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

Welcome to the RugVista Q2 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 very much. Good morning, everyone, and welcome to our second quarter earnings. And we're happy to see so many participants this time around as well. This is Michael, and I've got Joakim here with me as well. Let's kick it off with a quick highlight regarding the rug, regarding Q2. I think overall, what we see is that our order growth continues at healthy levels, but that the market remains quite challenging from multiple perspectives. I think I want to start off talking a little bit about the strategic initiatives we've been working on over the past couple of years and the effect that we're starting to see of those. So we still are able to maintain a very high level of customer satisfaction, which is quite good. We are also in a position to grow our order volumes more than double digit. And this is in a market where the consumer sentiment, albeit in some of the major markets, improved during the quarter but remains at quite low levels. And we also see that the inflation has made the purchasing power of the European households quite weak. And I also want to highlight the outdoor rug season, which primarily constitutes the second quarter and where we saw more than a 50% increase year-over-year in the sales contribution from that subcategory. From a revenue perspective, we essentially were flat, minus 1% versus last -- or 0.5% actually versus last year, organically minus 1%. The reason the net revenue was a tad bit lower is due to the decrease in the average order value, where the customer price-sensitive behavior is negatively impacting growth. On the profitability side. The positive thing is that the variable profitability so the major costs associated with orders or sales actually decreased year-over-year and quarter-over-quarter. So the items part of gross margin in addition to marketing being the variable costs. However, the EBIT margin was significantly lower versus last year and to a large extent driven by one-off costs related to reorganizations as well as a negative outcome in the line item operational expenses, which is very much related to currency effects. To note also, of course, is that the second quarter is our seasonally smallest. And then like I mentioned, we're quite proud and continue to see our high customer satisfaction ratings as something proving that we're doing the right things for our customer. So with that being said, let's do a few quick details, where if we look at the strategic KPIs that we follow in terms of customer satisfaction and market penetration and attracting new customers on the NPS and the TrustPilot we still maintained very, very strong ratings. Order count and new customer count both grew in the lower double digits. And despite, like I mentioned, the quite tough market conditions. We see, highlighting a couple of markets here on this slide that the consumer sentiment did improve slightly, especially in Germany and remained flat in a couple of markets, the highlight here by France, but still at low levels when looking at from a slightly longer time series. And on the topic of average order value, we -- on the left-hand part of the slide, where we kind of -- we want to highlight how our price group of mix offering has developed over time. So essentially it's showing, okay, what do the consumers have available to purchase from us by price group, article price group. And what we can see here is that we, during the course of the last year, have actually slightly increased our offering within the higher price ranges and have remained relatively flat when it comes to our offering within the within the price range below SEK 2,000. Despite this, we see a clear and have seen during the past 4 quarters essentially, a clear AOV average order value decline, which is very much driven by consumers to a much higher degree compared to historically selecting the lower-priced items. And then I think the order growth that we've seen during this period does reflect that we have an assortment that is attractive for the consumers we try to reach. And of course, we will continue to develop our assortment offering over time in one of the key areas that we're working on. And that being said, looking a little bit into the outdoor assortment where last year was the first year we made a specific or concerted effort to ensure that we improve that portion of our offering. We did further improvements for this season and can really see the impact of those efforts where we actually grew sales within the subcategory by more than or about 50% to 70% compared to last year. So with that being said, let me hand it over to Joakim.

Thank you, Michael. And as Michael mentioned here in the beginning, we saw a good quarter growth during the second quarter, but the drop in average order make is drop in net revenue, 0.5% or organically minus 1%. For the business units, to the left in the slide here, our largest segment, B2C is down by 0.7% and Marketplaces and Other, which mainly is Amazon, is up by 24.8%. B2B declined 3.7% in the quarter, where the larger drop was in smaller businesses, and that is a subsegment that otherwise often replicate the trends in the B2C segment. In the graphics to the right, you can see the regional development in our B2C segment. So DACH dropped 1.4 percentage points, although with double-digit growth in orders. The Nordics still performing better, growing by 8.6%. The rest of world, we decreased -- the rest of world, which is mainly rest of Europe, we decreased by 4.2 percentage points. So we see growth in Western Europe, but a higher drop in sales in the southern and eastern parts of Europe. So moving on to the gross margins. So we dropped the gross margin with 0.6 percentage points versus last year, but we improved 1.4 percentage points on quarter 1 this year that came out on 61.6%. So the margin drop versus prior year was driven by a higher share of sales on discount and the improvement versus quarter 1 this year was mainly driven by a general price adjustment that we made in early April. And in the report, we say that the price increase was a few percentage points. So if we go to the segments, the margin decreases in all segments and the main driving factor is the higher discounts this year. In Marketplaces and Other, the drop is a bit higher by 4%, and this is our smallest segment. And here, we tested new campaigns during the quarter, which negatively impacted the margin, but as you saw, positively impacted the net turnover. The B2C and the B2B segments are with 0.6% and 0.7% drop, respectively, which is explained by a higher share of sales on discounts. So moving on to cost ratios and the EBIT margin. So the second quarter is our low season historically. So cost increases and one-offs get a higher impact with that lower volume. And I just spoke about the margin variances versus last year, and the same explanations apply to the goods for resale, we've had higher discounts than prior year. And bear in mind here that the goods for resale percentage is not exactly 100 minus the gross margin as the other income is included in the gross profit. There is a 0.4% difference here. In other external expenses, we have improved 0.8 percentage points, and this is due to our focus on marketing efficiency, resulting in lower marketing cost, which was 1.4 percentage points lower. And as a total improvement was 0.8%. There are also cost increases driven by expenses related to preparations for the move to a new warehouse and office in the summer of 2025. That is a smaller part of cost increases, and then we have increased IT costs. Personnel costs increased by 5.6 percentage points. Organizational changes resulted in onetime costs of SEK 2.5 million. The remaining cost increases were driven by a higher number of employees, general salary increases and the transition of staff at the Berlin office from externally higher than were in the costs before to the employed personnel on our payroll. In other operating expenses, we have the foreign exchange effects on transactions from the revaluation of assets and liabilities in foreign currency, and this effect was negative this quarter versus positive last year and hence, sums up to a total of 1.1 percentage points cost increase. Last, depreciation and amortization has increased versus last year. It is driven by rent increases, the new warehouse that we contracted in quarter 4 and the fact that we have started our amortization of our intangible assets, our e-com platform. And this also implies that as from now and as from the next quarter, any further development costs from our e-com platform will no longer be activated in the balance sheet but directly expensed in the income statement. The bottom line here is dropped by 7.3 percentage points in EBIT margin. Moving on to inventory. So inventory increased by SEK 20 million versus the year-end number and decreased by SEK 25 million versus the same period close last year. So during this first half of the year, we are building inventory to be prepared for the high season in the second half, and this is a planned increase. And if you look at the right, we are within our target range of carrying inventory between 17.5% and 22.5% over the last 12 months of net revenue. So we ended the quarter with 21%. We move on to cash. So cash flow from operating activities decreased due to the lower earnings, but mainly decreased due to the working capital increase. So the inventory buildup for the high season is one part of that working capital increased, a planned increase and other is decreased accounts available to supplier, which could swing in a short period like this. Cash flow from investing activities is mainly the investment in our new e-commerce platform and that was somewhat lower than prior year. So the net cash position that you can see to the right here, at the end of quarter 2 was SEK 138 million, an improvement of SEK 56 million versus prior year. And during quarter 2, we paid a dividend of SEK 37 million versus prior year SEK 31 million. And it's not in this slide, but our cash balance at the end of the quarter was SEK 155 million compared to SEK 104 million a year ago, an increase by SEK 51 million. So all in all, we have a strong balance sheet. We have no interest-bearing debt to financial institutions, and we have a good cash position. So I hand over to you, Michael.

Thank you, Joakim. So a little bit of a summary and outlook. And I think the key message though is that we continue to focus on navigating the market conditions in combination with continuously improving our customer offering organization. And of course, here in the near term, also preparing for the peak season starting towards the end of Q3. And we are quite pleased to see that the efforts on our strategic initiatives are paying off with the outdoor. We talked -- outdoor assortment we talked about continuous order and new customer growth and maintaining a very high level of customer satisfaction. During the quarter, we also focused quite a bit on enhancing our on-site or web -- user experience in the web shop in addition to implementing a new e-mail marketing platform, which will -- intend to enable us to drive even more organic traffic moving forward. Moving on to the second point. I think the one-offs, of course, greatly impacting the profitability, but financial position remains strong, and we are able to face the uncertain outlook from a position of strength, so to speak. We, of course, see that the net revenue was essentially flat and very much driven by the price-sensitive consumer behavior. And it's a combination of multiple factors, but of course, a bit of down trading within categories, category mix in addition to a higher share of sales on discounts. The very profitability improving. And then, of course, are the largest cost items in that within that metric in addition to the personnel costs, of course, and that we stay efficient on the variable cost is very important as that ensures that -- and once we get further order growth that that is something that will roll down all the way to the bottom line. EBIT was SEK 2.4 million during the quarter, a significant decline profitability-wise, or EBIT margin wise versus last year and to a large extent, driven by the one-off costs we mentioned. Worth noting, of course, is the dividend payout during the quarter based on the AGM decision, SEK 1.8 per share. And looking a little bit out, looking into the future a little bit, we see that the outlook is -- remains uncertain, the development with the development in the large economies in Central and Southern Europe being especially difficult to predict. Despite that, we continue to focus on navigating those conditions, of course. Developing ourselves as an organization, our customer offering and preparing for the peak season, which we're very much looking forward to. And overall, we feel that we are -- we continue to improve our ability to capture demand and to satisfy a larger share of demand so once, the purchasing power of the household returns, we feel that we are in a very strong position. So with that being said, I'll thank you very much for the attention, and I hand it over for any potential questions.

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

So a couple of questions from me. Firstly, personnel costs grew quite a bit in the quarter. Could you take us through the FTE increase and give us an indication of what functions you're strengthening at the moment, please?

It's across all parts of the organization. So a little bit most personnel parts, but multiple functions, a little bit of the warehouse functions with the order increase, and we've needed a bit more resources there. And then on the office side as well, where we've had a few increases, for instance, in the team producing content since that has been a large focus area during the last year or so. And a little bit in technology and so forth. So there's a few different functions as we continue to evolve the organization with close to a 50-50 mix between the operational side and the office side.

I'm also interested in the restructuring costs, specifically, you mentioned a figure of SEK 2.5 million, I believe. Could you perhaps break out the subcomponents of this figure? And do you expect any cost savings moving ahead from this restructuring? I'm trying to get a feeling for the sort of run rate cost base here.

So we had a reorganization in the purchasing and design with the resignation of the lead in that function. The second point that's something we communicated via press release towards that towards the end of the quarter, somewhere around that timeframe. And then we're also in the process of -- we did a reorganization with our performance marketing team, where we're establishing that in the Berlin office and previously, those resources were in the Malmo office. And then -- and all of those costs or those affected -- those costs were booked here at the end of the quarter. So those are off the books moving forward. So if you sum it up, you can say we have a SEK 7 million increase in personnel costs and a little bit less than half of that is nonrecurring cost and a little bit more than half then is recurring costs.

I've also thought a bit about your assortment split graph. You've been talking about down trading for some time now. And I know it's a smaller share of rugs within the SEK 2,000 - SEK 5,000 range. Could you talk a bit about this is the share of the assortment too expensive for bargain hunters while being too cheap for enthusiasts or what's happening here, please?

It's -- the graph is this is a share of total SKUs. So the one number, and that wasn't a part of -- is the total SKUs available to purchase, and that has increased and primarily within the higher price ranges. So with that being said, the number of items or articles to select from in this sort of the SEK 2,500, SEK 5,000 range has remained relatively consistent throughout the period. We are, of course, continuously optimizing assortment and designs that we see aren't selling. They will be discontinued and then we add new things for each season. So there will always be a little bit of seasonal variance. That is the explanation to the visual aspect of that graph.

One final question. I wanted to ask about your NPS score as well. Like 62 is still world-class, it puts you up there with like Apple and the likes, but the NPS score has been on a slight decline for the last couple of quarters. Do you have any comments on this at all?

Yes, the -- it's something we, of course, are working on, on an ongoing basis, but a large -- one of the large reasons for it is that we've had off and on issues with a few of our carrier partners, where the service level expectations from our perspective as well as, of course, the customer expectations or perspective has not been fulfilled. So that has been a major driver for that development.

The next question comes from Victor Hansen from Carnegie.

A couple of questions from my side. Firstly here, I'm curious about sales in your various geographies. So the Nordics performed much better than your other regions. And I'm wondering here, is this purely based on macro differences? Or how would you explain the relatively better sales growth in the Nordics? And do you expect these trends to continue?

I mean big portion, of course, is the macros. What we kind of saw when -- if we call the sort of last 1.5, 2 years, a little bit of a recession, almost. We saw that the Nordic markets slowed down faster than the -- many of the other markets in Europe. And now we're at least seeing that the Nordic region over the past couple of quarters have outperformed most of the other markets in Europe. And there are within the -- in the rest of the world or rest of Europe 1 or 2 markets that are still going quite strong. But that is the general picture that we're seeing in terms of the Nordics being maybe a little bit of a leading indicator. Then in terms of the lag between the Nordics and rest of Europe is still very difficult to predict.

And then a second question here. You mentioned strong sales for outdoor rugs. I'm wondering if you could quantify how large this category is for you?

It's, historically, has been a very small share of the annual sales. And we essentially doubled it last year and then this year, also essentially, yes, grew it quite a bit. So it's now a significant portion of the sales within the -- especially during the summer period or spring -- spring and summer period. We haven't given a specific number on the share of total, but it is a relevant portion of our sales, especially during the Q2 period. And I think also one thing I'd like to highlight when it comes to the outdoor assortment, it's -- items that are suitable for outdoor use doesn't mean that they cannot be used also indoors. So we're also -- we saw -- we did quite a few improvements to that portion of the assortment last year already. And what we could see is that many of the bestsellers within that range continue to do well throughout the fall. So we see that the consumers also find them suitable for other purposes, especially in the kitchen areas is what we're seeing.

And a final question here. I noticed that your average order values, they increased slightly sequentially, compared to Q1. But do you think that AOV has bottomed out here? Or how should we view this?

Yes. Let's typically we see that the average item values are higher during the fall and winter as there's a tendency for the consumers to buy slightly heavier rugs. So whether the -- whether it's a bottom-up and bottomed out or not difficult to say, but if one looks at it from a typical quarter-on-quarter perspective, we should see it increase Q3 and Q4 compared to where we ended up in Q2.

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

So we have a few written questions. And yes --

Do you want me to read it?

Yes. Okay. So a couple of questions from Emanuel at Danske. Where the first question is related to our perspective on AOV moving forward. And I think the -- what we just talked with Victor about essentially answers that.

So the next question is, how is development of the new domains progressed in terms of ranking high enough on Google to drive organic traffic?

And whether that is driving the lower marketing cost of sales ratio? And the answer to that is that our new platform and work on -- and efforts to build and publish content is definitely improving our organic rankings and a large driver of the lower marketing to sales cost ratio because we continue to see a relatively intense climate within the paid traffic platforms such as Google and Google paid ads on our AdWords and on the Meta platforms.

So we have a question here from [ Adam ]. Do you experience that you have lost market share in DACH and/or rest of Europe?

No is the short answer. Then the -- there's always nuances to that type of -- that type of questions. But overall, we feel that we are more than holding our own when it comes to the online share. There have been dynamics in the marketplace during the past year that we've spoken about previously with -- specifically, of course, a very large and aggressive new market entrants entrant in TMO and that has been very aggressive across Europe in multiple product categories, including home interior products.

We have a question here from [ Stephen ]. Given that the consumer confidence bottomed out several quarters ago? I'm not sure we agree with that, though. How come that you see the decline AOV now and not earlier?

Of course, I think the -- if we -- Sweden, of course, is a microcosms and quite specific in terms of the -- how the household discretionary spend is used and that were the -- were a very high share of the sort of money into the household goes out for bank loans than in housing in general. And those, like we all know, it takes a while for a couple of quarters before those interest rate hikes actually affect even though the central banks change the rates. It takes a couple of quarters or more depending on how the duration of the interest rates affecting. That's a little bit Sweden and a few additional markets that have that type of profile. Rest of Europe is very much where we're seeing a general inflation on many of the core necessities when it comes to heating, food, et cetera. And that's, I would say, a big portion of the sort of lag we're seeing and that people, yes, are a little bit more optimistic about the future, but still quite hesitant towards making a large single item purchases here now.

Okay. We have a question from Johan Fred. The staff cost is up almost 25% year-on-year. Please be more specific what this new staff will do to make your company better. How and when will this investment drive sales.

So we talked a little bit about that where we have, of course, invested in our content production functions and organic channels. We are already seeing that the benefits of that in terms of efficiency, especially where, of course, only in the early phases in terms of what we want to do within these areas, when it comes to customer-facing activities. And so I would argue that we are seeing the benefits of it already. And also, if you kind of follow the experience and content availability in our web shops, there's been a tremendous development in that area within the past 12 to 18 months, which is partly the new platform, but very much the fact that we have more resources to produce content.

We have one more or 2 more from Johan. What can you in the current environment do to improve the average order value? Have you focused too much on budget products, on site displays, campaigns and so on?

I think the topic in terms of growing AOV in an economy where the spending power is lower is always difficult. And that's for sure. I don't think if you start with the second portion on that question, are we focused too much on the lower end, lower price points. No, I think is the short answer there. We've historically been underpenetrated within that market segment. And during the past, around about 2 years have improved our position within those price ranges. And it doesn't mean that we haven't also made improvements to the other price ranges, which we saw on one of the slides there. But in the current economy, the consumers have selected to focus on the lower prices and/or the highly discounted items. But what can be done on the AOV topic, of course, ensuring and that we display and merge on-site merchandising in terms of the -- what we feel are relevant options for the consumer. And we are working on topics such as average items per basket and during the second quarter, an additional feature on that in terms of ensuring that we recommend car anti slips and carpet cleaners was introduced as part of the purchase journey. So we are also working on that aspect.

I guess last question from Johan. Please describe the marketing cost environment in Central and Southern Europe during this quarter versus last year. How are the usual competitors behaving on customer product price? Any new competitor in the region?

Talked a little bit about that both in Q4 and in Q1. I think one I very much reiterate many of those topics because they have very much been part of the environment also here during Q2. And from a new -- so the new entrant in the market is TMO, where -- and I think anyone who follows online retail certainly has most likely seen the efforts they've done over the past year to enter the European market on a very, very big scale. And that has impacted the dynamics of the market, where, of course, many have reacted. And reacted in 2 ways is what we've seen; is that in the paid channels, they've increased their willingness to spend, both from a visibility and of course, click price. In addition to having a quite aggressive discount offers available in external advertising as well as on inside the different web shops. And that is -- that is a little bit dynamic. And despite this, I think it's a -- and it's an environment where we've had to navigate this and still year-to-date deliver more improved or a lower marketing cost to sales ratio, and that is very much driven based on the fact that we have a larger share of organic traffic and sales compared to last year.

So we have what appears to be now at least the final question, it's from [ Philipp ]. So in the markets that are not as heavily impacted by pressurized consumers, how does the AOV trend look in those markets? Are you confident that the decline in AOV is temporary?

We're very confident that the AOV is affected by the price-sensitive consumer behavior. That is for sure. And then I think the important thing for us is to ensure that we have an assortment that attracts as large of a portion of the European customers as possible and that people want to buy those items. And of course, we have items priced across all relevant price points besides maybe some of the very, very low ones. And with that being said, yes, increasing AOV could be beneficial. But at the end of the day, we need to adapt to what the consumers are willing to spend and make sure that our order economics remain profitable and that our overall cost base and internal efficiencies and marginal or variable cost profile adapts to what the consumers are willing to spend. And we can maintain both -- yes, maintain profitable growth also in that type of environment, both on a -- whether it's temporary or not, it's difficult to say. And -- but we -- it is something that we need to adapt too to a large degree. Of course, there are certain things we can do to try to drive the slightly higher order value. But at the end of the day, if a household has the wallet or the budget to buy something for EUR 300, it's very unlikely that they will end up buying something for EUR 700. So with -- was that it?

That was the final written question.

So with that being said, unless there are any other questions, no. The -- so we -- again, I want to thank everybody for their attention and look forward to meeting and talking to all of you again for our Q3 report. Thank you. Have a good day.