Komplett ASA (KOMPL) Earnings Call Transcript & Summary

Good morning. Welcome to the presentation of Komplett's Third Quarter 2021 Results. And thank you all for being here today. We are very happy to finally be able to do this as a physical presentation and are pleased to welcome those of you in the room as well as those following us through the webcast or are dialing in through the phone. Before we get started, I'll just make a very brief introduction of myself since I'm new from our last presentation. My name is Per Christian Brander, and I'm the Head of Investor Relations at Komplett. So then you know who I am for any questions in the coming days. The presentation today will take between 20 and 25 minutes. Afterwards, we'll do a Q&A session, where we will take questions from the room, the webcast and from the phone. The Q&A session will take up to 20 minutes, making total time for the presentation, including the Q&A to about 45 minutes. And now please welcome Komplett's CEO, Lars Olav Olaussen, who will take you through our third quarter.

Thank you, Per Christian, and good morning. Quarter 3 is the first quarter without any COVID restrictions on physical trade, and Komplett Group continues to deliver strong top and bottom line results. The consumer shift towards online shopping continues coupled with strong execution on our commercial plans. In sum, group revenues increases by 15% in the quarter with solid growth in all business segments, despite being faced with extraordinarily strong comparable figures from last year. We continue to translate volume growth into improved economies of scale as we leverage on our existing infrastructure, reducing our OpEx by 0.9 percentage points and strengthening our cost leadership position. In sum, our adjusted EBIT is growing by 33% versus last year, confirming our ability to drive profitable growth. Looking at the top line. As we come out of the first quarter without any COVID restrictions on physical trade and where people are able to go out and travel again, Komplett Group continues to deliver strongly with 15% top line growth. And the growth is balanced between all business areas. B2B is growing 19% in the quarter, driven by strong growth in its existing customer base. The distribution segment grows 25% and is continuing to benefit from new distribution agreements. In B2C, growth for the quarter comes in at 9% on the back of very strong comparable figures and is an especially strong result given the reopening of society. Our gross margin continues to grow in the third quarter and is up by 11%. The total gross margin is, however, somewhat down from 13.2% last year to 12.8% in quarter 3. There are 2 key drivers of this. First of all, the significant growth in the distribution segment creates a negative overall mix. The volume in the distribution segment is, however, very well suited for our supply chain, and the EBIT margin of the Distribution segment continues to grow despite us taking on more volume at lower margin, and it continues also to contribute to our overall profit. In the B2C segment, we experienced an intensified price competition in the beginning of the quarter. Our key priority is to protect our price position and secure that we always have an attractive consumer offering, and we responded immediately to the lower pricing levels in the market, which had a negative impact on our margin in the start of the quarter. We have since then been working with the revenue management initiatives to be able to maintain -- we have a revenue management initiatives to be able to maintain a leading price position while moving back to margin growth. And we have seen margins coming back to growth towards the back end of the quarter. If I look towards our EBIT, our business goal continues to deliver good results. Our top line growth drives scale benefits as we grow on our existing infrastructure. And in the quarter, our OpEx, including depreciation, is down from 10.6% last year to 9.7% in quarter 3. The efficient operations positively impacts our EBIT. EBIT margin, which grows by 0.5 percentage points versus last year, landing at 3.1%. In absolute numbers, our EBIT grows by 33%, up to NOK 83 million. If we move into the segment. For B2C, it's the first quarter after the COVID restrictions on society were lifted. And we're pleased to see revenue growing 9% on top of very strong comparables from last year. The [ revamp ] promotion program, which we also announced during the IPO process, is being well received by our customers. And further, we have applied a more competitive pricing strategy, which is also proving successful. In addition, as I said, we responded swiftly to increased price competition in the beginning of the quarter. While all these initiatives positively impact our revenue, it goes without saying that it has a negative impact on gross margin. Through solid commercial work, both with our suppliers but also through working with our mix and driving a more premium product range. We have, however, been able to move our gross margin back to growth towards the end of the -- towards the end of the quarter, enabling an increase in EBIT margin for the third quarter from 3% last year to 3.1% this year, lifting EBIT to NOK 46 million. In sum, I'm happy to see that we managed to balance growing our top line, offering competitive pricing and strong promotions to our customers, while at the same time, expanding our EBIT margin. For the B2B segment, we delivered the highest revenue ever in a single quarter for B2B in Komplett driven by strong demand from our existing customer base and strong growth in the education sector. At the same time, gross margin continues to grow by 0.7 percentage points due to solid commercial execution, and we still maintain also strong cost control and efficient operations. In sum, it's a solid top line growth. It's a solid top line growth. It's -- we have a margin expansion and efficient operation, driving up our EBIT margin by 0.6% to 8.7% in total, delivering NOK 35 million of EBIT. For the Distribution segment, it's also the highest quarter ever from a top line perspective. On the segment, we continue to grow strongly, benefiting from new distribution agreements. We're also increasing the sales of our private label, which is positively impacting our gross margin. But at the same time, the new distribution agreements have a very high share of low-margin products and in sum, our gross margin declines from 6% to 5.8 percentage points in the quarter. We are, however, continuing to drive an increasingly more efficient operation, and we're leveraging on our existing infrastructure. This enables our EBIT margin to grow up to 2.2%, 0.6 percentage points up versus last year, delivering a total EBIT of NOK 18 million. We've also been executing on our strategic agenda in the quarter, and we see good progress on many initiatives. Our sustainable subscription module FLEX is being well received by our customers. The number of customers choosing FLEX is growing month by month and accounted for 10% of sales on average over the quarter in the stores where it's been launched. With FLEX, Komplett's will get an opportunity to build long-term relations to our customer, and it also represents a solid circular economy initiative. Further on the strategic agenda, the Ironstone acquisition was also completed in the quarter. Ironstone as a company has managed to stay focused on its core business throughout the acquisition process and are progressing according to plan, both in terms of acquiring new customers as well as on their development agenda. We're happy to welcome Ironstone to the Komplett Group, and we remain confident that Ironstone has a managed service offering that will be attractive both to our existing customer base and to new customers of Komplett in the future. If we look at the supply chain, there is continued uncertainty, and it's been uncertainty for the full year related to product availability due to both supply chain constraints and component shortages. Despite these challenging market conditions, Komplett Group has delivered strong growth so far this year, and I'm very satisfied with our ability to manage this risk. Looking into quarter 4, we see a supply situation that should enable continued growth. For the B2B segment and the distribution segment, we do believe that we have the necessary supply. For B2C, there is still some risk. The risk is primarily related to the component and gaming categories. This risk is, however, not new. It's the exact same risk that we've been managing for the full year so far, and we'll be managing it well, and we will continue to manage it going forward. And I want to stress the fact that our business model makes us a preferred partner to our key suppliers in a situation of product shortages. In our supply chain model, we do not build trade stock, and we do not fill up stores with products. We hold limited stock. We turn our stock quickly and place the products in the hands of the consumers quickly after we receive them. And there, the products are being activated and put to use. Getting products not only sold but put to use and activated is a key parameter for an increasing number of suppliers. And the feedback we're getting is that we have a very strong performance here, which makes us a preferred partner in periods of product shortage. Going forward, Komplett Group will continue to invest to grow in line with our long-term financial targets. We'll continue in investing delighting our customers with a leading customer experience. And we will continue investing in attractive promotions and competitive pricing. We will also, as said, we're working closely with our suppliers to secure stock. On our more strategic agenda, we'll continue the work of driving scale benefits and efficiencies from our existing infrastructure, while we continue to execute on our strategic plan and securing long-term competitiveness. As part of this, the planning of a new warehouse and more efficient warehouse in the Stockholm region as well as increased capacity and efficiency, especially for [ larger goods in the Sandefjord ], Norway warehouse is progressing according to plan. I will now hand the word to get to our CFO, Krister Pedersen, who will take you through the financials.

Thank you, Lars. As Lars has mentioned, revenue is up by 15% for the quarter, where all 3 segments contributed to the strong growth. So far this year, we have a growth of 21%. And as we have seen earlier, the high growth in the Distribution segment have a negative mix effect on gross margin. The same mix effect and growth on existing infrastructure has reduced operating expenses in percentage of sales from 10.6% to 9.7% in the quarter. The sum of it increased the adjusted EBIT, EBIT margin up from 2.6% to 3.1% of revenue. The one-off item is cost related to the acquisition of Ironstone including the thorough due diligence process. Net financial cost is up by NOK 1 million compared to last year, and that is due to a higher average debt compared to last year. So far in 2021, profit before tax is up by 66% compared to last year and last year had a lot of positive COVID-19 effects. On cash flow from operations, we saw a big improvement in the third quarter. We succeeded with the inventory positions we took in the second quarter, which was one of the contributors to the high growth in the third quarter. Further, we are taking new positions for the [ incoming ] quarter. Trade receivables increased significantly last year due to high growth in the distribution segment, but the change this year has been more moderate. In investing activities, the most significant single item is the Ironstone acquisition. Net interest-bearing debt has increased due to the dividend payout in the second quarter and the acquisition of Ironstone. However, the available liquidity has more than doubled compared to last year, and our leverage ratio decreased from 1.5x to 1.3x. Thank you.

This year, we celebrate Komplett's 25th anniversary as an online retailer. For 2.5 decades, competitor has managed to stay competitive through a culture of being innovative and brave in adopting new technologies. And we now find ourselves with a well-invested platform without any brick-and-mortar heritage and the cost structure. The structural shift to online trading continues and competitor is well positioned to capitalize on that shift. It is with pride we celebrate our 25th anniversary, and we're excited about the prospects that lie ahead. A few key takeaways to wrap it all up here. It's been a solid quarter for Komplett Group, and we've been doing well, and it's been a quarter where we see the benefits of our business model. Going forward, we're well positioned, and we benefit from the structural shift to more online shopping coupled and coupled with more strong commercial plans and execution, we delivered 15% top line growth in the first quarter without any COVID restrictions on physical trade. The volume growth is also translated into strong economies of scale and our OpEx has improved by 0.9%. This, in turn, we translate into a 33% increase in EBIT and overall, a strong performance in the quarter. [ Per Christian ], I'm going to hand the word back to you now for questions.

Thank you. Yes. That concludes the presentation, and we will now open up for questions. We will do this by first taking any questions from the room here. After that, we will take questions that have been dialed in through the phone solution. And lastly, we will finish up with questions coming in from the webcast. For everyone in the room, which we will start with, we will just ask you to wait to be handed the microphone before asking your question so that everyone also watching the webcast can hear your question. So let me start the question session with a question over here. I'll just go over with the microphone.

[indiscernible] good results. And then [indiscernible] has been developing. I just wonder how do you book those revenues [indiscernible] account right now [indiscernible]?

It is possible. When we have a transaction with FLEX, we sell the product to the third party. So we don't have that product in our balance sheet. So we don't have the risk for the product. So it's -- for Komplett, it's a sales transaction. And when -- after 2 years, that the customer can choose to renew the product, then we generate a new transaction. That's a new sale for us. So that's the recurring part of it.

And just one on the gross margin. [indiscernible] on the supply chain and how has this impacted gross margin [indiscernible] on the cost side from suppliers and on the gross margin. And also [indiscernible] gross margins with different products within say B2C [indiscernible] and other large items in the quarter, there's a lot of differences in that [indiscernible].

So the last part of the question is if there's differences between the categories and margin for the quarter?

Yes. Significant [indiscernible].

We have pretty stable margin between categories. So it's not a big change whether we grow in one category compared to another one. So I think it's not a big shift for us.

The mix, I think we've been managing well across the quarter is what you've seen -- well, a trend I think we've seen during the pandemic is that as people are staying more at home, there is a higher willingness to pay to sort of upgrade your devices, your white goods or your electronics. So there is a -- and we see that globally as well, that there is a trend towards more premium products and sort of capitalizing on that premium trend. I think we've done -- we've performed well. I think we're well exposed to premium customers, both through our gaming, through our exposure to gaming and our overweight towards gaming customers, but also that we have what I -- what would call technology enthusiasts, people who are looking are quite involved in their purchases and enjoy strong technology, makes us a bit more overexposed to that -- to the premium segment. And I think we've been able to sort of capitalize on that and drive a more premium range through the quarter. And that's going to be important going forward as well to manage sort of -- to manage the product shortage because in periods of product shortages, component suppliers will want to allocate their components into more premium products as they get more paid there. So I think that is sort of a mix trend that is important to take -- to be aware of going forward if that was understandable. And the first part of your question, I'm not sure if I really got that if so.

[indiscernible].

I think -- I'd like to answer that in sort of 2 -- there's 2 answers to the question, I think. First, I think a key driver for us over the last 3 years for improving profitability has been scaling of our existing infrastructure. So -- and I think you see that very well in the distribution segment, as you point out, that we're able to -- as we've taken new distribution agreements that fit our auto store that is well suited for our supply chain, we managed to drive through significant amounts of volume without any certain cost increases. So that scales very well. And so that is sort of the key driver for the distribution segment uplift that is basically scaling on our existing infrastructure. And I think with the long-term plans we have in our supply chain, we're well set up to continue to do that also going forward. Now as we've said, if we get further improvements in our OpEx, we might just reinvest that in competitiveness, especially in marketing. So the long-term financial target is around 10%. We maintain those. Now the second part is on -- your question on the gross margin, should we expect sort of to see a deflating gross margin going forward. And I think we still -- we sell our long-term ambition is to approach 15% gross margin. And I think we're still very confident with that. What, of course, could sort of slow that down if we get more significant distribution agreements because we think that drives good economies of scale and the negative mix effect we've gotten from new distribution agreements, we're quite comfortable with. Over the last quarter, we've seen quite intensive price competition, though in the B2C segment, especially. I think that will occur from time to time. There will come periods where some retailers will want to drive more traffic where there is a bit more price competition, and we have to respond to that. But in the long term, I still see that we have significant headroom to improve our terms to drive mix to drive more premium care to move into more premium categories. So we remain very confident with the long-term targets. And as I said, we've made -- we responded very quickly to an intensified price competition at the start of the quarter. We were working with our prices with our revenue management initiatives with our suppliers throughout the quarter. And towards the back end of the quarter, or the gross margin is back to growth, year-over-year. So -- and we still maintain our competitive price position. So I think -- but there may be smaller bumps in the road. But on the longer-term trend, you should still hold us accountable to our 50% outcome target.

We don't expect the distribution segment to grow about 25% going forward, so that growth will be more close to 5% when the full year effect of the distribution agreement, new distribution agreements is mature, yes.

And in terms of the strengthening of the kroner, how does that affect your numbers?

To strengthen...

The Norwegian kroner -- it's [ now at 840 or something ] versus the dollar.

In the short term, we are -- the products we send from Norway to Sweden and Denmark have a negative gross margin effect. But when we buy products from the suppliers, it have a positive effect. So it's a mixed effect.

[ But you're just ] spot exposure? Or do you have any hedging strategies?

We don't have any long-term hedging strategies. So the risk we have in currency is more a market risk, not the Komplett risk.

But I think it's also fair to say that we do not have all our procurement in foreign currency.

That's correct.

So there's a hedge there that some contracts are in NOK, some contracts are in foreign currency.

Any other questions from the room? No. Then we will take any questions that have been coming in from our phone solution. So operator, if you have any question, you can please read them out now.

[Operator Instructions] We have no questions coming through on the phone lines. So I will hand back over to your host.

Just a few seconds, so I just have a slight problem logging into the iPad here with the webcast question where I know we have a few. There we are. Okay. So the first question, can you comment on how the gross margin in B2C developed during the quarter? How do you see the competitive environment going into Q4 given the low inventory levels in the industry?

Yes. I think we covered already a bit of the gross margin through the quarter, but we can quickly go through it again. At the start of the quarter, especially in July, we saw intensified price competition in the B2C segment. We responded quickly and we -- which took down our gross margins. After that, we've been working with our suppliers. We've been working with revenue management initiatives and with our pricing to stay competitive while we get our gross margin back to growth. And over the course of the quarter, we've increased our gross margin levels back to growth year-over-year. So when we -- so at the end of the quarter, we're back to growth. But on balance, the gross margin is down. So the latter part of the question is how do we see the price competition going forward? I think -- it's a bit hard to say because there's 2 factors. But I think there's 2 factors that will -- they will heavily influence how the competition will be. And one is, of course, the availability of products. And I think we've all seen that a bit through the pandemic that when there is sort of a large demand or a bit product shortage, one tends to sort of hold back on discounts a bit. So that might affect it. But so far, it seems like the competitive pressure has been quite high. So the industry doesn't seem affected by it yet. And we've also been able to keep up our promotion pressure throughout the quarter. So that hasn't had the big effect. The second part is, of course, I think how physical trade will respond to the -- after the reopening. And I think we should expect as trade sort of physical trade now tries to find their new normal. If traffic comes in a bit soft, I think we will see quite healthy promotion pressure for a period of time in order to drive traffic back in. And we have to respond to that for a period of time. So I think we should expect continued have to quite have the promotion pressure in the period going forward, and we need to be able to balance that out on our gross margin.

Yes. And normally, for the B2C segment that gross margin in the fourth quarter is lower than the third quarter.

While in the B2B segment and the distribution segment, we -- I do not expect anything -- any drastical changes. I expect sort of a normal trading environment.

Another question here. You say you were able to counter price competition in the quarter by revenue management and category mix. Can you explain this?

Yes. If we start a bit by revenue management, first of all, it's -- as we've been doing for the -- the last 3 years, I think it's important to also be able to pass part of the bill for lower pricing in the market back on to our suppliers. So we need -- that is part of negotiating. So -- and we've been doing that, getting more funds from suppliers. We've been -- as we've talked about in the IPO process as well. We have been introducing a new more automated pricing mechanism, which gives us much more -- a much more solid ability to do pricing changes quickly and to respond quickly to pricing changes in the market, which both gives us the ability to respond to increased competition quickly, but also gives us the opportunity to drive out some more profitability. And thirdly, as we commented on during the earlier questions here, there is a trend towards more premium where we have been able to -- which we're capitalizing on. So I think we've been able to upsell in many categories, which gives us a positive margin mix throughout the quarter.

Another one here. Are you seeing any difference in price competition between Norway and Sweden? If yes, can you elaborate?

I think -- I think the consumer electronics market in the Nordics is in general, characterized by very healthy price competition and has been so historically. I don't see any major differences there. It's -- I don't see any major differences in what we're able to realize profits in neither of the markets. So I see them as quite comparable when it comes to promotion and pricing, yes.

But it's more players in Sweden than in Norway.

Yes. But I think, we could -- I think there's one thing we could add, which we found interesting also is that Swedish Media now picked up on an article last week saying that Amazon is not as price competitive as one is not price competitive in many categories, which was in Swedish media last week, which was -- which I think proves the point that there is tough competition between the incumbent players, and we're performing well on that.

A question regarding FLEX. What can you tell us about the customers using FLEX? Are these already existing customers? How is the basket size and what kind of products are they purchasing?

Yes? FLEX customers, I think FLEX customers are -- they're typically -- they typically have a higher basket size and an attractive average order value that is clear. We're still learning, but we see this -- this is an offering that works well within categories with this high innovation -- high pace of innovation and in the technology, especially within gaming. We see this working very well. We see also -- so those categories are performing well, high basket size. And yes, I think we primarily now have addressed our -- more of our existing customer base. But you need to bear in mind that this is only a few months old, this product, and we made what we call the soft launch, which was saying that we want to do -- we put the technology -- we put the offering out there without putting a lot of marketing money behind it. And that was a conscious decision because we wanted to also test the technology live and at scale before we start to market it to make sure that when we really push the button, it all works well. So we took some time to learn. So the results that come now are basically with limited marketing efforts, but that's also driving an overproportionate amount of existing customers. So we do still think there is vast potential in as we start marketing it and towards a more -- a broader customer group.

Then one final question here. I believe you regarding the price competition. I believe you touched upon this briefly already, but -- do I understand it correctly that price competition has [ normalized it ] now versus the beginning of the third quarter?

I would -- I would say maybe not. We saw just an example from last week in Norway, where Power has its 20% on the full store promotion and [indiscernible] answered with 20% in their loyalty club, I believe. I think that was one of the as it is promotion weeks in quite some time. So I think it's still been -- it's been a period of quite intense promotion pressure. I do think so. But I think we've -- but it's within that environment, I think we're able to put our margins back to growth as well.

One final question coming in here towards the end. Can you comment on your ambitions in the toy category? What do you expect for Q4?

Yes. I think the toy category, we -- it's a bit like FLEX. We're testing it. We do see -- what we do see in the toy category, and we've seen for a long time, especially in Webhallen our Swedish subsidiary is that a lot of our customers enjoy purchasing toys and use it for sort of the leisure. We sell sort of a different assortment of toys. We do sell -- which are more for sort of young adults and adults. So for example, we don't -- we may not -- when we sell [ LEGO ], we will sell the 7,500 pieces [ Star Wars, stormtroopers battleship ]. So we're looking to sort of test our position there also in the Norwegian market. We've taken a small assortment and are going to spend the next few quarters sort of reviewing our strategy before we make a decision. So I'd say expect us to test, expect modest results, but then also see this as our longer-term strategy to expand into adjacent categories where we hope to find -- where we think we have a right to play.

And one more on the FLEX here. Is the gross margin on FLEX in line with the B2C segment?

It's not a big deviation on gross margin, but we see a quite upsell potential where people buy the next level on the price list, and that normally have a little bit higher gross margin. But it's not shifting the gross margin significantly for the B2C [ as total ].

And I think if I just may add to that, I think how you should look at FLEX, as FLEX is not an initiative to earn a lot more on just that transaction. But it's a way for us to create a long-term customer relationship where customers come back again and again and again to get a good offer. And it's also -- it also gives us a neat way into a circular economy revenue stream where we get back a lot of products. So it gives us sort of also some long-term options that we think are very attractive rather than sort of the high margin on the individual basket right now.

That was all the questions. We want to thank you all, both you in the room [ and you ] attending through the webcast for very good questions. So that concludes the Q&A and that's our presentation for [ the day ]. Again, thank you all for attending, and we hope you have a nice day.