RugVista Group AB (publ) (RUG) Earnings Call Transcript & Summary

Hello, and welcome to the RugVista Group Audiocast Teleconference Fourth Quarter 2021. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Michael Lindskog, CEO. Please go ahead with your meeting.

Thank you very much. Welcome, everybody, to our year-end earnings call. We are glad that you're all here. It's myself, Michael and Henrik. If we move to the first page, just to kick it off. Really what we had in terms of '21 is really a year where we had a solid end to an exceptional year to speak plainly. The -- I think some of the key messages is really that the financial performance, of course, was quite outstanding. We achieved all-time highs across multiple metrics. The SEK 705 million in net revenues and the adjusted EBIT is -- was SEK 138 million, of course, is a tremendous achievement for us as an organization. And the Q4 numbers, of course, were a bit challenging to beat when we had a really strong Q4 last year. So the fact that we ended with a 7% organic growth rate is quite pleasing and then, of course, continued a solid EBIT margin of about 18.4%. In terms of the challenges during Q4, the market conditions remained challenging, similar to what we spoke about, especially in Q3. What we saw was continued high activity from -- across all ad formats to be quite -- to be honest. And in terms of both play -- new players, in addition to also existing players being quite aggressive as well as advertisers from other categories seeking the attention from the consumer. So all of those factors in combination made the marketing investments that we did significantly more costly versus last year. That, in combination with, I would say, unpredictable and volatile consumer demand, we had a situation where different markets or different -- since we're quite geographically spread across Europe, so the way governments were kind of treating the Omicron phase of the COVID pandemic was very different. So it's quite challenging to predict how a given market or a given consumer segment would react. So we really had to be on our toes throughout the quarter in order to execute. The other thing, I think, is really that we are extremely happy to continue to receive excellent feedback from our customers. And as we mentioned before, that continues to be our top priority. And we are very happy also that we, during the peak season. even though there were challenges with some carriers, maintained an overall stable satisfaction level. And then we've alluded previously about some of the key strategic initiatives we've been working on in the background. And 2 of the main or very important initiatives started to materialize towards the end of the year with first us introducing RugVista Essentials and then second, the very first version of our new RugVista web-shop that we introduced in Croatia. So if we move to Page 4, just to a little bit highlight some of the strategic KPIs that we keep monitoring. So if we start on the left-hand side of the page, the Net Promoter Score and the TrustPilot value or feedback we get on TrustPilot continues to be outstanding. So it's actually flat for the full year. In the middle, in terms of how do we measure whether we're increasing our market penetrations, of course, order count is a good measure for that. And we managed to grow almost 32.5% in terms of order count during the year. And we continue to attract a high number of new customers, so almost 200,000 new customers joining the -- joining, let's say, the RugVista family during 2021, and that continues to be a very high number and that number we're pleased with. If we move to Page 5. We -- in our reporting throughout the year, we've often mentioned the category mix as a driver for some of our financial metrics. So we wanted to give a bit more background to what's going on there. So if we kind of start at the top, which is really the average order value, what we see here is it's been relatively flat during the past 3 years, so around about SEK 3,600, including VAT. And then if we move to the next page, as of Page 6, what we see here is how the category mix has developed during the past 3 years from sort of the traditional, what we call the traditional hand-knotted compared to the -- what we call the design rugs, which are the ones that are, let's say, mass produced. So if we start at 2019, we really see there what share the traditional versus the design was from shipped value. So this is looking at money, so shipped value compared to '21. And as you can see, it's a relatively significant shift in the type of products that our consumers buy. Our offering has been relatively constant during this entire period. So what's happening is that the consumers are actually looking for the -- what we call the design rugs versus the traditional rugs. And we've also mentioned and if you visit our site, you've probably seen that there is a significant price item value -- price difference between the traditional versus the design. So if we move to Page 7, and dig a bit deeper into the average item value in actually 3 different subsegments. So we have design machine made, we have design handmade and then we have the traditional hand-knotted. And this slide hopefully gives you a bit of a sense in terms of, number one, the price difference between the different subcategories, but also how the average item value has evolved during these past 3 years. And what we can see is actually if looking at within each subcategory, the item value is actually increasing overall. However, with the category mix, that, of course, is somewhat depressing the average order value. So -- or one can also say that the average item value is sort of helping the average order -- AoV, though, because the items per order has been relatively consistent. And then if we move to Page 8, also another highlight in terms of the -- related to our product development efforts and our categories and the assortment we carry is us introducing RugVista Essentials. It's been an effort we've been working hard on during '21 in terms of, okay, how do we attract those that would start setting up their first home. That historically has been a, let's say, a white spot in our assortment because typically, as a first-time homemaker, the size of your wallet may be somewhat depressed. So we really needed to find an attractive collection of items, which, of course, is a bit more fashion forward or trend right, is attractively priced, but still has a very good price-quality ratio. And with those aspects in mind, we developed RugVista Essentials. And this page just gives you a bit of a flavor in terms of some of the styles that we've introduced, the number of SKUs is still early. We're still receiving more deliveries over the next couple of months. So this is just the initial deliveries. And so you also see that it is a significant effort that the RugVista Essentials constitutes. So with that being said, I'll hand it over to Henrik.

Thank you, Michael. If we go to Page 10, we'll start by having a look at our net revenue development. And starting on the left-hand side, you can see the development for the full year, where we broke through the SEK 700 million net revenue level, ending up, as Michael mentioned, at SEK 705 million, with strong growth across all our 3 segments. Reported net revenue grew by 25.5%, while organic growth was 36.4%. And thus, we ended up well above our mid-to-long-term financial target of having organic growth by approximately 20% per annum. If you look at the middle of the slide, zooming in on Q4, as Michael mentioned, we were facing a quite challenging comparable with growth in Q4 2020 of 57%. And despite of this, we managed to grow the business organically by 7% with all segments delivering growth, not least the B2B segment, which grew year-on-year by 19%. And on a geographical point of view, on the right-hand side, you can see the development across all regions within the B2C segment. And as has been the case for the previous quarters throughout the year, DACH has been our growth engine and remains so in Q4 with a growth of 12.1%. Nordic subtracted by 5.1%, but that was mainly driven by lower average order values with the order intake only marginally down year-on-year. And then finally, Rest of World, which, to a large extent consist of Rest of Europe, grew by 6.5% with France and U.K. continuing its positive development that we've also seen throughout the year. So if we move to the next slide, a view on our gross margin development, where in the upper left-hand corner, you can see that we, for the full year, ended at 64.6%, nearly up 3 percentage points compared to 2020. And for Q4, which you can see in the chart below, we also saw a marked increase in our gross margin, up from 61.2% in 2020 to 64.9% in '21. It should be noted though, as also shown on the slide, that 2 percentage points of that uplift was due to an accrual we've made related to a claim towards the U.K. tax authorities for double VAT, we have paid since Brexit went into effect on the 1st of January. And thus, if we look at the pro forma adjusted gross margin, it was at 62.9%, still thus up by 1.7 percentage points to the previous year. And looking at the right-hand side, you can see the development for Q4 on a segment level. And you can see that B2C was the main driver for the improvement in the gross margin with the gross margin increasing from 61.3% in 2020 to 64.6% in '21. And the drivers being the 2 effects we have also alluded to in previous quarters being the category mix effect with the shift from traditional towards design rugs and lower average discount rates towards our customers, and then finally, also, obviously, the impact from the U.K. double VAT claim accrual. If we go to Page 12, then look at our operating profitability and starting with the full year in the middle of the slide, you can see that we ended up with an adjusted EBIT margin of 19.5%, more or less on par with 2020. And as Mike mentioned, we believe this is quite a significant achievement, having meanwhile grown our topline organically by more than 36%. For the quarter, as you can see on the right-hand side, we saw a decrease in the adjusted operating margin of 2.6 percentage points, coming from 21% in 2020 to 18.4% in '21. And this decrease was driven by 3 factors. One is higher other external expenses, which is due to increased marketing investments, which Michael also mentioned. Secondly, we continue to invest in the organization in line with our plans and thus saw an increase in personnel expenses. And then finally, in December 2020, we divested the subsidiary ArtGlass i Malmo with the proceeds from that sale contributing positively in 2020 with 1.1 percentage point of net revenue. Irrespective, despite of the headwinds in the online ad space, we remained a highly profitable business and managed to stay well above our mid-to-long-term financial target of having an EBIT margin above 15%. If we move on to Page 13, then a view on our inventory development, where we continue to bolster our inventory, adding SEK 16 million worth of goods during the quarter, and this resulted in us being well in line with our target of having inventory as a share of last 12 months net revenue of between 17.5% and 22.5%, where on the right-hand side, you can see that we started the year at 16.2% and ended up close to 21% and thus being well-positioned to service the demands for the remainder of the ongoing peak season ending with Q1. And moving on to Slide 14, a view on our cash flow and net cash position. As you could see on the previous page, and as we have mentioned in previous earnings calls, inventory heading into 2021 was at the lower end. And thus, we've had to invest quite heavily in getting additional goods on stock throughout the year, which naturally has hampered our cash flow generation throughout 2021. And nonetheless, we managed to generate a cash flow from operating activities of nearly SEK 105 million throughout 2021. And as you can see on the right-hand side, we managed to increase our net cash position by SEK 80 million from around SEK 110 million at the beginning of 2021 to nearly SEK 190 million at the end of the year. And moving on to Page 15, as a testament to our company's strong cash generation, both historically as well as future expected and due to the fact that we have no plans of conducting large investments in the near future, the Board proposes to pay out a dividend of SEK 2.5 per share. And this is equivalent to approximately 52% of our earnings per share. And with that, we more than fulfill the last of our 3 financial targets for the mid-to-long term in paying out up to 50% of our net profits to our shareholders. So with that, I will hand it back to you, Michael.

Thank you. So if we move just to Page 16 then for a quick summary before we open up for questions. So again, '21 was outstanding from a financial performance perspective. So all-time high in terms of topline as well as profitability and absolute profits or absolute profits. And SEK 138 million in adjusted EBIT is, of course, a very strong number. We had a challenging Q4 comparable. But despite that, we did manage to deliver 7% organic growth and we've maintained profitability despite the ongoing tough market conditions. The cash generation, as Henrik mentioned, is still very strong, more than SEK 100 million despite the investments in inventory during the year in addition to us now or the Board proposing a cash dividend or a dividend payout. And all of those factors in combination, of course, is a testament that we are still able to deliver good earnings and cash flow. Personally, I'm also extremely pleased to see that some of the key initiatives are starting to materialize. As we mentioned earlier, RugVista Essentials is an important addition to our offering towards the consumer and also the very first version of our new website being introduced in Croatia. And the new website, of course, will be an extremely important leader for us in terms of how we interact with consumers and how we execute our improved commercial approach moving forward. And finally, if looking into the next year of 2022, we are very well aware of the strong comparable that we're facing in Q1 where last year we had 92% growth and that is, of course, a very tough number to go up against. But overall, we are working on the right initiatives, and we're still very confident in the fact that we have the ability to deliver on our mid- and long-term financial targets. So with that being said, we open it up for questions.

[Operator Instructions] The first question comes from Fredrik Ivarsson from ABG.

I've got 3 questions. I'm going to take them one by one. And first one on the Essentials collection, which presumably attracts some younger people. Do you view these new customers as mostly incremental? Or does it sort of cannibalize on your existing customer groups, you would say?

Incremental primarily. The -- and that's a little bit what we meant with filling a white spot in our assortment. We have seen, if we -- we have some estimates in terms of the age distribution on our sales, and we've seen that there has been an opportunity for us to attract that somewhat younger consumer better than we have.

Perfect. And do you see any other white spots? And do you have any new collections that you currently work on that we will see during 2022?

Yes. I mean, part of our historical, let's say, value proposition and then also something we're continuously evolving is our product expertise. That is one of the key reasons consumers come to us and we want to ensure that we have something for everybody. So that means, of course, with the RugVista Essentials, having some good selection for those with a slightly -- let's say, slightly smaller wallet versus sort of our core assortment historically. And there are other opportunities that we're looking at as well.

Great. And second question, on the new website, can you share any initial learnings from the beta or the new website where you're sort of seeing in terms of conversion rates, if you would be willing to talk a bit about that?

Yes, of course, we have those numbers. I will unfortunately not sort of give any specifics. And the reason for that is that the current version of the site is sort of what one would call a technical release. So we've -- what we've done is a completely new architecture and new code base, and we wanted to make sure that all of those things are working. So that's the reason beside the slide, we're actually not buying any traffic to that site right now. So yes, the conversion rate is up quite a bit, but the -- we're not sort of putting our full marketing machine behind driving traffic to that. Once we decide it's a bit more mature, we will, of course, start pushing the sort of go button on marketing investments, and then we can get a more true picture on how it also performs from a sort of consumer-facing perspective. Right now, it's mostly testing and making sure that all of the changes from a technical perspective are working.

That's fair enough. And third and last question on current trading, and I appreciate that you can't say too much, but maybe if you could talk a bit about the overall landscape and if you've seen any big changes from Q4 because I think we've heard a few e-com players complaining about lower traffic. So it would be interesting to hear what you guys see.

Yes. I mean, we don't have a completely different perspective on those topics. The -- like we mentioned regarding sort of the trading environment in Q4 was rather choppy to a certain degree. And what's really happened during -- from my perspective during the COVID pandemic is that more, let's say, the multichannel players certainly had become a bit more -- had been forced to be more sophisticated during COVID because a lot of the store network was closed. And then also during '21, we kind of saw the -- especially towards the second half, the return of the big brand spenders in terms of the auto, movie industry, et cetera, seeking, again, the attention of the consumers, which during 2020, they were not around to a large extent.

Okay. So slightly lower traffic in the first half of Q1 versus Q4 in like-for-like terms. That's how I should read your comments?

It's -- yes, it's still a challenging environment for sure.

Your next question comes from Carl Deijenberg from Carnegie.

So my first question is on conversion rates and inventories. I mean, you showed that slide also that your inventory has improved gradually here throughout 2021. And I know that the sourcing environment has been quite volatile for you throughout the year. But I'm just curious, how are you feeling in sort of supply situation at this stage now? Do you feel that your inventory levels are fully restored? Or do you still see some issues on that side?

Overall, we're pleased with where we stand on sort of our in-stock levels in total in inventory position. It is in line with some of the communicated levels. There's -- of course, there are challenges, especially with the [ goods ] out of India. Productive capacity is essentially up to full capacity, so to speak, where, however, the reliability of transport is still challenging due to the ongoing container capacity constraints, so to speak. So there are -- things are overall quite okay, but it doesn't mean that we are not sort of ongoing having to sort of take care of our [indiscernible], so to speak.

Okay. Very well. And then my second question is on the marketing spend here, and you elaborated a bit on it in the beginning of the presentation. But I'm just curious sort of what are you seeing in the marketing space here looking into 2022. Do you see sort of prices on ad works gradually coming down from what you reported here in Q4? Or do you see sort of a structurally higher base here that we should go -- or we should expect also going into this year compared with 2021?

I mean, it's a bit hard to sort of have a perfect crystal ball to be clear. But what we have seen is that across categories, to be honest, is that the multichannel retailers, of course, during COVID had to divert more of their investments to their online efforts. The physical network was the largest and closed. And that has undoubtedly made those types of players that [ have ] bit more sophisticated. And then what will happen moving forward is hard to say with eventually COVID, let's say, COVID restrictions being removed across Europe, then, of course, that may or may not affect how those players choose to invest their marketing funds. I think I just saw this morning the [indiscernible] and of course, that is a very Swedish focus, so only a little bit small portion of our business, but giving an indication that e-commerce is a tad bit down, but the actual share of total offline versus online was actually higher. So the point being that the stickiness of the new customers trying online during a pandemic, I think, will be quite high. All first-time online buyers during the pandemic will not stick around online, but we are seeing indications that a large portion of those first-time buyers will continue to buy online even when restrictions are eased.

Okay. Very well. And then my final question is on current trading. I'm not going to ask on development because I think that question has already been addressed. I'm just curious on the monthly demand you saw in Q1 2021. I mean, organic growth accelerated quite substantially quarter-over-quarter. But how did that development go on a monthly basis? Was that quite stable in between January to March? Or was it sort of at peak in the beginning of Q1? Or how did that develop?

So I think what we can say is that we mentioned before that the holiday season for 2020 was quite unusual in terms of the consumer behavior with essentially no travel and people spending time doing online shopping. That, of course, will not happen this year and then [ out of ] 2021. And then little bit of what happened in January and in Q1 '21 was that some of that residual effect was definitely there during January, but then I think it kind of got back to a bit more, let's say, somewhat normalized level towards the end of the quarter.

[Operator Instructions] There are no further questions in today's conference call. Dear speakers, back to you for the conclusion.

Thank you, everybody, for the attention and hope -- wish you all a wonderful day. Thank you very much.

Ladies and gentlemen, this now concludes our conference call. Thank you all for attending. You may now disconnect your lines.