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

Hello and welcome to the RugVista Group Audiocasted Teleconference Q3 2022. [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, sir.

Thank you very much. And welcome, everyone, to our quarterly earnings call. Let's start off by going to Page 2. And let me give you a quick introduction and summary of the quarter. Overall, we are starting off with a situation where the macroeconomic climate continues to be challenging, but we have adapted successfully to ensure good profitability. And the measures we announced during our Q2 report have had intended effects, which our EBIT margin of 13% for Q3 would indicate. The 13% is a 12.5 point, percentage point, improvement versus Q2. The price adjustments and our focus on marketing spend efficiency were both critical for the improved profitability. However, consumers across Europe continues to be negatively impacted by the macroeconomic climate, which is -- which has resulted in reduced purchasing power and lower confidence in the future economic outlook. This has, of course, impacted us by lowering the demand overall for the category, and as such, our net revenues declined to SEK 128 million, which is about a 9% decline. Our organic net revenue growth was about minus 13%. And the difference between the nonorganic and organic, of course, is due to the SEK depreciation, especially versus the euro. The year has undoubtedly been challenging, but we are still financially strong. With no bank loans, we have SEK 55 million in net cash. And we have also seen now during the quarter that investment into our assortments have materialized. In addition to the above, we continue to deliver on our #1 priority, which is to offer a world-class customer experience. And the all-time-high NPS value of 72 is a testament to that fact. So before moving on, I'm just summarizing the macroeconomic climate is challenging, but we can still deliver healthy profitability also in this environment. Let me move over to Page 4, please, to go through some of the business, start off with the business update. So if looking at our KPIs related to our long-term strategy, the -- there were somewhat mixed results. We are, of course, extremely happy and proud that we continue to delight our customers. And the -- and as I said, the NPS value of 72 is a clear indication of that and also a huge improvement versus last year as well as quarter-on-quarter. In terms of orders and customer acquisition, those numbers are down and reflect the overall economic climate. Moving over to Page 5, talking a little bit about the consumer confidence indicators. As we can see on the graph and we're following in a couple of our key markets, we see that the consumer confidence indicators showed further decline during Q3 and reaching all-time lows -- or very close to all-time lows. So overall the environment continues to be challenging, but we have taken measures to successfully navigate this climate. If we move over to Page 7, please, and then start digging deeper into the financials. We -- as I said, we ended at SEK 128 million in net revenue, organic decrease by 12.7% versus last year. The challenging market conditions have negatively affected consumer demand. So the 2 segments especially who are focusing on private consumers, which is the B2C and the MPO segment, have shown the most decline versus last year. However, I think it's important to note that we did see indications in some markets of a slight recovery in consumer demand towards the -- toward the end of the quarter. A bright spot, though, is our B2B segment, which actually grew double digits and reached a growth rate of almost 11% versus last year. And here we continue to have strong relationships with the interior design customer segment. On a regional level for the B2C segment, which is on the right-hand side of the graph. The Nordic region continues to be challenging with the economic climate. And overall, the marketing intensity remains relatively high. Let's move to Page 4 (sic) [ 8 ] and dig a bit further into some of the key financial metrics. So looking first at our gross margin: Compared to last year, we did see a 0.9 percentage point decline, but I think the important thing here is to look quarter-on-quarter. And here we improved the gross margin by 3.4 percentage points, and the price adjustment is a big driver or the main driver of this. The negative pressure or the downward pressure comes from the discount -- higher discount rates towards the customers, category mix effect and continued fuel surcharges. On a segment level, the gross margin on a segment level, the quarter-on-quarter improvement was similar across all 3 segments; however, slightly more pronounced within the MPO segment due to the -- some of the efforts in our carrier mix has had a bigger impact on that segment versus the others. And if we move to Page 9, please, also looking at the -- a couple of additional line items in our income statement. So we kind of have talked about the goods for resale already. I think the other external expenses is where our marketing expenditure is booked, and that's the main reason we see a year-on-year improvement for Q3. And then in terms of personnel costs, we have 2.5 percentage point higher versus last year; and that's primarily driven by the higher number of FTEs. Other operating expenses or -- higher or -- versus last year by 1.4 percentage points. And that line item captures all of the effects from currency fluctuations. And we have seen throughout the year to a large extent a high degree of negative impact on that line item compared to what we've seen historically. And of course, the SEK depreciation versus essentially all currencies has driven that. And our EBIT margin, as we said, ended at 13%, which is a 3.2, 3.3 (sic) [ 3.3 percentage points ] decline versus last year but improved 12.5 percentage points versus Q2. If we move to Page 10, please, and just looking a little bit on a longer-term perspective. So year-to-date -- or LTM, rather, net revenue is down to -- last 12 months due to the challenges, so far, these 3 quarters of 2022. However, we are still able to maintain a double-digit 12 months EBIT margin, which is still a healthy level. If we move to Page 11, please, and looking at our -- how inventory and some of the other balance -- or inventory as a starting point. So we have seen during the quarter that investments into our assortment have materialized ahead of the peak season. The -- and those efforts, the assortment investments, of course, during the COVID period were limited due to the fact that we could not travel. And part of our product development process is actually to work with the producers directly and one has to do that in person, so -- but now since COVID had -- has eased during the past year or so, we have been able to jump-start those efforts. And we're seeing those materialize now ahead of the important peak season. The inventory as a percent of LTM net revenue, however, is a bit higher than our target range. And that is primarily driven by the lower net revenues. To note is that we historically have seen a very low what I would call fashion risk in our assortment and within the product categories itself, so even though the ratio is a bit above our target range, it's not a major concern for us. If we move to Page 12, please, looking at our cash flow. So cash flow from operating activities during the quarter declined or was a negative SEK 24 million. And that was primarily driven by working capital developments, and the cash going into inventory was a major driver there. We -- if looking at cash flow from investing activities, we had about SEK 3 million in total, of which about SEK 2.8 million was driven by the capitalization of technology development costs. Looking at the right-hand side of the page, we have how -- have an overview of how our net cash has developed. And as we can see there, the quarter-on-quarter declined SEK 27 million, around about; and that was primarily driven by the working capital. And of course, the big drop between Q1 and Q2 was driven to a large extent by the dividend payout of SEK 52 million. If we move to Page 13, please. And let me then just summarize the quarter and also some thoughts in terms of the outlook. The year has been extremely challenging with the, yes, I would call it, unprecedented disruptions to the world economy. These events have eroded the consumer confidence, purchasing power and demand, which has negatively affected our prospects. However, we have adapted to this new reality and can still deliver good profitability, as our Q3 profit -- EBIT margin would indicate. Year-to-date, our net revenue is down 10.5% versus last year, but our EBIT margin year-to-date is still at a healthy 9%. And our rolling-12-months EBIT margin is still over 12%. Our financial position remains strong, with no bank loans, with a net cash position of SEK 55 million. We have SEK 82 million cash on hand. And investments into our assortment have materialized ahead of the peak season, so we feel that we're well prepared, yes. And of course, we're also very pleased about the actions we took during the last quarter or so to improve profitability, and the fact that they've had the intended effect. And the 12.5 percentage point EBIT margin improvement versus Q2 indicates that those actions were successful. The -- but we are still aware and, of course, very humble around the fact that the market -- current market conditions are turbulent and the outlook remains uncertain, so we must continue to be vigilant in how we drive our business. And as such, we did a reorganization within our warehouse team during the early part of Q4; and we did that to continue to optimize our organization to the current situation. We are also continuing to introduce new carriers, which will improve the customer experience and over time also optimize our carrier costs. And finally, I would like to also say that we are in the beginning of our peak. And our focus now is to continue to deliver on our customer promises; ensure that we execute at a world-class level across all functions, that we maintain a high degree of marketing spend efficiency and, of course, capitalize -- that we capitalize on some of the early signs of recovering consumer demand in some of the markets. So with that being said, I'd like to thank you for your attention. And we'll now leave the floor open for potential questions.

[Operator Instructions] Our first question comes from Benjamin Wahlstedt from ABG.

Could you perhaps elaborate a bit on -- I mean you mentioned the -- you mentioned like indications of a slight recovery in consumer sentiment in some markets. Could you elaborate on what markets and maybe what indications as well you are referring to here, please?

Yes. In some of these selected markets across Europe, we've seen that year-on-year search volumes are up or were up towards the end of last quarter. Explicitly which markets, we'll not share right now, but the -- but overall I think the situation in Europe overall is quite depressed, of course, and -- but there are differences in terms of how the current situation is affecting consumers. So for instance, in Sweden the mortgages and the development in terms of how interest rates are going to develop moving forward is -- has a big impact on discretionary spend, whereas that is not necessarily the case in some of the other European markets.

Perfect. That brings me to the next question as well, if you could perhaps elaborate a bit more on the relative weakness in the Nordics. Is this just due to different leverage [ in ] households or a different marketing allocation? Or is there something else we need to understand here?

It's a combination of multiple factors, where of course the consumer sentiment is a major one, but we've mentioned in the past in terms of sort of how the references or the other players active within our categories somewhat changed during COVID. And it also differs between the different regions. And the Nordics is one of the regions where the multichannel players definitely took a big step forward during the COVID period. And we also see continued high activity from some of the online specialists.

Perfect. And then I was also interested in if you could give us a rough estimate on the total level of price increases during the quarter, please. And also perhaps, if you could give us an indication of [ future ] price increases, that would be helpful as well.

Absolutely. What we shared during the last earnings call and -- was that the price increases we implemented on a large portion of the assortment were tied to or were driven by the need to adjust to how the USD versus euro had developed. And then -- and that number, of course, is -- yes, it's known information in terms of how that was. And then our price increase was, of course, in that range because the main driver for the increase was how those currencies have changed during year-to-date back then or at the end of Q2, beginning of Q3.

All right, so we should understand that as no further price increases during Q3 then. Am I understanding you correctly then?

Yes, exactly. [ For the ] second portion of your question, absolutely, yes. We haven't done any major changes to our [ out pricing ] during -- or since subsequent to those, and -- but it is, of course, something in terms of -- or something we're monitoring, the U.S. -- versus USD-versus-euro exchange rate. And there's always a bit of a balance, of course, in terms of ensuring healthy gross margins and ensuring that we have an assortment that is attractive and affordable for the consumers given the current climate.

Loud and clear. And then also if you could give us a bit more flavor on the reorganization in the warehouse, you mentioned, in early Q4. What has been done specifically?

The reorganization resulted in some of our team members being -- well, in the Swedish term, but the English term I would use is let go. And that is, of course, not the correct translation of [ the factual ] Swedish term, but essentially the outcome was that.

[Operator Instructions] Our next question comes from Carl Deijenberg from Carnegie.

So a couple of questions from my side. First, on the marketing spend here in Q3 and maybe if you could share a bit if you think this is a sustainable level going forward. And then maybe my second question on that topic is if the -- sort of the improvement that you see here sequentially. Is this sort of mainly a result of what you see as improved marketing efficiency? Or is it basically also that you scaled down your marketing budgets? Sort of to understand maybe the mix there [ in-between, if you could ] say anything about that.

Yes. So if we kind of talk about the expectations moving forward. What we are doing is to ensure that we have an efficient level in terms of how -- or yes. [ CSR ] is the term I use but -- that our marketing spend efficiency is at a level that we feel is appropriate. There's always a trade-off in terms of investing more into marketing versus -- so there's always a margin-versus-growth trade-off. And then I think what we have done is to ensure that the marketing investments that we do make are done in as an efficient manner as possible. And of course, the -- what that more explicitly means is that we're reviewing where we spend money in terms of markets as well as which channels we use. So those 2 main actions in combination has been the driver of the improved efficiency and something that we will continue to ensure and focus on also here during the peak season.

Okay, great then. And maybe following up on that on sort of the general climate and prices on keywords, if we take [ ad words ] for instance. Do you see it from your side that these prices have also sort of declined sequentially? Is this something that you're sort of familiar with or seeing? And has this contributed also then, I guess?

Yes, no. It's a bit -- again, we operate in quite a few markets, as you know. And in some markets, yes, there have been also in the keyword area some sequential decline in CPC since some markets there haven't been that trend. So a bit of a mixed bag. And the -- and a big -- but a big driver and really the most important driver in terms of the Q2 versus Q3 development on the marketing spend ratio has been actions and decisions that we've taken internally versus field, versus the general market condition, I would argue.

Okay, very well. And following up on another topic here on the inventory situation. You elaborated a bit about this in the presentation, but I'm just curious. I guess there's also a USD or U.S. dollar revaluation effect here in Q3 and sort of obviously taking up the value in the balance sheet and if I just then take the sort of the absolute level versus Q2. Is that correct? And would it be possible to say anything, sort of magnitude, the sequential magnitude, Q2 versus Q3 from sort of the currency development there?

Yes. So the -- there's actually not a revaluation of the goods on hand. So if you, if we have the goods on hand at a given point -- so we value the goods once it's brought into the -- into our sort of realm of control and then we put it on the balance sheet finally when we receive it. And the currency rate at that given point in time is used to value the goods in the inventory. And those specific goods, of course, for that will have that value in our inventory in SEK throughout its life span. However, what -- if we take articles that we reorder, what it can mean is that we have a constant USD price that we buy for. And earlier this year, it was one price. And then when -- and if we brought it in at that point in time, we would have one SEK value, and the same number of items brought in here during the last quarter or so would have a different value. So the main driver in terms of the increase quarter-on-quarter, with that being said, is that we've made investments into developing new designs and new collections and those have arrived now ahead of the peak season. I mean that's the main driver of the quarter-on-quarter increase in our inventory.

Okay, great. That's very clear. And I think a final one, on the balance sheet then, if you could say anything about the receivables line here. It's up quite significantly sequentially. I think you ended Q2 at around SEK 12 million versus SEK 46 million during Q3, so any comment on that, yes, would be helpful.

Yes, absolutely. That's driven by that we moved money into our tax account. So taxes could be paid from -- yes, taxes could be paid, so moved this out of our bank accounts, into the tax account that -- with the Swedish tax authorities. And that's the main, the driver on the and the vast majority actually in terms of the quarter-on-quarter development there.

Okay. And my final question is if you could just share a bit the development on the new web shop that you've been working for some time. I know that you launched it in a few more markets here in Q3. So maybe if you could say, how many markets are you live with that version? And how many left are there to sort of upgrade? And when do you think you have fully transformed?

Yes, absolutely, yes. So the team did a tremendous push during both Q2 and Q3 in terms of moving the development of our -- essentially we're rebuilding our entire e-comm platform; and the front end, which is only one portion of the entire work. So what you see, the web shop is live in Croatia and Austria. And the degree of maturity still is something that needs to be enhanced before we move into additional markets, but that is work that is ongoing and -- but currently Austria and Croatia are the only domains with the new infrastructure.

There appear to be no further questions. I will turn the conference back to you.

Thank you. And then there was a related question, written question, here to the inventory numbers, yes, specifically in terms of the increase of the inventory as share of LTM net revenues, the ratio between them. And quarter-on-quarter, it's -- it increased about 4 points, right? And -- actually about 7 points, almost 8 points. And that is obviously since the beginning of the year. And that's the quarter-on-quarter sequential development is really the more important one here. And that is really driven by, number one, of course, the investments into the assortment that we've spoken about. And second, of course, is that the LTM net revenue is down versus before. And though that -- and then of course, the ratio has increased above the target level that we have. However, we -- as I mentioned, there is a low degree of fashion risk in -- within our category or vertical. So the -- and we still feel confident that, over time, we will be able to sell the items. And of course, the new items that we have invested in or the new collections and -- that we've invested in, we feel strongly that they will enhance our assortment and be attractive to consumers, so over time, we feel that we can get back, yes, let's say, to a level closer to our target range, but the inventory value by itself is not a major concern. Anything -- no. That was everything from the written questions. If nothing else, I would like again to thank everybody -- for your attention and look forward to speaking to you all again next time. Thank you.

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.