New Wave Group AB (publ) (NEWAB) Earnings Call Transcript & Summary

Very, very welcome to the presentation of Q2 and the first half year. I'm pretty happy with Q2 actually, where we show a growth in both sales and earnings. And it also feels a little bit for the first time in many years actually that the market starts to be a bit more positive. It's only one point I'm not happy with in this report, and that is the organic growth, where I was hoping for more than 4%, 5%. And I think we pretty soon will be there. We should also remember that we have several things that is happening this fall. For example, Dallas will start selling from all distribution from 1st of October. I think the costs on Dallas it's around SEK 10 million for the first 6 months, and it will continue to cost money in the coming quarter. And then hopefully -- and what I believe is that -- and that is one of our biggest investments in many, many years. It will start contributing sales-wise, of course, from October. And profit-wise, I think it will be 3 to 6 months, and we will be up running at least breakeven there. So it's a lot of interesting things in front of us. Today, 2,877 employees, 28 countries and 3 different segments, as you know. And maybe there, I should say also that Sweden is now down to 20% of the sales, and it will continue to decrease due to the investments we are doing and the acquisition of Cotton Classics that are not there yet. Yes, here's not much to comment. We had -- and I think based on the questions we had earlier today, we have maybe a small misunderstanding regarding the tariffs because back to the result, it's only the tariffs on sold goods. The rest is deduction of the stock value that will strengthen the margins coming quarters instead. And if you look at the figures for half the year, it's not any big effect of it. The result in Q1 should have been better than it was and the result in Q2 is slightly lower. So you know that. And one big investment we also have done that we have not talked so much about is Toppoint, our company that producing pens, water bottles and so on, that moved into a new fantastic facility in -- which was opened up in May. Also a pretty big investment. I don't have the numbers in my head, but -- so it's another SEK 250 million in investment there. The quarter net sales, plus 14.6%, 12.3% are coming from Cotton Classics and the integration there is going pretty well. That includes also what they sell our own brands today that are also increasing all the time and 2.2% from organic growth. And again, that there, I'm not really happy. We should be higher on the organic growth, especially due to all the investments we have done and all the products we have launched last year and so on. If we look at the different countries, you can say it's -- I'm actually happy with all countries right now, excluding U.K. That has been very, very tough, and it continues to be very, very tough. And we also know that our competitors there have decreased their volumes, actually, most of them more than we, but it's not a good development there. Operating profit, SEK 295 million. And there, I must say, due to all these investments we are doing with Dallas, with Toppoint and so on, I'm very, very happy. And the underlying profitability is very, very good, I would say. And we should also remember here that the second quarter and the first half of the year, we didn't have Cotton Classics last year. So when we compare, we have taken in acquisitions on roughly SEK 1 billion in a yearly turnover with an operating margin on 6%, 7% approximately. So if we look at, so to say, the old group, excluding investment, I think those results are very, very good and could have been much, much worse actually. And what's holding it up is also, of course, a very strong gross margin. And I think I've said that for a few years now and it has been tough times that we will keep our gross margin. We will not use the price to deduct margin to increase sales. And that's, of course, sometimes it can be tempting to do that to blow up the growth. But I also know based on those 30 years that it's very, very difficult to raise again if you once have start the cutting. April to June, yes, [ 13.5% ], say, SEK 2.6 billion. And currency was negative with only 1%. When it was it worst, we discussed that before. For example, in January of this year, U.S. was contributing minus 19% in currency. Then it's a bit hard to show growth actually. Promo, 17.5%. And the reason -- the main reason of that, that they are going very strong is of course, the Cotton Classics acquisition that are in that channel. Also retail sales up 5%, which I think is pretty good. I'm a little bit afraid actually on the backlash in South Europe in the third quarter due to that has been very, very warm. I don't have any figures to base that one. But when I talk with the retailers there, it has been quite empty in the shops when it has been those really warm conditions. Cutter & Buck continued to grow well, and I think that, that growth will really increase. We also launched Tenson in U.S. through Cutter & Buck right now. And when Dallas open up, it gives us a very, very good chance to serve that part of U.S. As an example, you can say, if I take a simple example, all the sales before Thanksgiving, for example, that we have on the net, we have to quit 3 days earlier or cut order taking 3 days earlier in South U.S. today than we do in North U.S. because we can't deliver before. So that will mean a lot, and I think they will actually continue to increase, and they have a very good growth. And in retail, it was in this quarter, mainly Craft, but also Clique. We were a bit lucky there. We were not involved in any way, you can say, with -- in the world championships of football. We have no -- unfortunately yet no national teams playing in Craft either. But what we did and what really shows the strength again about stock is that Sweden was qualifying so late. So the chains couldn't preorder or they didn't dare to preorder since in time. And we could supply from stock. Actually, we sold into Swedish merchandise, you can say, to Intersport, Åhléns, Team Sportia, yes, everybody, excluding Stadium. So that was very, very good. And it's nice to don't pay the sponsoring fee and then get the merchandise. Yes. Here, you also see the different segments. In one way, I'm also pretty happy there that all 3 is growing even if it was very little, 2.7% on Gifts and Home Furnishing, it's at least a growth. Yes, sales per geographic area. North America increased and Sweden was a very nice increase, I must say, because if you look at the market shares we already have and continue to grow, it's a very strong development. And Benelux slightly up, Nordic up. And there are Norway going quite strong. Now we finally see the effect of all the national teams we have in Norway. It took longer time than we thought, but now it's paying off. And rest of Europe heavily up, and that's mainly due to Cotton Classics, the acquisition and others quite heavily down, and that's only trading. And as we have said every report, trading is extremely volatile up and down. So you can have 2 weeks coming in with a weekly sales plus 100% and then you have 1 week, minus 70% and so on. And that's how that business is. It's still very profitable for us, and it's a very good cash flow. So we want to continue this. But there, you have to get used to that it can come a very good quarter and next quarter can instead be looking bad and then good again. So it will continue that way. And the reason is, of course, that it's quite a few number of clients compared with other channels and it's very big orders. So here, it's more or less if you are unlucky to -- or lucky to deliver in the right quarter if you look at the short term. Yes, the margin we have talked about. And there, we should also remember that the majority, I think, SEK 65 million, if I remember correctly, is write-down on the stocks due to the tariffs, which gives us a good chance to hold a strong margin in the U.S. market in the coming quarters. And we will continue the same way. We will not use discounts and so on to blow up sales. And we will continue the same way. We will not use discounts and so on, very good gross margin in the coming quarters that we have in front of us. And we should also remember that, again, Cotton Classics came in, in the figures you compare with, with more than SEK 1 billion in sales with a gross margin on what is it now, it has increased a little bit by 27%, and it was 25%. So if you take away acquisition, I think it is the strongest gross margin we ever had external personnel costs continue to increase, and they will continue to increase. But I think also that we will see a more normal cost increase and especially investments that are taking as cost from latest third quarter, maybe next year. It's a little bit hard to say. But then I'm talking also about existing business. If we do more acquisitions during that time and so on or we decide to establish one more new big warehouse, which I don't think we will do within 1 year. But if we do, it can, of course, affect. But if you look at the normal business, it will come down. And there, we maybe should point out once again because I have some questions on that, too, that are different now when we -- in the past, when you change ERP systems. You put it into the balance sheet and then you write it off for 5 years. Now it's in the cloud, and you have to take a big part of this as cost day 1. So if you look for the coming years, we will have quite much lower depreciation in that. And I think those changes in the bookkeeping it's really not good because it's very difficult sometimes for analyst and investor to compare. I think with the old -- do you dare to guess if it was working the same way as in the past, you took it as an investment in the balance sheet, the results so far this year would improve.

I don't dare to say, but it's a big difference because we have only trophy to give the system in 2 entities and we have a majority of the cost for the entire template. So it's a huge difference.

And therefore, again, I say I'm -- if we can hold an operating margin on this level due to all this investment at the same time, I take it as a proof that 20% is absolutely reachable, again, excluding acquisitions. You know that we love to buy companies for SEK 1 and SEK 1 company is not very profitable when you buy them. And we will continue -- we want to continue the same type of acquisitions if we can and if we find them. And you can say that all those kind of acquisitions has been quite successful over time, excluding all of our customer. So we are continue to look at companies that are in a problem. It's, of course, not easy to buy them and especially not to find them. But excluding that, I think the margins are very, very good. Yes, 11.3% in operating. And you can say you see on corporate since Cotton Classics is 100% into the corporate sector. It's lower there. Sports & Leisure increased quite good. And there also the majority of the majority of the minority of the money we came back from tariffs is in Sports & Leisure. That's also one reason. And Gifts & Home, at least finally a positive margin and not negative. And there, I now think that in that area, we will never reach any 20%, but we should manage 20% in average anyhow. But I'm very happy if we can actually come up to at least 10%. So we can quite consider it as a problem. Cash flow is also quite okay, I think due to the -- again, to the investments we are doing, I think it's even stronger. And in the cash flow, the effect is not yet seen by the tariffs either. So I'm quite positive to that.

Yes. And also in addition, Torsten mentioned the ERP investments, they are not shown in investing activities in the cash flow from operating activities. That's why that...

Balance sheet continue to be, I would say, very strong, which are -- we are very happy for. We still have room for more acquisitions and later on more establishments, which I think is also very, very important to have a strong balance sheet. Dallas, 10 million units, we can store there. And it's the most advanced in automatization and technology in the whole group, including AutoStore and embroidery, direct to garment decoration and so on. And the main reason is, of course, that we have a lot of actually also existing clients that we don't serve in a good way today in that part of the U.S. So I think it will go quite quick to come up to breakeven. And if we can reach breakeven 6 months or something on that fulfillment center, I think it's very good. And it really means a lot for the future growth in the U.S. market. I got a question earlier today, how big we can be in U.S. or what is the level we can take. And we should remember that we are still extremely small in U.S. I haven't counted the market shares because I don't have enough zeros in my calculator. So if we really succeed there, it can -- it should be -- nothing is easy, but theoretically, we can at least do 10x what we're doing today within 6, 7, 8 years. So -- it's a very interesting market. And it's also interesting because I was misjudging U.S., as I said in the earlier report because I thought that U.S. should be our most difficult market due to all things with everything from tariffs to a terms different decision to the war in Iran and so on. But I repeat that it seems that Americans have some kind of gene in the body that we don't have in Europe that they just continue buying whatever happened. That's actually a feeling. So U.S., I think, will have been one of the strongest markets also in general the last years. So it will be very interesting, and I'm quite excited to this. And I go to U.S. on Saturday morning, and we'll meet the people responsible on Monday. Toppoint, we have not talked so much about before, but it's a company we have doing hardware located from the beginning, a Dutch company, but located with the production nowadays in Poland since quite many years. But there, we start up 35,000 square meter big production facility started in May. It also cost a lot of money also in actually decreased sales for a short while. It's very modern, 25 different printing techniques that we are quite dilemma about, many products available in 24 hours. We do that we are at the same level or better than the competition after this. So this is also very, very interesting to see what we can do there. And you can say we have still 2 areas on the corporate that we in a European perspective are quite small. And Toppoint and hardware is one of them and the other one is workwear. So it would be theoretically easier for us to continue taking market shares in this area than it is on corporate in most European countries. Yes, this I mentioned, without stock, we have lost all the things just -- this is again a proof that especially on merchandise and happenings and those things, it's speed to market that are the absolute most important thing. So now we hope that in more of our big countries in the future, the countries qualify but very late. Too early, sounds good. For the first time also, we have a champion playing in Craft. It was Aarhus that won Danske Superliga, which we are very happy for. And Craft is really moving forward on the teams. Another nice example was that you had the first game. I think the second game is still left to play between IFK Gothenburg and KAA Gent. I think it was the first time it was 2 teams playing in Craft in a European. So it's really moving. And Here, we can also see sometimes it's very, very difficult for us to also give forecast on some things because if Aarhus wouldn't win, then we probably have sold merchandise for SEK 20 million lower. So this is also quite important. So I have nothing against Sirius, but now I hope that Hammarby is passing. And it will be very nice to have both Danish and Swedish champions as well. This is one of the biggest events we ever have supplied Royal Run in Denmark, 112,000 runners. I think it was in 6 cities or 8 cities maybe even. And all of them, those 112,000 run in a Craft T-shirt. It's fantastic also, not only fantastic for the sales, it's also fantastic for the exposure of the brand. So it's happened quite a lot in those areas. Half year, it's not very much to say there in one way because it's more or less following Q2, and you don't have any big effect on the tariffs if you look at the half year figures. As I said before, Q1 would be a bit better, Q2 a little bit worser. Half year is quite great. Yes, SEK 4.9 billion -- million, not billion yet. 10.2% up in sales, corporate, 14.4% and retail 2.0%. And again, the big difference there is also that Cotton Classics, of course, was not in first half year last year. Yes. Not so much to say here. Geographically, you have pretty much the same picture. North America, minus 2% is due to currency and the currency effect there for first half year, I don't have it in my head, but do you have that Anna. Okay. Sweden, plus 6%. There, I must say that if I'm a little bit negative surprised in, for example, Great Britain, I'm positively surprised in Sweden because to have that growth rate with the big market shares we have here is very good and especially when you don't use discounts and so on, you really grow on full margins.

Minus 8.6%.

So on half year in local currency, U.S. is plus 6%. Benelux, plus 5%. And there, we now start to see a positive effect of the automatizations we did in New Wave Netherlands last year. We have been operating there since May last year. And for a while, we lost sales due to bad service when we had all the movement and so on. Now we start increasing again. So that's good. Other Nordics, 5% and rest of Europe, plus 43%. And the reason for plus 43% is the main reason, I should say, not the only reason, but the main reason is again Cotton Classics. And others minus SEK 23 million, and that's one single reason and that the trading came in low in Q2. Yes. Corporate, minus SEK 33 million. Sports & Leisure plus SEK 57 million and Gifts & Furnishing an improvement on SEK 70 million. Cash flow, also pretty happy with that also if you look at the half year. And that's, of course, also one of the reasons we continue to have a strong balance sheet, which we will keep strong even if we do acquisitions. So that's more or less that. I think we'll open up for questions as well. Yes.

Andreas Lundberg with SEB. If I start on the outlook comments, you seem that you turned somewhat more positive versus previous quarters. What are you seeing? Where do you see it? And where do you don't see it?

We see more positive clients, more positive comments. We see better figures. But again, I'm a little bit scared without having figures how it was in mid-Europe during this summer. But otherwise, sports retail, for example, has the index there have improved. The clients are more positive when I talk with them and it feels also more stable. Then I should maybe add that it can still be surprises because I go to bed in the evening and I don't know what I'm doing during the night when I wake up. So it can -- I think it can still be a little bit up and down, but it feels much better than 6 months ago. And the first -- the first time we really will see if I'm right, is pretty soon because we will start doing the presales in sports retail right now and do it for 6, 8 weeks in forward. And then we will see if the chains really also act as they say that they are more positive and increase the preordering because if you look, for example, in -- if the sports index is good in Q2, we will notice that in Q3 when they place preorder and we will get into our P&L in Q1, Q2 when we deliver the preorders. But also corporate market feels a little bit more -- not a little bit, it seems more stable and people are also there talking more positive. Then you can say sometimes it's difficult to judge if it's -- that they are more positive because we have launched new products and do all this investment or if they are more positive in average in general. But we feel -- I feel more confident than 6 months ago.

And different topic. You mentioned a few things about the Dallas factory. Can you more broadly talk about the -- what it will mean for your distribution or logistics in the U.S.? And how will the other facilities be affected?

I don't think it will be affected so much. And I should also say now we will not invest in any new big warehouse in U.S., at least for coming 3, 4 years. But if the outcome is what we think on the Dallas warehouse, we need another 2 facilities in U.S. but to really cover the country. But that will be earliest in 3, 4 years. But we don't think it will hurt so much because we really give a poor service in that part of U.S. We are covering down to -- I shouldn't say South U.S. because we are pretty fast down to California. But if you come to Southeast or South Mid, we are very, very slow. And we have several competitors there with the warehouses in that area. And they are today much better than we are. And they will not be better than we are 3 months from now.

If I may, last one, and I will let someone else in. Speaking about the U.S. and the teamwork set up there, the teamwear, can you give us an update on teamwear club in the North American business?

It's moving forward. I could say that it's a little bit less than I expected. It takes a little bit longer time, and it's also some differences we really learned to need to learn. For example, I think you all know that most of the teamwears business is running in through schools and not through teams and so on. You have that in several sports, the whole league is blocked because they sell the league, they don't sell the teams and so on. So it's -- but it's a positive development, and I still believe in it on the same level as I did from the beginning. And it's working due to service and so on that really have been one of our weapons in Europe. The competitor is not better in U.S. than they are in Europe. So yes. And before you ask, I can also comment that the shoes also continue to increase, but a bit slower there.

I'll take the chance to jump in Karl-Johan Bonnevier, DNB Carnegie. You mentioned that you would have expected 4%, 5% organic growth in the quarter and still craft looks good and a couple of other things. Where do you see the shortfall compared to your expectations?

Mainly, you can say it's actually trading. And it's also if you look geographically, great. Then, of course, we should have a better effect also on the launches or the merger of our 2 companies there. So I don't know the organic growth if trading had delivered the same, have you checked that?

[indiscernible].

And looking in U.K., is that BTC that is not really working as up until compared to your competitive expectation?

Yes, yes. You can say that Cotton Classics is actually doing at least what we thought and maybe even better. So it's going quicker. BTC are going slower. So you are correct.

Looking at the custom duties refunds, you mentioned most of it is coming through in Sports & Leisure, as I understand it.

Yes. I should be clear there as a segment, but this is very tricky because if you look at channels, I mean, Cutter & Buck that have received most is in the segment, Sport and retail. But the main -- their main sales is in channel corporate. So it's a difference between those and it is below the IFRS.

We can agree on that, I think, overall, but their table is in that [indiscernible]. And looking at both the inventory impact and the cost of goods sold impact, when would you see the similar kind of effect on cash flow? Because I guess there is a delay there compared to what you see in the P&L. And when you look now at the inventory levels at the end of the quarter, so you had a continued inventory buildup in Q2. What kind of growth rates do you see that being able to sustain if the market is there in the second half?

Organic, we can at least go up to 10% if we can sell so much. But the warehouses on the stock is not a problem. But don't take that as we will have 10% organic. That's why we couldn't...

Emanuel Jansson, Danske Bank. Jumping on moving forward to the organic then. I mean, given that you are in this heavy investment phase, is it fair to assume that you need to grow by double digits organic in order to sustain higher EBIT margin at the moment?

So we have a very big, so to say, fall through in the P&L. So we don't need to go up to the 10% -- but if we really should be able to deliver a high operating margin with [ 8% ] organic, but we should also remember that -- sorry to say Dallas all the time, but we can take Toppoint also when you open up something. I mean, Dallas, we take the cost every day, and we're not start sending out one single garments from there. Start will be October. Toppoint decreased sales for the first time in many years during the period when they had all the moving and everything. So I think we can be there. And we also have now launching Tenson in U.S. It will not be any big effect this fall, but hopefully next fall. And we also have some lines -- new products and lines we will launch in January on corporate. Craft is coming with indoor shoes, which we think is actually in one way, an easier market than expensive running shoes. So we have a lot also in pipeline there. We have taking a lot of costs in the P&L that we have no income at all on yet. But that's how we have done many, many, many, many years.

And did I understand you correctly that, that will continue until the third quarter as of next year?

Some of them will, of course, always continue. I mean we need to develop new products all the time. It's just that we have done it more than normal in the last 2 years without seeing movement and all those things. But we can never stop that because then we will probably have a negative growth 3 years later. But some of the cost, for example, automatization of warehouses, a lot of warehouses is done. Then it's another story if we, for example, make an acquisition and say that we need to automize that warehouse. We are a bit keen on the coming 2 years, maybe, establish a warehouse in Germany that are automized for Cotton Classics. But most of them can it be 75%, 80% of the warehouses is now done there we actually need automatization. So it's much less investments in future in that perspective than it has been in the last years.

So you're happy if you're able to defend the EBIT margin from this level until next year?

Yes. I think we can start and really see an improvement, again, excluding acquisitions, we will see an improvement from the second half next year in operating margin as well. And if we can hold it until then through those investments period, I think it's very good because if you look at the underlying profitability, it's really nice.

Perfect. That's very clear. And just curious, we have seen several other retail names reporting Q2 numbers describing the weak German markets, RevolutionRace, Fenix Outdoor, H&M. And also, I think Klarna also mentioned the weak consumer sentiment. You don't experience that or what you do in...

We do, but not so bad as we write into the report. But Germany, I think, as a country is under a lot of pressure and the consumers there are in one perspective, weak. I can take one example. We had the former CEO in Intersport with us on the trip. I met them in Germany and me and Goran was down to Poland afterwards. And there you have I think that I was a little bit surprised of. You can see how fast things are changing because the German Intersport dealers on the border to Poland just a few years ago had the problem that consumers in Germany was buying in Poland instead because it was cheaper. Now the shops in the border in Germany is going very well because it's Polish people coming over and buy in Germany. So it's really fast changes. And I think with everything with the car industry and so on in Germany, it will be a tough market. And we should also remember it's a market that everybody wants to be because it's so big. So the competition there are much, I would say, much tougher than in many other countries.

Perfect. And final question, you mentioned Craft. And is it fair to assume that both the teamwear running business is doing well, but also the retail business within Craft?

Retail business in Craft has not done well for some years. And it's not like we are losing shares to other. But as you know, the sports retail has been terrible in several countries in the last, I think it's 3 years.

And it's still not doing well in this quarter, the retail business, I mean.

But again, before you see it in our figures, because everybody knows that if, for example, Q2 comes out strong for the retailer, they will increase the buying -- the preorders they place to us in Q3, which we will deliver Q1 and Q2 the year after. You always have this lead time. So we need -- before we really will see a positive effect in general from better retail sales, it will take 6 to 9 months. And then, of course, sometimes we can have a small effect that they need to buy in season if they are doing very, very well, but so good is it not yet.

So I guess the cold weather in Q1 and also sport index data was quite good in Q2 as well. The inventory level should be quite good.

Lower than before is we expect and we expect higher preorders. But you never know. And now I hope that in one way, I hope that they don't place too much for the winter, I would say, is most sensitive because in the past, it has been many, many times that they do a big winter or good winter. Then they think that next winter will be even better and then they place 2 big orders. And then that winter is not so good and then you have a bad effect the year after. So...

Alice Beer from ABG here. Just a few questions. First on Cotton Classics. What's the gross margin like for Q2 compared to last year for it? How is that earnings development going inside of Cotton Classics?

I have -- we don't release but it's improved a little bit.

What we actually measure all the time is how many percentage, but we don't publish that, but how many percentage of Cotton Classic's total sales is turning into New Wave brands. So on...

Yes. And I was just about to ask that, has that increased in the pace that you expected? Or how much would you say that's now?