Musti Group Oyj (MUSTI) Earnings Call Transcript & Summary

Hello, everyone. My name is David Ronnberg. I'm CEO for Musti Group. Today, we're going to present the quarterly report. In Helsinki, Finland, we have Robert Berglund, our CFO, and he will soon speak and take over for me. I think, Robert, you're going to show the slides. We can start with the agenda. I don't see the slides from here. If you can show them. Is that possible? Perfect. Thanks a lot, Robert. So the agenda for today is that we will go through the group development, then we will go into the segments that Robert will go through and then the financial and market outlook. We will do a summary with a quarterly report in the end, going through our financial targets. But if we start by looking at the highlights. So a very strong and profitable growth that we're showing in the third quarter. We are very pleased with the mostly strong third quarter report. Net sales grew with 16.6%, coming up to EUR 68.8 million. That was mainly driven from new customers that we've seen, that we are still continuing to take market share in all 3 markets. So during second quarter, we grew with 15.9%, which means that we have a very strong momentum in the last 9 months. We -- during the quarter, we have been focusing on growth, adapting to the COVID-19 situation, but also focused even more on the profitability that we've seen in the EBITDA development. Sales in like-for-like was 11.5% in total, 5% was coming in stores, and online was growing with 36% like-for-like. So we have seen a strong ramp-up since March when the COVID-19 impact was shown. There was a clear shift from stores into online, and our pure plan online strategy has served us very well. Focus for us has been to keep high availability and serve our customers. And that's why we've also seen that the online share of sales has been increasing in the quarter. Important to point out is that in the end of the quarter, in June and also in July, we've seen that it has been flattening out to levels that it was before March. But also when we're talking about the profitability, we, of course, incredibly happy seeing the adjusted EBITDA increases to EUR 6.4 million, a increase of 54%. And it's strong profitable growth in all 3 countries. Adjusted EBITDA margin came in at 9.3% versus last year, 7.1%. Last quarter, we presented 8.3%. So also here, we have a very strong momentum in the last 9 months. Cash flow from operations was EUR 2.2 million versus EUR 11.1 million. There is a lot of details behind that deviation that Robert will go through that more later on. Net debt came in at EUR 107.9 million, including a lease liability of EUR 65.9 million. So excluding that, we have EUR 42 million in net debt. And the last 12 months adjusted EBITDA net debt came in at 2.4, which is below our long-term target of 2.5. We -- I was saying in the beginning that the growth was mainly driven from new customers, and it's proven that our loyal customer base is growing superfast. So we had an increase with about 13% versus last year's quarter. And also, if we include our online verticals with the registered companies that is still not in the loyalty club, we had over 1.3 million customers. So an increase about 18% total versus last year. So let us look at the COVID-19 effects. So first of all, very important that we have been focusing on the staff and customers safe and also maintaining availability, be able to deliver products to our customers. The goal has been to deliver high-quality service, even though we've seen these challenging times. Availability, fast deliveries through our local warehouses into the pure-play and omnichannel verticals. And as I said earlier, we saw a huge increase in the online sales, especially in March, since March, coming -- flattening out, coming back a bit in the end of the quarter in June. But in total, share of sales online was 25%, an increase of 36.7% during the quarter. Also important to point out is that the total underlying demand has been very stable, good momentum in the last 6 to 9 months, but we've only saw a shift during these months from stores to online and that we're now seeing coming back. Most of these underlying growth has continued to be very strong after the third quarter. Something that we've seen is that registered number of new puppies has been increasing rapidly since March. So during April to June, we've seen an increase at the [ kind of clubs ] of about 14% registered new puppies. And important to point out there is that those puppies -- it takes a while before we see it in our numbers. We have slowly seen it since June, increasing the visibility in the end of June and also going into July. And those puppies will, of course -- we see it as a long-term effect because they will probably be loyal customers to us the coming 10 to 12 years. So let's look at the sales. Net sales increased by 16.6%, a record quarter in growth. We're, of course, very happy with that. We had 11.5% like-for-like. There was a strong growth in all 3 countries. In Q1, we grew 9.7%; in Q2, we were growing 15.9%; and now, 16.6%. So fantastic momentum. Sweden was delivering during the quarter 13% like-for-like, both a strong momentum in stores and online. Norway was doing 45% like-for-like, also strong growth both stores and online. Finland was doing 6% like-for-like. There was a clear shift here in Finland from stores into online where -- specifically Helsinki area and shopping center, with a tougher restriction in the -- with the COVID-19 was visible. This was also flattening out in the end of the quarter. So the increase in online part was more visible in Finland than in other countries. Net sales rolling 12 months, EUR 272 million. And per segment, we've seen that Finland are losing a bit of share to Sweden and Norway. So Finland is now standing for 46%. Last quarter, Finland was having 48%, and that's also part of the strategy to grow Sweden and Norway bigger and also converge the margin closer to the Finland levels. And that takes us to the increased profitability. So from a profitability point of view, adjusted EBITDA increased by 54.3%, which takes us to the margin going from 7.1% to 9.3%. That's an increase, about 30%. We have been focusing on growth taking market share but also using our operating leverage and our strong platform that we've been working with the last 2 years. And it's clear now that even though we see a shift from stores into online, we can increase the profitability. Very good cost control and efficiency in all 3 segments and markets. Adjusted -- adjustment in EBITDA of the EUR 0.7 million is referring to the IPO process. What we're also very pleased with to see is that the adjusted EBITDA margins in Sweden and Norway has converged faster than expected towards Finland levels. This is one of the main strategy that we're having for increasing the total margins in the company, and Robert will tell you more of that fantastic development in next section.

Yes. So hello, everyone, also from my behalf. We go through the segments and then the financial position. Starting out with Finland. Finland continue with a strong, stable net sales development, has also EBITDA improvement by 1 percentage point during the quarter. Like-for-like was 6.2%. Total growth, 10%. Growth in both stores and online, even though Finland was the country where we saw the kind of the biggest impact of the COVID-19 situation, especially in shopping centers in the Helsinki area that was then compensated by the increase in online, but also in stores in other locations than shopping centers. And we continue to have the focus on profitable growth, which is also visible then in the profitability improvement in Finland. The EBITDA -- adjusted EBITDA margin increased from 21.9% to 22.9% in the quarter driven by operating leverage from the growth. Also, we had lower hours in the stores driven by the kind of a switch from stores to online due to COVID-19 and also lower operating costs in general due to, for instance, lower level of traveling during the quarter compared to earlier. We opened one new directly opened -- operated store in Finland during the quarter. Sweden, the strong momentum continued also in this quarter. Profitability -- with also a clear improvement in profitability. Net sales was 16.8%, up compared to last year, and 13% of that was driven by like-for-like, both in stores and online again and clearly driven by increase of number of customers. We are also very happy with the EBITDA improvement from 7.3% adjusted EBITDA margin last year third quarter to 10.5% now in this quarter, which is a continuance of the trend we have seen earlier where we -- where it's really driven by the scalable platform we have in place and operating leverage that gives us compared with then -- combined with better campaign efficiency and also kind of some part of lower costs driven by COVID-19 and then we also have kind of an offsetting impact from increasing share of online where we have a slightly lower profitability than in the stores. But a very good development all in all. We also had a -- this was also a quarter where we focused on new stores and actually also acquisitions of franchise stores. So we opened 3 new stores and acquired 2 franchise stores. And at the same time, we also closed 4 franchise stores during the quarter. Then going to Norway. The incredibly high sales growth continue also with now a clear EBITDA improvement, also something we have been visible during previous quarters. But this quarter, it was even higher than quarters before that. Sales increased 62.9% driven by like-for-like of 44.8% and then the ramp-up of the new stores. So we have a very strong momentum in both kind of stores that start to get mature, but also in the new store development. And yes, the EBITDA improvement from 5.5% in adjusted EBITDA margin to 15.7% is something we are very happy about and driven by the fact that in Norway, we start to reach a critical mass where, really, the impact of the operating leverage start to kick in and that we are very happy about. We opened 3 new stores in Norway during the quarter, all directly operated by us. That was about the segments. Then we go into the financial position and market outlook. Starting with the cash flow from operating activities, that was EUR 2.2 million in the quarter. It was actually impacted by a couple of things. First of all, we increased the inventory level to ensure high availability in our network also during the COVID-19 situation. We also then paid a significant part of the transaction costs during the quarter. And then we had a bit of a different timing of payment of accounts payables compared to last year's quarter, and that actually causes the deviation to last year. However, most of these impacts are kind of areas where we see that and expect the kind of a normalization during Q4 this year as the transaction costs have now been paid and inventory levels are on a level, which we can actually secure high availability. At the same time, gearing was a level of 73.3%, slightly up from last quarter, but still on a very good level. Net debt, EUR 107.9 million, which, as David mentioned, includes EUR 65.9 million of lease liability. The liquidity of the companies on a very good level, EUR 7.8 million in cash and cash equivalents at the end of the quarter. And on top of that, we have a credit limit of EUR 4 million and EUR 10 million in undrawn credit facilities. Investments during the period relates mainly to new stores, relocated stores. And then also, we did the acquisitions of the franchise stores. Yes. That's about the cash -- the financial position, then we go into market outlook, and I hand over to David.

Thank you, Robert. So market is growing with 4%, approximately before the COVID-19 impact of the puppy boom that we're seeing. And we are obviously outgrowing the market heavily with about 12% during Q3. With our financial targets, we -- from a growth perspective, we estimate to reach at least EUR 350 million in 2023, which is 9% CAGR. We are at 13.9% the first 9 months. So I think we have a good position there. Profitability, 10% to 12% adjusted EBITDA margin mid to long term. We are now at 9.5% first 9 months. So for us, the 10% is more short term as we see it. Capital structure, net debt below 2.5. We are at 2.4 also there in a good position. And dividend policy, to pay a dividend corresponding to 60% to 80% of net profit. Overall, we are in a very, very good position. We see it. So let's do a summary of today's quarterly report. So we have a very strong third quarter with strong profitable growth in all segments delivered today. Sales grew with 16.6%, 11.5% like-for-like, mainly driven from new customers. All 3 segments were showing strong like-for-like. We had a shift from stores to online during the quarter. I think we have adapted the company very, very well to these challenging times. We have been increasing share of sales online to 25% with a sales increase of 36% during the quarter. Our scalable and omni platform has served us extremely well. So we have been taking market share. And not only taking market share and also increasing growth, we have more or less doubled our EBITDA with 54% to EUR 6.4 million. Very positive also is that Sweden and Norway, their adjusted EBITDA margins are now converging faster towards Finland than we have expected. And we also, a couple of months ago, went out with the communication saying that we are focusing more on growth because we're seeing a huge opportunity to take more market share. And I think today, we are proven that we can focus on profitable growth, not only growth. And we can also communicate that most of this underlying growth has continued to be very strong after the third quarter. So all in all, I think Musti is in a very, very good position. We have a lot of things to do ahead of us and also to keep on gaining market share in all 3 countries. Thank you very much. So we probably have some questions coming up.

Okay. We have a few questions from the venue. First one, what percentage of sales is spent on marketing? And what type of marketing do you prefer?

Yes. So the percentage spent marketing increased a bit last quarter. During this quarter, we went back to a more normalized level. We're spending it on all types of marketing, everything from digital to radio to print, et cetera. Regarding the levels in marketing, maybe you want to voice that over, Robert?

Yes. The percentage of sales has been actually fairly stable during the -- already couple of years, so about 4% of our net sales.

Thank you. We have another question from the venue. Of the strong like-for-like growth you had in Q3, how much is related to COVID and how much about it is gaining market shares on competitors?

So if we look at the COVID-19 impact, we saw a bit of a spike in demand during March. And then we saw a bit of a small hangover in April and then it normalized during May and June. So from a quarter perspective, why don't -- I don't think we see any impact of the COVID-19 situation. But what we see in the end of the quarter is that we are getting more puppy customers seeing in our own figures, but that's something that we believe will grow and be stronger going forward, something that we also can correlate with the strong demand after the quarter.

And the last question from venue, can you elaborate a little bit on the normalization of the sales growth in June and July?

Robert, can you...

Yes. Well, we can say that the share of online started to decrease back towards the level that we have had before the COVID-19 situation, and that -- that's actually the trend. We are not exactly there on the same level but started to kind of level out towards the same level.

From a total demand situation, we have seen a strong demand momentum in the last 9 months, pretty stable going upwards, also following the growth and numbers that we have been delivering in the quarter reports, but it has been a strong shift, as we said, starting in mid of March and then from stores to online, peaking. We saw a peak in April and then leveling out, as Robert said, towards June and then going forward.

Thank you. There are no more questions from the venue. So operator, we are ready for questions on your side.

[Operator Instructions] Our first question is from Svante Krokfors from Nordea.

Svante Krokfors from Nordea. First one is regarding product availability. Have you seen any problems in your supply chain during Q3 or after? And have you seen any signs of price increases from suppliers following the COVID-19-related demand boost that has been in the market?

Robert, you can take that.

Yes. So during the -- we haven't seen any significant kind of issues on the availability. The availability has been strong during the whole kind of pandemic, and part of that is due to the fact that we increased the value -- the inventory level in order to make sure that we are -- we have that situation. And that actually also goes for price increases. We haven't seen any kind of price increases due to the corona or COVID situation actually at all.

Okay. That's very clear. And then perhaps a comment on the competitive landscape. Can you elaborate a bit on if you have taken more market share online or in stores, at least if you compare to the surpluses growth numbers you appear to be growing at least double the pace than they are.

Yes. I think overall, the competitive landscape is still the same regarding the surplus and also the groceries and the small independent stores. We've seen clear visibility, especially in our online verticals that we have been taking market share and customers from other online players. And I think very important is the local shipping customer service availability that we have been focusing on versus others, as surplus, for example. And then we have seen that we have been taking market share for -- from small independents and groceries that we've done the last couple of 2 years.

Okay. Then regarding your gross margin. I think you commented in the report that the gross margin was broadly unchanged year-on-year if you adjust for the shipping costs in online. So I guess this is quite a good achievement given that your O&E share is also declining, and you are probably not concerned that you see a decline there as long as you are able to take market share and will be able to lift that part up later.

Exactly. I think that's an important discussion. We look at that gross margin 1 that has been on the same level. And then gross margin 2 that we are reporting includes distribution and freight costs. And that's why it's coming down a bit. So overall, even though we've seen a channel shift, we have been able to keep the margins, which -- it's -- a couple of reasons behind it, but supplier efficiency, pricing campaigning and those things is behind it. And I think it shows that we are not diluting the margins by lowering prices. I think the opposite.

Okay. And then regarding the EBITDA margin improvement in Finland and Sweden. You noted that part of that was driven by lower working hours and lower volumes related to that. Is that a material impact on Q3 numbers?

It's a material. If you look at only the stores, it's a positive effect, but we -- you need to have in mind that the volumes has been coming down also at the same time. And at the same time, we have seen a shift into online. But -- so from a country perspective, it's not the one-off positive effect.

Okay. And then perhaps the last one regarding Norway. Surprisingly strong EBITDA margin at 16%. Should we now see this as -- is this now the new floor level? Is this -- are we only going up from this? Or how should we interpret it?

It's a very strong margin. Let's see how it looks going forward. It's, of course, a -- yes. It's proven that we can deliver very strong margins in short term, but let's see how it looks going forward.

Okay. Then just one final. Regarding the currencies, can you elaborate a bit on how that impacted your operations and also the positive net financials impact?

Yes, Robert?

Yes. So yes, we saw a stronger -- kind of stronger development now in the -- especially in the kroner -- Swedish kroner during the period. That has a positive impact on the sales figure, but of course, also the cost increases and the level -- kind of impact on the EBITDA level is not significant actually due to natural hedge and other hedge -- hedging activities. The impact and the kind of exposure to foreign currencies we have is really on the financial items where we saw in the previously quarter a weakening Swedish kroner that then kind of ended up in a negative unrealized currency -- loss kind of currency -- unrealized currency loss in the quarter. Now when the kroner again got stronger, then we got a kind of a gain on that. So that is the kind of area, which fluctuates and also an area where we look into measures to kind of mitigate that even more. Yes. So yes, it's mainly relating to the Swedish kroner, actually. The other currencies are not significant.

[Operator Instructions] Our next question is from Olli Vilppo from Inderes.

I was thinking that how does this puppy boom affect the overall market growth to the puppies spend -- on the owner of the puppies spend more money? And how long do you see that this boom continuing?

So when we look at the market growth of 4%, 1% is number of new pets, and the 3% is usually -- it's the outspend going from lower quality products to more premium. It's also proven that puppy customers are spending a bit more. So puppy phase for us is superimportant, not only taking in the customers and get them into our system for long-term revenue, but also for the more outspend that they are doing. What you've seen is that registered puppies was increasing rapidly from about 2% every month to now 14% the last quarter. How that will affect the market growth is not -- it's not 100% clear for us, but it's obvious that the market growth will go up. And we believe that we are in a fantastic position to gain more puppy customers than our competitors.

And our next question is from Svante Krokfors from Nordea.

One follow-up question on the tax position that you have. It appears you have a tax rate close to 20%, just looking at the headline numbers. Can you give some guidance on how we should look at that going forward?

Yes. So I mean we have unutilized tax losses in -- outside of Finland that now during the quarters, we haven't really kind of looked into the full year impact of that and taking a position on that. So in that sense, more kind of stick to the kind of effective tax rate based on the kind of tax rates of the countries. Assumption is that -- current assumption is that we will have a slightly lower tax rate than in the last quarter once we have the full year numbers in place. Exactly how much is today, quite hard actually to kind of give exact guidance on due to the fact that it's a bit different how -- it's kind of not yet exactly clear how the kind of profit divides between the countries with all the kind of central warehouse operations we have in Sweden and so on. But I expect it to be lower than in the quarter so far.

[Operator Instructions] And there seem to be no further audio questions. I will hand the word back to the speakers.

We have 2 more questions actually from the venue. First one, could we have more details on the impact in basis points of margin related to the different [ effectives ] given on the margins, less travel expenses, more COGS, fewer opening hours, et cetera?

I think, yes, we don't -- I think we don't share those details. But I think overall, there's been a cost improvement through the lower cost that we just talked about, but there have also been a volume impact in Finland, specifically regarding the COVID-19 restrictions. So in net, I don't think we should -- I don't think it's an impact that has gained us.

Thank you. And a follow-up for that, any reversal effect to expect for Q4 and into next year?

Yes, Robert?

I mean the measures we have taken are actually based on how the kind of customer behavior have changed and the channel shift that we have seen, and that we will continue to adapt to also. Also now, if that changes with the COVID-19 situation, then the impact of travel costs of those, they are not that significant to -- compared to the kind of a full impact -- full EBITDA figures.

[Audio Gap] from the venue.

Okay. If there are no more questions, we'd like to thank you, everyone, that was joining and listening, and hope to speak more soon.