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

Welcome to the RugVista Q2 2023 Conference Call. [Operator Instructions] Now I will hand the conference over to the speakers. CEO, Michael Lindskog; and CFO, Joakim Tuvner. Please go ahead.

Good morning, and welcome to our Q2 2023 Earnings Call. I hope everybody is having a great morning. To -- it's myself, Michael and Joakim here as the speaker mentioned. We will start off, as usual, with a bit of a highlight for the quarter and the business updates to later on go into the financial details as well as a Q&A session. So let me kick it off just some highlights for this past quarter. So Q2, I think we are very pleased or we are very pleased to report that we continue to maintain a good profitability level. We have, during the quarter, also seen signs of increased consumer demand, which is promising, considering 5 very tough quarters on that area for the profitability. I think us moving from essentially breakeven on EBIT last year to almost SEK 12 million this year is a great achievement, and that also represents an EBIT margin of about 9%, which is a significant improvement. The -- our net revenue in SEK increased to SEK 129 million, which represents about 6.5% increase versus last year. However, that was, of course, partly driven by the currency effect as such net -- organic net revenue was at minus 1.5%. However, we do see that the implementation and execution of our strategic initiatives are impactful. Then in terms of growth, growing consumer demand, I think we see that in some markets, it's definitely not a sort of picture we're seeing across all markets, but there are some signs during the quarter that, that consumer demand is at least starting to recoup. And then as we mentioned before, we continue to focus on cost efficiency and then both on us, the major variable cost items in terms of gross, which impacts gross margin and also our marketing efficiency, of course, where we saw year-over-year improvements in both areas. We continue to maintain a very healthy financial position, both from a net cash perspective, as well as an inventory perspective. And we also -- and that's also after our dividend payout during the quarter. And then finally, the -- spoke earlier about the positive impact from the strategic initiatives, I'm very happy that our investment into improving the outdoor assortment, of course, paid off. We took or released rather the new e-comm platform we've been developing into 7 markets during Q2. Those markets also represent a significant share of our ongoing sales or total sales. And of course, we continue to maintain a very high customer satisfaction level. If we move into the business update a little bit in detail, I think, number one, after, like I said, 5 tough challenging quarters, we are seeing growth in some of our strategic KPIs related to growth. Both in terms of orders -- a number of orders as well as the account of new customers that we've been able to acquire. And then I think that's good, but should still be seen in light of the fact that consumer confidence is at low levels, although improving. And as you can see here on the chart we've used. We are starting to see that across some of our key markets still at low levels, but slightly improving throughout the year. Then moving over to our e-com platform. As you know, it's really 3 major components that we have been developing. Number one, the -- of course, a new front-end or the web shop that you as an end user would see. The second major component is what we call the content management system, which is where we publish and host all of the content essentially that you see on site and then, of course, a new modern API layer, which connects to our existing backend services. The platform is now live on the markets you see on the chart. So of course, very important markets for us, both in Germany, Sweden, U.K., for instance, as well as France and Italy. So major markets are now on the new platform. And of course, I think it's important to keep in mind what the platform is expected to deliver for us, which is, of course, some of the basics in terms of improved load speed and all of the technical areas, but also developed with a mobile-first user experience in mind, it's a platform that will enable us to localize content and other areas to a much larger degree moving forward. It's also built -- to build to host and publish content, which, of course, in addition to indexation, which is all areas of CEO optimization. And then it's also, of course, a lot more modern and built for easy maintenance and further development. Moving forward, the plan is to continue to add features after, of course, we move the rest of the RugVista business to the new platform, which is expected to happen during this quarter 3 of this year, of course. A little bit of a highlight in terms of our outdoor assortment. We showed last quarter that we about doubled the selection within the subarea or subcategory and we more than doubled the sales in that area. And what we're seeing here is the share of total rugs sold from the outdoor subcategory, and it increased by about 150% or 1.5x versus last year. So with that in mind, I'll leave it over to you, Joakim to take us through some of the deeper financials.

So thank you, Michael. So overall for the quarter, our focus has been, apart from what Michael mentioned in driving and implementing our strategic initiatives to deliver an improved bottom line and this is also what our numbers show. We improved our profitability substantially, although comparables were quite low. So if we start on this slide, with the top line, our net revenue is up 6.5%, but we have a strong tailwind from the depreciation of the Swedish krona and we are retracting 1.5% when we exclude the positive currency effect. And as Michael mentioned, we saw an increasing demand as the quarter progressed and signs of continued increasing demand into July. For the business units to the left in the slide, our largest business unit, B2C is up 4.1%. Market places and other, which is mainly Amazon, is down 9.5% and B2B continued to perform well. Sales is up 26.9%. And in quarter 1, we mentioned specific customer types performing well but in quarter 2, we are growing across most customer types in this segment. In the table to the right, you can see the regional development in our B2C segment, and DACH is performing as a business unit as a whole with a 4.2% increase. The Nordics is performing better, growing 6% and also in light that this region has less currency impact with, of course, the Swedish market, but also the Norwegian weak krona it has a better performance. The Rest of World, where the major part is Rest of Europe, we are performing slightly below the B2C business unit. So moving on to gross margins. So we have a good improvement of our gross margin versus a low comparable prior year. We improved 3.5 percentage points and the main factors contributing to the increase are the price increase of previous year in quarter 3, the lower discounts in this quarter this year, a positive category mix and also in the short term, the depreciation of the Swedish krona. So if you go to the segments, the margin increases in all segments and the main driving factor is, of course, the price increase for Q3 of last year. Marketplace is another with a small increase of 0.2% versus last year. Here, demand is focused on lower price points, which gives a higher cost in percentage terms for the freight. The B2B segment has a 0.4% increase versus last year. And here, the customer mix increases more for the customers, which have a higher discount rate than compared to prior year. B2C has a 3.8 percentage points difference versus last year, and the main drivers are the same as for the whole as this segment is so big. So the price increase of quarter 3, the lower discounts, the improved category mix and the depreciation of the Swedish krona. So moving on to the big picture. So from a profitability point of view, we have improved on more or less every line item we see here. I just spoke about the margin variances versus last year, and the same explanations apply to the top line here, the goods for resales, a 3.7 percentage point improvement versus last year. Bear in mind that the goods for resale percentage is not exactly 100% minus the gross margin as the other income is included in the gross profit as well. In other external expenses, we have improved 1.8 percentage points, and this is due to our focus on marketing efficiency, resulting in lower marketing costs. Personnel expenses are down from a high comparable in last year, and we had one-off costs that were incurred relating to changes in personnel. So in total, that's improvement of 2.5 percentage points versus prior year. And in other operating expenses, we record the foreign currency effects on transactions and from the revaluation of assets and liabilities that we carry in foreign currency. So this effect is positive this quarter versus negative in last year and hence, sums up to 1.0 percentage points improvement. Depreciation and amortization is flat versus prior year. So the bottom line is we reached an EBIT margin of 9.1%, a substantial improvement and year-to-date, we are at 12.1%, close to 5 percentage points for the full year-to-date improvement. And this is, as you can see, driven by our improved gross margin, improved marketing efficiency and lower costs for personnel. So moving on to the balance sheet, starting with our biggest item there, the inventory. So this is almost flat, a minor decrease versus the year-end and a minor increase versus the Q1 close. Here, during the quarter 2, we introduced a never out of stock program for our top sellers, and this added up some inventory. We still have a target that you see in the right of the picture, to reduce our inventory to the interval 17.5% to 22.5% of the rolling 12-month sales. We don't want to put too much urgency into reaching that, but we want to be ready when we are back to our growth targets and the peak season that we have ahead. So we see our growth targets is more important than to optimize in the short term our inventory. So we have the cash balance. We have the cash. We have the balance sheet to sustain that, and we generally see very little risk in our inventory, which we also have proven in the past. Last but not least, to cash flow and cash. So cash flow from operating activities was strengthened by the increased earnings and EBITDA of SEK 14.8 million versus the prior year SEK 3.3 million. The working capital changes were less prior year and the cash -- less than prior year and the cash flow from operating activities ended up at a minus SEK 4.4 million. And there are several working capital changes, but the major one is the decrease of the operating liabilities, which includes the VAT payable, and that drove the main increase of working capital. Cash flow from investing activities is as before, mainly the investment in our new e-commerce platform and that is on par with prior year. Net cash position at the end of quarter 2 happens to be at the same as prior year. It's down SEK 30 million since the year-end. Of course, a lot happened since then. But now in -- on the 1st of June, we paid a dividend of SEK 31 million to our shareholders. Cash at the end of the period. You can't see that in this picture, but in the report, it was SEK 104 million compared to SEK 111 million prior year. So all in all, we have a strong balance sheet, no interest-bearing debt to financial institution and a good cash position. So with that, I hand over the word to Michael to conclude before the Q&A.

Thank you. So summary and a little bit of an outlook. I think the key message we want to convey here and which we definitely believe in is that are very well positioned to continue to successfully navigate the current climate. And then of course, the rest of the year. We have performed from a financial perspective, quite well so far this year and also especially during Q2 compared to Q2 of last year with growth in our net revenues of 6.5% and a significant improvement in profitability with SEK 12 million in EBIT during Q2 compared to essentially breakeven last year. And that has, like we mentioned, been driven by the improvements across all of the different line items. We are also encouraged that we have started to see some slight improvements in the consumer demand in addition to the positive effect of our strategic initiatives that we have been working on. And in terms of financial position, of course, a very healthy balance sheet and inventory. So we are well positioned to continue our efforts and rest of year, both from giving us flexibility across all areas of these sort of commercial toolbox. And I'm also looking forward to the rest of the year, of course, where we have number one, implementation of additional strategic initiatives, further improvements in our assortment, of course, but here near term, is the new e-com platform that we'll be rolling out to the rest of the RugVista sites. And if you happen to visit some of our sites during the last couple of days, we are also now actually live in Holland, Belgium and Ireland on the new platform that happened yesterday. And that also is positive. So we're progressing on that. And then, of course, we -- in July, which, of course, is after this report's reporting period or closing date, we did achieve organic net revenue growth which is promising. But keep in mind that the overall outlook for the fall is from a macroeconomic perspective is still uncertain. July is typically the smallest month within Q3 for us. So total demand typically increases towards the end of the quarter, but at least a good early start to Q3. And with that being said, our focus right now, be it besides the strategic initiatives is, of course, getting ready for this year's peak season with several improvements to our overall customer value proposition and our commercial activity plan. So with that being said, we open it up for questions.

[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABG Sundal Collier.

Congratulations on a strong quarter. So a couple of questions from me. First, relating to the new websites. You note that initial KPIs are promising for the converted website. Could you give a teaser or say something on like the kind of KPIs you're referring to here, please?

Especially the engagement KPIs and especially on the mobile side, I would say where we're seeing people -- seeing that people are engaging with our products, with the content that we have already and the various navigational features. And that, of course, is resulting in some, let's say, lower bounce rate as one specific KPI.

Perfect. And I note also the conversion rates continues to get better 0.94% in this quarter. Is this driven by the new website as well? Or is it still like too early to tell or to make an impact, please?

It's still a bit early, of course, as traffic mix plays a big core part in the conversion rate and pricing and all of the other elements of the sort of overall consumer experience. But the site, of course, is intended to make it easier for our users to find what they're looking for. And of course, as we do feel that we have a very appropriate and comprehensive selection of products across most different product types. We do expect that the conversion rate over time should increase if people are able to easier find what they're looking for.

And to follow on marketing there. You previously mentioned that platform revamped or website revamped, might mean that you have like a stronger -- they have to lean more strongly on paid traffic. Could you perhaps give us some idea of what these website revamps might mean in terms of added paid traffic costs or anything on that topic really would be interesting to hear as well.

I mean, with the release of any major new tech product, there will obviously be some challenges in the early phases and so forth. And then, of course, during quarter 2 as those who are most of you who follow e-commerce are aware that universal -- Google Universal Analytics was discontinued and then the new tracking software GA4 or Google Analytics 4 was introduced, and that's also something that we of course, impacted us and something we had to deal with during the quarter and so forth. But I think in terms of explicit things that has the potential to short term negatively impact us when the domain is released that includes certain things related to the paid marketing and also some of the indexation might not be up and running, there's always those type of things when it comes to a complete URL structure, there's many things that needs to be changed from the sort of old versus new, so to speak. And most of the times, those things go well, but sometimes, of course, there are things that are a bit extra challenging and things that will need to be fixed and, of course, takes attention and has the potential to negatively impact the business on a slight -- on a minor degree, of course, overall but that's some of the challenges one has to deal with.

Yes. One final question from me. You mentioned that you see organic growth in July. Are there any significant differences between Q3 months and 2022 to take into account here? Or like comparable growth figures similar for all 3 months in the quarter? Or how should we think about that, please?

So it's a little bit difficult, I mean, because '22 was versus '21, which was a bit abnormal as well, right, with all of those things and weather has a tendency of during the summer period have a slightly larger impact on retail sales in general and of course, to certain areas as well. But what one can say is that during Q3, what we historically have typically seen is that the August is slightly bigger than July and then September bigger than August. So...

The next question comes from Emanuel Jansson from Danske Bank.

And I think we can start off with looking at the growth within the B2C segment where you've seen growth in both in the DACH region and in Nordics. Is this the same pattern you have seen also in July, or within growth within these 2 areas? Or have you seen any pickup in any specific region as lately?

We'll comment on that potentially when we present our Q4 in terms of the different Q3 rather in terms of the different regions. But overall, I think what we can say is that in general, consumer demand is starting to recoup and we were able to achieve organic net revenue growth during the month of July. So quarter 3 started off well.

Yes. Okay. Fair enough. And could you maybe give us some flavor on -- I mean you have implemented, of course, some new products to the assortment and also putting more effort into the outdoor segment, for example, but could you maybe give us some flavor of consumer behavior? And what has changed from a year ago whenever it comes to consumer behavior? And what have you seen so far?

I think the -- if you start maybe with outdoor, of course, which is a very important subcategory during the summer months and an area where we have not historically had a sufficient assortment undoubtedly. And we, for this season, put in a significant effort in terms of improving that, both from a selection perspective as well as driving traffic to those areas or to those product types and overall, very successful. So we have now or we this year were able to capture a significantly larger portion of that natural demand that exists for that type of product. And then when it comes to the other product category, we put effort into which is bathmats. There, we also saw some promising early results during the quarter. It a very small area for us. but one that we -- a little bit more on the midterm can be a good starting product for those consumers who don't know us and are a little bit potentially afraid to spend, let's say, EUR 300, EUR 400 on a first purchase and instead are able to spend EUR 30, EUR 40, EUR 50 and thereby having a good experience, and we are establishing a customer relation, which we can, of course, leverage during -- yes, moving forward, so to speak. And -- but overall, of course, like we've spoken about a little bit over the past year or so that we are seeing a slight downward pressure in terms of consumer spending power, which impacts our category mix and within the difference of sub areas. People have a tendency of seeking slightly lower price points to a certain degree. And that's also why the RugVista Essentials collection or sub-brand has been a very important area of our assortment during the past year.

Perfect. That's very clear. And just moving slightly ahead for the Q3 season here. And you're stating that you are aiming to implement at least the rest of the domains with the new e-commerce platforms. Can you maybe give us some flavor on what the main risks are here for the upcoming Q3 results? Is it related as you mentioned to increased cost for paid marketing? Or how should we view the main risk with implementing the rest of the e-commerce platforms to the new domains?

Yes, understood, I think, first week or so, there's always a little bit of a risk that the paid channels going to or the campaigns going to a little bit of a learning pace, which from -- with the algorithms, which, of course, typically means that the marketing and efficiency during a learning phase is slightly lower. And so that, I would say, would be from that area, the main risk. I think keeping in mind, though, we are live on domains already, and those domains, of course, had a priority order, and let's assume that, that priority order was based on importance for us. So we are already on a bulk of the significant portion of the RugVista business on the new platform. And during the summer, have gone through the learning period for those domains.

Okay. Perfect. That's very clear. And maybe a last question from my side. Can you give us some saying on market shares within the different regions growing in, for example, in DACH and also in the Nordics. Are you maintaining market share or gaining or how should we view it?

Like we've said before, I think it's very difficult since the -- to give a very certain answer to that question as the data transparency within our categories is very limited. What we can see, of course, is some indications from our partners in terms of total category volume, et cetera on sort of consumer interest within our sub product type. And from those indications, I will argue that we are overall maintaining a good market share position.

[Operator Instructions] the next question comes from Rebecca Gustafsson from Carnegie Investment Bank.

So I would just like to follow up a little bit on the conversion rate question here earlier. Yes, you wrote in the report that the website visits decreased by some 19% during the quarter, but at the same time, both number of orders and also a number of new customers improving quite significantly. And this even though you've worked with that cost efficiency on the marketing side, I mean, should we think of this as an effect primarily related to the platform rollout? Or are there any other explanatory factors right now that you see that could explain these figures?

Absolutely. If we talk about Q2 platform, of course, impacts to a certain degree for those markets, which has the new platform. And also the other main thing to keep in mind is the traffic mix, not so much paid versus unpaid or earned. But within the paid area, we have throughout the last year done with a focus on cost efficiency, of course, a part of what that means is reducing or eliminating spend in often channels, which on a, let's say, CPC level might be relatively inexpensive, but results in a very, very low conversion rate and of course, thereby being very -- not being on overall. And throughout the year, we've -- over the past 12 months, how we've been reducing or eliminating that type of spend. And that's also part of the reason why we're seeing improvements in the conversion rate.

Okay. Perfect. And also a question on the strong growth in the B2B segment, how come it's so much higher than the B2C in the quarter? What you think? And also it would be interesting to just hear your view looking a few years ahead, do you think that the B2B segment over the longer term would -- do you expect it to grow as a share of the group over time, please?

Yes. I mean, it's still a relatively small portion of the -- of our business. But it has been performing well, if we think about Q2 last year that -- I mean that was right after the macroeconomic and geopolitical unrest that started to emerge during the end of Q1, affected the different business units a little bit -- differently, of course, and also throughout 2022, to be fair. And -- but I think explicitly what we have been doing to drive our B2B area is more focused approach in terms of who we are trying to reach. We've improved our overall customer proposition for that customer type and those and then put in a little bit of extra personnel resources. So those efforts are paying off on the mid- to long term or beyond, of course, in many product categories, B2C and B2B or of similar size. The -- so of course, there's a lot of potential within the B2B space if one had those product types, which were ideal for a B2B customer in terms of public spaces, et cetera. That hasn't been historically our focus. But of course, we continue to evaluate opportunities. And if we see that we can deliver something that is better than what's out there. Today, we -- a lot of times, will try to do that.

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions.

We have two written questions. One second here. So the first question relates to most positive and negative portion of the new e-com platform on daily basis. I think the positive is internally, of course, we see that the new platform for -- or users is a great improvement for the user experience. The ability to browse our assortment and also be inspired by a significantly better content experience that all of those areas are still very much in -- sort of in the starting phase, of course, in terms of our ambition level. But the overall project is, of course, something that many different functions internally have worked on and seeing that all of that work over the past couple of years come to -- starting to come to fruition is, of course, satisfying. And then in terms of a potential negative, I mean it -- I wouldn't call it necessarily negative. But of course, it is extra work that needs to be done across many different functions in terms of preparing the release of the new platforms. So we're all working hard, I guess, is the short story. The...

Shall I read out or...

Yes. Second -- just the second question relates to benefits in shipping costs from the new platform and whether that is already seen in our operational -- day-to-day operations as well as financial numbers. I think the short story is yes, there's still a fair amount of work remaining in terms of optimizing our costs for deliveries to and from customers, but the [ e-mail ] platform is definitely a very strong enabler for that ongoing effort.

Shall I read out the question maybe? So the second question from Axel here is -- has to switch from Google Universal Analytics to GA4 had any effect to your KPIs. The conversion rate, the number of orders and visits, it seems to have increased significantly in Q2 against previous highs. What is driving this? That's the first.

Yes, so for Q2 numbers, which are captured based on the global tracking infrastructure, which, of course, is in this context session count that is during Q2, still based on universal. We -- for Q3 and moving forward, we'll have that KPI based on the GA4 count of a session and user. So far, in our financial reporting, it hasn't had an impact. And the -- like we mentioned before in terms of the conversion rate, that's more an optimization of traffic mix. And of course, those domains with the new platform has had a better user experience during part of the quarter as well.

And then Axel had a second question, but that was also asked by Benjamin. So the last question we have here, it's in Swedish, so it has to change from Google Universal Analytics to GA4 had any effect on your KPI on or the conversion rate, number of orders, number of visits, et cetera, compared to prior year? And is that driven by the new platform?

And again, the answer for Q2, the answer on that in general would be that the switch from GA -- Universal GA4 has had no impact on our reported numbers. The -- it's a traffic mix, which is driving the conversion rate increase in addition to, of course, trying to send traffic to better land entry pages and other things that is part of cost optimization. And then, of course, the new platform being available to some of the customers during part of the quarter. And I think the potential in the platform is, from a technical perspective, already proven, I would argue, but it's still very, very immature in terms of many of the features that are currently live. So improving and building on this platform, it will be something we do over the next couple of years for sure. The -- it is version 1.0, and we're coming from a platform that has supported our business for 5-plus years at least and expecting from -- that we will, from day 1, get to exactly the same level of maturity on the new platform, of course, is not realistic.

Good. And the last question here is you mentioned promising KPIs on the new platform, I think we or you reply to that from Benjamin's questions, right.

Yes. And priorities moving forward in terms of the development, we mentioned, of course, in the report a little bit around the -- or in the materials we produce a little bit around the checkout and the current -- the checkout phase of the user experience is still on the old platform where iframing it in is kind of the short explanation in terms of how it is on the new -- yes, on those domains that actually have the new platform. But the checkout step is still based on the old infrastructure that the checkout completion rate is typically a KPI that one works with within e-com, which is an extremely important KPI and of course, we intend to -- intend with the new checkout is, of course, to improve that checkout completion rates through various means.

And that was the final question.

Excellent. So unless there is anything else, we would like to thank for everyone's attention, the continued support from all of our shareholders. And of course, for myself, thanks to the team for all of the hard work that we continuously do and that lays the foundation for us being able to execute on now on everything that we do. Wish everybody a great continued day, and hopefully, we'll see you back for our next earnings call. Thank you.