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Call Start: 18:00

Call End:19:16

Billabong International Ltd (OTCPK:BLLAF)

F2Q2014 Earnings Conference Call

February 20, 2014 / 6:00 P.M E.T.

Executives

Neil Fiske – CEO

Peter Myers – CFO

Analysts

Shaun Cousins – JP Morgan

Michael Simotas – Deutsche Bank

Craig Wilson – Citigroup Australia

Ben Gilbert – UBS

Phillip Kimber – Goldman Sachs

Operator

Thank you for standing by and welcome to the Billabong half year results 2014 conference call. (Operator Instructions). There will be a presentation, followed by an analyst question and answer session. (Operator Instructions). I must advise you that this conference is being recorded today, February 21, 2014.

I would now like to hand the conference over to your first speaker today, Neil Fiske, CEO of Billabong International. Please go ahead, Mr. Fiske.

Neil Fiske

Good day, everyone and thank you for joining our half year results call. With me today is our Chief Financial Officer, Peter Myers. A short while ago we lodged a results statement and today's slide pack presentation with the ASX and posted it on our website, www.billabongbiz.com.

We will be referring to those slides throughout today's update. Our agenda today is three parts. One, a summary of results, two, an update on our turnaround plan, and three, financial details. Let me start by being very clear about the challenge before us. This is a complex, difficult turnaround. The 18 months of turmoil while the company was in play has taken a major toll, the lingering effects of which will be with us for a while longer.

We are not daunted by the challenges we face, but neither do we underestimate them. Over the last few months, the team has come together to confront head on the challenges that must be made to get this business back on track. We are confident in our plan and the growth potential of our brands.

Overall, I am pleased with the progress we've made. Across the globe, we see a renewed sense of confidence, energy and focus within the business. While there is much work to do, we have a clear direction and passionate, dedicated people signed up for the job at hand.

Let's turn to results for the half year, all of which are expressed in Australian dollars. Excluding significant items, total sales were AUD667 million and EBITDA came in at AUD41.2 million. However, these figures include the sold businesses of DaKine, Nixon and West 49.

The table on page four of the presentation summarizes our sales and EBITDA with and without these discontinued businesses and also show the movement on a constant currency basis. Sales for the ongoing businesses at Billabong International were AUD576.8 million versus AUD560 million last year, while EBITDA declined to AUD42.4 million from AUD49.3 million in the prior year period. The decline in EBITDA margin was driven by lower gross profit, although the raw comparison is helped by currency conversion.

To appreciate the underlying performance drivers, it is necessary to look at the results on a constant currency basis, which we have provided in the summary table. On this basis, gross profit was down 5.5%, compared to a 3.4% fall in revenue. Some of the fall in gross profit was from planned store closures, but some of it came from lower gross profit margins.

53.6% down from 54.9%, as we have taken more aggressive action to get our inventories in line. Year-over-year inventories are down more than AUD20 million on a comparable constant currency basis. Overheads were down 3% or AUD8 million across the Group in constant currency, with the biggest savings in Australia, again helped by store closures.

The trading pattern for the half was consistent with our description at last month's EGM. Namely, stabilizing or improving in Australia and Europe, with ongoing weakness in the Americas, which represented more than 100% of the EBITDA decline for the period. A number of key factors impacted the Americas result for the half, including weakness in South America, which accounted for approximately half of the EBITDA decline in the Americas, reduction in sales to the close out channel, which lowered revenues, although a smaller impact on margin, a cyclical decline in the long board segment, affecting Sector 9, whose revenues dropped by about 20%.

Lastly, 18 months of leadership distraction and organizational turmoil, which impacted all our brands. It is important to recognize that the company's protracted transactions process hit the Americas region particularly hard. First, by creating a long gap in leadership and subsequently, a significant loss of talent.

We are stabilizing and rebuilding the organization under new Americas president, Ed Leasure. We've brought new leadership to our merchant and design teams, both through internal promotions and with new hires. We hired an exceptional head of sales for Brand Billabong and have strengthened our team of sales reps.

In addition, searches are underway for sales managers for Element, Von Zipper and our major accounts where we have lost share over the last few years. In Latin America, we have just announced the appointment for Felipe Motta as general manager for the region. Felipe started and grew the Quiksilver business in Brazil. He is a major addition to our team and will help bring experience, focus and leadership to our sizeable growth and profit improvement opportunities in the region.

We have also converted Chile and Peru to distributor models, saving significant cost. More importantly, putting our business with highly capable partners who are leaders in these markets. Over the next few months, we expect to round out the rest of the team in the Americas.

Once in place, I am fully confident that the team will be stronger than ever in the region. What we face and what we've been addressing in the Americas are fundamentally operational issues. With the exception of a cyclical downturn in the long board skate segment affecting Sector 9, we believe the decline in the Americas result has much more to do with the organizational turmoil and loss of talent associated with the 18 months of protracted deal related distraction than any underlying issues with the strengths of the brand.

To the contrary, having just come to the January trade shows and getting preliminary indications of fall orders, I remain confident that the region will bounce back and that the Americas represent a region of sustainable growth for us in the years ahead. In Europe, we are seeing overall sales stabilize, although we still have softness in Brand Billabong. We are completing the major downsizing of the overhead structure of the business, and now are turning out attention to logistics and distribution.

Asia Pacific has showed significant progress with gains coming from improvements in retail and the sales trend in our core brands. Both Billabong and RVCA have showed good growth in the last six months. Comp store sales in Australia were up 3.2%, including associated online sales, a significant development, given the size and importance of the retail business in this market.

We have also undertaken a restructuring of our South African business, which will save approximately AUD2.5 million annually. Much more needs to be done, but we are encouraged by the traction we are seeing in the region. Turning now to our seven-part turnaround program which I detailed at the AGM in December.

The focus of our efforts since then has been to realign the organization or structure to our strategy and put the talent in place that can execute on the key initiatives. This is the foundation upon which we will build. So we are going to both start with and spend more time on that part of the turnaround today.

We have set in motion a major restructuring of the organization that is guided by the following principles. First, building strong global brand teams that are locally and regionally responsive. Second, distorting emphasis on the big three, Billabong, Element and RVCA, while providing a structure supportive of attractive emerging brands.

Third, developing an enhanced merchant front end to drive assortment, productivity and focus. Fourth, reorient the regions as the sales, local marketing and distribution partners of the brands. Finally, building global scale efficiency and capability in critical support functions, notably finance, IT, supply chain, the direct to consumer platform and HR.

In our new organization, we will have three groups. Global brand structures for the big three, regional operational groups and global support functions. Let me describe the role of each, since this is a significant, but considered change for an organization that has been structured and operated with a predominately regional focus until now.

The objective of the brand group is to maximize the potential of the big three brands, Billabong, Element and RVCA. Each brand will have a global president or general manager reporting to the CEO and accountable for the brand's P&L. Global merchandising, marketing, design and digital commerce will report up through the brand president or GM.

Importantly, however, we are not centralizing design or merchandising into any one region. Rather, we are leaving design, merchandise and marketing teams in each region to be close to the market, fast and highly responsive to local customer needs. We know from experience that small differences in color, print and pattern, silhouette, price point and fabric can make a huge difference in the success of a style.

We want to be able to capture that customer nuance in our product deliveries. After careful study, category by category, we have created a structure that appropriately balances global and regional needs, as well as the reality of having a northern and southern hemisphere fashion cycle. At the same time, however, we want our brands to show up as global brands, anywhere around the world, with the same DNA, personality, visual language, imagery and alignment on the big ideas.

The objective of the regional GM group is to drive sales distribution and channel development in their respective geographies, while providing critical input on customer needs back to the brand teams. They will drive the go to market model for each country based on a newly defined tiering system. Regional leaders will also take responsibility for growing the smaller emerging brands, for example Tigerlily in Asia Pacific or VonZipper in the Americas.

The objective of the global support functions is to build global scale capability and efficiency, driving our cost down so we can reinvest in the brands. We can no longer afford to have three regional supply chains, three regional IT structures with different systems, five different direct consumer technology platforms, high cost logistics in fulfillment and underdeveloped human resource management.

This group will have a chief human resource officer to drive talent development and human capital productivity, a chief operating officer to focus on our major opportunities in global sourcing, logistics and technology, and a turnaround office leader focused on cost takeout and accelerating the impact of key initiatives. Today we've announced key executive appointments under that new structure. Firstly, Mara Pagotto has been appointed as our chief human resource officer. Mara brings extensive experience in complex turnaround situations. She previously ran HR for American Express Global Travel and most recently Interwest Resorts, both of which involved extensive turnarounds and restructures. Hiring Mara reflects our core belief that people are our biggest assets, that the turnaround depends critically on talent and teaming and that success will require extensive communication, culture shaping and change management.

Our second hire is Bennett Nussbaum who will be leading our turnaround office. Bennett is a well-respected turnaround specialist. He led the highly successful post-merger integration of Winn Dixie and BI-LO Holdings LLC, two large US grocery retails with combine sales of $10 billion. He was part of the leadership team that conducted a successful turnaround at Burger King and directed a global consolidation effort at Kinko's in preparation for its sale to FedEx. Bennett held numerous executive positions at PepsiCo, including 6 years as CFO of PepsiCo International, where he oversaw operations in 190 countries. He has an impressive track record of driving operational improvement and growth. His hiring reflects our understanding of the complexity and magnitude of the turnaround in front of us.

Finally, I'm delighted to announce that after an intensive search process that Shannon North will step into the role of global Billabong brand president. Shannon is a surfer and has the creed with the core of the market. He knows the brand inside and out, has a vision for its future and will be a champion of its authenticity and its Australian heritage. Equally important, he's a strong leader with a track record of success. Shannon started his career with Billabong back in 1993 working in retail marketing, sales and merchandising. Appointed general manager Asia Pacific in 2004, Shannon has since grown our revenue in the region from AUD190 million to over AUD450 million. Throughout his career, Shannon has worked closely with Gordon Merchant in growing the brand and there are few more knowledge or passionate about it. Paul Burdekin, currently general manager of operations in Australasia has been appointed acting GM Asia Pacific.

Within the next six months we expect to have most, if not all, of the remaining top level positions filled and announced. With all critical open positions we are taking a best team on the field approach, looking at both internal and external candidates. Below the executive team we are quickly filling key positions and adding bench strength where we need it, particularly in merchandising and design. Most encouragingly we are seeing a strong inflow of resumes and interest. People in the industry are seeing the opportunity and want to be a part of Billabong's resurgence. Clearly the focus of the time since the AGM has been on putting together an organization and our team, but we are continuing to undertake actions and initiatives under all parts of the turnaround strategy, and I want to touch briefly on the other six areas.

As I said at the AGM, everything starts with brand. We are focused on the core of the board sport market with authenticity and credibility that resonates with the young consumer. This month we completed the re-signing of our brand founders, Johnny Schillereff at Element, Pat Tenore at RVCA and Greg Tomlinson at VonZipper. Together with Gordon Merchant, these founders represent a unique source of brand culture differentiation, creativity and competitive advantage. We've also strengthened our team of athletes and advocates. For brand Billabong we re-signed 2012 world champion surfer Joel Parkinson.

Importantly, we also signed the next great surfer for the next generation, 16-year-old Jack Robinson, a surfing phenomenon with explosive potential, amazing athlete, great ambassador to youth culture, next in the legendary bloodlines of great Billabong board sport athletes. But Jack is more than just an athlete. He is a symbol of our commitment to keep the brand young and relevant, to be about what is happening next. From the women's side of the Billabong business we see the potential to double the size of the brand over time and have put together an amazing team led by Susan Branch to go after the opportunity. Susan is one of the most highly accomplished executives in the industry and credited by many for the turnaround at Roxy.

It's been a good couple of months for accolades and accomplishments. We are proud of Element for winning Transworld skate team of the year. We are thrilled with RVCA's winning men's brand of the year for the fourth straight time in a row at the Surf Industry Manufacturers Award in the United States. And we celebrate surfer Justine Dupont being named female athlete of the year in Europe. During the next six months we expect to complete our portfolio review, looking at each brand's growth plan and fit with our longer term strategy. We will also initiate work on the brand books in guiding documents that are the cornerstone of a new brand management system.

Part 2 of our turnaround strategy focuses on product. We have great design across our brands. What we lack is great merchandising, what I call the merchant front end. The good news is that we've made excellent progress in strengthening our merchant teams and expect to be making important announcements in that regard in the weeks and months ahead. For the big three we have developed clear merchandising strategies and assortment guidelines. We have defined the balance of global versus regional styles. We will continue to narrow our assortment and implement disciplined design to adopt ratios which will drive cost down and improve quality, service levels and inventory turns. But equally important, we will focus on making the fewer styles bigger and better with greater clarity of focus.

Which brings me to marketing. This past month we have restructured the Billabong marketing group into four parts to give it greater power. Men's marketing, women's marketing, brand creative and digital marketing, which includes both e-commerce and social. We have filled two of these key positions and expect to have the other two filled within the next few months. The men's and women's marketing teams will focus on our integrated go-to-market calendars, our athlete, advocate and event activation and our customer relationship marketing. We see a major opportunity to have more impact from our marketing by concentrating on fewer, bigger, better stories that cut through the clutter and better align to our key merchandising programs.

Lastly, we have escalated our marketing investment in RVCA by about 2 percentage points of sales to capitalize on the brand's momentum and tremendous growth potential. Part 4 of our strategy is omni-channel. As we said at the AGM, we are prioritizing brand before multi-brand in both bricks and mortar and e-commerce. This month we closed the sale of West 49 and initiated a strategic review of our SurfStitch and Swell multi-brand e-commerce businesses. In preparation for a major investment behind our mono brand direct-to-consumer business we have begun the process of separating our underdeveloped mono brand e-commerce businesses from the SurfStitch organization.

Over the next six months we will review our multi-brand brick and mortar businesses outside of Australia and New Zealand for their strategic fit over the long term. Meanwhile, we intend to capitalize on our dominant position in Australia and New Zealand by continued to drive operating improvements in our stores and reinvest in much stronger brand presentations of our core brands. In the ANZ region we are encouraged by the positive trajectory in comp store sales, lower costs and better operating margins. In the US, our focus is squarely on our wholesale win-back program in key accounts and strengthening our sales teams at Element, VonZipper and Billabong. Across the globe we have now defined a new go-to-market tiering system that each regional general manager is implementing.

The restructuring of South Africa and the transition in Chile and Peru to our distributor partner for us follow out of that strategy. Part 5 of our turnaround program focuses on supply chain. I am pleased to report that our initial pilot test of global sourcing, conducted in the Walkshort category has yielded a 13% reduction in costs. We are in the process of expanding that pilot to three more categories while continuing our diversification out of China and focusing on fewer, bigger, better suppliers. Our pilot tests affirm our view of the tremendous potential in building a global supply chain focused on speed and turn. But we also recognize that an undertaking of that magnitude takes time and the right leadership in place. That executive search is now in process.

These five parts of the strategy feed into and ultimately shape the organizational design and restructuring I described earlier, which brings us to the final part of the program, financial discipline. With the successful placement in January and rights offering underway, we are now turning our attention to implementing more rigorous financial processes throughout the Company, including CapEx, inventory and cash flow management and standardized reporting. Through the turnaround office we are also launching a major cost reduction effort to fund a marketing war chest that we can reinvest in brand growth.

Altogether we have taken significant turnaround measures since our last update as summarized on slide 17 and 18. This is of course just the beginning. We reiterate that the turnaround is difficult and complex and that the lag effects of months of corporate turmoil will be with us for a while longer. But we feel good about the progress we are making, have full confidence and conviction in the potential of our brands, know what we need to do and are getting on with at an aggressive pace. With that, I will turn it over to Peter Myers for a more detailed financial update.

Peter Myers

Great. Thanks Neil and good morning to everybody on the call. It's great to be here on the Gold Coast talking to you this morning and many of you will appreciate that I've now been at Billabong for a little over a year and what a year it's been. It's tremendously exciting through to be with Billabong as we now move our attention away from all of the transactional issues that so dominated my first 12 months and the opportunity to be part of rebuilding Billabong into the sort of company that we all want it to be is exactly what I signed up for.

There is much to do of course, as Neil has outlined, and no one should have any complacency amongst our team or our investors that the progress that Neil has outlined this morning entitles us to claim victory. Setting the strategy and aligning the organization are key precursors but it will take time and skill to execute on the plan but that's the exciting part.

Now before I get into the slides, I need to make some comments about certain restrictions under which we're operating today, and in particular when we get to the question and answer session. The Company today launched the previously announced AUD50 million 3 for 8 rights issue for the prepayment of existing debt and general corporate issues. You will see a slide in my presentation which provides more detail on this matter.

On our call and webcast today we have participants from a number of international jurisdictions including the United States and many of you will be well-versed on the regulations around such matters, and accordingly in my comments today and in the Q&A that follows, we will not be adding any additional information or comment in respect of the rights offering.

Now turning to the first of the financial slides, we've included this information purely to help people navigate from the statutory accounting results for the period to the set of figures that we believe give investors the key information they will want on the performance of Billabong's continuing portfolio of businesses.

We have previously foreshadowed that the result for this period would include further significant items, mostly around the refinancing and the restructuring initiatives during the 6 months to December. As well our portfolio of businesses going forward is not the same portfolio that makes up the statutory results, whereas 49 for example is in this year and there were even more changes impacting last year's figures.

So I'll detail those later but the real purpose of this slide is to clearly identify the performance of what's left, so sales to customers of AUD577 million, an EBITDA of AUD42.4 million being the key measures.

Now as an appendix to this presentation we've included a similar analysis for last year just to help you navigate your way through there.

In terms of the result there are a couple of features I want to particularly highlight around tax and then separately a restatement of the 2012 results, whereby we had a deferred tax liability that should have been derecognized at that time and I'll take you through those in a few minutes.

So moving to the next slide, Neil has covered this reasonably comprehensively in his presentation so I don't have too much to add, other than to point out that again for convenience we have disclosed both the as reported change whereby the difference in the percentage change for the period is based on the actual foreign exchange rates that existed in the prior period, but we have also provided a constant currency comparison which is effectively the percentage change expressed in local currencies and gives you often a better measure of operational performance.

Overall a mixed result as Neil has outlined, but somewhat ancient history in the context of the opportunity to reform this business in the years ahead. By the way, you'll notice that my slides are in the old format and that's symbolic as they deal almost exclusively with the old Billabong and that the results today predate any impact of the turnaround plans that we've shared with you and next time they'll be in the same style as Neil's.

Turning to the regional slides, Neil has already described the impact that the Americas had on the Group result, with the decline representing, in that market representing, effectively all of the decline for the Group. Neil has also identified the operational instability prior to the Oaktree Centerbridge Consortium refinancing, but it's fair to say we're also impacted, as we've said, by a weak performance out of South America and some of our smaller brands. Overall sales from continuing operations was down 2.4% or 7.6% on a constant currency basis. Neil has already outlined the actions that we're taking to address these issues. I'd also point out that whilst overheads look like they were up 10%, the reality is that in local currency terms they were down nearly 1%.

In Europe – after a long period of decline, Europe has stabilized somewhat under the new management team. Comp store sales were good, up more than 5% and revenue up slightly. SurfStitch Europe continues to grow but as expected is still loss-making. Overheads were down but we still think there is opportunity as our restructuring plans take effect.

In Australasia, the result here reflected a number of initiatives which have been implemented over the last 12 months. Downsizing in Asia, the restructure of our South-African operation and tight cost controls all contributed to a solid lift in EBITDA. Comp store sales in Australia were up 1.7% and from a brand perspective, Tigerlily, as Neil has said, showed strong growth and brand Billabong increased in the period nearly 5%.

So moving to the significant items page, I want to keep the theme of complete transparency here so we've provided a lot of detail both here and in the accompanying financial statements. The main thing to point out is that we've incurred over AUD60 million of pre-tax costs during the period and most of it cash. Obviously the biggest single item is the finance costs which represent the establishment in particular of the Altamont refinancing proposal, a large amount of associated due diligence cost and then subsequent break fee. You will also see a very large number in the cash flow for finance costs.

The next largest item a fair value adjustment to the assets of West 49 to reflect the deal that was recently closed, but because that sale didn't close until after the end of the year, the asset and liability adjustments are fair value to the deal price and the adjustment treated as a significant item.

The other items are probably self-explanatory, other than the derivative adjustment and tax. In terms of the derivative adjustment, when we negotiated the equity placement arrangement with Oaktree and Centerbridge we fixed the exchange rate at AUD0.924, the US/Australian exchange rate and as at December the exchange rate hadn't moved in Billabong's favor so we effectively had an unrealized gain.

Now let me take you through the tax and this is slightly complicated since it's hard to work out how a AUD63 million pre-tax loss attracts such a large tax expense. Let me be clear, there's not much cash involved in the tax line. If you look at the cash flow you see AUD9 million tax paid and most of that was a franking deficit's tax legacy that Billabong had left over from its last dividend.

In June we wrote off our tax losses that related to permanent differences so normal tax losses, but we did not write off tax assets that arose from timing differences. But the difference is that, for example, provisions for employee entitlements that have been expensed through the P&L can't be claimed until they're physically paid so they create tax assets. As those payments get made you'd expect those things to be offset against the tax payable, but if you're not paying tax in the subsequent period there's nothing to offset them against and you have to write them off.

So when this occurs you get a weird situation where you have low taxable income or losses but a big tax expense as you write off the assets. So this impacted us in the half about AUD17 million and at the end of the period we would have still had AUD39 million of such assets on the books and that would have continued to create the same problem going forward.

So rather than continue to go through all of that and have this great explanation going on each time we get to talk to you, we have taken the conservative decision to write the AUD39 million off at December. So this issue, being the AUD17 million and the AUD39 million, represents the vast bulk of the AUD64 million tax expense. We have provided a full reconciliation in the half year accounts to help people understand this, even though such disclosure's not technically required.

Let me stress that this is a non-cash items and it does not impact whether the benefits will be ultimately available to Billabong or not. It's more of an accounting issue and to be equally clear this has nothing to do with the restatement that I'll describe in a few minutes. Wow tax is exciting huh?

Moving to working capital, we've made progress and we're reducing our working capital. Twelve months ago it represented 19% of the previous 12 months sales, this year 13. Inventories are well down year-on-year but this does include decline coming out and some other adjustments. We still have much work to do on our inventories. Net debt is up from AUD152 million to AUD175 million in the 12 months and the AUD175 million excludes the deferred consideration for previous acquisitions of AUD43 million, but importantly on a pro-forma basis as noted in our accompanying press release, net debt as of December 31 would have been negligible effectively zero on the basis of the Oaktree Centerbridge placement and the rights issue proceeding successfully. The main message here is that our balance sheet will be significantly strengthened and we can address the turnaround with confidence and with a long term perspective.

Turning to cash flow, cash flow from operating activities was down AUD56 million but the substantial number in that table is the refinancing costs. You'll also note that CapEx has been reduced and importantly we are very focused on turning that CapEx into customer-facing opportunities.

I won't dwell on the next slide, I'm sure you've got much more interesting things to do in terms of asking Neil some questions. I would like to move to the rights issue that we officially launched this morning. It has been well-flagged. We are happy to take offline questions from investors and on the basis of the observations I made earlier about the restrictions that apply to us in these circumstances, I would suggest that's the best way to go.

I'd now like to move to the early trading conditions for the second half. The directors met yesterday and agreed the following statement. We've made it very clear and this is not part of the following statement – we've made it very clear though that our plan for communication with the market is to inform you as to those plans – our plans to inform you as to our progress financially or otherwise but to refrain from making financial promises or forecasts. We do want to keep you up to date though with contemporary trading in key matters that you should be aware of and we hope that the following statement does that.

So taking in the early part of the second – trading in the early part of the second half has been largely consistent with the first. EBITDA in the Americas remains down year-on-year and the difficult conditions it faces continue. The rest of the Group is up slightly. The company notes that in recent years Billabong's first half EBITDA has represented as much as three quarters of the company's annual earnings. Whilst the strategy is set the company is still finalizing the detail work on the turnaround plan. The Group expects that in the second half we'll begin to see the impacts from early stages of the cost out initiatives offset by selective investments being made in both capability and marketing.

My last slide relates to an error that we've identified in relation to the 2012 accounts. It is non-cash and I trust you will agree it's no big deal. After Billabong's listing on the ASX it had a carrying value for brand Billabong that was greater than its tax cost base. On that basis if we had sold the brand Billabong at the book value that we were carrying it at we would have not made a profit for accounting purposes but we would have made a taxable gain and we would have had tax to pay. So quite correctly, we raised the provision of the potential tax.

When we started impairing brand Billabong in 2012, in effect, we wrote down the value to a value that was lower than the tax cost base and in simple terms that meant that we could now sell it for our book value and pay no tax. So the provision that had been created for the deferred tax was no longer required but unfortunately when the accounts were drawn in 2012 this matter was not addressed. So we have continued to carry until these accounts we've continued to carry that provision forward when we didn't need to. So we've adjusted that today – the effect is a decrease in our liabilities and an increase in net assets. There is not and was not any cash flow impacts in this matter and there is no income statement implications other than in respect of 2012 where the result should have been AUD45 million stronger and there has been no change on the income statement since.

So that's it from me – lot of complications in there, Neil. Apologies for that but over to you I'm sure people will have plenty of interesting questions for you.

Neil Fiske

Thanks Peter and with that let's open up the lines for questions.

Question-and-Answer Session

Operator

We will now begin the analyst question and answer session. (Operator instructions) The first question is from the line of Shaun Cousins from JP Morgan. Please go ahead.

Shaun Cousins – JP Morgan

Thanks and good morning. Just a question regarding EBITDA outlook. You made the point that the first half was as much as 75%. Given the changes in the business does that still hold and as a result are you comfortable that consensus forecast EBITDA of 73.8% is accurate?

Peter Myers

Shaun I think that – thanks for the question. I think that we've made it pretty clear that we are not going to be drawn into making forecasts for the company. We'll tell you how we are travelling but we do I think make the point that the earnings have become in this business significantly skewed to the first half. You could – I suggest that you do your own math from there. I know that if we go back into the history the first half/second half splits weren't as accentuated as they have been the last two years but equally probably during that period business became a little more retail focused and became certainly a little more Australian retail focused.

Shaun Cousins – JP Morgan

Okay that's helpful. It's still a very – it's a difficult business to analyse given the significant changes that have gone on. Maybe potentially for Neil as well – how do you think about the degree of cost savings that you can generate and how they flow down to customers particularly – sorry to shareholders – particularly with a view that you want to rebuild marketing and maybe if you could also detail where marketing is as a proportion of sales and where you'd want that to be over time please?

Neil Fiske

Yes great questions Shaun, thank you. So on the cost out question consistent with Pete's comments we're not going to make full promises. We'll tell you as we undertake initiatives with the impact of those will be. We believe the cost out opportunity is substantial and is a result of a regionalised structure that is subscale and has outlived its usefulness. So in order to get at the costs we've actually got to sort of break the mould of that structure by building these strong global centralised functions in IT, in supply chain, in finance.

If you will we're going to have to make a bit of an OpEx investment in leadership talent to put people in place that can go drill down into those opportunity areas and drive the change. I think that this will clearly be a multi-year process and we're going to be on it for a while. It will be an intense focus for all of us because we want to generate the savings both to float EBITDA and be able to reinvest in the marketing war chest as you point out.

Having Bennett just coming on board I think will accelerate our ability to get after the near term cost opportunities if you will sort of the low hanging fruit but some of the others will require structural changes into the business that layer in over time over multi-year period.

With regard to marketing as a percentage of sales I think it runs in the mid-single digits. Again our goal is pay as you go if you will – be able to fund the marketing war chest with the cost reductions, take that marketing war chest reinvest it in the business. So the actual shape of how much we're going to reinvest will depend on the size of that war chest how much we choose to put back into marketing and how much we choose to flow through to EBITDA. But we would say looking at our benchmarks we're probably competitively a couple of points light as a percentage of sales on marketing.

Shaun Cousins – JP Morgan

Right and just finally how important is juniors to the broader improvement of the business? I mean you're splitting your marketing there a little bit but I know the former turnaround strategy that Launa spoke about was reliant a lot of juniors really coming back and the brand had its heyday in the mid 2000s had a very, very strong juniors business. So could you talk a bit about how important juniors is please?

Neil Fiske

Yes I think – thank you. Juniors is a big opportunity for us as I mentioned in my remarks. We believe that business can double over the long term without putting a specific time frame in it. If you look at the size for example the Roxy business versus the Billabong women's business it's more than twice as big as our business. I actually believe that the Billabong brand in women's has unique appeal, distinctiveness and design. And we just haven't scaled it appropriately.

So we have Susan Branch and the team that she's putting in place we have a tremendous opportunity to go after categories that we know we're underdeveloped in, markets we know we're undeveloped in, channels we know that we're underdeveloped in. I think within a matter of a couple of months we'll have a pretty good line of sight into how those growth opportunities stack up for the Billabong women's brand.

Importantly as you point out the key enabler of that is really to be able to put dedicated focus of executive leadership and talent behind it and when Billabong women's was at its peak, that's the kind of focus that we had on the business. So in some ways we're getting back to something that we've done in the past that we know works well and is a proven formula for us.

Shaun Cousins – JP Morgan

Great thank you.

Operator

Your next question is from the line of Michael Simotas from Deutsche Bank. Please go ahead.

Michael Simotas – Deutsche Bank

Good morning. You've spoken a little bit about consolidating some of the retail operations. Can you just talk a little bit more please about where you see wholesale as a proportion of total sales versus retail when the business is where you want it to be?

Neil Fiske

So I think what we could do is at this point sort of describe our principles and the shape of the business we want to build over time. Obviously we're in the process of working out that portfolio sort of now. But I would say the principles at this point would be maintaining and strengthening our dominant position in the Australia and New Zealand market in a strategy we call Fortress ANZ. Then downplay multi brand retail in the other regions in Europe and the US. Offsetting that from a store perspective will be some build out of our direct consumer store business and our direct consumer E-com, which we see as having enormous upside. So those are sort of the principles that will shape our portfolio and shape the composition of revenue over time but it will evolve no doubt. I think importantly on the retail part of the business you will see a shift from multi brand to mono brand.

Michael Simotas – Deutsche Bank

Okay and in the Australian business you speak about maintaining the dominance – do that include the dominance in multi brand retail or will that ultimately converge to mono brand as well?

Neil Fiske

No we like the position that we have in multi brand retail in Australia. We believe that we can make it even better, continue to drive operating improvements in that multi brand business. Importantly we have a big opportunity right in front of us to present our big brands more powerfully in the retail space that we can control and see that as an immediate upside opportunity for us.

Michael Simotas – Deutsche Bank

Okay and does the consolidation in brands owned by Billabong impact on the ability to execute in multi brand format?

Neil Fiske

I'm sorry could you repeat the question?

Michael Simotas – Deutsche Bank

I mean there's been some consolidation in the number of brands owned by the Billabong Group – does that impact on the ability to execute in the multi brand format?

Neil Fiske

No actually probably the opposite...

Michael Simotas – Deutsche Bank

Okay.

Neil Fiske

Because it's consistent with our belief that the way we are going to be most successful is building big, powerful brands. Fewer, bigger, better.

Michael Simotas – Deutsche Bank

All right. It sounds like the business is heading in the direction of focusing a little bit more on the core customer rather than the more fashion-oriented customer. Can you just comment on that, please?

Neil Fiske

So what is important, I think, to all of our brands is that they have authenticity with the core of the market. It is a little bit of a paradox in the sense that when we focus on the core of the market and we grow relevance, share and aspiration with that core the brands become more widely appealing. So really our strategy is to focus narrowly, but create brand positions that are so well defined and aspirational that inherently they have broad appeal.

Michael Simotas – Deutsche Bank

Okay. That makes some sense. Then just the last one from me, probably for Pete, can you just give us a rough indication of what the current lease commitments of the business are at the moment?

Peter Myers

So in the six months about AUD45 million, Michael.

Michael Simotas – Deutsche Bank

Okay. That includes some West 49, so can you give us an idea of what the sort of run rate is on an annual basis?

Peter Myers

No, I think we took the West 49 number out of that.

Michael Simotas – Deutsche Bank

Okay. All right. Wonderful. Thank you.

Operator

Next question is from Craig Wilson from Citigroup.

Craig Wilson – Citigroup Australia

Good morning, Neil. Welcome aboard. It is great to hear a focus on brands first. Can I just start off with a clarification? Do you have a – I am trying to follow all the management changes. You do not at the moment have a president for Element or RVCA?

Neil Fiske

Thanks, Craig. We have presidents in the form of the brand founders, Pat Tenore and Johnny Schillereff. They are unusual positions in that they are presidents and really creative directors and ambassadors for those brands. They primarily oversee the creative part of the business. Our objective is to prepare those presidents with strong, global general managers and we expect to be naming those strong, global general managers over the course of the next 3 to 6 months at the latest.

Craig Wilson – Citigroup Australia

Okay. Thanks. With the org structure that you have outlined, what is the plans – the geographic location for the brands? Billabong's heritage obviously in Australia, but the other brands in the US, and where would the global support office fit?

Neil Fiske

The key word there, Craig, is global. The whole point of the organization structure that we are creating is to build global brand teams that have representation in each region and have talent where it has the highest impact. We will continue, I think, as we lay out our executive appointments, to talk about where those geographic positions will be residing. I do want to underscore that in some ways, like me, they are global brand leaders, are suitcase-based and, you know, travel a lot to every region.

The other thing that I would just again underscore is that we are building – the whole goal is to build global brands that are local and regionally responsive and to have sales, marketing and design teams in those regions to be close to their customers. There is obviously with the brands a sense of provenance and origin. RVCA founded out of Costa Mesa, California. Element anchored there as well. Billabong historically out of Australia. We want to make sure that, regardless of geography, that that provenance and soul of the brand carries forward in the brand personality.

Craig Wilson – Citigroup Australia

Got it. Well, you will have plenty of frequent flyer miles for all of you. On that retail strategy, the – it is intriguing that you have gone with a view that the multi-brand strategy works in Australia – multi-branded store strategy works in Australia, but will not work in other markets. Can you just explain the rationale for the difference there?

Neil Fiske

Yes, thank you for asking that question. So we look at it really simply, which is, in every business that we own and we want to get behind we look at it in really simple terms. Can we build a big, dominant, powerful position? If we cannot build a big, dominant, powerful position, probably it does not fit in our portfolio. So in Australia we built a big, powerful, dominant position in multi-brand retail. In Europe we have not. In the US we have not. It would be a lot of investment and a lot of work to get to that sort of market share position that we have in Australia and New Zealand in those other geographies.

Craig Wilson – Citigroup Australia

Yes, I – it just – I mean, it will be interesting to see how the retail market evolves. There are fewer and fewer apparel categories that have third party retailing of brands and maybe Australia becomes more challenging in the wholesaling space if you remain as committed to the retailing.

Neil Fiske

Yes, again and I would just emphasize, I think the retail footprint is part of an overall direct consumer strategy in Australia that includes e-commerce and CRM, customer relationship management.

Craig Wilson – Citigroup Australia

Got you. Just a quick one I will finish up with, just around the stores, can we get the store count? I might have missed it. But if it is not in any of the releases, can we get a store count by region, as we have had historically, and is there any clarification around the total store count, split between multi-branded and direct to consumer, or single-branded, stores?

Peter Myers

So let me just deal to – and that is ex-West 49, yes. Got West building, okay. So just to give you a sense of it – and I think, going to the granularity of the multi is going to be a bit tricky on the call, Craig, but just to give you a sense of it, in North America the store count, when I take out West 49, will be about down to 66. In Europe it is at 112 and in Australia to 252.

Craig Wilson – Citigroup Australia

Right. Thanks a lot.

Operator

Next question is from the line of Ben Gilbert from UBS.

Ben Gilbert – UBS

Morning, Neil and Pete. Just the first question, following a little bit from Sean. I just want to understand sort of when you look at this recovery, are you seeing this sort of more of a sales-led recovery around sort of really pushing the brands, or a cost-led? Because I suppose my sort of interpretation is that you really need to get the costs to actually be able to start driving those sales again. So it is really going to be costs in the initial instance and sales coming forward in time as you can invest back into them.

Neil Fiske

Yes, I think it is really about – we talk about our offence agenda and our defense agenda all the time in our turn-around program. Offence is really about brand revitalization generating growth and margin, and defense is around productivity, cost reduction, building global scale to drive costs down. We recognize we have to do both.

Ben Gilbert – UBS

Just on the cost side from the CapEx perspective, I notice you put in a new system. I think it was a couple of years ago. But just how are you thinking in terms of the systems that you have got in place and consolidate, because that can be a pretty costly exercise, particularly a business sort of globally like yourselves.

Neil Fiske

So I would split that into two buckets, if you will. One is commercially oriented CapEx and systems, if you will, our direct to consumer platform, and our investments in social media and digital marketing. Those will be priority areas for us going forward and will receive a substantial amount of investment to get us to be well advanced in the market in our capability there. We see that as a critical capability to serve our young target customer and so I think our CapEx will distort towards the development of those systems.

Then we will be quite prudent in the amount of money we spend, for example, in financial systems and support, focusing on targeted business intelligence applications that can give us the kind of standardized reporting insight and management capability we need. Then down the road after that phase we will look at whether or not we need to do something more substantial.

Ben Gilbert – UBS

So it sounds like it is more of a gradual push round the CapEx as sort of investment is needed, rather than some big leap – up-front leap – of CapEx.

Neil Fiske

That is correct.

Ben Gilbert – UBS

Just a final one from me. Just wanted to touch on the online, the SurfStitch and the Swirl businesses. You have obviously said sort of reviewing your ownership of those. I just wanted to understand what prompted that. Have you received interest out there, or did you think that there is probably value that has not been recognized in the business, and how we should think about that review from a timing perspective?

Peter Myers

Look, I think it is consistent – firstly, I think the strategy is the important thing, Ben, and it is completely consistent with the messaging that Neil has, I think, shared with the market, both through the AGM presentation and indeed this morning, about our ambition to build a much stronger mono-brand, sort of omni-general business where our direct to consumer ambition we can prosecute without complication and with conviction.

The question as to where SurfStitch sits in that and how we either co-exist or we – co-exist, but in a different way to the way that we are today – is an open issue that will be addressed as part of the review. But certainly it is a business which, I think, has shown good growth and has significant appeal and obviously up to the announcement in the last couple of weeks there has been a tremendous amount of inquiry and interest in relation to what our plans might be and what that strategic review might deliver. But all options are open to us.

Ben Gilbert – UBS

Could you give any idea of how much – obviously Swirl is losing money, but just how much the SurfStitch business is making it?

Peter Myers

Well, I think we have been pretty clear that, as you would expect, we are still in the start-up phase in Europe. I think everybody knows that the business in Australia is profitable. Certainly the – all those businesses are showing good revenue growth. But they are sort at the – they are all at slightly different stages, so Swirl is still moving towards critical mass and is probably more advanced than Europe, whereas SurfStitch Australia here has got a strong business with strong earnings.

Ben Gilbert – UBS

Great. Thanks, guys.

Operator

The next question is from the line of Phillip Kimber from Goldman Sachs, please go ahead.

Phillip Kimber – Goldman Sachs

Hi Neil and Peter. My first question was just to get some clarity around I know you're trying to help us here with the 75% comment. But I mean is it possible, and maybe not on the call, to get fiscal 2013 numbers on the same basis that continuing business that you've shown in the first half. Because I guess the only issue I'm contemplating is without having sold West 49 and that was actually losing money. I mean we can all go back and look at what the second half did last year but it might be a bit of a misleading number given how much change has gone on. So are we able to get the base of the second half 2013?

Peter Myers

Well there's quite a lot of information a) provided in this release Phil, and indeed if you were to reflect on the Grant Samuel report that took the West 49 standalone loss and identified what it was for the full year. You can see essentially in this half year the impact of the DaKine if you pull out of last years' AUD72 million it was about AUD10 million and you can see from the material that we've released today that it was about AUD7 million in the first half and about AUD3 million in the second. West 49 like most retail business is better in the December half than the June half, and I think the number in the Grant Samuel report was around AUD9 million, so there's tons of information out there.

Phillip Kimber – Goldman Sachs

Okay, and West 49 lost AUD9 million.

Peter Myers

It lost AUD9 million, correct.

Phillip Kimber – Goldman Sachs

Yes, so it presumably it loses more money in the second half.

Peter Myers

Yes.

Phillip Kimber – Goldman Sachs

Yes, okay that gives us something to go with. The question – my next question, I guess really for Neil is – just around the sales level and how we should think about that from a turnaround perspective. You're obviously still stabilizing the business. If you look at the distribution and I think you want to consolidate ranges, should we think that the sales hasn't hit its base level yet? Whilst you want margins to go up it may well be that to do that the actual, natural level of sales has to come down.

Neil Fiske

Yes, so it's a fair question Phil. I think that it would be safe to say that it's going to take us a while to get on top of our assortments, get them turned to exactly the position we want them and regenerate our sales momentum. We are clearly very much in the process of stabilizing, but it's not – the other thing I would just emphasize – it's not an across the board brand issue. We have geographies for example where brand Billabong is doing quite well. We have geographies where it's softer. We know what those issues are, they tend to be operational issues not brand issues. So we're really attacking it where we see the opportunities to stabilize those sales trends region by region, brand by brand. Some of its sales, some of its merchandising, some of it's getting our marketing calendars aligned. I think it's difficult at this early stage to say how much lift we're going to get out of each of those different revenue drivers. But we understand where we need to put the focus.

The other thing that I would say is we're quite systematic now about the way we're thinking about planning our inventories. As we get our inventories in line over the next couple of seasons and sales cycles, I think there should be an inherent margin improvement around a faster inventory turn. As I said at the AGM, our goal overall is to get our inventory turns from 2.5 to 4 times. That's going to be a bit of a multi-year process but it will help our margins significantly. So both an answer on the sales line and the margin line.

Phillip Kimber – Goldman Sachs

Sure but I'm not sure if one of the issues you're looking at I get distribution and maybe you feel it has got too wide into geographies or brands and therefore it's a case of actually cutting that back. Or are we not facing that sort of an issue?

Neil Fiske

I'm sorry, can you rephrase that question?

Phillip Kimber – Goldman Sachs

Yes. So you can always get sales, but sometimes they're unprofitable. One of the key things in managing a brand is being very tight on the distribution in which it's released to. I'm just wondering if that's an issue that will be part of this turnaround – i.e. you may have to drop sales materially because you choose not to service them because you're looking to strengthen the brand as a result. Is that part of this turnaround? Or that's not really an issue in this turnaround?

Neil Fiske

No. Okay, got your question and it's a great question. One of the things I think that we do have in our positive column is that we've really focused on quality of distribution, over the last couple of years in particular. As you recall we got a little sideways a couple of years ago in the US in particular with sales to the Closeout Channel. We've cleaned up a lot of that distribution and we are really focused on quality distribution channels. I think within the trade are seen as having not over extended the brand and have kept our distribution quite clean and brand appropriate.

Phillip Kimber – Goldman Sachs

Okay. Maybe just a couple of more financial questions. One of the things, trawling through the EGM note, it would appear that apart from the money that's been raised today and that you're looking to raise, I don't think you're able to repay any of this new term debt without incurring significant penalties. So I'm just intrigued as to if there is any asset sales in the near future, what that cash would be used for. Should we assume that you're not going to repay that debt early because it's quite onerous if you do?

Peter Myers

It's a good question Phil. There are some relatively complicated provisions to deal with. Particular assets that were identified at the time that that deal was established and how those proceeds might get dealt with or get perhaps reinvested in the business in a way that might provide some relief to that. So it's a good question, you're right there are material prepayment penalties – or premiums – for certainly the first year. They start to amortize after that and then after a couple of years are much more modest. So we've very much got that though in our thinking. The reality is our partners share the strategic ambition here too, and I think whilst obviously we have to work our way through those particular provisions – and as I say there are some complexities that were carved out at the time. But equally I think there's very much a strong-shared ambition here to get this business the way we want it.

Phillip Kimber – Goldman Sachs

Sure, and we should assume that you've got quite big cash balances. Again I'm assuming they can't be used to offset, so we should assume pretty low interest revenue on that. I think it's over a AUD100 million or something of cash.

Peter Myers

Yes, that's correct Phil. Particularly at December we had some drawings under the ABL facility that were paid back relatively shortly thereafter. So we did have a bit of a bloated cash position as at December. So we can certainly retire the ABL and would expect with the sort of liquidity that we're staring at now that that would be minimal drawings. So if you think about you're modeling you've got your term debt and then your balance of your net debt arrangements sitting in cash – or your net debt modeling sitting in cash effectively. You're right, there's not much of a return on that.

Neil Fiske

With that, I think we've – questions that were in the queue and we thank everybody for listening, following our turnaround and for the good questions that have been asked. Good day.

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