Komplett ASA (KOMPL) Earnings Call Transcript & Summary

Good morning. Welcome to the presentation of Komplett Group's Third Quarter Results. My name is Kristin Hovland and I'm Head of Communications. We will start today's presentation with our CEO, Lars Olav Olaussen, who will go through the highlights for the quarter. Then our CFO, Krister Pedersen, will give you some more details about the financials. The presentation will take approximately 20 minutes. During the presentation, you are welcome to post questions via web, and we will answer them at the end together with the questions from the audience. With that, the floor is yours. Lars.

Thank you. The third quarter represents yet another quarter with a challenging consumer market. Consumers are negatively impacted by increased inflation rates and consumer confidence is at an all-time low, which negatively impacts the spending they have in our core categories. But despite the market decline in the recent quarters, Komplett is in a positive long-term trend. On a pro forma basis, since 2019, we've had a 10% average growth rate every year. The negative market sentiment that we see now, we expect to be with us well into 2023. And we are taking several mitigating actions to secure that we maintain our competitiveness and that we create the necessary resilience in the face of a tougher market condition. Over the quarter, we've continued the journey of improving our inventory and have successfully reduced the level of slow-moving stock. This, of course, releases working capital. It creates a more healthy stock composition that gives us more attractive products in store for our customers, but of course, also has a negative impact on our gross margin. We continue to display strong cost control and have implemented solid cost measures also in NetOnNet over the quarter. Further, we have solid net working capital improvements through our factoring agreement with Resurs Bank. The integration with NetOnNet is also going according to plan. We have good progress on the negotiations with our suppliers, and we remain confident that we'll be able to deliver on our commitment of NOK 200 million of synergies within 24 months after closing. This all also in the face of a lower volume base than we originally had planned for. If we look at our top line, on aggregate, the top line grows by 39% over the quarter, by and large, driven by the inclusion of NetOnNet in the numbers. If we go on a pro forma basis, the organic growth is a disappointing minus 15%. The revenue decline is especially driven by the B2C channel while we see a modest growth in the B2B channel and a stable development in the distribution channel despite being faced with very strong comparables from the last couple of years when we added significant new distribution agreements. Our gross margin also remains under pressure. In a weaker market, where retailers also have a high inventory levels, and we saw a need to continue to sell out slow-moving stock. And some of this puts our gross margin under pressure. But we're succeeding with our other measures, we have reduced our inventory levels by more than NOK 400 million year-to-date. And we have a much better stock composition as we've significantly reduced the level of slow-moving stock, which gives us the opportunity to take in fresh stock that gives us also a more attractive product offering as we move into peak season. And as I said, in the integration with NetOnNet, the supplier negotiations are progressing as we planned. We are confident that we will be able to realize the NOK 200 million of synergies within 24 months after closing. And we think that we will reach a run rate of around NOK 100 million during 2023. It's, of course, a disappointing quarter on EBIT as we land on minus NOK 10 million. The disappointing result is driven by the volume decline in B2C and the gross margin, the pressure we have on our gross margin. But on a positive note in this presentation, we have -- we continue to display solid cost control, and we sustain our industry-leading cost position. Excluding the M&A of NetOnNet, our like-for-like OpEx declined by 6.1% in the quarter and our OpEx as a share of revenue, including depreciation, lands at a solid 10.7%. In NetOnNet, we've also implemented significant cost initiatives that should yield between SEK 70 million to SEK 90 million on a gross level from 2023. If we move into the channels. In the B2C channel, our revenue surpasses NOK 2.5 billion to a full extent, the growth fully driven by the inclusion of NetOnNet. Excluding NetOnNet, there are multiple factors driving the revenue decline. First of all, we come from a period with exceptional consumer spending in our categories during the pandemic, and then directly move into a new period with very low consumer confidence, where we're also very early in the replacement cycle and the market is quite saturated after the sort of peak we saw during the pandemic. At the same time, the share of spend between online and offline is normalizing after the pandemic, both impacting us negatively. And thirdly, as you all know, during the couple of last quarters, we've been working very diligently to improve our stock composition and reduce our stock level. And I think it's fair to say that in doing this, we've become -- in some categories, a bit well conservative in placing insufficient orders on new stock. This has put us in a position where we've had a few out-of-stock situation that also has impacted the sales somewhat negatively. We've taken care of it now. The products are back in stock and we see normalized stock levels, and we're ready for peak season again. And further, the gross profit has, of course, been impacted by the pricing pressure in the market as we see and also by our efforts to reduce inventory. In sum, our EBIT is negatively impacted and lands at minus NOK 24 million. In the B2B segment, we continued to see growth, but also a modest growth of around 4%. The growth -- we're mainly exposed to the SME segment with B2B and the growth comes from the upper end of the segment with all the medium-sized enterprises is continuing to display strong growth. In the lower end of the segment we find our smallest customers, where you see a shopping pattern that more resembles the one we see in B2C, and we see a softer demand there. We also had some further upside that we couldn't capitalize on sales over the quarter as we saw some supply chain issues that restricted our availability of Apple products over the quarter. Our gross margin declines primarily driven by a mix effect, as we've sold quite a lot of products into the educational sector. This is a sector where we normally see products with lower margin being preferred. Further, the gross margin was reduced by our efforts to reduce our inventory and reduce slow-moving goods as well as a negative currency impact, especially hitting us in the Swedish market. In sum, we delivered an EBIT margin of 6%, and that is including Ironstone, our managed service provider. Excluding IronStone, our EBIT would jump to 7.4%. This is a deliberate investment we've made as we're putting our investments behind building a solid technology stack that is -- that we can commercialize and sell in the SME segment. In the Distribution segment, our revenue base holds up well. If we'll take a bit longer view on the distribution segment, we've had fantastic growth for several years as we've adopted and taken on new major distribution agreements. Faced with those comparables and at the same time, with a softer market, we think it's a strong performance to sustain our top line also in quarter 3. The gross margin is negatively impacted also here by mix as we again see that it's the larger accounts and Apple that is driving our sales, while the smaller accounts that typically have a more preferable mix has a softer development. But again, the product mix we're selling is also a product mix, which we can handle with extraordinary efficiency and our EBIT margin is sustained at 1.6%. I'm now going to hand over to our CFO, Krister Pedersen, to take you through the financial performance.

Thank you, Lars. Yes. On reported figures, we have a revenue growth of almost NOK 1.1 million but driven by the combination with NetOnNet. Excluding NetOnNet, we have a revenue decline of NOK 400 million and is related to the softer consumer market. On the positive side, we have good cost control, as Lars has mentioned and we've also taken necessary actions on inventory and net working capital, as I will come back to. Altogether, we have an EBIT decline from NOK 79 million last year to minus NOK 14 million this year, including one-offs. The main deviation is the decline in the B2C market and the pressure on gross margin. On net financials, we have -- of minus NOK 19 million, NOK 11 million is related to the bridge facility, NOK 5 million is related to leasing and the rest on interest on the other facilities. In the third quarter, we had an effect on operations or discontinued operations, profit and loss on discontinued operations. And that is a refund or dividend on the closure of a subsidiary back from 2019, and the effect from this is NOK 6 million after tax. The profit for the period is minus NOK 29 million in the quarter and minus NOK 91 million year-to-date. From this, the Board of Directors expects no dividend to be paid based on the 2022 figures. On cash flow and working capital, we have improved the cash flow from operations by NOK 227 million even with softer figures on the P&L. The biggest single event is the implementation of factoring announced in -- as we have announced in the last quarter presentation, the fact so far is NOK 200 million and we expect to have NOK 300 million to NOK 400 million by year-end and additional effect next year. Further, we continue to improve the composition of the inventory where we are reducing the level of slow-moving stock. Cash flow from investing activities was NOK 29 million in the quarter, compared to NOK 77 million in the third quarter last year, where last year, we had the acquisition of IronStone. The net interest-bearing debt Including leasing was NOK 2.9 billion were of the bridge facility equals NOK 1.5 billion and leasing NOK 0.6 billion. Net interest-bearing debt, excluding leasing and bridge facility was NOK 760 million compared to NOK 667 million last year. Further, as earlier announced, the bridge facility is without covenants, giving us a leverage ratio of 2.8 compared to 1.7 last year. At the end, Liquidity reserve has improved from NOK 521 million at the end of third quarter last year to NOK 969 million this year. Back to you, Lars.

Thank you, Krister. If we do some key takeaways from the quarter. It's been a quarter with a challenging market, especially in the B2C segment, and we do believe that the challenging market will be with us well into 2023. But in order to sustain our competitiveness and create the necessary resilience, we've taken several mitigating actions to make sure we're ready for a period of softer market conditions as well. We're maintaining our cost leadership position, and we're taking significant steps to reduce our cost level in NetOnNet with a program yielding between SEK 70 million and SEK 90 million gross. We're working on -- we're continuously working on improving our stock composition and having a healthy stock level, and we think we're well prepared for the peak season coming up. And we've taken significant steps to secure a healthy balance sheet. Amongst others, we have secured NOK 200 million of working capital from the factoring agreement we've recently gone into. The integration with NetOnNet is progressing also according to plan. And in the supplier negotiation, we're seeing a result that makes us confident that we'll deliver on the NOK 200 million synergy target within 24 months of closing. And we do believe we will be able to realize a run rate of NOK 100 million during 2023. And despite it's been a quarter and just in a couple of quarters of very challenging growth, we're still on a long-term solid growth trend with 10% organic growth since 2019. If we look at our priorities going forward, a key priority for us is, of course, to continue executing the integration of NetOnNet and delivering on our commitments on the NOK 200 million of synergies. Further, a key priority is to secure a long-term refinancing of the bridge loan. We have a very flexible bridge loan facility, and we'll continue to use that flexibility as we find a solid capital structure that creates the best value for all our shareholders. Maintaining our cost leadership position will always be a key priority for Komplett. And in the coming quarters, we'll have a special focus on realizing the effects from the very solid cost program now that we've now implemented in NetOnNet. And we continue to be committed to keeping a solid inventory level and also stock composition that allows for an attractive consumer offering and a good working capital management as well. And we're taking several steps to secure a healthy balance sheet. Of course, we remain committed to investing in having an update, an automated IT stack and Supply Chain Solutions. But in order also to create financial flexibility, we've taken several measures to postpone and to have the option to reduce investments in CapEx as we see fit going forward and have created solid flexibility through that in our CapEx plans. Through the factoring deal with Resurs Bank, we have yielded a NOK 200 million in the third quarter, and we expect a further NOK 100 million to NOK 200 million effect in quarter 4 and potentially even further effects moving into 2023. Over time, we're confident that the consumer electronics market will return to a normalized growth. And everything we see in the consumer research we do gives us confidence that consumers also, over time, also will continue shifting their spend from offline to the online channel, and we're well positioned to capitalize on those trends with solid brands with -- also with strong price positions. There's significant value creation potential that we will realize with a combination of NetOnNet, and we have a leading cost position. And in some we have a very attractive and robust position, and we think we're well positioned for creating profitable growth in the mid- to long-term as markets normalize again. Thank you.

Thank you, Lars. Thank you, Krister. I will now hand it over to Karina for the Q&A session.

All right. Thank you. So we'll start by checking if there are any questions in the audience first? Yes. Could you please say your name and where you're from, please?

Yes. So Petter Nyström from ABG. 3 to 4 questions for me. I take one at the time. So can you give some details on the cost cut in NetOnNet between NOK 70 million to NOK 90 million. When should we expect that in the numbers? And when do you expect it to have full effect?

I think you should expect to start seeing effect early 2023 and gradually moving up to full effect during the first half year, most likely.

Perfect. And then looking at the working capital going into the fourth quarter, if we were to exclude the factoring agreement, how should we view the working capital effect on cash flow in Q4?

We should expect inventory to be reduced by year-end as it should, after the peak season.

I'll continue with a couple of more. Within the B2C, As Lars talked about price pressure now for several quarters. Are you seeing that the price pressure is accelerating? Or is it, let's say, more stable -- and how should you think about that also in the fourth quarter?

Yes. I think we've seen from the biggest supplier -- the bigger retailers, we've seen a bit of easing in their pricing pressure. And so basically, as expected, as inventories turn more normal. Then I think we've also seen that we see an indication that we're moving towards a more normalized level. But still, the smaller incumbents seem still to be relieving themselves of inventory and being a bit push on price. But the larger one seems to be moving towards a more normalized state of pricing towards the end of the quarter and at the start of quarter 4. But then again, how the peak season will play out, I think it's very hard to give any predictions on. But on sort of a going basis, things seems to be slowly moving towards normalization.

Perfect. Last question from me. You talked about postponing CapEx. What should we expect on CapEx for 2023?

Well, we have announced that the central warehouse in Sweden will come at a later stage. We have, of course, maintenance CapEx of between NOK 80 million and NOK 100 million. In addition to that, we have IT investments in upgrading the ERP platforms. So I think in the level between NOK 100 million and NOK 200 million should be -- I would look at that figures.

Any other questions from the audience? No. Okay. So we will move on to the online questions. You've already touched on this, but the first question is, last quarter, you announced a significant reduction in inventory and that this reduction would continue in the third quarter. but we can see that it has increased by NOK 70 million. Can you explain the increase?

Yes. I think it's -- we have increased the inventory somewhat as we prepare for the peak season. So it's only natural that we have a somewhat increase in inventory as we've come down quite solidly. But what we're focused on over the quarter is not the absolute level of inventory, but more the composition of inventory. So we've relieved ourselves of slow-moving goods. And that is often goods that has been in our warehouse for quite some time and has been paid to suppliers. And when we get in fresh goods, that also releases working capital. So it gives us a more attractive product offering to our customers, and it releases a bit of working capital.

Can we expect the same year-on-year reduction in OpEx going forward as we saw in Q3?

Is that for Q4?

Yes, we can see -- yes, it's probably going to be Q4. Yes.

Yes. I think that we can say that we will continue to work on OpEx as we need to compare the cost against the revenue. So we will always look at OpEx.

And to add on that, I think we've displayed quite clearly now that during the pandemic, I think we showed very well, we can scale the business with increased volumes. And I think if you look at our cost percentage, which we -- which is in the material that we're scaling well also in the face of softer volumes, and we'll continue to make the necessary steps to make sure we have an industry-leading cost position. We see that as a key competitive advantage, and we think there is more to be done if needed.

You are guiding for flat revenues in 2023 relative to 2022. Where do you see 2024 revenues? What is the implicit assumption for B2B and B2C revenue growth on your guidance for 2023?