Thank you for standing by, and welcome to the Itunes Limited Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Mark Ronen, Managing Director and CEO.
Please go ahead.
Good morning, all. We're glad that you could make the time to join us as we announce details of Adair's acquisition of Mokka, a vertically integrated pure play digital home and living product designer and retailer operating across New Zealand and Australia. The acquisition of an online pure play business with strong sales growth, good margins and high levels of profitability and cash generation is a great strategic fit with Adairs. The transaction will see Adairs acquire 100% of mock up for a notional enterprise value of New Zealand $80,000,000 with 43,400,000 payable in dollars 5,700,000.0 payable in ADARE shares and variable deferred payments based on earnings for the FY 'twenty one, 'twenty two and potentially 'twenty three years. The transaction will be funded by an increase in our debt facility to $90,000,000 with the upfront payment due in the December.
The acquisition is expected to increase Adair's online revenue mix to approximately 29% of sales and deliver EPS accretion of circa 10% based on the pro form a FY 'twenty results. Mokka is a highly complementary strategic fit for Adair's in the fact that both businesses share a common DNA and philosophy. This is highlighted through a customer proposition that is design led with a focus on providing value for money the offering of exclusive product, which provides control of the vertical supply chain and market pricing and a focus on delivering a superior customer experience. Mocha is a pure play online retailer in a large and growing category with a focus on furniture at a lower value price point than the Adairs business. This provides a good fit with Adairs as Adairs is a soft furnishing business with an element of furniture, and Mocha is a furniture business with an element of soft furnishings.
Like Adairs, Mocha focuses on ensuring it looks to deliver a profitable business model with the Mocha management team building a highly profitable and cash generative business with low CapEx requirements. As highlighted on Page three of the slide presentation, through the good execution of their underlying strategies, the Mokka business has a strong track record of delivering revenue and EBIT growth. Importantly, Mokka has significant growth potential through continued execution of their underlying strategies and increasing their brand awareness. It is important to note that the acquisition will see a bit partner with the existing management team of Mocha, with the Mocha business to be run independently of Adairs. The Blake family, together with the experienced management team they have established over the past three years, will continue to run the business and execute and deliver on their proven strategies.
Mocha's existing strategies have seen the business focus on delivering great product and compelling everyday value for money across its well designed, functional and stylish home products. The growth has come from and will continue to come from ensuring the product offering is differentiated in the market. As a design led product business, the in house team allows Mokka to develop products for their customers to deliver value at sustainable margins. Their versatile approach to design allows products to coexist across ranges and categories with a distinctive Mokka handwriting. This allows customers to buy with confidence, knowing the pieces are designed to come together in a contemporary family home.
As a vertically integrated business, NOKA owns the customer experience, allowing them to ensure the product is developed and designed with a focus on building a profitable business with attractive margins and that strong cash generation. The growth from Oka will continue to come from three key pillars, which Adairs understands well and is well placed to assist with. These being category range expansion, where there is further scope to both offer additional options within existing categories as well as look to expand into new categories the customer experience, where there is always opportunity to invest in the web platform and associated technology to enhance the customer experience and brand awareness, where there is great scope to enhance the brand awareness, shopping frequency and market penetration, in particular within Australia. Through our experience at Adairs, we have the opportunity to add significant value to the Mocha business. This will be done by leveraging our digital and social media assets and expertise together with our understanding of the strained home consumer to increase brand awareness of MoCA and assist in building a more efficient customer acquisition model within Australia.
Further, our understanding of the MoCA growth strategies will enable us to help accelerate and derisk their range expansion strategy whilst helping systems and capability to continue to deliver profitable growth. For our shareholders, this acquisition creates a larger, more diversified business with increased exposure to the fast growing online channel. We look forward to working with the MoCA team to help MoCA achieve all that it can become and collectively continue to grow Dares as the leading homeweds retailer across Australia and New Zealand. I'll now hand over to Ash Gardner, who will walk through the deal structure, funding and financial implications of the acquisition. As Mark mentioned, the transaction involves us acquiring 100% of the MoCA shares.
With 65% of that paid upfront, which equates to circa $43,500,000 in cash and $5,500,000 in Adair shares. The balance of 35%, notionally will be paid through FY 'twenty one and 'twenty two, and as Matt mentioned, potentially FY 'twenty three based on the earnings of the business. We've chosen this deferred consideration model for a number of reasons, but principally, it is to ensure that we retain alignment with vendor managers that will continue within the business and both businesses remain focused on growing and realizing the full potential of the Moffett business. The deferred consideration amounts are subject to a minimum amount of $20,000,000 over that period. However, we anticipate based on our expectation of the earnings performance of the business over the years that there's will ultimately end up paying in the vicinity of 85,000,000 to $90,000,000 Australian.
From a funding perspective, we have funded this through a combination of cash in the form of new debt facilities. Those debt facilities have been put in place and are now secured until March 2023, which is an extension of the current facility that we've had, and those facilities have increased to $90,000,000 From a balance sheet perspective, we don't see the increased level of leverage creating any additional issues for the business. We expect to maintain our current dividend policies, and our covenants and so on remain largely unchanged and comfortable and capable of being serviced by the business in the combined business. From a revenue and earnings perspective, Mokka is an accretive acquisition. We expect to see revenue grow to circa $410,000,000 in FY 'twenty on a pro form a basis.
And likewise, earnings growing to circa $53,000,000 taking the midpoint of our revised guidance, which I'll come to in a moment. From a margin perspective, Mokka is a highly profitable business, delivering EBIT margins of circa 20%. And what that will add circa 100 basis points of EBIT margin to the combined group on a pro form a basis in FY 'twenty. In terms of our guidance moving forward, we have updated our guidance to include MoCA. There's been no change to the underlying ADEZ guidance that we published previously.
So in terms of MoCA, we're now anticipating our EBIT for FY 'twenty, including the thirty weeks of contribution from MoCA to be in the range of forty eight million to 52,000,000 or on a pro form a basis, if Mocha had been included for the full year, to be in the range of 52,000,000 to $56,000,000 I'll now hand back to Mike. Thank you. In relation to the acquisition, we're excited that this is the first acquisition of Adans and believe that the great strategic fit between the two businesses will see us continue to grow the business going forward on a combined basis. And with that, we're happy to open the line up to any questions.
Your first question comes from John Hind with Wilson's Advisory.
Perhaps if we could start with the business there in the near term, how quickly is this acquisition going to impact the group? And how quickly do you think you could translate those attractive margins in the online business across to your business? And what and how does this change your online strategy that you've been talking about for the last twelve months? And are you going get some alleviation through some of the warehouse synergies? And does it change the strategy at all?
Thanks, John. The simple answer to that is that we have done this transaction with a view that we continue with the strategies that Adair has been focused on for the last number of years and continue to deliver well against. We don't see there being any specific synergies in relation to the warehousing and the solution to our supply chain challenges that we've been documenting for the last little while with this acquisition. We continue to see that will play out in the way that we have forecasted earlier with us coming to market in as part of our results for the first half with a view as to how that will play out over the next twelve to eighteen months. What we do believe is there'll be some ongoing learning and no doubt sharing of opportunities between the two businesses as we progress.
But in the short term, we don't see that impacting Adairs results. And as a result, what you're seeing at the bottom there in our guidance is very much the addition of two businesses rather than any significant synergies being built into the model going forward. But we do know that collectively, the two businesses will enhance their supply chain capability over the next twelve to eighteen months, and we should see ongoing improvement in that space. And can we expect you to consolidate this in your accounts 100%? Are you going to be breaking out the performance of I'm assuming you're going break out the performance of Amoka at least in 2023?
Yes. So we will be fully consolidating. So the deferred consideration will sit on our books as debt. And we'll ensure that the information we provide gives you enough information to understand how the business is performing both businesses separately. And last one for me before I jump back in the queue.
Can you maybe, Mark, give us a little bit of color on, I guess, why the family would be selling here? And I guess, reasons that they'd be selling. And I guess some of the help understanding some of the terms with the earn outs as well, please. Yes. I'll cover off the reason behind the sale.
So ultimately, the family business being owned by some parents, Trevor and Judy Blake, as well as their two sons and their collective families. So the parents have decided that they wanted to enter the business in a retirement sort of phase of their life, so they want to step away. So that meant the that is what caused the business ultimately to come to market. But the underlying family, the two brothers who are heavily involved in the business want to remain in the business and hence the earn out component that we've built into this is for them to share in the upside that we expect to see them continue to deliver the results over the next two to three years. So with that, that's the overarching reason for the sale.
Was not a forced sale. Was more aimed at making sure the parents could exit well, and we then partner with the family members. And I think that's where Adair adds real value to this transaction in that we bring a lot of expertise and assistance to the family having done a lot of this work in the past, and we can really add some strategic value whilst they continue to execute on those underlying strategies. Thank you. And just some detail around the earn outs, if possible, earn out terms?
Well, in the deck, we distributed appendix on Page 12 provides quite a bit of detail around how we see it playing out. Essentially, 35% of the consideration is yet to be paid and will be paid based on earnings in FY 'twenty one, which will be 15%, and then earnings in FY 'twenty two up to another 20% or potentially they could defer a component of that FY 'twenty two earn out to FY 'twenty three up to 8% of that remaining 20%. And essentially, what we've what we'll pay is a defined multiple based on where the result plans in those years of the remaining balance of the consideration that they're due. That very much aligns our objective to drive good results out of the business as well as their objective to maximizing and realizing value. And during that time frame, it allows for us to develop strong succession and strong capability in the business that will then the business continues to thrive and grow post the exit of the management shareholders if they choose to exit at the end of the period.
Your next question comes from Jordan Rogers with UBS.
Just a clarification on that, Ash, if you can. So on Slide eight, you've got the New Zealand $80,000,000 to 20,000,000 given max of 100,000,000 But then in Slide 12, we've got kind of consideration the range of New Zealand 90,000,000 to $96,000,000 The 20,000,000 is part of the 80 The 20 is in the amount that the deferred consideration could be. Yes. Okay. That makes sense.
Cool. Thanks for that. Then, Mark, you've mentioned not a whole heap of synergies across the malls in terms of supply chain. But can you just give us an update on the new DC? And did this come into your thinking around how much setup you'll have for increased furniture capability versus the furnishings?
Or was it none at all? Yes. Okay. Well, we're still in the same position that we had been in relation to the supply chain project that's underway in Adairs and in those commercial negotiations. So therefore, there's no real update other than to continue to confirm with everybody that we are on track to both provide a further update as part of our first half results release and secondly, that we remain on track to be fully operational for July '1, which is in line with everything that we've put out there beforehand.
So that piece of work continues, and we are making good progress on it. But as we've said with everybody, we'd prefer to keep working and lock down some of these contracts without compromising it by publishing too much out there. And none of that is actually signed, so it's not really locked and loaded yet, but we are well and truly along that path. In relation to how this correlates to thinking about our supply chain project, we will have additional space in the supply chain project that we are putting together. Obviously, the warehouse will be or the DC will be built to be bigger than what we require in FY 'twenty one.
And we will give due consideration to what that looks like going forward. But in terms of the way we've thought about this deal and put it all together, we continue to see them running as quite independent businesses. And we'll look for those opportunistic synergies as they come to fruition as opposed to necessarily sitting down and thinking we need to develop a whole bunch of synergies in order to make this transaction stack up. We think they run a good ship today. They know what they're doing.
They will go through if we can grow the business like we want to grow the business, And all parties expect that there will be ongoing need to build supply chain capability in that business just like there has been in Adairs. And the one thing we have learned is we need to look a bit further ahead than perhaps we did at Adairs at a point in time such that we make sure that it doesn't stime into growth or incur the same step up in costs that it is we've incurred over the last little while. So we're definitely thinking about it as part of that strategy. But primarily, we see them as running independently due to the nature of the product. But there may be that furniture element within Adairs, we do think there's an element where some of that might come together in time.
But in the near term, it's independently run and don't rock the boat whilst we continue to build the supply chain capability in this. Okay. So I'll let he's got a couple of other questions. I'll let him have a go. Your
next question comes from Joe Little with Morgan. Just
firstly, on the you've given us some margin detail. What's the gross margin running out in this business? Is it 40 odd percent?
It depends again, Joe, how we're gonna define gross margin in this conversation because, you know, if we include all shipping costs, etcetera. So if if you're including that, it's it's around that 40%.
Okay. Thank you. And just should we think about this as a potential omnichannel proposition down the track? Is there a store physical store rollout possibility here?
I think there's always something that we would give due consideration to as the business evolves, we get in and understand it further than we do today and think about that. Think omnichannel, we're being a big believer in the fact that omnichannel, we think, wins in the long term. And obviously, we have good capability in stores within a bid. So it's definitely something that there'll be an ongoing conversation around the Board table of not going to think about what opportunities other opportunities there are to drive additional growth as opposed to on top of the growth that we expect to just deliver through the pure play online business that it is today.
Okay. So when I mean, you've given us an FY 'twenty two EBIT multiple, which implies, I think, about $12,700,000 EBIT in FY 'twenty two. So within those growth assumptions that you've made, is there any store rollout? Or is that just consistent growth as you've seen in recent years from and then you being able to accelerate that?
Yes. That's consistent growth. There's no store rollout included in those numbers.
Okay. Great. Yes. And Ash, just on that leverage ratio you talked to on Page eight, that it says 1x leverage over the three years, but then it excludes the deferred consideration. Can you just explain that?
And I guess your comfort with the balance sheet and you're going to have to invest potentially in the supply chain program, etcetera, etcetera. Yes.
So as we look ahead, we assume that we will be doing the supply chain, which is obviously the most cash cost scenario within the next three years. So we factored that into our forward plans and that net debt ratio is effectively net bank debt, inclusive of us funding the supply chain to the tune of circa $15,000,000 still leaves us with a leverage ratio that is comfortable, well under our covenants and something that we can comfortably service.
Okay. So sorry. Does it it doesn't include the deferred consideration on Mocha.
Is that right? It includes payments over the next three years, but it doesn't include the actual deferred consideration on day one sitting on the balance sheet. And pay these amounts in FY 'twenty two and FY 'twenty one.
Yes. Perfect. And I guess, lastly, Mark, can you just give us maybe a I mean, it's a bit of a different market niche here, but maybe what you think the size of this market is that Mokka is operating in, the competitors, who's winning out there, who's got the closest offering. It feels like it's a higher price point than like a Kmart. But yes, where are you trying
to position it? Yes, good question. Ultimately, I think it does position quite nicely between Abbe's and Kmart. If you think about we're sort of at opposite ends of the spectrum to a degree. So we do think there's a market in there.
I think its key competitors in Australia will be guys like Fantastic Furniture, IKEA. If you think about the flat pack furniture sort of business, that is very much a large part of the MoCA DNA. So that market is pretty big. We'd easily say it as being north of $1,000,000,000 in terms of just in Australia by the time you put all those guys together. So we think there's massive upside for these guys to get involved in there.
And we do think the beauty of this business is it sits neatly between theirs and Kmart, and it isn't a business that necessarily sits right alongside of theirs, and we're going after the same customers. Even though we all know that customers shop up and down that spectrum of retailers within the K Mart to Sheridan sort of view of home. So we are definitely continuing to support their proposition that they believe they sit between Adairs and K Mart, and we agree with that. And we think that, that market is quite sizable in relation to the furniture component of it plus soft furnishings on top of that.
So just lastly, that 20 odd percent margin or 21%, is that sustainable Or how should we think about that?
Look, I think there will definitely be some investment to drive growth going forward. But it's I would expect the EBIT margins of this business to remain higher than the Adair's EBIT margins and therefore continue to support the combined business rolling out total EBIT margin, as Ash commented on before, 100 basis points. So I think we'll continue to learn, but it's going to sit in the high teens would be where I think it sits long term.
Your
next question comes from Arya Narose with UBS Investment Bank. Please go ahead. Just
one for me, please. If you look at the sort of FY 'twenty two implied multiple, you're sort of implying around 20% earnings growth over the prior year period. Just wondering what's driving that growth and what you guys or Adairs bring to the table for Mokka and whether there's potentials, for example, for cross selling Mokka products into Adairs and vice versa? Well, if I start with, I think what we've seen in this business and what we're comfortable with and continue to support them on will be that ongoing growth platform around the category range expansion and increased brand exposure, particularly in Australia. We think those two key platforms or pillars of their growth strategy will drive the revenue and EBIT growth that we expect to see over the next two to three years, supporting that FY 'twenty two number before we even get to things like how Adairs can support that via ongoing utilizing our, I guess, database, our reach, our knowledge of the home consumer and how we can start to test and trial how the two businesses can support each other in driving growth.
If you think about it in a two way street, obviously, they've got a really big customer database in New Zealand. We have a much bigger customer database in Australia. But in that, we also want to be really careful. The businesses need to stand on their own two feet and continue to build that database, but there will be some work done internally as to how we work through that and support the ongoing growth of both businesses by utilizing the combined assets of the businesses themselves in terms of that customer reach. We don't see significant product moving between the businesses.
They are aiming at different market. That's not something that we sit here today thinking of in three years' time, you see a whole bunch of mock up product within the Adairs business. I think we can certainly learn some things about what style of product works and those elements. But then we are looking at two different price points and two different customer sets in this transaction in between the two businesses. So I think what we've learned is expertise and how we think about developing and designing product and what works and how we tweak and change that to make sure it suits the right market that it's in.
But we are definitively looking into two markets to make sure that we don't compromise either business. You know, they both have a DNA, they both have a way of working and they both have a customer expectation, which is slightly different. And we need to make sure that we maintain that difference to ensure that what we're doing is capturing more and more market share between the two businesses rather than trading share between them. Sure. And just second one for me.
I know you guys mentioned there's no synergies from a base pay perspective, but what about other sorts of synergies like kind of head office consolidation, etcetera?
Is there any you guys are seeing
any scope for that? And is that factored into the growth forecast within the numbers? Not in the short term, and it's not factored in. As I said, I really think it's important when you think about these businesses, and this is a business based in Christchurch in Brisbane. When you're when you're doing this sort of thing, you're working and building a partnership with people and making sure that the people that have delivered the numbers and have delivered the business to where it is today continue to do so because they are the key part of the business.
So we don't see significant synergies and certainly haven't built them in of relocating head office or doing anything like that. We don't expect any of that to happen. There may be over time opportunities to think about some of the functions of the business and how they work better. But we do have a firm philosophy that when you run retail businesses, you need to make sure those retail businesses stand alone, focus on their customer, know what they're who they're focused on delivering products for, what customer experience they're trying to do, deliver to that customer set to ensure that you don't lose that DNA of the brand that can happen as you bring businesses together. And we are making sure that we don't dilute the the capabilities of either businesses by bringing them together.
So I know it hasn't been factored in, and we don't see it as a short term piece. Yes. And just final one for me, please. Does firstly, Stuart, did you sort of delay any potential for offer expansion outside of sort of New Zealand you've gone out to? So how should we think about that, please?
No. I think for the underlying Adairs business, our strategies remain unchanged and continue to be worked upon by the management team at Adairs. And as we continue to develop strategies and the underlying pillars of the Adairs business, we don't see this as slowing down any of that. This is a business where we are partnering with a management team. We're not having to parachute in a whole bunch of Adairs people to help them deliver the numbers that are in these forecasts.
They have the capability. They are the right team to partner with, and we look forward to that partnership delivering that whilst the Adairs underlying Adairs business continues to drive its own growth strategies and deliver ongoing growth from within that business as well. Perfect. Thanks, guys. Thanks.
Your next question comes from Mark Wade with CLSA. I
think you've covered off pretty well around the mean, like, taking synergies and customer overlap and supplier overlap. So like to do on that part. I was just more interested in the core of these business and how you how you're seeing things progress there. I know there's some some comments around promotions. You're doing well.
I know you're at the start of the financial year. Some plans to try and cut back on promotions a little bit. And Just curious to know about that, how that can feel like you're progressing down that path as well as just how would you, in general, characterize the health of the consumer? Yep. Well, I think we obviously had a plan for this half.
And as we see here today, we're quite comfortable that we are on track to deliver the numbers that we expected to deliver for this half. The reduction of depth of discount that we want to execute, the price increases that we wanted to push through the market and the negotiations with our suppliers have all gone well. Obviously, we're coming up against a reasonably good headwind in terms of the currency decline that we're coming up against. But we are seeing good results in all of the strategic actions that we've taken over this half and feeling comfortable with three, four weeks still to go in their big four weeks, that we are in a good position to deliver the half that we expect to deliver. In relation to your second point around the health of the consumer, I mean, I've been talking about this for quite some time.
I continue to think the health of the consumer is good. If you are delivering good product and the good value proposition that they are looking for, the consumer is there and they are prepared to spend and they will spend when you put that in front of them. And if you're not, well, then they're not prepared to spend, but I don't think it has a lot to do with the health of the consumer. It's probably more something that you need to look at yourselves. And we have we've always said in our business, we have areas of the business that are working well and areas that aren't working well.
And you never get a 100% of your product right. And we know that internally, the consumer, we think, is pretty good. And therefore, any area that's not working is something for us to be staring at the product because that's the place that's missing the mark, not the consumer themselves. I think in saying that, the only other thing I'd add is that I do believe it's probably it's at the $120 to $150 board average order value than it is at higher ticket prices. I mean, there's definitely been enough talk about that consumers probably a little more cautious on the 3,000 or $4,000 purchase or the new car and those sorts of things.
But in our market, we're certainly not seeing that flow through into our customer base, and we think they're pretty robust at the moment.
There are no further questions at this time. I'll now hand back to Mr. Ronan for closing remarks.
Thanks, everyone, and appreciate you taking the time to listen on to the call this morning. And we look forward to delivering a good first half and working with the MoCA team to deliver an even bigger business going forward. And again, thank you for your time.