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1 FOR IMMEDIATE RELEASE ASX ANNOUNCEMENT 30 August 2016 SurfStitch Group FY16 Financial Results Results Overview SurfStitch Group Limited ( SurfStitch or the Company ) (ASX: SRF) has today released its results for the financial year ended 30 June Underlying revenue was $235.6m, an increase of 18% over FY15. The majority of the growth arose from acquisitions. Retail sales were up 7%, (3% in constant currency terms) mainly from good growth in Europe. Retail gross profit margins reduced from 46% to 39%. Underlying EBITDA, which excludes share based payments, acquisition related costs and impairment charges, was a loss of $18.8m. As part of the on going strategic review of the Company s assets, business units and other investments, the Company booked a non cash impairment of goodwill, intangibles, plant, property and equipment and aged inventory totaling $99.3m. The impact of these impairments was reflected in the statutory EBITDA loss for the period of $139.1m. The statutory NPAT loss was $154.7m. The statutory result also includes share based payments and acquisition related costs. A reconciliation of underlying EBITDA to the statutory loss before tax is included in the investor presentation released to the ASX. The contracts referred to in the Company s announcement on 9 June 2016 are detailed in the Directors Report and note 26 to the Financial Statements released to the ASX today. Some of the contracts are now subject to legal dispute and are before the courts. Cash on hand as at 30 June 2016 was $21.4m, compared to $39.7m as at 30 June Excluding net capital raised and cash payments for acquisitions, cash outflow for the year was $40.6m. The results are clearly very disappointing. SurfStitch Group is fundamentally a great business, but the Company has been through a period of rapid expansion, which has involved significant management time in effecting the relevant acquisitions and two major capital raisings. A focus on increasing market share, combined with difficult trading conditions (particularly in North America) had a major impact on retailing margins and overall results. The accelerated roll out of the ecommerce platform, planned global re branding and other initiatives had an impact on expenses and cash flow said CEO Mike Sonand. The number one priority on my appointment was to implement a stabilisation plan with a key focus that the business has better control of its cash flow. SurfStitch Group Limited ACN Page 1 of West Burleigh Road, Burleigh Heads, QLD

2 This plan included: A new Executive Team structure to ensure functional alignment across all regions A restructure of the North American operation, reducing the workforce by over 65%, while maintaining a strong local presence, through support from our Australian and UK operations Reducing the UK workforce by 25% Accelerating a brand rationalisation program Aggressively managing working capital Reviewing all expenditures of the group Mr Sonand said that while much had already been achieved the key priority remained managing and controlling the Group s financial position. Forecast spending has reduced, the cash position has stabilised and we ve materially improved our working capital. We ve strategically reduced the number of brands we offer, reduced inventories in line with our retail plan and are on track to deliver an increase in our gross margins. The team is heavily focused on day to day execution and is aligned in their thinking, with a strong action plan. As we stabilise the business, we are refocussing our efforts on our retail platforms, with accountability and management of SurfStitch, SWELL and Surfdome now under a highly experienced retailing executive, Mr Chris Athas Mr Sonand said. First Stage Strategic Review Conclusions In addition to the impairments outlined above and included in the FY16 results, the Board concluded that while Surf Hardware International (SHI) was a good and profitable business, it was not a strategic fit. The Group acquired SHI in December Deloitte Finance Advisory has been appointed to assist in pursuing divestment options for SHI. The strategic review included an assessment of the Company s media assets acquired during the year. The Board concluded that these are a core part of SurfStitch Group s growth strategy. All three businesses are leaders in their category, have clearly segmented audiences and are complementary and highly relevant to SurfStitch Group s customers. The media assets are now managed by one executive, Mr Mick Lawrence, to co ordinate activity, enhance accountability and extract maximum value. SurfStitch Group Limited ACN Page 2 of West Burleigh Road, Burleigh Heads, QLD

3 Outlook For FY17 we are forecasting single digit sales growth and an underlying EBITDA loss of $2m to $3m representing a material improvement on FY16 EBITDA loss. Cash from operations is forecast to decline by $6m to $7m for the year, a reflection of the underlying loss and planned capital investments. We have a robust and sustainable operating platform in place and we can therefore focus on the core areas that will return the business to sustainable and profitable growth, Mr Sonand said. We have set demanding retail metrics to drive improved performance across the business. Over the coming months we will better leverage our traditional and new channels to drive engagement and focus on creating a customer experience that generates loyalty and repeat business. If we can do all of these things well we are confident that we will further consolidate, and take advantage of our position as the world s leading online action sports retailer, Mr Sonand concluded. Webcast and teleconference SurfStitch will host a webcast and teleconference at 10:00AM (AEST) on 30 August This can be accessed at The link can also be used to access a recording of the teleconference later in the day. ENDS For further information, please contact: Helen McCombie, Citadel MAGNUS Matt Gregorowski, Citadel MAGNUS SurfStitch Group Limited ACN Page 3 of West Burleigh Road, Burleigh Heads, QLD

4 For personal use only SHAREHOLDER PRESENTATION 30 AUGUST 2016

5 A Difficult and Challenging Year Significant management time spent on six acquisitions from the time of the IPO in late Two major capital raisings in that time. Spending rose materially as we embarked on major branding and system consolidations. Focus on top line and market share came at a significant cost to the business. Surprise exit of founding CEO during the year. Managing major content agreements and ensuing legal dispute (refer Note 26 and Directors Report in Financial Statements). Reporting: Underlying EBITDA loss of $18.8m Statutory EBITDA loss of $139.1m (includes non-cash write-offs of $99.3m) Statutory Loss Before Tax of $155.2m. SHAREHOLDER PRESENTATION - AUGUST

6 FY16 Financials Summary by Group and Segment UNDERLYING GROUP RESULT (A$M) FY16 UNDERLYING SEGMENT RESULT 1 (A$M) FY15² FY16¹ Retail SHI 3 Media 3 Total Revenue Gross profit GP margin 46% 40% Revenue Gross profit GP margin 39% 41% 63% 40% EBITDA 7.7 (18.8) Profit before Tax 4.1 (18.9) NPAT 4.1 (19.3) Cash & equivalents Underlying result excludes revenue and expenses from Content Agreements; asset impairment charges, items considered unusual or non-recurring in nature, and share based payments. ² Pro forma FY15 results are prepared as presented in the FY15 Earnings Release and Investor Presentation as announced on the ASX stock exchange. Assumes SurfStitch, Surfdome, SWELL, Magicseaweed and Stab acquired as at 1 July 2014 and are included in all periods shown; Excludes IPO listing expenses and items considered unusual or non-recurring in nature, and share based payments. 3 SHI and Garage represent partial year numbers. SHAREHOLDER PRESENTATION - AUGUST

7 Key Retail Financials Summary by Region A$M UNDERLYING REVENUE Asia-Pac Europe North America Retail Total FY FY FY16% MVT 3% 18% (12%) 7% FY15 (Constant currency) FY16% MVT 3% 11% (21%) 3% Growth in Europe offset by a disappointing result in North America. GROSS PROFIT FY FY FY16% MVT (8%) 3% (44%) (8%) FY15 (Constant currency) FY16% MVT (8%) (4%) (49%) (12%) GROSS PROFIT % FY % 40% 28% 39% FY % 46% 44% 46% 1 Underlying result excludes revenue and expenses from Content Agreements; asset impairment charges, items considered unusual or non-recurring in nature, and share based payments. ² Pro forma FY15 results are prepared as presented in the FY15 Earnings Release and Investor Presentation as announced on the ASX stock exchange. Assumes SurfStitch, Surfdome, SWELL, Magicseaweed and Stab acquired as at 1 July 2014 and are included in all periods shown; Excludes IPO listing expenses and items considered unusual or non-recurring in nature, and share based payments. SHAREHOLDER PRESENTATION - AUGUST

8 Key Observations Ambitious growth targets set for FY16 Inventory acquired to meet those targets. Achieving planned sales growth proved challenging, material price discounting was used to clear excess inventory. Retail margins fell +600 bps. Variable costs, a major component of any ecommerce business model, increased in line with increasing volumes, just as gross profit dollars declined. Challenging conditions in North American market, combined with its high cost structure, resulted in significant losses in that market. Increasing expenses driven by fast tracked global branding and ecommerce platform roll out. Slow to integrate and gain benefit from media assets. Declining net cash balance. Immediate task implement stabilisation plan Control and stabilise cash Stem losses Core retail disciplines are needed to improve to compete more effectively. SHAREHOLDER PRESENTATION - AUGUST

9 Actions Taken Since Appointment of CEO Stabilisation Plan for the Group Deferring high cost/high risk initiatives. Implement expenditure reductions. Restructure of North American operations exit of 35 FTEs to 14, but maintaining strong local presence through global support from Australia and UK. Surfdome reduced 25% of its headcount. Aggressive action to reduce inventory. With stabilisation plan underway - Refocus business Commenced a strategic review (per 15 July announcement to the market) Set realistic FY17 targets with improved margins SHAREHOLDER PRESENTATION - AUGUST

10 Actions Taken Since Appointment of CEO Refocus business Implemented an executive restructure, delivering functional alignment across all regions. Media assets centralised under one executive to coordinate strategy and enhance accountability. Laser sharp focus on delivering high performance retail metrics and improving our retail disciplines by: Prioritising product and proposition Introducing a strong trading culture across all three retail business Improving merchandising planning and product assortment Strategic rationalisation of brand offer Focusing on delivering higher margin sales Improve inventory management and stock turns. Align brand and performance marketing resources which had previously been run autonomously. Build a strong customer centric culture. SHAREHOLDER PRESENTATION - AUGUST

11 Operating Outcomes So far.. Cash balance stabilised. More disciplined team and aligned culture. Rapid reduction in forecast spending. Brands on offer reduced from 700+ to 350. Improved merchandise assortment. Material inventory reductions executed in accordance with new retail plan. The commerce + content strategy remains valid. Our immediate priority is to build a solid foundation on which to deliver it. UNDERLYING BUSINESS IS STRONG AND SUSTAINABLE, SUPPORTED BY: Excellent, world class assets. Very engaged, talented team of employees. Dominating its category. Being global. Preferred partner of choice for premium action sports brands. A channel that is only scratching the surface as to its potential. A large and traditionally difficult to access audience. Proven and efficient supply chain processes. SHAREHOLDER PRESENTATION - AUGUST

12 Key Customer Metrics are Encouraging AOV AUD (constant currency) For personal use only FY15 FY16 $114 $111 $117 $132 $121 $118 $117 $116 Europe North America Asia-Pacific Consolidated Unique monthly MSW App Downloads Social Followers 6.5m 3.6m Database 1m 1.3m 2.8m 0.2m Basket size FY FY Usage Metrics Retail Media Europe North America Asia-Pacific Consolidated DEVICE BY USAGE 44% 56% 43% 57% Mobile Desktop Conversion FY15 2.7% 3.0% FY16 2.8% 2.6% 3.3% 3.5% 2.9% 3.1% USAGE BY REGION 14% 46% 40% 34% 39% 27% Asia- Pac Europe USA Europe North America Asia-Pacific Consolidated SHAREHOLDER PRESENTATION - AUGUST

13 ecommerce Global Reach With Balanced Geographic Mix And Local Expertise Asia-Pacific Europe North America GLOBAL OPERATIONS Ship to over 136 countries, next day. 1 order processed every 13 seconds. 3 strategically located logistics centres in major action sports markets to maximise delivery speed and customer service Australia, UK, USA. Capacity for growth across all logistics centres. 6 local offices in 3 major markets Australia (Gold Coast, Sydney) UK (London, Devon) USA - California (Irvine, Venice Beach). Cross regional and cross seasonal fulfillment to maximise gross profit and sales by fulfilling orders where it is most economic to do so. WITH LOCAL PRESENCE 5 local language websites (English, German, Spanish, French and Portuguese). 16 currencies. Local payments. Dedicated carriers in selected markets to fulfill specific local needs and minimise costs. Next-day, Saturday and Sunday delivery in different markets All local hubs equipped with local sourcing, digital production and distribution capabilities in order to: Optimise cost structure Efficiently handle returns (locally, including cross region sales) Minimises impact of FX on product cost and distribution cost while still pricing at local rates. SHAREHOLDER PRESENTATION - AUGUST

14 First Stage Strategic Review Outcomes SHI is a good business but we have concluded that it is not a strategic fit. Deloitte Finance Advisory appointed to advise and assist in assessing opportunities for divestment. Detailed review of the 30 June 2016 Statement of Financial Position completed. Material impairment (non-cash) of goodwill, intangibles assets and aged inventory totaling $99.3m (see slide 12). Confirmation of integral nature of media assets and the opportunity they provide in enhancing customer acquisition and experience (see slides 13 and 14). SHAREHOLDER PRESENTATION - AUGUST

15 Reconciliation Underlying EBITDA to Statutory Profit UNDERLYING EBITDA (18.8) One-off adjustments and share based payments (19.0) Share based payments (10.4) Acquisition related costs (5.1) Other (3.5) PRE IMPAIRMENT EBITDA (37.8) Strategic Review Adjustments 1 (101.3) Write-off of Goodwill (54.6) Write-off of Intangibles (33.6) Inventory impairment (10.3) Restructure provisions (2.0) Other (0.8) While the underlying EBITDA result was a loss of $18.8m, our Statutory Loss Before Tax was $155.2m. Although a difficult decision, this has cleared the decks to enable management to focus on the core ecommerce business. STATUTORY EBITDA (139.1) Depreciation and Amortisation (16.2) STATUTORY LOSS BEFORE TAX (155.2) 1 All adjustments are non-cash other than the restructure provisions SHAREHOLDER PRESENTATION - AUGUST

16 Media Assets Our media assets are a core part of merging content, community and commerce. All three media businesses have clearly segmented audiences and are highly complementary and relevant to our customers. Now centralised under one executive to coordinate strategic and tactical plans with enhanced accountability. Magic Seaweed is a world class dominant forecasting service directly engaging surf participants with 1.5 million unique user views per month Stab has evolved from a surf magazine to a sophisticated digital portal with emphasis on high performance surfing. A credible voice with the millennial surf culture, talking directly with today s most challenging and sought after market demographic, representing fashion conscious early adopters, tastemakers and influencers with 0.6 million unique user views per month. Garage uses long form and short form video on demand to create the wider customer experience. Exploiting it s extensive film library enhances the attraction of the SurfStitch Group ecosystem, with 0.6 million unique user views per month.. SHAREHOLDER PRESENTATION - AUGUST

17 Media Assets Through this integrated approach the key benefits to SurfStitch Group will be: Cost effective customer acquisition reduce reliance on expensive third party digital marketing platforms for customer acquisition and retention and use our own assets to grow quality traffic and a more valuable customer journey A more engaged customer will gravitate to SurfStitch Group when they recognise us as the home of premium content and relevant products. Improve market control through content and story telling - The way content is created and deployed will become critical in driving future sales. We have already demonstrated that working with key brand partners, short form and long form content drives results for both SurfStitch Group and the brands especially when partnered with exclusive and/or first to market product. All three businesses are passionately operated by founders who aggressively pursue growth within their segment of the market. SHAREHOLDER PRESENTATION - AUGUST

18 Where to From Here Key Focus for FY17 CONTINUED STABILISATION OF THE BUSINESS: Maintain cash balance. Implement strict cost and capital expenditure disciplines. REFOCUS ON CORE REVENUE DRIVERS: Product. Traffic and conversion. Margin improvement. DELIVERED BY: 1. A strong retail and product focus curated to meet our customers needs. 2. Enhanced digital (performance) marketing capabilities and driving the right balance of paid and organic traffic sources, especially our own media assets. 3. Build an elevated customer proposition to ensure we remain the destination for our category, reflected by our focus: It is all about the customer experience. Whether shopping or content sharing, our customers will have a rewarding online journey where we offer the most desirable brands, relevant products and compelling stories in surf, fashion and action sports. SHAREHOLDER PRESENTATION - AUGUST

19 Summary and Outlook Disappointing result - business was in a difficult position. Decisive actions taken, generating results: Stabilised cash flow Materially improved working capital More robust and sustainable operating platform. Assessing opportunities for divestment of SHI. FY17 Guidance: Forecasting single digit sales growth and material improvement on FY16 EBITDA loss. Forecasting an underlying EBITDA loss of $2m to $3m. Cash from operations is forecast to decline by $6m to $7m, reflecting the underlying loss and planned capital investments. Refocusing business on: Improved core retail disciplines and delivery on high performance retail metrics. Driving traffic through traditional and new channels. A compelling customer experience which generates loyalty and repeat organic traffic. SHAREHOLDER PRESENTATION - AUGUST

20 Appendix SHAREHOLDER PRESENTATION - AUGUST

21 Statutory Consolidated Statement of Profit or Loss Continuing operations (A$m) FY16 FY15 Revenue $238.0 $97.9 COGS (153.9) (60.5) Gross Profit $84.1 $37.4 Other income Selling and distribution expenses (101.3) (44.7) Administrative expenses Impairment expense (49.2) (89.0) (7.4) - IPO costs - (6.6) Results from operating activities ($155.3) ($21.3) Finance income Finance costs (0.3) (0.0) Net finance income Loss before tax ($155.2) ($21.2) Income tax benefit Loss from continuing operations ($154.7) ($17.6) SHAREHOLDER PRESENTATION - AUGUST

22 Analysis of Impairment Charges millions SHAREHOLDER PRESENTATION - AUGUST

23 Full Year Cash Reconciliation FY16 cash reconciliation (A$m) Cash position $39.7 $22.3 ($6.1) ($18.8) ($4.8) ($0.9) ($2.2) $21.4 ($7.9) Opening Cash 01 Jul 2015 Underlying EBITDA Loss Acq. & legal related matters Net Share Placement Funds PPE and Software Acq. Capitalised Dev Costs Income Tax Paid WC Mvmt. Closing Cash 30 Jun 2016 SHAREHOLDER PRESENTATION - AUGUST

24 Statutory Consolidated Statement Of Financial Position SHAREHOLDER PRESENTATION - AUGUST

25 Statutory Consolidated Statement Of Cash Flow A$m 30 June June 2015 Cash flows from operating activities Cash generated from/(used in) operating activities (29.2) (18.9) Interest and income taxes paid (1.2) (0.0) Net cash from operating activities (30.4) (19.0) Cash flows from investing activities Interest received Acquisition of subsidiary, net of cash acquired (26.1) (58.6) Acquisition of property, plant and equipment, net of disposals (2.9) (0.6) Acquisition of intangible assets, net of disposals (8.0) (2.7) Total cash used in investing activities (36.6) (61.8) Cash flows from financing activities Proceeds from share capital Transaction costs related to the issue of share capital (1.5) (5.2) Total cash used in financing activities Net increase/(decrease) in cash and cash equivalents (18.6) 39.7 Opening cash and cash equivalents balance Effect of exchange rate fluctuations on cash held 0.2 (0.0) Ending cash and cash equivalents balance SHAREHOLDER PRESENTATION - AUGUST

26 Disclaimer This presentation and information communicated verbally to you may contain certain projections and other forwardlooking statements with respect to the financial condition, results of operations, businesses and prospects of SurfStitch Group Limited ( SurfStitch Group ). These statements are based on current expectations and involve risk and uncertainty because they relate to events and depend upon circumstances that may or may not occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. Any of the assumptions underlying these forwardlooking statements could prove inaccurate or incorrect and therefore any results contemplated in the forward-looking statements may not actually be achieved. Nothing contained in this presentation or communicated verbally should be construed as a profit forecast or profit estimate. Investors or other recipients are cautioned not to place undue reliance on any forward-looking statements contained herein. SurfStitch Group undertakes no obligation to update or revise (publicly or otherwise) any forward-looking statement, whether as a result of new information, future events or other circumstances. Neither this presentation nor any verbal communication shall constitute an invitation or inducement to any person to subscribe for or otherwise acquire securities in SurfStitch Group SHAREHOLDER PRESENTATION - AUGUST

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