in
lockdown. So yeah, I really can't comment on that. You know what we do know – from what we
- everything we know today, as of the 21
st
of September, we know that our first half for FY22
will be lower than the first half of last year. As far as how much, we really just don't know until
we can see when particularly New South Wales and Victoria open up.

And obviously we're hoping and assuming that there's no lockdowns or closures of other states
or indeed other countries, knowing that our breadth of results across those and Rip Curl skews
to northern hemisphere and Europe as well.

Chris Kinraid: Yeah. And I think we're going to look – the way we look at it Marni is, I mean, clearly
for Q1, there's a lot of impacts with lockdowns. I mean, that's pretty clear for everybody. And
some supply chain challenges related to that. Long term, I mean, we've got some – we've
mentioned a few times the order book’s incredibly strong, especially for Oboz and for Rip Curl
and into 2H. And so, I think we look at it with a lot of confidence that the first half will be impacted
no doubt because of the lockdown.

Marni: Okay. Okay, that's clear. And it’s – because there’s talk in the press this week about markets
like Bali opening up, in the lead in to the opening of borders of some markets like we thought
you've spoken about particularly Hawaii performing really well. Do you get any kind of lead
indications from your partners there about the reopening and ordering? Or does the ordering
kind of come through once they've reopened?

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Michael Daly: Yeah. Look, it changes on a daily basis, Marni. All I would say is that where we have
seen – historically where we have seen borders open and travel come in strong, we've seen
outstanding results. Six months ago, we were talking about Hawaii and our business there
being decimated. Since they've opened up that travel back to Hawaii, those stores have come
back online strongly and are back at pre-COVID levels, indeed above that. I have no doubt that
when Bali ultimately opens up and when Thailand opens up, and quite frankly, even in the
Australian results, particularly for the Rip Curl business, with borders closed, with tourists from
Victoria and New South Wales not getting over to WA and not getting up to Queensland, that
has a negative result as well. So certainly, I'd expect that once we see Australian borders open
up, once we see Bali open up, Thailand open up, as we have seen historically, we're certainly
expecting a really strong bounce, which gives us a lot of encouragement for the future. But
obviously we’ve just got to wait patiently for these borders to open up.

Marni: Okay. Just a final question from me. You've called out M&A, and I think I recall you calling out
something similar at the interim result, just in terms of when you talk about your balance sheet
providing you with the capacity to do that. Is that something that you're going to prioritise as we
remain in the lockdown? Are there very good opportunities? And are the opportunities skewed
to offshore or within Australia.

Michael Daly: Yeah, I think that at the moment, it's a very active space, obviously. As you would know,
a lot of things out there are available for purchase. But at the same time, I would say across
the board, there's probably some inflated expectations. So, from our point of view, we want to
have that flexibility, and it's something that we'll look at. But is it a priority at this point in time?
No. I think that with the complications of looking at particularly anything offshore and doing due
diligence on the business when we can't travel, there is some obvious limitations on what we
can do. So, it's an option for us. We've got the balance sheet to do it if something that comes
up is perfect and a really ideal fit for us, but it's not certainly in – it's not front of mind for myself
at this point in time. We've got plenty to work on with our existing brands and plenty of potential
as the world opens up, and that's my main focus.

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Marni: Well, that's clear those are my questions. Thank you for answering them Chris and Michael. I'll
jump back in the queue.

Operator: Thank you. It appears there are no further questions. Michael, I'd like to turn the conference
back to you for any additional or closing remarks.

Michael Daly: Thanks. No look – Thanks, everyone for your time. Look, we're really comfortable with
the result and excited by the future. We just got to get these things back, open up and borders
open, and we're looking forward to that. So, thanks for your time and patience.

Operator: Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your
participation. Stay safe. You may now disconnect.