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

Hello, and welcome to the presentation of the RevolutionRace Q4 results for 2021, 2022. [Operator Instructions] Today, I'm pleased to present acting CEO, Paul Fischbein; and CFO, Jesper Alm. Speakers. Please begin.

Thank you, operator, and good morning, everyone, and welcome to this conference call, where we will address the fourth quarter and full year results of the fiscal year 2021 and 2022 for RevolutionRace. My name is Paul Fischbein. I am as of this morning, the interim CEO. And today, I'm also joined here by the company's CFO, Jesper Alm. Before we comment on the report, let us start with the news that were announced last evening. The company's CEO and Co-Founder, Pernilla Nyrensten, has decided to step down from the CEO role. She will remain in the Board and therefore, continue to play a very active role within the company as an active shareholder and Board member. When she announced her resignation, she also asked the Board that her wish was to step down from the operational role immediately. The Board, therefore, decided yesterday to appoint me as an interim CEO, and during the interim period, Andreas Källström will take my role as the Chairman of the Board. The process of finding a new CEO starts immediately, and we expect that the process of getting a new CEO on Board will take some months, even if we cannot commit ourselves to an exact time period. We have a strong management team and the whole team who remain intact and also a Board, including Pernilla Nyrensten with long experience from both the company itself and e-commerce and digital businesses in general. Moreover, as Pernilla is 1 of the major shareholders and will stay within the company as an active Board member, we continue to have full access to all her knowledge and expertise. Therefore, we are very confident that we will face a very orderly handover process and smooth transition period. I would now like to take the opportunity on behalf of the whole board to thank Pernilla for her fantastic achievements as both Co-Founder and CEO of RevolutionRace. Pernilla and Niclas Nyrensten, started the company less than 10 years ago. And today, we stand here with a public company with sales exceeding SEK 1 billion and delivered earnings of SEK 370 million per year. RevolutionRace is now well-established -- is a well-established brand among consumers and has a strong team and foundation to deliver future success. We and the Board have enjoyed very much working with Pernilla and now look forward to continue to work with her, in her new role as a Board member, where she will have an extra focus on our expertise areas, sales and marketing. And Pernilla likes to start these presentations with a short video, which we would like to do today as well. [Presentation]

Now I would like to address the Q4 and full financial year of RevolutionRace. And we are very proud to report RevolutionRace earnings for its first year as a listed company. In short, we are very satisfied to see that for the full year, net sales grew with 48% and to SEK 1.3 billion, and gross profit rose to SEK 963 million, corresponding to a gross margin of 72%, EBIT amounted to SEK 367 million, corresponding to an EBIT margin of more than 26%. This performance outperformed our own expectations and objectives that we defined a year ago. And we are also pleased as a result of this strong development over the year that the Board of Directors also proposes a dividend of SEK 0.77 per share, which is an increase compared to last year's dividend. But first, for those who are not familiar with RevolutionRace, I would like to begin with a very short introduction. RevolutionRace is digital native international D2C an active outdoor brand. We sell quality products with an unmatched value through a digital D2C business model, meaning that we skip the middle. We operate with 18 localized web shops and sell our products in more than 35 countries. And similar to previous quarters, we see continued strong growth outside the Nordics. And during this fiscal year, the region DACH grew from 40% to 50% of net sales and the Rest of the World region grew from 15% to 17%. Since the IPO in June last year, we went delivered on all strategic goals as set out ahead of the IPO. Not only have we outperformed in terms of total net sales, we have also continued our geographical expansion, both through an expanded partnership with Amazon and by adding 3 new markets. Switzerland, which was launched in Q2, is our most successful launch ever. And during the year, we have also expanded our product assortment and in addition to adding new colors and items to existing categories, we have also successfully launched 2 new product categories, shoes and bags. Over the year, we continued to work on developing our product strategy. For some time, RevolutionRace has been building a product range designed to attract people with active lifestyles. The company's range is divided between base, pro and statement, according to product specifications and target group. The division gives us access to a large target group and means we can offer something for everyone. Our digital know-how, our customer communication and positioning are important components to build a strong brand and to further strengthen our brand position over the year. Tonality and feeling on various social and digital platforms enable us to continue increasing market shares. We continue to produce high-quality content for social and digital platforms in-house. And that adds a further dimension to the overall RevolutionRace experience and cuts through the noise, which is critical to our success. Now let's look on a few operational highlights. And as I mentioned, during the last financial full year, we outperformed our own expectations, and succeeded in increasing our sales by almost 50% to exceed SEK 1.3 billion. And at the same time, we maintained a strong profitability. EBIT for the full year rose to SEK 367 million, which is an increase of 59% compared with last year. Gross margin raised to 72.3% and EBIT margin was 26.3%. We believe the performance was very strong, taking into account the sad war in Europe, supply disturbances and other macroeconomic challenges during the year. This was also somewhat mitigated through an increase in investment in our inventory level. During the last quarter, we are pleased to see that the profitable growth continued even though we, at the same time, see that external uncertainties have accelerated. Net sales for the fourth quarter increased by 16.2% to SEK 318.2 million. Adjusted EBIT amounted to SEK 73 million. EBIT increased by 9% to SEK 73 million, corresponding to an EBIT margin of 21.3%. Now let's take a quick look at our markets in Q4. And in our most important market, the DACH region net sales increased by 37% to SEK 167.4 million, accounting for 53% of total fourth quarter sales. The Rest of the World region also reported strong sales growth of 35% to SEK 51 million. And in the Nordic region, sales decreased by 12%. This is due to successful and focused marketing efforts outside that region. I also would like to highlight 1 of our most important KPIs, which is the net average net order value. It increased to SEK 774 from SEK 740, mainly thanks to a favorable market mix. Q4 generally has a lower average order value compared to other quarters as a result of increased sales of products with lower price points such as T-shirts and shorts. And with that, I would like to hand over to the company's CFO, Jesper Alm, who will now present and walk through the financial performance. So Jesper, please go ahead.

Thank you, Paul, and good morning, everyone. I will talk you through our financial performance during our last quarter of the year, starting with our financial targets and dividend policy. So ahead of the IPO, the Board of Directors established our long-term financial targets, related to net sales, EBIT and dividend. Net sales during the most recent financial -- net sales during the financial year '23, '24 shall amount to at least SEK 2 billion. The company shall maintain an annual EBIT margin of at least 25% meaning an EBIT of SEK 500 million in '23, '24. And RevolutionRace intends to distribute 40% to 60% of profits for the year. So when summarizing the last financial year, we conclude that we're on track to deliver on the net sales target and the EBIT margin for the year exceeded the target at 26.3%. In addition, the Board of Directors proposes a dividend of SEK 0.77 per share or SEK 87 million in total, corresponding to a payout ratio of 30%. Moving on to net sales development during the quarter, which was SEK 318 million, which is a very healthy number for us, taking us to a full year number of more than SEK 1.3 billion. This is, for the quarter, a growth of 16% in net sales and 14% in local currency. Global supply and logistics situation continues to be challenging for -- especially in new products when it comes to lead times, but we have a healthy inventory situation of primarily the running assortments. Looking into gross profit. We noticed a strong development with a growth of 14% during the quarter and 48% for the full year, taking us to SEK 230 million in the quarter and SEK 960 million for the full year. We've seen positive impact from market mix and negative impact from price reductions during the quarter. Moving on to operational expenses. And here, we see an increase in personnel expenses compared to previous periods as a result of recruiting to meet the company's continued growth. When looking at the right-hand side, we see that other external expenses, which is a larger share of the total cost base have increased primarily as a consequence of higher marketing expenses relative to net sales. EBIT amounts to SEK 73 million for the quarter. Both adjusted and unadjusted EBIT is the same, and we have no adjustments throughout the quarter. The EBIT margin for the quarter was 21.3% and somewhat lower than previous quarters, but still at very healthy levels given the current macro environment. And for the full year, we delivered an EBIT of SEK 167 million, corresponding to an EBIT margin of 26.3%. When it comes to the balance sheet, we see minor movements overall, but I will highlight some topics on the following slides. Net working capital as a percentage of sales is flattening out compared to Q3, which is a good sign and also in line with strategy. First topic to be highlighted is related to inventory development. As discussed over the past quarters, we have performed a planned inventory buildup from unhealthy levels a year ago. The reason for the increase is to mitigate the supply chain challenges, but also to cater to 2 full warehouses as well as smaller hubs that we have. As mentioned on the last earnings call, we expected this increase to slow down during Q4, but have not yet reached this point, mainly due to increased goods in transit. Our cash position increased from SEK 71 million to SEK 75 million during the quarter. Cash flow from operating activities amounted to SEK 46 million, where the operating result was offset by increased net working capital. Cash flow from financing activities was minus SEK 41 million and that's mainly attributable to repayment of borrowings. During the quarter, we have expanded our total credit facility from SEK 300 million to SEK 600 million. To increase financial flexibility and to support the company's continued growth. And we have, at the same time, extended the facility by 1 year to the fourth quarter of '27. Well, since this is the last quarter of our financial year, the dividend proposal, as Paul has pointed out, was SEK 0.77 or SEK 0.77 per share to be decided by the AGM in November. The proposed dividend is for a total of SEK 87 million, 30.2% of net profit for the full year and corresponding to a 20% increase compared to last year's dividend. So I think that sums up my part now, and I'll hand over back to you, Paul.

Thank you, Jesper. So in summary, we are very proud and satisfied with the performance during both the first financial year as a listed company and also the last quarter of the year, where we saw that the growth story continued. We have a clear focus on customer satisfaction, and are pleased to see that it results in high engagement among our customers. We have a strong brand position. Our financial position is very strong, and we now look forward to an interesting future, where we believe that we are well positioned to continue to increase market shares. Looking ahead, we are very humble in facing the macroeconomic challenges currently prevalent in the world. These entail reduced purchasing power among consumers as a result of rising inflation, for example. The cost of digital marketing is also increasing, which may affect our margin in the short term. We see that online sales volumes have generally decreased and it is likely that RevolutionRace may also be affected by this. We, therefore, expect that in the short term, the sales growth rate may gradually slow down the upcoming quarters. And in fact, in July 2022, we noticed lower sales growth compared with a quarter that recently ended. That is Q4 '21, '22. This said, we are very convinced that RevolutionRace is very well positioned for future profitable growth. We have our sights set on continuing to grow profitably over each quarter and year, and therefore, look forward to the future with great confidence. And that concludes our comments on the results, but before we finish, I would like to take the opportunity to also thank the whole team at RevolutionRace for a fantastic performance during last year. It was very impressive to see and with that we are now happy to answer questions. So operator, do we have any questions?

[Operator Instructions] The first question comes from Niklas Ekman at Carnegie.

Yes, I have a couple of questions. Firstly, I'd like to start with the CEO resignation that was announced here. Obviously, you've had 7 fantastic quarters behind, and this is the first quarter with a slowdown. I'm trying to understand this decision to leave the company immediately the night before the results, why not ensure a gradual transition rather. Is there any dispute that has been behind this? Or can you elaborate a little bit more here just so we can understand from the outside what is going on. That's my first question.

So maybe I'll start to answer that before we go on with your next questions. So first of all, of course, not. We don't have any disputes with Pernilla. In fact, we have a very strong relationship, and we look forward to continue to work with Pernilla as a Board member, she'll be a very active Board member. And with that, especially focusing on her areas where she is an expert, which is sales and marketing. And it was Pernilla's explicit wish to actually step down with immediate effect as of today. And Pernilla is -- it's her conviction that if you don't feel 100% and to do the role 110%, maybe it's better to pass it on immediately, but of course, I mean, it's her decision. I know that she's been very active this morning with answering questions about her decision. So I guess you should -- we should forward the questions to her, and I'm sure that she will address the questions, but rest assured, there is no conflicts or disputes behind this decision if that was the question.

Okay. Yes, that's fair enough. And thanks for commenting as much appreciated. Second question, can you talk a little bit here about current trading? Is there any way you can quantify? You're saying that growth in the start of Q1 here is lower than the 16% growth you reported in Q4. Is it a tangible slowdown? And can you maybe talk a little bit about the monthly trend here in general? Have you seen, in general, during Q4, is it a gradual slowdown throughout the quarter? Was any month worse than the others? Or can you just try to help explain the trend here? Are we seeing a gradual deceleration or how should we look at the trend you're seeing now?

Yes, I can address that question as well. I would say that we are very confident. First of all, we have our financial goals, which means that we have an objective to reach sales of at least SEK 2 billion for the financial year 2023 and 2024, which is not that far away anymore. And at the same time, our goal is to maintain an annual EBIT margin of at least 25%. I think that's an important component to understand and we are still confident about that. At the same time, we definitely see that we will continue to grow, we will continue to grow profitable each quarter and year. So we look forward to the future with great confidence. On a very short term, we do see that in the beginning of this quarter, the Q1, we see that growth rates have slowed down and in fact, is lower than the growth rate we saw in Q4 last year, which was 16%. So you're asking me to quantify. I can actually say that since we are confident that we -- our goal is to continue to grow, you could sort of say that it's between 0 and -- or between 1% and 16% something on a very, very short-term basis, because that is what we are actually saying in July.

Okay. Yes. Fair enough. Another question here just on the inventory. It's up now quarter-over-quarter and then sales growth is slowing. Do you see a risk of significantly increased markdowns? Or is it more a normalization as you see it, obviously, from exceptionally low levels 1 year ago. But how should we view this? Is there any risk that you have now gone from having too little inventory to having way too much inventory?

No. I think that you could I can -- my comment is that we definitely see that the inventory level will flatten out going forward. We will, of course, make sure that we are ready for the peak season in Q2. But we definitely, we will -- you can expect the inventory level to flatten out. And we do not see any -- we definitely do not see any sort of risks or something, if that was your question on the inventory itself, since such a high share of sales is based on running assortment, so we feel very confident both with the inventory level, but also the inventory mix. And as you said, it was too low a year ago. And we now feel that we have a healthy level, but you shouldn't expect it to increase significantly more to flatten out.

The next questions come from Benjamin Nordin at ABG.

I believe 2 names were mixed up there. Well, that's right. I can just ask 1 more question on the July growth figure. You're right. So the current quarter is sort of softer with July growth below the quarter's growth. Was -- like my question is, was last July exceptionally strong? Or was it more in line with the quarter overall, just to get a bit more flavor on that, please?

I will actually pass that on to Jesper, who was CFO a year ago, I'm not sure that we disclosed the monthly numbers a year ago, but maybe you want to elaborate a little bit on it, Jesper?

No. We haven't disclosed last year's July sales, but it was not exceptional in either direction.

What we do see, and we often don't want to talk about the weather and how hot it is, but it is exceptionally warm right now, at least in the Nordic region. And it is helpful for the company if the heat slows down a little bit because, as I mentioned in the beginning, shorts and t-shirts and those kind of products do have a lower average order value than our products for maybe a little bit cooler season.

Absolutely perfect. And then just 1 question for clarification as well. Inventory levels flattening out, you mean that in absolute terms, right?

Yes. During the year, but on a quarterly basis, you could expect some preparations for seasonality effects, for example, prior to the peak season in Q2.

[Operator Instructions] The next question comes from Daniel Ovin at Nordea.

Paul and Jesper, I have 1 question here on sales and your medium-term target here because you're now aiming at SEK 2 billion sales in the year '23, '24. And I calculate that you would need to grow sales by a CAGR by about 23% to reach that number. And now given that we see this slowdown also going into the next financial year and consumers being relatively weak. I just wonder how -- what do you base this assumption on? Is it mainly on the high growth in new regions? Or is it on new categories? Or how do you think about your view on reaching this target? That's my first question.

Well, first, we don't base it on a 1 month -- slower 1 month. That's for sure. We are still very confident of reaching those levels. We are used to operate with higher growth rates than we saw in July. I think we based it on a mix, but I would like maybe to highlight that I've been working with e-commerce for almost 20 years. And in fact, I've seen that brands and e-commerce companies often tend to sort of getting an advantage of maybe what it turbulence and challenging times. So what I'm trying to say is that, I think that RevolutionRace is very well positioned to actually grow faster than the market and increase market shares. So I think you can say that it's not based on like 1 single component. It's based on a higher overall level and especially that, I think that we are very well positioned to continue to grow. We have very good relations with our customers, with our suppliers. We have good engagement, high product ratings from customers. So I think it's very much based on that -- it's a very strong brand in general. I don't know, Jesper, if you want to add something on that?

No. Well, of course. Continued growth overall, new products, new product categories increasing online penetration over time. So there's a number of factors in our advantage.

Yes. And we also have actually a number of new markets and countries in the rest of the world region who are still small, but they are growing very fast. So in -- when they start to grow bigger, that will, of course, also have an impact on the total growth numbers.

Okay. Perfect. Then 1 question here also on the inventory level here that you seem to feel quite confident even though that number is up quite a lot if you could look at last year then. I'm just wondering what you're seeing in the industry. Is your feeling that your competitors overall are also sitting on a high inventory levels? And perhaps have you seen already in Q4 that the level of markdowns has come up. I think you wrote in the report somewhere that the gross margin was a bit under pressure by campaigning. So I just wonder if you can elaborate a little bit around that?

I think it's difficult for me to comment on that. I'm not that into the details of the competitors yet. I often tend not to comment on competitors. But -- so I don't have -- please bear with me and excuse me for not having all the answers today, since I'm very new to this assignment. So I don't really have any comment on the market development in times of -- in terms of price pressure. But we haven't seen any significant sort of patterns in that direction from our side.

Yes. All right. Then 1 question also on the OpEx side here. I noticed that OpEx grew quite much faster than sales here. I'm just thinking a bit forward here. I think you also mentioned that marketing costs were up quite a lot here. But how do you think about the OpEx levels going forward? I mean do you have any cost saving plans? Or do you have any I mean how do you think about continuing to invest in marketing, et cetera? I'm just trying to get a feel here for how easily you can adjust that OpEx level? That's the third question.

I can elaborate a little bit on it, even though I'm very new. I mean, we have invested quite significantly over the year in increasing headcounts. And that, of course, is to facilitate the higher volumes that the company is operating on compared to a year ago. I think that's very natural. However, having said that, we feel that we have, at the same time, also invested in our infrastructure. So you could definitely sort of on a high-level basis, expect that to flatten out. We, at the same time, we have -- and we'll continue to invest in our brand. We -- as we mentioned in the report, we have seen that the cost of digital marketing has increased lately, but at the same time, we have also chosen to continue to invest in our brand. And not only on sort of short-term sales performance activities, but also on the more long-term brand building activities. And we will continue to do that, of course. We are here for the long term, and I think it's important to continue to invest in the brands is brand. Our brand and our product is maybe the 2 most important components for the future success. And as I -- and also, as I mentioned before, we actually see these sort of macroeconomic challenging times as an opportunity for the company to increase market shares, and we want to grab that opportunity. On a short term and long-term -- midterm and long-term basis. But of course, also balance that to uphold a decent profitability going forward as well. So it's a balance.

All right. Okay. Just 1 last question, if I may, also that I also noticed that you only choose to pay a dividend of 30% of the profit for the last financial years, whereas your guidance is 40% to 60%, and you're also running with a net cash position. So I just wonder a bit of how you have reasoned around this? That's my last question.

Sure. No problem. I can actually -- I can comment on that. And as you know, we intend to distribute between 40% and 60% of the profits for the year. But at the same time, we also say that we have to take into account growth or investments in growth opportunities and strategic initiatives. And we definitely feel that our increase in investment in increasing our inventory level is maybe the most important strategic initiative that we have taken so far in the -- this company's life cycle. So we have taken into account that the inventory level have actually increased by a couple of hundred million during the year. So therefore, we have taken into account when we -- that into account when we decided on the dividend level. So we still feel that when we -- the baseline is sort of 40%, 60%, taking into account these investments, so well end in a balanced 30% dividend of the profit for last year. That is how that decision was based.

Thank you. There are no more questions at this time. So I hand the word back to the speakers for any concluding remarks.

Yes. We actually have a question from online. Is that correct?

That is online. To comment on the negative growth in Sweden.

I can comment on that. And as we did in the last quarter, we have -- we always choose to focus our marketing efforts on markets or regions where we feel that we get higher returns on those investments. We do feel that we have got higher returns in other markets. So that is -- I think that is more of a result of our -- of us refocusing those efforts in our other markets. And I would say that, that is the sort of the major explanation behind that. So do we have any other online questions? No. Okay. So that concludes the question-and-answer session. And I guess I can conclude with saying that we are seeing exciting days. And look forward to the coming months. And I would like to say thank you for -- to all for participating today and for your interest in us. We look forward to speaking to you again over the coming weeks and months. And may I also remind you that our Q1 report will be announced on the 8th of November. So with that, thank you, and goodbye.