RVRC Holding AB (publ) (RVRC) Earnings Call Transcript & Summary

Welcome to the RevolutionRace Webcast Teleconference Q3 2022. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Pernilla Nyrensten; and CFO, Jesper Alm. Please begin your meeting.

Hi and welcome to this Q3 report from RevolutionRace. I'm very happy with the result of this quarter, 50% growth, and EBIT margin is follow us. The running 12 result is SEK 373 million adjusted EBIT. And under these circumstances with war and the inflation is even better results. So a great congratulations to the team also for all the hard work that you have done. So in -- we always start with some movies so you can get a sense of what we are kind of brand. We are good at social media and content creation. So let's watch a movie and then we're going to report the numbers, enjoy. [Presentation]

Welcome back. Now let's get over to the numbers. This quarter, we grew by 50%, SEK 367 million, and the EBIT margin grew by 61% and gave us SEK 103.5 million. And we are growing. The best region for RevolutionRace this quarter is the DACH, where Germany grew by 89% and the DACH region grew by 93%. So -- but we see a great result having in the rest of the world. As you can see, comparing to last year, where the rest of the world stands for 14% of net sales running 12, you can see that that is increasing and that's good for us because we are building a brand globally. RevolutionRace is an active outdoor lifestyle brand, pure digital. That means that we can communicate with our customers on social and digital platforms. And the knowledge is in-house that gives us leverage because we know how to handle the digital landscape. And we skip the middleman so we can offer the customers great quality products at reasonable prices with really high quality and great feeling. And that is Niclas Nyrensten with team that has designed all the products and design is one of the main reason why the customers are buying our products. So huge congratulations to the in-house production with Niclas in head and making all these great products for us. We skip the middleman so we can give the customers better price point and at an unbeatable price. So we are digital native, and we are -- know a lot about the digital landscape. So we are reaching out on different social digital platforms, and we also use Amazon. We saw great results in this quarter also with Amazon. Last year, we had the 3% net impact from Amazon's platform, and we recently re-launched in U.K. So as you can see, 27% EBIT margin in this quarter, even though it's a struggling time with all the inflation. And you can also see the reviews is still very high. Trustpilot is up. As I talk about last quarter, it was affected a bit negatively. And you can see the numbers are increasing now and that was because of the longer lead time. But now we have handled the situation. And you can also see the 4.5 on Amazon and Facebook have 4.1. So it's in line with our own 4.6. So yes. We have a good product at half the price because we skip the middleman, so you get same quality as a product that costs almost a double. In this example, you see a product that costs SEK 185 and RevolutionRace same product cost EUR 105. And we have several colors to choose from. We have a lot of reviews that actually are helping the customers to find the right size and know which products they need for the different activities outdoors. And we use a lot of unique content to localize on different countries, and we are good in both the website kind of authentic wipe and also on social media. And in-house team also produce a lot of content. Yes, the numbers, we have increased up to almost SEK 1.3 million, SEK 1.287 million to be exactly, and that gives us a growth year-on-year, 50%, as we discussed earlier. So the growth is still here, and we are very pleased with this number. And one of the best factories actually that the EBIT margin is following. And that is because we are focusing a lot on profit after marketing. So we are calibrating our offer on different markets accordingly to the demand. And we are very fast here, and we can change our strategy within ours. So that's very good with the digital business model. And the projects are very multifunctional with a large age group, both men and women between the age of 18 to 70 years old. You can see that average order value increased by 9% up to SEK 850. So that is also good news for us. And that's mainly affected because customers buy more products and also the fact that the market mix, many countries in Europe have higher price point than the Swedish and Norwegian local currency has. We discussed the growth, 50% in this quarter and also the increasing average order value. The gross margin, 73.1% is also very good news. We have been focused a lot on the gross margin since start, and we try to aim to always be above 70%. So all new products that we are purchasing, we have that in mind, so we can have that as an average goal. 27% in this quarter. Key highlights. We launched in Estonia. It was successful even though it's quite a small country. We saw in the EU side that it was kind of a low-hanging fruit for us. So therefore, we decided to launch in Estonia. And now we have 3 out of 4 countries that we promised to the capital market that we are going to launch. And now for the future, we are going to focus on existing markets and the newly launched markets. It was -- it's a struggling times out there. So we have to work really, really hard because the supply is struggling for us with the new products. We need to place the order earlier to handle the situation because the lead time is double the time as before. So that's a good thing for us that we have a lot of cash and EBIT, strong EBIT development, so we can handle the situation. So now you can see it's a clear winner strategy to be profitable and higher growth at the same time. Amazon, as I talk about earlier, we think that Amazon is a great add-on to RevolutionRace direct-to-consumer business model. It's very important to us that Amazon actually had that brand store. So our customer can get the same feeling and arrive and understand the brand even on their platform. You can see that we have reached a high #1 position in the hiking plants category for men. That's a great achievement. And we have the knowledge in-house to handle RevolutionRace Amazon. Re-launch in U.K. because of the Brexit situation, we had some problem. And now all that problem is solved. So the re-launch in U.K. went smoothly and really good. So it's a great add-on. And our goal for this fiscal year is to have less than 10% of total net sales coming from Amazon. And we have great result also when it comes to EBIT margin on Amazon. Yes, it all looks good. And it's also important for me to tell you that the plan is to have approx 15% of total assortment on Amazon's platform because we want, of course, drive customers to our own platform. So we see Amazon as a new customer acquisition channel because many like to use the Prime, get fast delivery, so when they get in contact with our brand, then we can drive sales because we don't sell the full assortment there. That's the plan. And we have seen that when we look at the data that we're actually converting more customers from Amazon in the long run to RevolutionRace website and losing less. So it's a good scale of economic for us. I talk about add-on, 3 new markets this fiscal year. U.S. is the most struggling part, to be honest, in this situation with the supply because it's a new continent. We use Amazon to calibrate the offer and get speed delivery. But it's a little bit struggling for us. The result is promising with the U.S. market, but it could have been even better if we haven't been struggling that hard with the supply, but we are getting there. So it's looking really promising for the future, but we have some issues that we need to solve for the future. Switzerland delivered really great growth results, and we are very happy because it's also helping the gross profit because it's higher the [indiscernible] profit after marketing. One of the best and promising launches when it comes to profit after marketing. So it's a nice add-on to the DACH region. Estonia is recently launched and it's quite a small country. It's the size of Stockholm almost. So -- but it's, like I said before, low-hanging fruit, low cost to launch, and we saw the number in the EU side that it was beneficial for RevolutionRace. And now for the future, we are going to focus on existing and these recently launched markets. Strong record. Once again, Niclas and his team has done an amazing job with all these new products because it's not that easy to go in, in a new category because it's very important to have the high quality and the shoes has get amazing reviews, very high and also the backpacks. We sell 18-liter and 30-liters so far and planning to add on more shoes. We have 2 shoes for now but we are planning to have more. So it all look good, and they also have high average order value, slightly less gross margin, but in total, it's not a problem because when we are placing bigger and larger orders, we are going to hedge so we can get healthy gross margin even in these newly launched categories. Market development. Yes, I talk about earlier, DACH is main driver, but that is because RevolutionRace decided that the digital know-how, we catch the need and the demand in a very good way, so we can calibrate the offer both when it comes to products and specific markets that we see a good development in profit after marketing and new customer acquisition. So we see now that the Nordic countries is 28% is flat growth, but that is because that we have decided to focus on other region because it's more beneficial when it comes to the new customer acquisition cost. And many other companies see decrease. We saw from you report that actually it went down 14%. To be able to have flat development we think in this situation is a good result. So we have 18% in rest of the world, and Germany stands for 54% with DACH in Switzerland and Austria. So it all looks good. We are developing both the brand and the product launches accordingly to plan or we are actually ahead of the plan if you compare it to the physical financial goal of '23,'24. Average order value increased by 9%. Mainly drivers are that profit after marketing driver and also add-on from our customers. They buy more products and also the marketing mix is give us this result to SEK 849. Yes, let's talk about the financial targets and the dividend policy. Almost 1 year ago, we're entering to the public environment and promise at least SEK 2 billion, '23, '24. And as you can see, we are ahead for now SEK 1.3 billion and also the EBIT margin has developed very well, and we promised SEK 500 million, at least 25%, '23, '24. And as you can see from now, running 12, we have adjusted EBIT margin of SEK 373 million, but it's very important for RevolutionRace to keep the 25% at least because we are humble about the fact that the inflation is increasing, but we are handling the situation really, really well. Dividend 40% to 60% dividend, that's what we have said. And last year, we gave out 42.1% dividend. Over to you, Jesper.

Hello, everyone. Good morning. So thank you, Pernilla. I'll share some views on the financials, less color than Pernilla, but all the same, here we go. So net sales development for the quarter, SEK 367 million, which is a very healthy number for us, taking us to a last 12-month number of close to SEK 1.3 billion. This is, for the quarter, 50% growth in net sales and 46% in local currency. Global Supply and Logistics, it remains a tough situation. And for us, it's especially challenging for the new products where we have a very good position for the running assortment. Gross profit, well, we have a positive development also here with an increase in gross profit for the quarter of 52%, taking us to SEK 269 million and getting close to SEK 1 billion LTM, not really there yet, SEK 937 million. So the margin, SEK 73.1 million, and it's impacted positively by the favorable market mix during the quarter. Operational expenses. Well, we continue to have good cost control. Bear in mind that the comparison quarter was an extraordinary quarter. And we're now at a healthy level, both when it comes to personnel costs and total OpEx. So a good cost control continues. Adjusted EBIT, SEK 103.5 million for the quarter, which is both adjusted and unadjusted EBIT is the same. We have no adjustments during the quarter. And I remind you that the only adjustments that we've had were relating to the IPO costs during last year. 27% EBIT margin in this environment is a sign of good growth and good cost control. Balance sheet. Very few developments in total. I'll get back to some parts on the financing side, but I'll skip this slide. Inventory development. We have a planned increase that we have discussed over the past quarters. What is now good is that we have more sellable products as a share of total inventory, meaning less goods in transit. And the reason for the increase is to mitigate the supply chain and also to cater to 2 full warehouses as well as smaller hubs that we have. Net working capital. We have seen a negative development here. But bear in mind that in this quarter, parts of this is related to taking our term loan into an overdraft facility, which is long term, which means that we have an -- we amortized or repaid debt of SEK 165 million during the quarter and compare that to the SEK 142 million. So the underlying number is actually negative for the quarter, which is good. And cash flow. We have, during the quarter, as I said, repaid term loan and increased our overdraft facility to the same extent. So we have lowered our cash position and also our loan volume. We have the same financing capacity as before. So we have an undrawn facility of SEK 220 million, and we have still a net cash position. So I think that sums up my part, and I'll hand over back to you, Pernilla.

Thank you. Yes, the growth continues in this quarter and the quarter we are in now we can see that we are in line with the expectation from this quarter when we went to public 1 year ago. So it's in line with the expectation of this quarter. So we are very pleased at the position with the financial goals, both in the quarter and this fiscal year. 50% growth is a strength that we are showing because it's not easy out there. And we show that we have -- we want this -- we want to build the next Swedish export globally to be the most recommended and loved out of brand out there. And we do it by happy customers, but also know-how in-house competence -- and when it comes to brand, how we talk to the customers, the communication directly on social and digital platforms and also the know how to handle our web store. And the coal lab, even with Amazon, we are showing that we are able to grow on marketplaces with EBIT margins that are healthy and close to revolution raise EBIT margin. So it looks very good. So we have shown that we can handle the situation to become a public company because it's a lot of changes that organizations need to handle. So I have to give them a big applaud to handle this well. We are still growing fast. We handle the cost control, and we are very focused and it's a lot of decision behind these numbers. Outlook. I talk a bit about it. It's in line with the expectation so far in this quarter, quarter-to-date, but we are humble because we understand that the inflation probably can affect the world and we are living in the same word as all the others. But we are very good at allocate after demand on specific markets, change products on different markets to handle so we can be able to grow fast. And the development of this quarter is in line with expectation that we put 1 year ago. So it's all look good, but we are humble because the situation is like it is. Yes. I have nothing else to add. So I'm ready for all your questions. Thank you.

Our first question comes from Niklas Ekman from Carnegie.

Congratulations on a very strong set of numbers. First question for me is regarding the Nordics and the slowdown here. You talked about a challenging market but also a deliberate decision here to reallocate your efforts in other markets. Can you say a little bit on your view here on the Nordics and the potential to bring that market back to growth? Do you see still good growth potential? Or is the Nordic market mirroring saturation in your perspective?

No. I think it's because of -- we are close to the Ukraine and Russia war. So I guess the underlying demand is less than normal for now. But we believe in our brands, we have not lost the position of our brand because it's actually decreasing in the Hui report of 14.3% to be able to handle with flat growth in that region even though the decision to allocate on other countries and regions with better profit after marketing and new customer acquisition. But I believe that we can increase sales over time because we are focusing a lot on both the running assortment, and we have been struggling with recently launched products. So when we are having the recently launched product in stock, that's also going to help them mature because the cross-selling in mature markets are higher than in new markets. So I see 2 big tools in the toolbox to handle to get back to the growth.

Very good points. And on current trading, you talked about the company developing well relative to your financial target. Is there any way to quantify that? I mean, the comparisons are easier in Q4. If we look at web traffic, it seems to suggest acceleration. Is that the signs you are seeing at the moment going into Q4?

No. Actually, last year, we grew by 152% in this quarter. So the numbers are not easy to beat. And the numbers that we put on the paper for Q4 is in line with how we trade now. So it's with the financial, both its keep up and also the expectation of the quarter 1 year ago.

Okay. Perfect. And on the gross margin here and the stability in the gross margin. Can you elaborate a little bit on here what the mix of rising input costs and price hikes. Can you talk about a positive mix effect? Is that a geographic mix effect? Or what are the different drivers here in terms of input cost versus price and geographic mix?

Yes. We handle the situation. We are not having -- in this quarter that you see, we have not increased prices. We have done that very small lines accordingly to inflation, but a lot less than the actual inflation increase. So we are able to handle it because the gross margin is higher in countries outside Sweden because of the strategy that this company actually put in place from the start -- so the Nordic and SEK is less gross margin compared to EU countries. So that's one thing. And this quarter, the expectation of the gross margin normally, we sell a lot of shorts and t-shirts in this quarter. So it can be a little bit less because of that. But we also are going to calibrate our offer and focus a lot on the gross margin even in this quarter.

Perfect. And you mentioned here, when you talk about new market, you said that going forward here, you're going to focus on existing markets. Does that mean that you don't expect a lot of new markets over the next 12 or 18 months or so?

We promised the market at least 2 new in the next fiscal year. But for this year, this is the end quarter for RevolutionRace. So we are going to focus on the existing and newly launched even in next quarter as well. But after that, we are planning to add more new markets.

Okay. And then just a final question here on the inventory. You've gone from exceptionally low levels to quite high levels, over 28% of LTM sales, where do you see this normalizing in kind of a normal market where you don't have significant supply disruptions. What are you aiming for in terms of inventory levels?

Decrease by 10% also. So we are going to be under 20% for sure. It's a struggling time with long lead time and also that we are building up many new countries and both 2 warehouses, one in Europe and one in Sweden, but also the on Amazon. But that is how we see it. We should be able to aim for that when the world is having shorter lead times.

Perfect.

Our next question comes from Johan Brown from ABG.

A few questions from me. Firstly, comparing sort of the start versus the end of the quarter regarding you allocating more marketing resources towards that region. Is this something that has accelerated during the quarter? Or has it been quite stable throughout. So essentially, have you seen any major trend shifts in regard to return on ad spend between the geographies since the war broke out essentially?

Yes. The Nordics are -- demand is not as high as is normal are, and you have seen that in many other e-commerce players as well. And it's the same view of this quarter as the Q3 for us that we see it. But also bear in mind that the DACH region last year had 200% in growth. So that is quite high numbers to beat, but we are allocating our offer both when it comes to products and market share. But don't forget about the rest of the world because that also contribute to the growth of RevolutionRace. So it's only the Nordic countries, how we see it, that's struggling with a war in Ukraine for now with Russia that have less demand than normal.

And secondly on the cash flow. I'm quite interested in the other current receivables, which increased to some SEK 61 million, I believe. Is it possible to explain the drivers here to that increase?

Absolutely. So bear in mind, last quarter, the corresponding number was SEK 42 million, now it's up to SEK 61 million. It is a consequence of the global supply chain. This is a prepayment of ordered goods and accruals of marketing spend basically.

And then finally, you touched upon it a bit earlier, but the outlook statement here and the change in communication, historically, I believe you said something in the lines of the growth in the current quarter is strong or remains strong or something along the lines. And now you have sort of changed that communication a bit. Is it possible to help us understand the nuances here and the difference between the 2 statements?

The statement is that we have been above our financial goals, 3 quarters in a row. And now with that this circumstance with the inflation and the demand is decreasing from many other e-commerce players, we actually trading at the same level as we thought we should be when we put the Q4 number. So it's in line with expectation, but we are not above the expectation of our financial goal, but we are on target, and that is a really strong signal at least for me.

Our next question comes from Daniel Ovin from Nordea.

So on the overall macro environment here with the diving consumer confidence, et cetera. And also you mentioned here that Q4 started in line with your financial goals. So if I calculate from end of last year, that would mean that you should grow on average by around 37% up to 23%, 24% to reach the SEK 2 billion. So can you just confirm if it's around that level that you've started Q4, if you could just comment on that?

No. Because when we're entering -- if you see at the financial goal is SEK 2 billion. And when we entered Q3 last year, we had SEK 732 million in net sales. And now we have SEK 187 million. That is the comparable numbers that you can use. And how we see it is normal that we increase percentage of net sales, but we won't deliver like 3-digit net sales increase. And now we see that we are in line with the expectation, but I think you are a bit too high, and you should consider that because that is not how we see this quarter, and we didn't see that last year either.

Okay. I understand. Then when it comes to the sales development here, you mentioned also that it's been difficult still to get the hold of products. So have your sales been held back in the quarter by a lack of products and perhaps -- if that is the case, can you quantify? And do you not expect it to be held back going forward for that reason? That's the second.

Yes. We have been struggling with the newly launched products that are delayed that affect the growth potential of the quarter. But we are in line with the expectation, and it's still very high growth. So yes, that is impacting the quarter for sure.

Perfect. And then the last question also here on Amazon. So you mentioned that you're close to your own margin on your Amazon sales. So can you give any indication of the difference? I mean, are we talking a few percentage points or more than that? That would be helpful.

I don't know if we can tell that number. Is a -- it's percentage in different for sure because Amazon at cost to be there. But we are good in handling the other like marketing part and to hedge. So it's not to be different, but you should expect some percentage here, but it's profitable and it's healthy, profitable on Amazon's platform.

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

Yes, I would end this call by saying we have a great position with our brand, and we have proven ourselves for 8 years now. Now we are up at almost SEK 1.3 billion in net sales, and that is quite uncommon both in the auto industry and in Europe for a single brand, many other companies that have a lot of brand to be able to have that net sales. So we are actually taking a lot of market share. We are increasing our product offering with both the shoes, the backpacks, and all these categories so we have a lot of potential and the know-how, how to handle both new marketplaces like Amazon and show you that we are able to build it profitable and still build a brand even there and also handle all these new market launches and still deliver high EBIT numbers. So it look good for the future. We are humble about the fact of the situation with all the war and inflation. But for the future, RevolutionRace has a great position when it comes to brand, both, how we trade now, how we have traded in line, and before the expectation. So we -- the future looks promising, and we have a lot of confidence in building the best, most loved out of brand out there. Thank you for listening.

Thank you.