Komplett ASA (KOMPL) Earnings Call Transcript & Summary

Good morning from a beautiful spring day here in Oslo. Welcome to the presentation of Komplett Group's First Quarter Results. My name is Kristin Hovland, and I'm Head of Communication. We will start today's presentation with our CEO, Jaan Ivar Semlitsch, who will go through the highlights for the quarter. Then our CFO, Thomas Rokke, will give you some more details on the financials. At the end, Jaan Ivar will summarize the quarter and give you some perspectives on the outlook. Today's presentation will take approximately 20 minutes and during, you are welcome to post questions via web, and we will answer them at the end together with any questions from the audience. So Jaan Ivar, the floor is yours.

Thank you, Kristin, from a very nice morning here in Oslo. And as Kristin said, I will be going through the first part of the presentation and then Thomas will take us through the highlights of the financials. But as you all know, it's been a difficult start for the year -- for the quarter. But before dividing into the highlights of the quarter, I'll give you some backdrop. As we communicated on our Capital Markets Day in February, markets have remained challenging during Q1 affecting our core categories and our core markets. And during the period, the competition has been rather intense both from traditional players and also pure players; more tactical marketing, more campaigns and then affecting the margins. But we are on track with our communicated cost savings for 2024 and we have introduced additional measures both commercially and cost wise in order to proactively manage our cost base and to offset the negative impact from volume shortfall. I will share a few examples in a couple of minutes. We are confident for the full year. I also want to highlight that although lower profitability has led to a temporarily elevated leverage ratio for the group, our liquidity and financial position remain controlled. And we are confident for the longer term communicated at our Capital Markets Day on our fundamentals in the industry, our online growth and our low cost positioning. But to sum up the quarter. continued market challenges with deteriorated core categories led to a revenue decline of 10.3%. But sustained gross margin progress 0.9 percentage points despite intensifying price competition in the quarter. It's been good work on the sourcing side, on the commercial side in improved payment terms. Cost inflation largely contracted by cost measures leading to relatively stable operating costs year-over-year. Good cost control during the quarter. But a difficult start to the year resulted in an EBIT adjusted of negative NOK 40 million. Weaker sales led to prolonged yet positive build-down of elevated inventories. Very good work around the inventory and the inventory level in all companies. And good progress on commercial efforts and cost reduction initiatives and expected to have an increasingly positive effect throughout the year. But let me give you some highlights of actions we are accelerating further on the backdrop of this quarter. First of all, the store expansion in NetOnNet Norway is going very well. We opened our store -- newly reopened in Stavanger the 11th of April. Very good opening and very good growth momentum during April for NetOnNet Norway in total and also for that store. Another large city has been signed to be open before peak and we're very enthusiastic about that. And we have improved online checkout and more active price management and working on that during Q2 and Q3, both on payment functionality and delivery options. And the price strategy on NetOnNet Norway is working very well for the moment. And the local team is fully in place from 1st of April, a very small lean team but working very well. Then we are extending our product range and cost program in Webhallen and mobile with subscriptions and wider private label assortment will be ready from the second half of 2024. We are extending our cost program at Webhallen without any impact on sales or customers, but doing that in addition to the closure of the 5 Webhallen stores. And we are refining our concept to be rolled out during the second half. And in fact the Sverige, our flagship store in Stockholm will open with a new concept already the 2nd of May with more mobile phones, headsets, gaming and really taking the authority around those categories. And then we are improving our market share with leaner setup in Komplett, new storefront and improved delivery options from August. We see that the competitors are moving ahead in this area. We have always been leading in this area the best customer satisfaction rates and we are improving this further with effect from August. Also quicker response to price. As we see the tactical marketing, the tactical pricing there out in the market; we are doing even more in adjusting the prices more frequently both up and down in the market. And more tactical marketing as we see that from competitors, we do a lot around brand building. We're shifting a bit into more tactical marketing in Q2 and going forward. And then for Komplett services, we do see further potential on logistics, IT and overall spend; which also will have a meaningful effect from the second half 2024. And underpinning all of this, we are improving our commercial terms. The team centrally, as communicated on the Capital Markets Day, fully operating from 1st of March and we have agreed improved payment terms with more than 20 key suppliers already, which will also have a positive impact throughout the year. And also securing assortment for back-to-school and for the peak season with some key suppliers where we now will be fully in place with a very strong assortment for Q3 and Q4. So with that backdrop, I'll leave the word to Thomas. And I'll come back with a summary around our outlook and some of the key takeaways for the quarter. So the floor is yours, Thomas.

Thank you very much, Jaan Ivar. So good morning. After this, I'll just walk you through some of the details around the financial performance in the quarter. And as usual, I will start off with the top level of the group. And as you can see here and as Jaan Ivar alluded to, this is a quarter where quite a lot of negative effects impacted the company; some of them temporarily, some are more kind of permanent nature. The revenue declined by 10.3% and this time it was actually a weak performance both in the Norwegian and the Swedish market due to the fact that we had additional effects in some of our categories. Still a difficult market in Sweden and also on top of this Easter effects in some of our businesses, I'll come back to that. Given the gross margin improvement, this shortfall could be reduced to a 4.5% decline on the gross profit. And the gross margin progress continued this quarter despite the more intense price competition in the quarter as Jaan Ivar explained previously. We do expect to be able to maintain our sourcing efforts in this area and as we discussed on the Capital Markets Day, the commercial team and the impact of the commercial team will actually increase over the year. But given the new market environment and also as Jaan Ivar described for you, there is a need to optimize the balance between revenue and margin and we might have to invest some of these gains to drive the gross profit and the revenue going forward. In the cost side, you can see that has been a relatively stable development year-on-year. Quite a lot of the uplift here is actually driven by currency and translation effects and obviously also the expansion of the store network in NetOnNet and also increased marketing efforts. The underlying development was actually positive. Also here we are reinforcing our efforts, as we discussed on the Capital Market Day and expect to stabilize and even reduce the level of operating expenses for the year. Nevertheless, there was a decline of the sales driving down the result for the quarter to minus NOK 40 million, which is a decline year-on-year of about NOK 49 million. B2C is one of the more intense competitive environments and as you can see here, we had a relative negative development across the geographic markets. That was characterized by persistent demand challenges in Sweden and also the competitive environment. We have been discussing that on a number of occasions last also on the Capital Markets Day. And in Norway, we do see actually an underlying market improvement; but we see in some of our core categories that we benefited last year from new innovations and new product launches, which was not repeated this year and therefore hit us in some of our core categories for the period. The gross margin uplift continued also here and we could also here continue the positive development despite increasing price competition in the market. Again here is obviously one of the areas where we will have to rebalance between gross profit, price and volume. EBIT margin obviously was at negative 0.7%. And here, as again Jaan Ivar alluded to, we have continued obviously the efforts we have previously described, but have also added additional measures to make sure that we can also handle a more difficult market environment. On the B2B side, we did also see a relatively negative development in the quarter, which was also a continuation of the underlying trend we've been seeing for some quarters now. The shortfall in Sweden, which was significantly higher than Norway is also affected by year-on-year effects with a large delivery last year and also obviously the quarter is affected by Easter in this year. The B2B side is obviously more subject to billing days and we could also see here a meaningful decline in sales relating to the Easter. But still the macroeconomic environment remains difficult and in particular among the smaller SME customers, demand is muted. We did actually manage to keep a relatively high margin despite this price competition. And also there is a certain negative customer mix in the sense that the smaller customers are falling off. In the marketing expenses and the increases could actually be managed in this part of the business and therefore remain stable, but still could not prevent the sales hit in the quarter to an EBIT decline. Distribution also 1 of the areas strongly affected by Easter. This is obviously 1 area where we see less activity around the holidays. Again a significant drop, which reflects that fact. But also here we are affected by a decline in core consumer spending and also a shift from smaller SMEs to larger distributors also affecting the margin causing here, in particular the margin drop, a significant decline in the underlying profit. The overall profit and loss is obviously affected by the operational side as described already. The depreciations went up from NOK 81 million to NOK 95 million. Most of that is related to the new infrastructure and IT investments done during 2023, but some of it is also relating to increased right-of-use assets effects i.e., depreciation of leased assets. Oneoff costs totaled NOK 6 million and as last year mainly relate to organizational changes. And the net financials were down to NOK 43 million whereby it should be. Remember that in Q1 '23 we had NOK 10 million of oneoff costs relating to the refinancing. So the underlying costs have obviously increased in line with increased interest expenses. Tax income is just relating to the loss. But loss for the period ended up at NOK 72 million, down from NOK 43 million last year. Cash flow, we had a negative net operating cash flow in the period despite a decrease in the inventory and a decrease in the trade receivables. And in the trade receivables, we also have less factoring impact in this quarter. It's for the sake of Komplett, it is down to NOK 303 million from NOK 339 last quarter, which is reflecting by the way the distribution and the B2B business weakness up there or the Easter effects of those businesses. But this has been countered by a reduction in accounts payable of NOK 349 million. The reason why we see a reduction in the accounts payable is due to the shift, i.e., the phasing when you actually do a inventory reduction. You first actually pay the suppliers and then you reduce your purchase volumes and therefore, there will be a kind of a swing effect around those effects. We don't expect to see that going forward. Net cash flow used in investing activities is mainly related to the IT infrastructure and limited set of new stores. Net cash used in financing activities is mainly related to rebalancing of overdraft facilities and financing, but the underlying remaining part and the most important part is obviously the interest charges and the IFRS payments. In the quarter we did manage to build-down the inventory and we did that very proactively to avoid a deteriorating in quality of the inventory. As you may recall from our previous quarterly reports, the health of the inventory is critical for our business and we managed to do that during the quarter affecting, as I said, the payables. And we have managed to reduce it NOK 67 million and year-on-year actually by NOK 131 million and we do expect to be able to maintain this level going forward. Net working capital is obviously reduced year-over-year, but is affected by the tax deferment scheme in Sweden. Financial position: our equity ratio is 38.7%, which is slightly up actually from the Q4 given the structure of the balance sheet. The net interest-bearing debt is also stable year-on-year, a slight increase of NOK 40 million. And the liquidity reserve remains solid at almost NOK 850 million at quarter end whereby it should be remembered that comparing to last year, we had a facility of NOK 100 million, which we from our side discontinued as it was not longer required. And also at the year-end, we had a temporary uplift in overdraft facility of NOK 100 million, which needs to be accounted for when comparing to year-end. Again this is positively affected by the Swedish tax deferral. But as you will see in the quarterly report, that repayment of the swatch tax deferral can be extended for quite a substantial period of time. What we did see, however, was a temporarily elevated leverage ratio of 3.3x. That is comparable to 3.8x last year. So it does actually entail some seasonal effects and for that, we have together with our banking partners shifted the Q3 covenant to Q1 to better reflect the seasonality in the business, but also to obviously cater to the challenging market conditions. As we said on the Capital Markets Day, this is 1 area where we do not see ourselves done. We do have a target of 2x to 3x on the leverage ratio, but we still do feel comfortable that we can resolve this issue overall with organic means. And on that note, I leave the word back to you, Jaan Ivar.

Thank you, Thomas. I'll sum up a bit. As we mentioned, continued challenging demand environment especially in core categories resulting in a drop of 10% for the quarter. But good gross margin progress despite intensifying price competition in the quarter thanks to good work on the sourcing side as well. Good progress on existing cost measures and commercial initiatives and further actions to secure financial, commercial and operational benefits with direct effect from second half. And the financial position and liquidity controlled with a temporary rise in the leverage ratio. Limited growth potential in the first half 2024 as also communicated on the Capital Markets Day coupled with tough competition, but we are and have addressed that through more tactical marketing and more tactical pricing as one of the examples. And the commercial and cost initiatives expected to have an increasingly positive impact in the second half of 2024. And there are indications of improved consumer confidence to have a positive effect during the second half 2024. And the strong underlying market fundamentals for consumer electronics and online retail, that remains and we firmly believe in that. And the initiatives to drive growth and profitability towards 2026 and '28, they are well under the way. So I'd like to sum up also with the key takeaways from our Capital Markets Day in February. We are in a fundamentally attractive market. We are positioned in the fastest growing online segment with strong and leading customer satisfaction. And we have a cost leadership position and a scalable platform. So we stick and we firmly believe in our capital markets targets both on the organic growth side reaching NOK 18 billion and then NOK 20 billion on our EBIT targets and on our leverage ratio targets and also through our cash conversion targets. So with those words, we would like to open up for Q&A. And then we'll have [ Elisa ] here and Thomas.

We will start with questions from the room. So if you have any questions, please raise your hand. Yes, Joachim.

So you're showing quite a soft market development in Norway particularly in March, which I'm assuming is largely due to the Easter impact and fewer shopping days. Could you elaborate a bit on what sort of development you've seen in the market going into Q2? Is it pretty much stable or any major changes?

I can start. Of course there are some Easter effect on the B2C side, but also on the B2B side where we actually have 5 days without any trading on the B2B side, which is probably more of an impact on the B2B than the B2C side. So that's a bit of the backdrop to the Easter. Moving into Q2, we do see still a soft market, but it varies a bit between the different categories. Like for white goods, we see improvements online in that category, but we are exposed with a rather small exposure to white goods. So we do see some signs in some categories where the market is picking up slightly. But overall we see the same sort of market situation as we have communicated before, Q1, Q2, first half. And then the question is with the wage settlement and improved purchasing power for the consumers, when we will see some positive effects and we think that some of those positive effects we'll see in the second half. That's our take on that.

I think the longer sort of it, this is also quite early in the quarter to actually make a conclusive statement on it. But the first weeks of April has obviously been more positive.

Just a quick question on the gross margin, really impressive development in Q1. Could you just elaborate a bit more on sort of what specific measures that have been driving this gross margin expansion year-over-year?

So here because of our new scale with NetOnNet, Webhallen and Komplett combined; we are first very relevant to the suppliers and so we also meet suppliers at different levels than before. So it's been good work centrally and locally together in terms of reaching better terms basically both on the actual terms, but also on the payment terms. So that's number one. And the second part is that we have also gotten access to more relevant assortment especially in those categories where we probably are a bit underrepresented like white goods and also in some other small domestic appliances categories. And those effects you don't see now because that will be more for back-to-school and going forward on that note. But it's important to say that the team has been fully operational just since 1st of March. So we expect more to come in the joint work centrally and locally on that note.

Fantastic. And just finally, regarding the leverage covenant, it drops back to 3x in Q2, right?

Well, the covenant ratio I think is wrong to actually focus on 1 metric alone. I think what we say is that we think it's elevated, we think it's going to draw back and we don't think this is a situation that cannot be resolved organically and together with our partners.

Just the covenant threshold sort of from the..

The covenant threshold, yes, drops back to 3x for the time being.

Any other questions from the audience? We have a few questions on the web. We will start with the questions from Ole Martin Westgaard, DNB. He has 3 questions and I will read them one by one. First one, how much was factoring and the utilization of the deferred Swedish tax credit in Q1?

I think I mentioned that NOK 303 million was the factoring utilization and it's lower than previous quarters due to the Easter effect on the B2B and the distribution side. And NOK 444 million is the tax deferral in Sweden right now with the changes being exclusively FX related.

I think you've touched upon the next one as well. But how do you see the competitive landscape in Sweden? Are you gaining or losing shares?

I think in total we are keeping or holding our market shares, but it varies a bit between different categories. And those categories in Sweden where we see the biggest market decline is basically in categories where we are more exposed like these are some details, but like PlayStation 5 launched last year was huge and it's been very little around PS5 this quarter. So I think it varies a bit between the different categories. In general, the market in Sweden is very soft, has been soft. We do see signs in the Swedish economy now and they improved the GDP and also some improved consumer confidence in some of the surveys we do see. In terms of the competition, it has been rather intense for the quarter as we mentioned especially on some more tactical campaigns and then it's important that we also respond to that quickly, which we do from that point of view.

I think some of that also reflects that we are probably not the only ones going into the year with elevated inventories. So there has been a process of rectifying that.

Could you please comment on which product groups that did well and which product groups that saw more than average revenue decline in Norway and Sweden in the quarter.

Would you like to give some points to that?

I think we did actually quite well in some of the smaller segments of ours like MDA, SDA et cetera. Those were actually positive developments in the quarter. Unfortunately, as we said, the effects on the gaming side was actually cutting through both markets. The PlayStation 5 is just 1 tangible example. Specific graphic cards are another and also the shift in the PC market from kind of high end pieces more to low end pieces where our position is not as established was kind of an area where we actually saw weakness and there is some weakness both in the Swedish and in the Norwegian market and also actually in the B2B business.

We have a very strong position in our gaming portfolio, but on entry PCs we don't have the full assortment and it's part of the sourcing strategy going forward in terms of also having the right assortment on entry models for computers.

Moving on to a question from Vegard Bjerknes. Please give some insight into OpEx reduction plans and how OpEx level stands versus other pure players?

Yes. So as we presented on our Capital Markets Day, we have a leading cost ratio towards not just incumbents, but also the pure players and we intend to be a leader on that. And therefore, we are addressing further cost reductions, further cost measures in different areas without having a negative impact on the customers or the sales part and keeping up on the customer satisfaction ratios. And the increase in the OpEx percentage during the quarter is basically because of the revenue decline of 10% on our cost measures. And if you look at year-on-year with the inflationary environment and also some currency effects during the quarter and also we have invested a bit more in marketing during the quarter. So if you look at the underlying cost base, it's very solid and strong, but there's always room for improvement on the cost side also at the Komplett Group. So we are addressing that and take further actions. And as I mentioned on Webhallen, we are doing some additional cost measures in addition to the 5 stores which we closed down.

Good. Then we have a question from [indiscernible]. If you can sum up, what will be the most important measures to improve the results for the rest of 2024 for Komplett? In which city will we see the next NetOnNet store?

Yes. So we will not reveal the name of the city in Norway, but it's a very big city although Norway is a small country. But in Norwegian terms, it's a very good, yes, both location and the way it will operate. I think in addition to that, as we mentioned, we do expect improved consumer confidence during the second half which will be a positive. And we are very conscious on some of the efforts we do to get growth in the market and get growth for the Komplett Group in a meaningful way balancing of course is with gross profit and EBIT.

Good. Then we have a couple of questions from Hakon Fuglu. I think we have partly addressed some of them already. But are you able to quantify the Easter impact in Q1?

I don't think we would dare give a number on that. I think overall it is not that significant, but for the distribution and the B2B business, it's actually meaningful.

Good. Given the very strong gross margin for the quarter, do you expect to reach your 2026 target already in the second half of 2024?

I think it's important to stress here that we do see continued impact both from the sourcing team and also from the efforts already done on the sourcing side. But as alluded to in the presentation, given the current market environment, we do see a potential need to kind of invest some of these savings into generating volume. So we will probably see more investment in driving volume through this. We do not expect to reach our gross margin target by the second half.

He's also asking how has Q2 developed so far? Do you have anything to add beyond what you said before?

Not really.

Moving on to [indiscernible]. Can you give some more details on your further action plans on cost cuts for the group, but also in Webhallen?

So we are not sort of communicating the details around those additional cost measures. But as I mentioned, it's a potential within IT, within logistics where we do see simplification and we can have a leaner setup for example in Sandefjord. And also in Webhallen and NetOnNet, we are progressing on the existing cost programs, but we do see further potential in that area and that's progressing rather well. And then we do some -- as I mentioned, it's important that we keep control and have a very sort of controlled cost base, but we developed also on the revenue side, as I mentioned in my presentation; improved the storefront on our website, improved delivery options and improved payment functionality. We have always been a leader in that area, but we do see that some of the competitors have improved so we need to improve even more and that will have some positive effects from August when this is fully in place. So there will be more freight alternatives for example as a consumer when you order online.

And I think as we said on the Capital Markets Day, our ambition remains as before to keep the cost level constant and to eat all inflationary pressures and also eat and compensate for additional expansion, i.e., either keeping it constant or reducing it over time. And that's what both the originally intended actions contain, but also what the additional ones will kind of support.

Yes. His next 2 questions are on the Easter effects and Q2 development and I think you have already addressed those. Nearing the end here, 1 final question regarding the financial position and the question from [ Lars Erik Hansson ]. I would assume that the financial uncertainty could drop significantly if you put in, say, NOK 500 million in more equity. Why don't you pursue such a prudent action?

Well, we don't see that action required at the time being. At the present, we see that we can actually resolve the situation organically as we said at the Capital Markets Day. We are blessed with good financial partners who actually know the industry, know our business and we also have quite some potential in the business itself. So for the time being, it's clearly we want to actually do this organically and think we can actually control it that way.

No more questions from the web. Is there any questions from the audience? No. Back to you, Kristin.

Thank you, Jaan Ivar and Thomas. I want to remind you that our Annual General Meeting will be held on the 8th of May and we will be back presenting our second quarter results on the 18th of July. Thank you for joining us today and we wish you all a great day.