New Wave Group AB (publ) (NEWA-B.ST) Earnings Call Transcript & Summary

[Abrupt start] Q2 of first half year. Q2 was a bit less good than we thought. We knew before that it should be tougher than Q1. We had a positive calendar effect in Q1 due to Easter and that came out to negative in Q2 that we know from the beginning. Then we also have quite high effects on currencies. So in the end, I was hoping for 3%, 4% organic growth in local currencies, and we ended up with 1 point something. So it was less good than planned. The market was very tough. I thought for a long time now that the market will be better, but we still don't see any big signs on that. And I think that all the worry and things and news all the time about duties and tariffs and no one will know really what will happen and so on put a wet blanket on the market. And I think that we will continue to see at least 1 or 2 more quarters with a tough market situation. But we are pretty sure that we will continue to take market shares, and we continue to invest. We have the same speed investing in both sales, marketing and automatization of both warehouses and IT and so on. And we will not pull on the brake because of this, we will continue the same way. One very good thing, hopefully, you never know that before, of course. But one thing I'm very happy for is the acquisition of Cotton Classics that give us a very, very strong position in several countries. So we have been the market leader in Sweden, Norway, Finland, Benelux for quite a long time. Now we are very, very clear market leader in Switzerland, also Austria after this. And we come in as #3 or 4 in Germany. And they also have quite a lot of activity in Eastern countries. So Czech Republic is a big country for them where we are not there at all. Same with Hungary, Australia. So it's also opened up Eastern Europe a bit for us where we have been. And -- this is also much easier for us than it was to acquire B2C. B2C is a very similar operation. But since they were outside EU, it took us quite a long time before we could start introducing our own brands. And the upside both in D2C and Cotton Classics is really to introduce our own brand that have more than double gross margin than they have on the distributed brands today. And here, we could be much, much quicker to actually introduce not full collections, but partly of Click and Harvest and printer and already, kind of back already now in September catalog. So we were quite time pressed at the end of the acquisition because they released their collections twice a year on that September and January. And if it wouldn't be ready for 1st of September, nothing we couldn't have done anything before January. But that was quite a lot of work, but I think it's very, very important for the position in the future. Yes. So better I will not repeat this. Nothing really changed here. You can say after the quarter, it's not a very big thing. But after the quarter, we signed also an agreement now on the new warehouse in Ireland. So we will also be much more active in Ireland. And I think it's also an important step that for us because it's not a big market, but it's, again, inside the EU still. And the market in Ireland is dominated by companies in the U.K., which give them a lot of problem with tariffs and duties and so on. So that will start hopefully in October. Yes, nothing has changed here really. So I jumped in. Here, I have a familiar story that or not we should have that on [indiscernible] on some -- now on Monday, I think it was. And we produced a T-shirt with a big Macrolite enrolled under [indiscernible]. I call this is not so funny, when you use English. That was very appreciated. And it's nice to see -- here you can also see the importance of speed and stock because it was -- the sales was starting directly after the game and the day after they have sold, I think it was 2,300 shirts. So pretty nice. Yes, this is the same. Second quarter then, as I already said, a very, very tough market. And I actually think it was developed in general in the wrong way compared with Q1. Acquisition of Cotton Classics, I talked about. And I think it's a very, very important thing for us for -- especially for future growth in the Eastern Europe as well. Then we have one thing that we don't know, where it will end and the Department of Justice in the U.S. have started an investigation where they claim we have done wrong or it's not any criminal investigation. But we have different -- they count the number of employees in a different way than we did. So we have a possibility that we can be forced to pay back some of the -- some or all or nothing. We actually don't know of the loans that was forgiven during COVID. And the total amount is $5.4 million. We have not taken anything into the P&L because, again, we don't know if it will be 0 or if it will be all or if it will be in the middle, and we don't know if it take 3 months or 12 months or 2 years. But we think it's such an important information. So we want to inform about it to be transparent. So it's not come as a surprise like this if something happened. And the currency affected us, of course, a lot, especially on the P&L this time. Last report, it was on the balance sheet that had the biggest effects. But now it's on the P&L. We have strengthen presence in Central Europe and I would say also Eastern Europe with Cotton Classics. And you can say right now, we hope to have the permission from the competition authorities in Austria this week 18th of August.

18th of August. That's the last day when they need to inform that they want deeper investment.

But we don't see any high risk that we have now, but it also says a little bit about what kind of market shares we start to get and should get it. And Cotton Classics have a fantastic platform, actually, much better than ours and also B2C's. So that will also be interesting if we can also take that the other way. And as I said, we're now working very, very hard to introduce as much of our own brands as possible as fast as possible. And this is, again, much more easier than it was in B2C, since we already have stocks in a lot of EU countries that we can use also for Cotton Classics. Otherwise, it's a very similar business to B2C. Maybe also I should add there that, for sure, they will take down our operating margin for a while because they come in on 5.5%, 6% in operating margin and it's such a big turnover on more than SEK 1 billion. So it will affect the operating margin. So that isn't any surprise for you, and it will not be for us either, and it will take a few years to take them up. We have 1.3% in organic growth. Again, as I said, I'm not happy with it, but the expectation from my own side was more 3%, 4%. It was not very high that quarter during Easter, but it's still a little bit lower than I thought. And the currency we have talked about. Promo channel was down 2%, retail by 8%. That must be in SEK. Yes. So it's not -- and operating profit amounted to SEK 241 million and operating margin, 10.5%. And I think that it's still an okay result actually because, again, we continue investing and take market shares and spend money. We were also affected a bit about in May, first of May, I think it was, the first company in New Wave Group that are New Wave Holland, the Netherlands that are quite big entity for us was the first company that installed high robotics, totally new picking and they had -- at the same time, they was the first company out with a new ERP system. So that was quite a high risk, and it went okay, but it was affected in May, June, July, they were 100% up running everything. But now we're quite happy to have done this because now it will be easier if we implement both by robotics and in other warehouses, but also the new ERP system in other companies. But I had a very, very tired CEO there. So SEK 2.3 billion decrease then in SEK, 4.1%, but again, organic in local 1.3%. There's not so much to comment. I can say maybe that on the retail side here, especially retail, it's still a very, very tough situation. You have a few clear winners the last quarters. And that's, for example, [indiscernible] and it's the low price chains. All other are struggling and struggling a lot when you talk sports and also when you talk home furniture gifts. So it's a quite tough situation in the retail side. And I would say that corporate is more stable. The good thing, I think, on the retail side is that most of the clients have a lower -- much lower stock positions themselves than they had 1 or 2 years ago. So when it starts building up, I think we will see quite high effect on it. There's not maybe so much to comment. Gross profit down a bit, and it's not price decreases and not increased buying prices. It's a big effect there is that trading took a bigger part of the total turnover last quarter. And as you know, since before, trading is very up and down. So the gross margin in the other business are stable. As it is today, we were affected. I don't have any amount, but we were a little bit affected by tariffs in the U.S. -- some of the U.S. companies. I don't know, a couple of million SEK maybe. It was not a big effect. But even if we really have worked hard and fast to move production, we are not able to move 100% of it. So you have some effects, but not any big ones. And you will have some effect in the coming quarters as well. But again, not a huge amount, but it's a couple of million, I guess, each quarter. And the only thing you can comment here is that on the operating profit, I must say corporate are very stable if you compare with the times of retail and Gifts and Home and Gifts and Home is also majority retail, had a much tougher quarter than corporate. Cash flow is not so much to say about. We have planned and I think I'm sure I said already fourth quarter last year that we will go into a period with less good cash flow, depending on that we're building up the stock and we continue the investment in warehouses and IT. So it was no surprise that either. If we look on half year, we had a sales increase by 2.3%, and that is in SEK. So I don't have that in my head. What was it in local currencies? Do you have? Anna?

Sorry.

The growth in local currencies January, June because 2.4% must be in SEK.

Yes, SEK 2.4 is in SEK. It's so for -- is it a quarter?

No, half year. For the quarter I had.

Sorry. I just lost it.

If you can say -- more then 3.9% and retail 1.4%. And you will have soon this in local currencies, but I think 5 something.

4.8% is in local currency.

That was nearly 5.5%, around 5%. Yes. There's not so much to say, but I mean, the half year figures, of course, looks better than the second quarter, since we had a very strong first quarter. Gross profit, SEK 48.9 million compared with SEK 49.3 million. So as I said before, it's stable. External costs increased a bit, and that's mainly again, sales and marketing, but also IT is quite huge investment to change all the ERP systems and everything. And of course, [indiscernible] of warehouses and then operating profit on SEK 453 million. And here, you can say yes, not so much to say there. Balance sheet still come at SEK 6.5 million in equity, which gives it's a strong balance sheet, you can say. And then the first quarter was very affected by currency with -- was it SEK 0.5 billion?

Yes.

If I remember correctly. So the big difference in equity now compared with end of the year is actually currency. It's a whole effect, you can say.

Yes. And also, we have a dividend.

Yes. That's good. Yes, cash flow is still stable, I would say. Rolling 12 months then SEK 9.6 million in sales and an operating profit above -- just above SEK 1.2 million is 12.8%. And we will, of course, work as hard as we can to get up. I'm not very happy with 12.8%, I must say, even if I know why. Yes. I think I have said all of this. And I think also the important thing for us to say, we will not put the break on cost before as long as we see it, we take market shares, even if it continues to be a tough market 1 or 2 or 3 quarters. Cotton Classics, we have talked a lot about. I think we have a very strong position for the future, actually stronger than a year ago, which will become even stronger with Cotton Classics. So I think we have big opportunities, both in retail and in promo. The launch of Teamwear in U.S. is still doing quite well, and it's going, I would say, as planned or even maybe a bit better than planned. I'm also very happy for our balance sheet because most of the competitors today have a much, much tougher situation, which means that they can't invest in the same way as what we are doing. And we will continue to look at more acquisitions as well. That was basically Q2 and first 6 months. I open up for questions.

Nicklas Skogman, Nordea. A couple of questions, please. You mentioned that the gross margin was relatively strong. But if you look at Q1, it was -- you had an even larger impact from your trading operations. And then the gross margin was up 10 basis points. And now in this quarter with a lower impact from the trading business, it was down 100 basis points. So...

But the gross margin in the trading business is variation a lot. So we take orders down to, I would say, 8%, 9%. And when we take really -- when we have really good gross margin in the trading business can be up to 30%. So it depends very, very much on that. You can say, for example, the biggest order, now it's a few years old, but was 400,000 units of the same Polo Piqué to Costco. And then I'm very happy to close that deal on 8%, 9%, 10%. So it's a variation also inside there a lot. But in general, you can say that I think we end in general on a gross margin of maybe 16%, 17%, 18% in average, but it's still very different in the different quarters.

Okay. And then on the -- you mentioned that B2C had been a bit more tricky than you perhaps thought when it came to bringing in your own assortment. So what level of your own assortment do you currently have at B2C? I assume it started from summer.

Up to now, it's more or less only harvest printer and not full collections. And it will be full collections from 1st of -- from mid-January next year. But I would -- I shouldn't say it has been more tricky, but it is taking longer time, since they are outside EU. I mean there's no idea for us to import from the warehouse in Netherlands to launch in the U.K. with double duties and so on. So it's more that than...

And where will you be in terms of share of volumes do you think by June next year for B2C of you are being -- of your own assortment?

In the end of next year, I hope we can have up to 20%. But you can say today, it's -- the interesting thing is that printer that are the biggest brands there, they are brand #10 today, if you look on all the brands they are selling in sales, but they are #4 in gross margin in money. So it's a huge impact if we can move this.

Okay. And where do you need -- or where would you like to go with the Cotton Classics acquisition in terms of your own assortment?

I would say that that's the same in B2C and Cotton Classics, hopefully, up to maybe 40% because we should also remember that they distribute also low-priced brands that gives them a lot of clients, and we don't have those products, and we don't want to develop those products. So we will continue with that. And that's the strength, for example, Cotton Classics in the future is that they have the full range. Now they are much more orientated to low-priced basics.

Emanuel Jansson, Danske Bank. So staying on Cotton Classics then, in terms of profitability, I think you stated around 5%, 6% EBIT margin, right? And where do you think the potential is there to raise the profitability over time?

15%. They will never be the -- neither them or B2C can come up to 20%, 25% because to be up there, which we are with several of our corporates companies. For example, I think Netherlands has been on -- can be average 25% for a couple of years, but that we can't reach with external brand standing for 60 -- 60% or something. But I think we can get them up to 50%.

And perhaps difficult to estimate, but how long do you think that will take?

3, 4 years, I guess. It's quite a long process because first, we should have the stock, then we should sell in samples to all the clients, so they have in their showroom and then they should start selling. So I mean it's -- and in the past, sometimes we have underestimated the time a little bit. So far, when we have established countries or made acquisitions, I think we have succeeded in all cases on corporates 100% score. But quite often, it's 1 or 2 years longer time than we thought when we did it. And it's the same when we establish on sketch. Hopefully, we have learned something about now. So we don't -- now we are a little bit more defensive in how long time it will take, for example, in Ireland more realistic.

Great. That's very clear. And you think that you can use Cotton Classics also to maybe find some synergies via the Teamwear establishment in Germany, for example?

Yes. But it's a little bit tricky because you can say that the current distribution is mainly in Mid and North Europe, the sport chains like Intersport and Stadium and so on, if you take Swedish examples. And in Germany, you have one big player or you have 2 big players, you have 11 Teamsport and more. And 11 Teamsport also belong to Intersport even if it's not a shop. And it's not very, very popular to put in 45,000 clients they have Cotton Classics, if I remember correctly. They will not be extremely happy if 45,000 new clients all over Europe get access to the Teamware, but we can do it partly at least. But I don't say we could introduce the whole Teamwear collection through them without negative effects on the chains.

Okay. Great. And moving to the U.S. market, still seems a bit uncertain how everything will develop in the near term. But would you say that this has postponed any of your investments in the U.S. regarding Teamwear...

No. I mean we don't postpone and we don't put the foot on the brakes either. And we still have the same planning with establishment one more warehouse in U.S., South U.S., probably Texas as soon as we can and so on. So I prefer -- I mean, I think it's 27 years we've been public now. And I think the development during those 27 years is quite good. So it's better to take this. If we make a little bit less profit, we should still remember that we are quite profitable even this quarter was down. I prefer to have a few quarters that are tougher and standing very, very strong in the coming 5, 6, 10 years. So it doesn't change our plan at all. We have -- as I said before, we have signed a new warehouse on Ireland. We will sign in South U.S. as soon as we find the right facilities and so on. So we continue the same speed.