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

Welcome to the Rugvista Q1 2024 Conference Call. [Operator Instructions] Now I will hand the conference over to the speakers. CEO, Michael Lindskog; and CFO, Joakim Tuvner. Please go ahead.

Thank you and welcome, everyone, to our earnings call presentation for the first quarter of '24. Myself is Michael and Joakim is also joining. So let's kick it off with a few highlights in terms of the first quarter. I think overall it is a quarter where we've shown a lot of strategic progress on our initiatives, but that the overall market remains challenging. We continue to be excited about the fact that our customers love what we're doing. We're reaching more of them and we continue to develop our customer proposition according to the strategic agenda that we've set forth. However, of course the consumer sentiment in many of our larger European markets is challenging where the average order value has contributed to the decline in the net revenue and the lower AOV is very much an indication or a consequence rather of a continued price sensitive consumer. We are also pleased to see that the investments that we've done over the past few years in number one, developing the new e-commerce platform, has enabled us to really start to see traction in our efforts to also create content and thereby getting more organic traffic on to our platform, which contributes to the marketing efficiency gains. So a little bit more about the numbers. We landed on SEK 176 million in terms of the net revenue, a slight decline or a couple of percent down versus last year. I think the highlight here is also that we're seeing differences across the regions and markets and of course the decline is very much driven primarily by the lower average order value. On the main items when it comes to the profitability, I think it's important to highlight the aspects that the major variable cost items; which is of course the product cost, the freight to and from customers and the marketing spend line item. We are continuously working on those and they are showing progress on all of those line items even with the lower AOV. However, the EBIT margin is down both from a sort of absolute level as well as percent versus last year and very much also driven by the lower scale effects on the more fixed cost base due to the lower turnover in addition to our investments into organizational development and preparations ahead of the move to the new warehouse. So that's kind of what I wanted to highlight there. Moving on little bit to the business updates. I think we talked about the order count so we increased our orders by 15%. The number of new customers we acquired was 16% higher versus last year and we continue to maintain very high customer satisfaction ratings both in our Net Promoter Score survey as well as on Trustpilot. The consumer sentiment or consumer confidence is slightly improving in some of the markets we operate in. Some markets remain very challenging. But the overall picture is that there are some positive signals, but the outflow or the consumer confidence is still at very low levels overall. When talking a little bit about the average order value and the price sensitive customers and also the items that we can actually control. And yes, we have ensured that we have a more appealing offer on the slightly lower price points and that's kind of what we can see on the left hand side of the graph where our offer to the customers is slightly higher in the lower price brackets. But overall, it is a relatively minor increase in that share of our assortment. So what's really driving the AOV is the fact that customers here during the past few quarters have really down traded, which we've seen in terms of selecting slightly smaller rugs. We've seen that they're taking or choosing to buy the discounted items and that type of behavior versus a major change in terms of how we have constituted or developed our offering. Also want to highlight a little bit about with our outdoor assortment. Even though the weather can be what it is, but Q2 especially is the season for outdoor rugs. We've over the past years continued to develop that offering to ensure that we are also relevant during this period. And what we've seen is that we continue to see progress in this subcategory. And then also what I want to highlight here is with the new platform, we're able to really highlight and present new introductions in a very different manner or enhanced manner compared to what we were able to do historically. So with that being said, let me hand it over to Joakim to go into some of the numbers in detail.

Thank you, Michael. I start with the top line. So like Michael mentioned, we had a good 15% order growth despite the decline in sessions so hence we had an improved conversion during the quarter. However, the change in average order that we saw starting in the second half of last year still persists in all regions actually. In total, our net revenue declined by 2.4%. If you look at the regions, we had a big difference between markets also within the regions. So DACH declined by 4.6%, the decline coming from Germany. Nordics where we have the majority of sales in Sweden, Denmark and Norway grew by 13.1%. And Rest of World, which is mainly Rest of Europe, we had a decline of 6.1%; but also there some markets performed well like U.K., but in the southern parts of Europe we had larger drops. So I'll move on to gross margins. So going back to quarter 4 of last year we reported 60.3% gross margin and in quarter 1 this year we had 61.6%. So quarter-on-quarter we have improved by 1.3 percentage points mainly due to less discounting. Versus last year quarter 1, our gross margin was down 1 percentage point and also that is then due to higher discounting than previous year. MPO improved 2.1 percentage points from a lower margin prior year, but that was related to a less favorable geographical sales mix. So in B2B where we also have the smaller businesses and also in B2C, the margin drop was driven again by higher discounts and the customers to a larger extent opted for the discounts that we offer. So to the big picture. We have an EBIT margin decline driven by investment into the organization and business development. And as said earlier, the larger discounted share of sales rendered a higher product cost percentage. The freight costs, which is included in the goods for resale, was somewhat lower than prior year and also prior quarter despite the lower average order. So we have decreased the cost per order. In other external expenses, the next line, we have the marketing expenses which were decreasing versus prior year with 1.1 percentage point. So the increase in costs in this line were consultant costs like we had in Q4 for our new warehouse design and also IT costs. The split in between them being about 50-50 of the increase. Personnel costs increased due to the general salary increases and also due to the higher number of FTEs from the recruitments that we made in the second half of last year. Other operating expenses contains the FX effect on the revaluation of assets and liabilities in foreign currency and this is 0.8 percentage points lower than last year. Depreciation and amortization, in this line we have the right-of-use assets for IFRS 16. So this increased due to the inflationary adjustments of our lease agreements or the indexed leasing agreements and also for the new warehouse that we took on in quarter 4 of last year. So in total, this then sums up to a 2.8 percentage points lower EBIT margin as explained above and also due to a minor negative scale effect due to the decline in sales. So I'll move on to inventory. So we ended the quarter 4 last year with SEK 126 million in inventory and this was a low number at the bottom of the target range we have provided equivalent to 17.9% of the last 12 months of net revenue. So we increased our inventory with SEK 7 million during quarter 1 and that gave a total of 19.1% over the last 12 months of sales. So this is still in the lower side of the target range and we can expect this to gradually grow as we approach the next peak season in quarter 4. Last, but not least, cash. So at the top left on this slide, you see your cash flow from operating activities that improved over last year. So in last year we had an extra tax payment due to the then releasing the formerly deferred taxes. The positive changes in net working capital this year mainly derives from decrease in credits from suppliers. Cash flow from investing activities mainly consist of intangible investments in the development of our e-commerce platform and this was slightly up versus prior year SEK 0.3 million. So our net cash being then the cash we have at hand minus our leasing debt for the right-of-use assets landed at SEK 209 million, which is then up SEK 93 million from previous year quarter 1 and it's up SEK 23 million versus the last quarter. So all in all, we have a solid cash position. No interest-bearing debt to financial institutions and hence we are prepared for the inventory buildup for the peak season that I mentioned, the dividend that the Board of Directors has proposed and that is subject to a decision in May at the AGM and also for the investments that we will make related to the new warehouse. So that sums up the financial update and I hand over to you, Michael, to sum it up.

Thank you. So just a little bit of a summary and a quick outlook for the rest of the year. So I think we continue to focus on really realizing our strategic initiatives and of course navigating the market conditions. Q1 is a quarter where we have seen progress on multiple of our strategic initiatives and that of course continues to be a large portion of our focus because that will really ensure that we continue to develop, we. continue to improve our proposition for our customers and positions us for continued profitable growth. The Q1 numbers of course are a bit challenging where we did see a bit of a decline, a couple of percent decline in the net revenues. That is of course something we're not super pleased with. And we have also, as mentioned, taken actions to improve that overall position and trend. However, our gross margin did improve quarter-on-quarter. We continue to see improved marketing efficiency and we continue to optimize our freight costs to and from customers. In addition to the fact that I think it's important to mention that we delivered a relatively healthy EBIT margin despite the fact that it is a decrease versus last year. And then as Joakim also mentioned here, our financial position is very healthy. We have a strong net cash position and we are still in a position where the Board can suggest a dividend of SEK 1.8 here at the upcoming AGM. But looking a little bit ahead towards the rest of the year, I think the outlook of course remains quite uncertain both from the sort of global security aspects with the situations we have still in Ukraine and now also down in Middle East. We have an overall macroeconomic climate that continues to be challenging, which has impacted the European households in terms of cost inflation over the past few years. And of course in the near term we expect the situation to gradually improve hopefully, but it is very uncertain. And also considering these conditions, we did initiate some specific actions to improve our margin position, which included some price adjustments. We also initiated and focused on cost optimization in terms of operating our new e-commerce platform. Both of these initiatives have given a positive impact since being implemented and that is of course something we'll reap the benefits of moving forward. But overall, I think I want to reiterate the core business in terms of us improving our proposition to the customers is on track. We're growing our traction with customers. We will continue to of course focus in on navigating the current conditions as well as building and preparing for the future. So with that being said, I'd like to hand it over to the audience for any potential questions.

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

So a couple of questions from me. One is price adjustments slated during the quarter. Could you perhaps elaborate on magnitude and, if possible, compare it to the magnitude of price hikes that you did in Q3 '22, please.

Absolutely. The price adjustments were a level to make a difference. They were slightly lower than the ones we did back in Q3 '22. So still not sort of low single digits, but not double digits so somewhere in between.

Perfect. And then I have a question. You also in the CEO statement point to the implementation of Google's Consent Mode to have a negative sales impact. I was wondering if you could quantify this further, please?

Of course fully implementing that has been something that's been going on for a while internally. When that was fully implemented, we did see a period where the efficiency in our paid marketing channels did decline and then also to a small degree affect our ability to drive traffic and then of course that impacted the top line during a couple of weeks around about during the quarter.

Right. And I was wondering as well about the new checkout solution. Do you have any early takeaways? Any learnings from that, please?

Overall, we're pleased we're almost done. There's a couple of markets or domains which haven't migrated yet to the new checkout and that is a few minor technical issues, which we're still trying to solve. But overall in the markets where we have introduced the new checkout, we are seeing stable checkout completion rates, but of course some differences between the markets. But overall we are pleased with the performance of the new checkout so far. I think it's important to keep in mind it's still a very early version of what we intend to do in this area moving forward. But overall, we are pleased with the checkout completion rate so far.

Perfect. And then 1 final one maybe. You talked about AI-based functionality being launched towards the latter half of the year. What is this in concrete terms, please?

We've started to leverage of course AI in some of our content production efforts. We have started to leverage this new technology in some of also our customer service area team or in our customer service team. It's of course a technology that can be leveraged across multiple functions to a larger degree than today and that is something we are focusing on and will continue to focus on in terms of introducing and rolling out a new technology, which leverages AI both in terms of consumer-facing functionality as well as internal facing functionality.

The next question comes from Johan Fred from SEB.

First, could you just clarify something on the average order value for me, please? You write in the report that it decreased by 15.5% while on the slide in your presentation the average order value is stated to decrease by roughly 18%. Is the 15% decline in constant currencies?

No, it's unadjusted and there's a typo in 1 of the areas.

That's got to be [ incorrect ] in the presentation. but not in the report.

Sorry. The presentation is the correct number so it's 18% decline.

No. The report is the correct number.

Yes. So this is the full report for the 3 years. So the earnings call presentation is the incorrect number.

Okay. But you also state this number in the report as well.

Yes. We'll double check here which is the correct number with our internal data. Sorry about that.

No worries. And what have you seen in terms of market price pressure and campaign activities from competitors during the quarter? Have you seen any change in the trend throughout the quarter or how would you assess the sort of market price pressure?

It's definitely continued to a large extent in terms of being quite intense. Of course Q1 is not as intense as Q4. But Q1 this year versus Q1 last year did see, I would argue, a higher intensity on the price related campaigning efforts. We also had the start or Easter of course fell more into Q1 this year and many sort of home interior type companies have invested quite heavily in price offerings ahead of the Easter period as that kind of is the kickoff for the outdoor season.

And going into Q2, are you seeing any -- are there pressures easing or how should we think about this going forward?

I mean at the end of the day, the consumers are for sure seeking value for money and maybe to a somewhat larger extent than we've seen historically. And then of course some new entrants into the European scene with [ Temu ] specifically. Of course that is something that the entire industry in Europe needs to react to and what has been the case is that many have focused on price offers in many of the sort of communication efforts we've seen so far this year.

Got it. And just a follow-up on the Google Consent Mode update. Is this the same update as what's been referred to as the Google's core March update?

No. So the Consent Mode is a reaction from Google in terms of the European GDPR and then also in the second step that's where Google has been classified as a very large player or a gatekeeper is kind of the term often used. So with that being said, they have ensured that all of their advertisers meet the standard that the European regulation has set and of course that has increased the standards they put on us where we over the past few quarters have prepared to ensure that all of our setups in performance marketing meets those standards. Then in terms of what you were referring to that there was a major core update to the algorithms in terms of how they present web search results. It's been a while since they did a major update like they've done here over the -- it was really initiated towards the end of the quarter and completed during the first few weeks in Q2 actually.

Yes. Have you seen any impact from the core March update? I've read some industry reports saying that platforms with quality content should benefit more. Have you seen any impact?

We're seeing not a sort of major up or down when we look at it from a total perspective. Of course there are certain of our domains where we're seeing positive effect and certain areas where we're seeing some issues. But overall, it has not been super positive or not super negative either. But it is something we're still in the sort of process of adapting to because it's a gradual roll out across the different domains for us and them as well.

Okay. Got it. And could you just please quantify the impact of the Google Consent Mode implementation on the sales in the quarter?

We had a couple of weeks where we had some issues in terms of being able to fully operate our paid marketing efficiently or effectively which impacted the top line and the efficiency during that period to a certain degree.