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

Welcome to the RevolutionRace Q4 presentation for the year 2022-2023. [Operator Instructions] Now I will hand the conference over to CEO, Paul Fischbein; and CFO, Jesper Alm. Please go ahead.

Thank you, operator, and good morning, everyone, and welcome to this conference call where we will address the report for RevolutionRace for the fourth quarter and full year 2022 and '23. My name is Paul Fischbein, and I am the CEO of RevolutionRace. And with me for today's conference call, I have the company's Chief Financial Officer, Jesper Alm. For those of you who are not familiar with the RevolutionRace, I will start by -- give you a brief introduction. RevolutionRace is an outdoor brand, offering a wide range of outdoor products for people with an active lifestyle. We operate with a digital D2C model, meaning that we skip the middleman and sell our products directly to our customers. By doing so, we can offer quality products at an unmatched value. RevolutionRace was founded in 2013 and has been listed on NASDAQ Stockholm since 2021. Our headquarter is located in Boras in Sweden, and we have approximately 120 employees. What really makes us stand out is our engaged customer community. We know how to communicate with our customers, resulting in more than 500,000 unique product reviews and more than 1.3 million followers and fans on our social platforms. So how do we generate value? Well, our vision is to become the most recommended auto brand in the world and our mission is to make nature accessible to everyone, and that we do through an unmatched value. And I already mentioned our D2C business model. We create value by skipping the middleman and selling directly to consumers. Let's take a look at the net sales development for the quarter and also for the full fiscal year that we are now reporting. We are proud to say that we achieved a net sales growth of 14% in the last quarter of the fiscal year, arriving at SEK 362 million compared to SEK 318 million a year ago. The fiscal year resulted in net sales of almost SEK 1.6 billion, which is a growth of 17%. And this growth is being achieved in a period of significant market uncertainty and turbulence. RevolutionRace continues its international journey with now 77% of net sales in the quarter being generated outside of the Nordic region and close to 90% being generated outside of Sweden. The DACH region grew by 22%, and the Rest of the World region grew by a very encouraging 42% in the quarter. We experienced decreasing sales in the Nordics, and believe that the Nordic market as a whole, decreased in the same period, but we believe that we retain our market share in the region. U.K. and Netherlands remain the biggest markets in the Rest of the World region, and U.S. is showing strongest growth, however, still low numbers. As I mentioned before, RevolutionRace is an international brand. We now have customers in around 40 countries, with a total of 18 localized webshops. Today, we opened up RevolutionRace for customers in 3 new and interesting and exciting markets, Canada, Japan and South Korea. We are currently fulfilling orders at 2 main third-party logistics hubs in Germany and Sweden, with a smaller location also in the U.S. We designed all our products in-house and work together with more than 25 suppliers in the production process. Now let's take a look at the highlights during the fourth quarter, and we are pleased to see that RevolutionRace continues to report solid financial numbers with good profitability. And in fact, the underlying, the operating result is improved compared to last year. EBIT for the quarter amounted to SEK 68 million, corresponding to an EBIT margin of 19%. This is an operating margin that we are pleased with, given the challenging market climate and noting the difference compared to last year in net other operating income and expenses of SEK 16 million between the quarters, and that is related to currency effects on balance, indicating that the underlying operating result and margin for the fourth quarter is stronger, relative to the comparison quarter last year. And this is important and also relevant to understand and take into account when looking at the result. We are still observing substantial discounts in the market due to high inventory levels, but we managed to keep gross margin at a good level. The margin came in at 74.5%, and that also includes a positive net impact of SEK 2.5 million from a onetime event. Full year adjusted EBIT came in at SEK 322 million, resulting in an adjusted operating or EBIT margin of 20.6%. Our inventory levels remain healthy with a slight reduction in inventory compared to the same time last year, and we are currently now in the process of building up inventory levels, as a preparation for the upcoming peak season. At the end of the financial year, we have a net cash position of SEK 139 million and also on top of that, an undrawn credit facility of SEK 600 million. So we are pleased with that, as it feels extremely strong in the current market and also provides a foundation for our future. The customer dialogue is central to our success and together with the reviews and followers on our social media channels, this is a very important asset and success factor. During the quarter, we passed yet another milestone, with now more than 0.5 million product reviews by our customers with an average score of our products of 4.6 out of 5. Social media following is continuing also to increase very fast and now amounts to more than 1.3 million followers. Our range of lightweight products tailored for warmer climates, continues to also gain momentum. And in the fourth quarter, we, for example, saw increased demand for shorts, zip off trousers, shorts and long sleeve T-shirts. The footwear line is also on an upward trend. Additionally, the summer sale was well received, helping us to successfully clear older inventory as planned and in a balanced way. Looking forward into the next fiscal year, during Q1, we are excited now to introduce several product news within our existing categories. We are introducing a new footwear model called Trail Mid, which is a water-resistant hiking shoe. We are, in fact, today, also introducing a new water-resistant dog blanket called Cyclone Dog. We are launching a new collection for high-intensity outdoor activities such as trail running. We are launching new base layer shirts and also making a bigger push into West. So later in the fall, we are also bringing in winter updates and expanding our range of bags. So as you can imagine, we are excited for the upcoming outdoor season. And our work with sustainability and what we call a responsible race also continues, and we are preparing to report our progress in the upcoming sustainability report, due out in October. So we will come back to you on this important topic during the fall. We are currently in a final year, covered by our financial goals, and we are happy to report net sales of almost SEK 1.6 billion and an adjusted EBIT of 20.6% for the financial year just ended. Further, the Board of Directors today also proposing to increase the dividend of SEK 0.86 per share. This will mean that the dividend is increased again for the third time in a row since our IPO, and this corresponds to a payout ratio of 40% of our results. So with that, I would like to hand over to the company's CFO, Jesper Alm, who will present and walk through the financial performance. Jesper, please go ahead.

Well, thank you, Paul. Good morning, everyone. So I'll talk you through our financial performance during the fourth quarter and the full year. So looking into gross profits; we noticed a good development with a growth of 17% to SEK 269 million from -- up from SEK 230 million a year ago. This equals a gross margin of 74.5%, and includes a net effect of SEK 2.5 million from the implementation of a new obsolescence model and certain other adjustments to the inventory. The gross margin has been positively affected by a favorable market mix, including effects from sales in Euro, but offset by increasing costs of goods sold, following a continued stronger U.S. dollar. The full year gross profit amounts to SEK 1.1 billion compared to SEK 963 million a year ago, and that represents an increase of 17%. Moving on to operational expenses, we see a limited increase in personnel expenses compared to the same quarter last year, and this is primarily due to the salary review carried out during the quarter. Other external expenses increased to SEK 173 million compared to SEK 147 million a year ago. This increase is primarily explained by this cost being variable in relation to sales, marketing and logistics. Other external expenses, as share of net sales went from 54% to 55.5% when comparing the fourth quarters, and this is following a high inflation year. Moving on to Slide 16; EBIT for the quarter amounted to SEK 68 million, corresponding to a margin of 18.9%. The lower margin compared to the same quarter last year is mainly explained by the difference in the net of other operating income expenses, that went from a positive SEK 15 million last year to a negative SEK 1 million in this quarter. The full year adjusted EBIT margin came in at 20.6% based on an adjusted EBITDA of SEK 322 million compared to SEK 367 million a year ago. Balance sheet; when it comes to the balance sheet, we see only minor overall differences. Net working capital has increased slightly following a reduction of current liabilities. Inventory development; Inventory levels remain healthy. We've seen a decrease during the financial year, as previously discussed. We're now receiving inbound shipments for the upcoming peak season and will, as a consequence, short term, see a planned increase in inventory. Our financial position has continued to strengthen. We had a cash position of SEK 150 million at quarter end or a net cash position of SEK 139 million and the adjustment is for lease liabilities. We have a credit facility of SEK 600 million available and undrawn, and it has now been extended for a year and matures in 2028. So in conclusion, RevolutionRace has a solid financial position. We're growing profitable with strong cash flows. So I think that sums up my part, and I'll hand over back to you, Paul.

Thank you, Jesper. And to sum things up and update on current trading, we have a well-positioned customer offering, with a unique combination of a strong brand, high-quality design and competitive prices. We have a scalable and digital business model, an able and international presence, with great potential to continue to win market share. We are very excited about our new products being launched soon and also welcoming customers in new markets to join our community. We are focusing on continued long-term profitable growth. And also, we have made a strong start to the new financial year with growth in July and also in early August that exceeds the growth level we reported for the fourth quarter in the last financial year. And that concludes our comments on the results. And before we finish, I would like to take the opportunity also to thank the whole team at RevolutionRace, our customers, shareholders and partners. And I look very much forward to continuing to build on RevolutionRace success together with all of you. And with that, we are now also happy to answer questions. So operator, do we have any questions?

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

I have a couple of questions. Firstly, is there any way for you to quantify your current trading comment or at least put it in relation to the 5% local currency growth that you reported in Q4, is there a substantial pickup that you've seen in July, August or is it just a minor acceleration? That's my first question.

I can start by answering that. We've seen a strong start to the new financial year. And what we do see so far is that we have that the growth in July and also in early August, up until now, we have seen that we are seeing growth level that is higher than what we reported in the fourth quarter, which is the 14%. So that is what we have seen so far, what we comment. So we are pleased with a strong start of this financial year also.

Also, maybe you could sort out these one-off elements that you talked about, the SEK 2.5 million in change of obsolescence. What is that related to? And is that purely a one-off in Q4 or is that something that will also impact the coming 3 quarters? And the same thing when you talk about the FX impact of SEK 16 million. I assume here, you're talking about the theoretical impact of currency movements not related to what kind of price changes you have potentially done during the same period. Is that correct?

The other operating income and expense difference that is related to balance sheet items, and we expect that time effects. We have implemented a new obsolescence model, which contributed positively to the gross profit and offset by write-downs of parts of the inventory as well. So the net effect of positives and negatives is the SEK 2.5 million.

May I also add on the currency effect that the impact this year is actually only minus SEK 1 million. So it's the comparison that is sort of important to understand where we had a positive impact last year of SEK 15 million. So the impact of this year's Q4 results is only SEK 1 million. But if you compare the results to last year, then you get the significant difference.

Can you talk a bit about Rest of the World, a clear acceleration here from previous quarters. Which markets do you see as the key drivers here in this quarter?

Yes. We do see that the 2 biggest markets in that region is, of course is Netherlands, where we continue to see a very promising trend, growing nicely and also getting bigger and impacting the total number significantly. U.K. is one of the biggest markets in that region. But then we also see significant growth in U.S. However, still much smaller numbers than Netherlands and U.K., but if we can continue to see these kind of growth levels in U.S., it will, in the future, also have a positive impact. However, it is important for us to grow that market and all our markets in a balanced way. It's important for us to secure that we grow -- that we can secure profitable growth. So we are not heavily investing into marketing or and in launching activities in any markets. Our model is to grow it in a balanced way. And we are very pleased to see that many markets are actually taking off in that region, which, of course, is promising and also important. And on top of that, we're now introducing RevolutionRace to 3 more markets, big outdoor markets also maybe important to highlight. So hopefully, that can also give us some positive impact in the future. We are very excited about that.

And that was going to be my next question. Canada, South Korea and Japan. Are these markets where you have launched or where you're about to launch? And how are you going about this? Is this through Amazon or through your own platform? Any initial reception you can tell us about?

Yes. So this is very early. We launched it today or actually, we have sort of opened up. It's our own site, it's RevolutionRace where we open-up the possibility for customers in Canada and Japan and South Korea to buy from RevolutionRace. We have secured a logistics process so that we can handle all the operations behind it. But as we have done before, when we enter new markets, we do it in a very balanced way. It will be -- if I guess a slow process, we don't expect big volumes coming in immediately. But we will start slowly introducing it with some small marketing activities. And it's a sort of a deeper strategy as we have done before in other markets. If we feel that we get the positive response, we will accelerate our activities and maybe also look at further locally adapt the business and operations into the different markets.

And just a final one. If I look at your OpEx, we have seen 5 consecutive quarters now where OpEx has been growing at a much higher rate than sales. What is your forecast in for the coming quarters? Do you see that continuing or do you see a reversal anytime soon, just to -- and not least here on back of your margin target of 25% for the current year where you are currently quite a bit below.

Yes. If we look at the FTEs for example, which, of course, is an important component of the OpEx, we now see that we are at the same level as we were a year ago. And so I think we have highlighted that in the report also. We don't expect that to grow significantly. I think we are in a good place when it comes to our staff. And when it comes to other kind of costs like marketing, logistics, we expect it to grow more or less in line with our sales. We don't have any sort of plans to do any big investments on that with those areas either.

The next question comes from Benjamin Wahlstedt from ABG.

So a couple of questions from me as well. First of all, gross margins were very strong. I appreciate that there's a geography mix here, not supportive and also is more one-off effect. Could you perhaps give us some idea of what you expect for next year here, please?

That's the crystal ball, isn't it? We have benefited from the growth in Continental Europe, and that is both from a pricing level and from a currency perspective. And we see -- I mean, if we're guessing where we'll be seeing the growth for the coming periods, it is most likely going to be in Continental Europe. So price levels, they remain, currency fluctuates. So I'm not going to give a firm answer, but rather reasoning. I think that's my reasoning.

But I can maybe also give some flavor on that. I mean, we have seen a situation in many of markets with high inventory levels for many, many players in the market we have seen high discounts. We are pleased to see that we have been able to keep a pretty stable gross margin and our strategy is to provide or offer unmatched value at all times. So we haven't been that aggressive with clearances. We have seen, obviously, we have the currency effects of the dollar who have increased compared to the Swedish krona, but however, from a sales point of view more exposed to the euro. So I think when it comes to currency, one should understand the sort of the relation between those 2 currencies. So during the last year, we are pleased to see stable gross margin. And yes, I think that the history may give you some help on how to predict the future.

And sort of to follow on the comments on campaign intensity and so on, but also was asked about in last quarterly presentation. Could you perhaps comment on what you see in terms of same Nordics payment pressures, I believe that's the segment which sees the highest levels of discounts. Is this about to end soon or what do you see.

Yes. It's hard to guess. If I may -- but if I guess, I think one can expect at some point, obviously, things to slow down. It has been very aggressive. We have seen that many players have had high inventories, and hopefully, those came down. However, we also internationally exposed right now. So what we are referring to now is more on the Nordic market, how it looked like. And I guess, now entering a new season with autumn/winter season. My hope and maybe also guess is that we have seen the worst and don't expect such a clearance aggressiveness to the same extent going forward as we have seen in the last maybe 9, 12 months.

Could you perhaps also give some additional flavor on cost inflation? Specifically, I was wondering about the external cost line item, other external cost line item. I believe a year ago, what was driving the perhaps cost inflation was marketing costs. In Q3, we saw higher fulfillment costs maybe. Could you give some flavor on Q4? What is driving the higher external cost ratio, please?

Yes. On a general level, we've seen some cost inflation when it comes to logistics, for example. When it comes to marketing, we do -- the last priority of our investments go into what we call online performance-related marketing and there is more like an auction process. So it's not necessarily so that the prices have increased within that space. You can maybe expect if competitors or companies or players are facing challenging times, maybe they will be a bit more prudent or act in a more balanced way. So it's hard to say how it will impact online performance marketing. But we have seen some cost inflation when it comes to logistics-related costs. And also when it comes to staff cost, we follow the market trends and see that we can expect some cost increases this year and also next year.

I believe last quarter in your presentation, we talked about increased costs from, I guess, what you call it cross market availability of products. Is it possible to give us an idea of the magnitude of these increase of costs, please?

Yes. Just to give you an idea, when it comes to splitting orders roughly maybe between 5% and 10% of our shipments are being shipped from, for example, Germany to Swedish customer in order to fulfill a full order. So it's that magnitude, just above 5%. I think it's important for us on a cost level, but also from a sustainability level to really secure that we can fulfill our obligations to customers from the local warehouses, but that gives you an idea of the magnitude, at least of the split order. And my fifth order, I define it as one order being shipped from more than one warehouse.

And then one final question from me. It would be interesting to hear your thoughts on the proposed dividend, SEK 80 per share, 40% net profit. That's the lower end of your capital distribution targets and you're currently at quite a nice net cash position. Why not distribute more cash, I guess is my question. Would be interesting to your thoughts on that.

When deciding or when the Board is now proposing a dividend level, we're taking many things into account, obviously, the results that we are now presenting, forecast, but also the uncertainty that the world is in. So we have a dividend policy of distributing between 40% and 60%. And I think the Board is now proposing 40%. So it is within that range that we have said that we were going to distribute. But also worth also highlighting is that this is the third time in a row where we are increasing the dividend level since the IPO. We feel that we have a strong position with a net cash position, no debt. And so we are very pleased with that dividend level. And also bear in mind that the dividend policy was sort of decided and taken in a sort of a different time. So being able to uphold that level is very pleasant to see.

[Operator Instructions] The next question comes from Philip Woloszynski Tadayoni from MediumInvest.

My first question is on your comments about [software] development. During the Q3 quarter, you stated that the quarter ended stronger than it started, and that has carried on to this quarter of Q4. And you're now stating that the Q1 started even stronger. Could you clarify when we are discount based on organic or reported growth?

I'm sorry. I don't really get the question. I heard flavors of it. And I think it was related to our guidance, where we last quarter saw that we said that we saw a start that was stronger than the quarter before. We don't really guide on what we think. What we are doing is now presenting what we have seen. And we have now seen a strong start of this current quarter, and the sales growth level is higher than what we are now presenting, so higher than 14%. That is what we have seen so far. I don't know if that answers your question because I didn't really got the question.

In comments [indiscernible] been stronger than in July and August. Is that on an organic level or in reported growth numbers.

So yes, it's organic sort of full top line number is stronger than 14%.

Okay. So yes, but it is in reported numbers, correct, because organically in Q4, you only grew 5% on report.

We compare reported to what would have been reported for the same period.

Okay. Then my second question would be, if you could comment on how the development has been in July and August on an organic basis, is that better than what you have seen in Q3?

I think the only thing we can comment is that we are seeing a better growth number than the 14%. That is what we are commenting today when it comes to the current trading.

The next question comes from Emanuel Jansson from Danske Bank.

I think at this stage, most of my questions has already been answered, but I [indiscernible] last question here. Are you able to comment anything if you have seen a higher pickup in pace in August compared to July.

We haven't really commented on that. So it's difficult for us to say something about it. I think we have to stick to what we are commenting in the report. But we are seeing a strong start of this quarter, and it's higher than the 14%, but we have not quantifying that in more detail than that for the moment.

And also in the report, you also are, what you say, reiterating or at least maintaining your financial targets of reaching SEK 2 billion by the end of last year, you still feel confident that the sales growth will be able to pick-up in order to reach that target given these market conditions.

Yes. Well, as you just comment here, I mean, first of all, the long-term financial targets, they were set 2, 3 years ago in a different time, in a different world. But with that said, of course, it's as CEO, it's my focus and our ambition and aim to continue to grow and build this company in order to reach those targets that we decided prior to the IPO. I think we are delivering on strong growth internationally. Of course, we are seeing the declining market in the Nordics. So it's important that we can turn that around. And since I came on board as CEO during the last 3 quarters, we have grown by 19%. Of course, it will require slightly higher growth than the 19% in order to reach the financial targets. But we are seeing a strong start of this fiscal year. So we are aiming for it, but it's a goal, it's not the guidance and the long-term goal set 3 years ago. So yes, we are still aiming for that. And of course, those financial targets are ending 10 months from now. So at some point of time, we will, of course, have to look into an exact time plan to -- when we will come back on our financial targets.

And could you also mention some also something on the Nordics? Have you seen any pickup in recovering in that region or is it still very depressed and more or less heading south?

Well, in the last quarter, as you can see, we've seen a decline of 16%. And that is, of course, a number that we are not happy with. Our estimate is that we are keeping our market share, which is, of course, important. But we hope that things will look brighter in the future. We have had a good start, I would say, across the group. So that without going into detail, that can give you some flavor maybe that it looks better maybe in the Nordics, but I can't guide on that. But we can see that -- I mean we are not exposed to any weather effect. But as you are asking about as seeing about the Nordics, it has been sort of a helpful summer when it comes to rains. And that is I would guess, a bit positive for us maybe.

And maybe last question from my side. Now with the year just ended, could you give us some flavor on the -- or maybe some product split in terms of revenue? Have you seen any other product category starting to get a bigger share of the pie when it comes of your sales. I know that the [indiscernible] has been a substantial part of your revenue historically? And have you seen any other product target that you want to highlight?

Yes, I can do that. I mean, during the fourth quarter, we saw a big increased demand of shorts, zip of trousers also had a strong demand, and we saw an increased demand for short and long sleeve t-shirts also. And as we have mentioned in previous presentations, we have also seen that our shoe collection is very well received in the market. So we are excited about that. But we are -- I mean I'm really very excited about the new products that we are now introducing for the upcoming autumn and winter season. Today, we are launching the water-resistant cycling blanket for adults. We are looking -- we will still launch an alpine collection that we are excited about. And we will make a bigger push in to vest, for example. So I think there are many exciting product news coming in the upcoming weeks when we now enter the autumn and winter season. So yes, we are excited about the collection coming up.

The next question comes from Daniel Ovin from Nordea.

Paul, just have a few small follow-ups here. And the first one is regarding the average number of employees because you've now only written the average number, not the total number here. But if you look at the average number, it's SEK 119 million this quarter and in the previous quarter, the average was SEK 128 million. So I just wonder, do you have any big cut in the workforce or is there anything else explaining this? This is the first question.

No, we haven't had any cuts. It has been on a very stable level. What we have chosen to do now is to report the FTE number because we feel that is the more relevant number to look at because that is the one driving costs. The other number could be more misleading as it includes employees not working 100%, and some of them very small part. So that is the reason why we are now choosing only to expose that FTE number because it's mainly the cost driver. So no other sort of reasons behind that.

And then just one last question here. And that you're talking quite a lot about the success now of garments that is more summer related like t-shirt like and now you're talking about launching products here more for the winter season. So would you say that with these launches or the direction you're taking, you are getting more exposed to the different seasons or could you still say that you're relatively not so impacted by different seasonalities. So that's just a final question on your direction there.

I mean, it's important for us to broaden the assortment in order to build a strong international outdoor brand. And pants is definitely the biggest product category still. But I think it's important for us in order to be credible in order to sort of capitalize on all the nice customer relations we have, that we widen the assortment with new exciting products at not much value on a regular basis. There will probably always be a seasonality effect because of the average order value if you compare lightweight summer products compared to winter products. So one should of course take that into account. But we are definitely seeing that our company is growing not only in terms of sales numbers, but also in terms of new exciting products and product categories. So I hope that gives you a feeling.

The next question comes from Benjamin Wahlstedt from ABG.

So just a quick follow-up. You talked very quickly about marketing and logistics costs growing in line with sales. And I was just wondering if you could clarify, is that like in Q4 levels that you expect the ratio to be constant or is that in LTM terms or what level should we expect to see flattening out essentially.

We're not quantifying that in more detail. I think I only wanted to give you sort of a feeling that one should not expect any above the line investments or anything like that on top of sort of normal operations. And yes, so.

I was just trying to get a feel if we should expect another external cost ratio of 48%. That would be significantly above what you've done in recent years. All right. I understand.

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

And thank you, operator. And before we wrap-up, let's see if we have any questions online. And if you have that, I will read the question and then try to answer it also. And yes, we have a first question about container prices that have decreased a lot from 2021, it says here. And the question is if that will impact our margins positively of the upcoming quarters. And I mean going back when container prices were higher, we saw that the impact on our costs on goods sold was limited. So with that, we don't expect any big impact when the container prices are going south either. So I think the first, the answer is no significant impact. Second, it goes into the inventory. So if there would be an impact, it would be sort of -- we will see the impact in the P&L over a longer time. The second question is how will you distribute in 3 new markets. Will you have local inventory. So today, we have warehouses in Sweden, we have warehouse in Germany and 1 also in US on top of the -- and on top of that, we're also working with Amazon when it comes to the marketplace business, helping us with fulfilling orders generated from that. We will continue with these 3 new markets to fulfill the orders from the existing 3 warehouses we have. So we are not investing into any new warehouses at the moment to fulfill those 3 new markets. And that, I think, concludes the questions online also. So all-in-all, we are seeing exciting days and look forward to the coming months with new product news and new markets. Thank you 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 November 7. So with that, thank you, and goodbye.