Synsam AB (publ) (SYNSAM) Earnings Call Transcript & Summary

Welcome to the Synsam Q3 2022 presentation. Afterwards, there will be a question-and-answer session. [Operator Instructions] Today, I'm pleased to present Deputy CEO and Chief Innovation Officer, Martin Daniels; and CFO, Per Hedblom. Please go ahead. .

Thank you. Good morning, everyone. We will go through the Q3 results and of course, also open up for Q&A after the presentation. To start with, let us give you a summary of how the quarter has evolved and where we are at the moment after 9 months of 2022. To start with, we continue to take market share in a slightly weaker market environment. We have a growth of above 12% during the quarter. We see that our ongoing investments into the business is affecting the results slightly during the quarter. We have an organic growth of 9.6% during the quarter and an EBITDA margin of 22.7%. We see that the gross margin during the quarter has been affected by both a consumer pattern, which is changing towards -- in terms of the mix, but also an increase in purchasing costs from a number of suppliers. Measures are already implemented, and we are continuously monitoring this to make sure we stay ahead of this trend. What's very exciting to see is that the subscription business continues to be strong also in an environment, which is a bit more uncertain for consumers. We have a 23% growth during the quarter. If we go down a bit in the P&L, we see that on the OpEx side, the shortage of opticians, which we mentioned in the recent quarters, has affected the OpEx, but the situation has stabilized during the quarter compared to previous quarters. The investments into the business that we're doing are affecting the results with SEK 34 million during the quarter, and Per will come back to that later on during the presentation. In this changing consumer environment, we see that the recycling outlet format and also seen some mega store format continues to fulfill a role in the market where more customers are looking at the price tag compared to before. We also see that the recent launch of our own production site has benefits that we've just seen the first examples of, the first collection being produced in Sweden, [indiscernible], has been launched into the Swedish market and has become an immediate success in terms of sales. It is actually the best performing collection, individual collection that we have launched to date. And that is promising. And also for the future, we'll continue to strengthen the business. If we look a bit outside of Synsam and to the market that we're active in, we see a slightly changing situation. Of course, the electricity cost, inflation, rents increasing, interest rates increasing, that is, of course, affecting consumers. And the sort of competition in the market for consumers is getting more and more challenging. We see that competitors and the players in the optical retail space in the Nordics are even more campaign-driven than before, getting people into stores, generally more campaign driven. We also see that consumers tend to trade down, choose cheaper alternatives on frames and also lenses, and that they're a bit more careful. The process of buying a pair of spectacles is slightly longer than it has been in the past, and more consumers are taking a bit more time to consider their options and go home and think about it before they actually make the purchase. Promising though, is that in these times, we see that consumers are increasingly choosing our subscription model, which creates certainty on the price level and which is also flexible in the sense that it can be adopted to different cost levels depending on an individual's needs and opportunities, underlying again, important to emphasize that vision correction and eye health continues to be a fairly -- must have hyper purchase that it is something that consumers need to engage in on an ongoing basis. So that provides some stability in the volume and the demand, but we're seeing that consumers are changing a bit the product mix that they're buying compared to before. So that is sort of the market that we are seeing right now. And that's sort of emerged in the recent quarters, and we also believe that this will continue to affect the business in the coming quarters also into 2023. But coming back to subscription, which is an important part of our offering and one which continues to be in demand among consumers. Again, we're reaching a 23% growth during the quarter. And we're seeing that the growth is seen across all 4 markets with some differences in growth rates depending on the -- primarily the competitive intensity, which is more aggressive in Denmark. And on the other end of the spectrum for us, we're seeing Finland growing by almost 70%, of course, driven by a growth in a number of stores. And the reason why we see a continued growth in this offering is that the subscription still is the best way for customers to take care of their vision correction need. And the stability of the cost, the monthly fee is something that a lot of consumers value in these times. In terms of numbers, you're seeing it's closing into half of the net sales in the last 12 months and Q3. And 2 sort of underlying key performance indicators for us when it comes to subscription is, of course, the intake of new subscribers, less the churn i.e., the actual customer base, which you see on the left-hand side, continues to grow. We added 29,000 active subscribers during the quarter, and we are now close to 480,000 active subscribers. And on the right-hand side, we also see the churn. The churn rate continues to be stable and actually below Q4, Q1 and slightly higher than Q2, but still on a manageable level for us. Besides the lifestyle subscription, which can include spectacle, sunglass and sports glass and reading glasses and contact lenses, we also have the pure contact lens subscription, which is also continuing to grow. This is, again, a category which is traditionally very online-based category, where half of the sales typically in the market are online. We have, as we've talked about before, being able to recapture and retake a lot of market share in this space with a unique subscription model, combining the benefits of online speed, convenience price points with the value of our store network in which the contact lens subscribers are allowed to come into the stores, talk to the optician, get advice and so on. So that combination continues to be successful and driving growth year-on-year. And also important when we look at our overall gross margin is to note that this business is at a slightly lower gross margin than the Synsam overall. So this type of mix that we're seeing between categories, spectacles, contact lenses and what you see here on the next slide also online are affecting the overall total gross margin of the business. Similarly here on the online category, we also see continued strong growth during the quarter, LTM of plus 43%. And that is, of course, a good business but at a slightly lower gross margin compared to the overall. As we mentioned during the last quarter, we held back on new store rollouts during Q3. And now during Q4, from October to mid-November, we have opened 5 new stores, and you see them here in Finland and Norway. And this is an important driver for us to continue to gain market share and to maintain the growth that is slightly more difficult in this market to achieve, but it's a core focus for us, and that's why we're doing this, and we're seeing that it helps us to attract more customers and become more -- a better performer over time. It's also, of course, fun to see that our work is being recognized. In October, we were given an award for Best Retail Company of the Year across all retail sectors by Market Awards in Sweden. So it's a short time to look back and be happy for what's been achieved. But we are never satisfied and the journey and the focus on continuing to building the business continues. So to summarize before we go into the financials, in which Per will deep dive on the numbers. Some points, we want to send across and emphasize the market is slightly weaker from a consumer standpoint, but Synsam is continuing to invest, and we are seeing that we're taking market share across all 4 geographies. And that's an important strategic decision for us where the second point, subscription continues to be very strong, and that not only creates value for consumers, but also creates a better customer relationship for us and also a longer relationship with the low churn rates that we're seeing. So that's also strategically important to grow that base of active subscribers. A shortage of optician has affected the quarter. It has been stabilized, but it is something that we've mentioned in the recent past, and that's an important topic for us to continue to work with. We see also that in this weaker consumer sentiment times that the recycling outlet and mega store formats fulfill an important role, and that's why these form the majority of the rollout of new stores that we're seeing. Their own production, which has negatively affected the result during the quarter, is also strategically important investment and initiative that we're driving to strengthen the offering and profitability in the long term. And again, [indiscernible] launched in September in Sweden is the best performing collection that we have launched in all of Synsam's history. So it's a great sort of first start, and then we're going to continue to grow that collection, both under the [indiscernible] brand and other brands that we're taking back from Asia. I also want to leave you with the assessment that the market that we're seeing the consumer market is slightly weaker is something that we expect will continue to be present during the coming quarters. And therefore, we are not changing our strategy, but that is the new market that we are active in. With that, I leave it over to Per to go through the financial development.

Thank you, Martin. And as mentioned, the quarter showed strong sales over 12% nominally and organic 9.6%. Like-for-like, very important measures were 5.5% growth. So we're not just a penta new stores. We grow in our existing stores as well. Gross margin, I will get back to the drivers behind that in a few slides and lower profitability, EBITDA margin-wise. Earnings per share, an increase since last year, SEK 0.53 per share. If you look at the 9-month development, also there, we see a very strong growth, 14%, like-for-like 7.7%, but the gross margin and EBITDA margin then affected also by the third quarter. So we are 23.9% EBITDA margin for the first 9 months. Gross margin 75.4% and earnings per share of SEK 1.84 compared to just a few or a year ago. I will continue with the details regarding the Q3 financial overview and to give some more flavor on the results. And Martin mentioned the investments, not the CapEx, but the operational activities we're performing in order to ensure our long-term growth has burdened the -- has affected the EBITDA with SEK 34 million in the quarter and SEK 82 million in the first 9 months. And this is a combination of the production innovation center, which started in August, but where we have communicated a negative EBITDA impact as we start ramp up the facility. We have the new stores. And although we didn't open new stores in the third quarter, we have more than 30 if you combine the fourth quarter last year, first quarter this year and second quarter this year during a ramp-up phase, that effect profitability. We have our new concept Recycling Outlet, Ai, Hearing, also important for long-term growth. but an impact on EBITDA or just margin-wise, but in total. And important to mention, we have increased our marketing efforts. So the marketing cost has increased. And this is also a part of these effects I'm talking about, which affect the OpEx. Additionally, opticians has affected us and this is what we have communicated before. The lack of opticians in the market can lead to either that you don't sell or it can lead to increased costs. We have chosen, in the latter to be there for our customers and to ensure that we have enough opticians and then we have to take in external support as well. So we have ensured capacity, but at an increased cost, like we were done other quarters, by the way, but it has affected us. The inflation starts to buy to some extent also, so that also impact various parts of OpEx, part of the income statement. If you look at the gross margin, there we have a combination of mix effect and increased purchase prices. In mix effect is something that you can't really control as a company always because it's basically what the customers choose to buy. And this quarter, the choice of the customers has affected our total mix of products and therefore the gross margin. I can mention that the mix effect in this quarter. On the 1 hand, you have, to some extent, increased sales of contact lens and online, which Martin mentioned, which is a good thing in itself because it gives us extra sales, next EBITDA in absolute terms. But it has lower gross margin than the rest of our business. So that has an impact. Furthermore, when people in these times think harder about where to spend their money, to some extent, it affects what kind of glass quality they buy. And if they buy cheaper lenses, the mix between lens, where we have a higher gross margin and frames, affect us with a lower gross margin in total. Furthermore, if you -- when we continue to increase our sales in lifestyle, the subscription program, when we get new -- a lot of new customers, that has an effect on gross margin. These are the mix effects. The purchase prices, we have been able to withstand increases from suppliers regarding COGS. I'm talking about COGS, goods for resale for a number of quarters. But in the third quarter, the inflation has started to affect our vendors and ourselves as well. So that has given -- that has impacted us. We have taken measures to adjust for this, but such measures as they have a certain lag before they are implemented. The adjustments from our side has been -- have been implemented -- have implemented in Q4 and are implemented as we speak, have been implemented. But we got sort of an impact in Q3 from increased purchase prices, not matched by adjustment fully. These are the main explanations behind the increased OpEx and lower gross margin. If we continue with the long term, very short long-term financial development, then looking a few years back, we have grown significantly and continue to grow. We are significantly above SEK 5.1 billion in sales last 12 months and the EBITDA is basically somewhat higher than it was in 2021 full year. So LTM, SEK 1,277 million in EBITDA. However, as you mentioned, lower EBITDA margin as a result of the factors that I mentioned briefly. And if we go then quickly into cash flow and financial position. What I want to mention here is that we have SEK 214 million in cash flow from operating activities, SEK 252 million last year, third quarter, so about SEK 200 million. We continue to invest in our store network and other parts of our business. However, if you look -- and we do also -- we do invest in increased stock levels inventory because we believe that to have the products in the stores available for the customers is something that drives sales. So we have a lot of new stores, and we have stocked up to ensure that there is availability in all stores. Also as an effect of the global environment, what's happening in the world around us, and we want to ensure that we don't get disruptions, supply chain wise, so inventories increased. However, the net debt has increased to SEK 2.864 billion compared to a little bit more than SEK 2.5 billion last year. This is mainly due to 3 factors: One is the increase of lease liabilities because this is IFRS 16. So when we get a lot of new premises, the IFRS 16 debt from the contracts we have with landlords given impact on net debt. These liabilities increased SEK 176 million during the 9-month period from January, September this year. We also paid a dividend, as you may recall, SEK 255 million. And then we had currency effects since we have certain loans in other currencies and SEK. And since IFRS 16 includes [indiscernible] these liabilities, as you know, we have, this time, stripped out just to give a better view of where we would have been if IFRS 16 will not have been in place. And then we would have had a net debt of SEK 1.99 billion compared to SEK 1.9 billion. Certain increase, but much less since we would not have been affected by the leases. But we are in IFRS 16, and this is just to give you a view of how much leases impact net debt. So we can continue with the segments results. We'll go quite quickly through this. Sweden, strong organic growth, strong like-for-like, but lower EBITDA in Q3 and for the first 9 months. This is very much to do with the same effects we have seen in the group in total. We need to ensure capacity from opticians. We have a lot of new stores, a lot of new stores in Sweden. And we have also spent on marketing to ensure that we deliver on growth. So increased market spend as well. These are the main factors behind the increased OpEx, leading to somewhat low profitability in Sweden. Denmark, There, we have a very tough competitive environment. So 3.2% growth in Q3, 7.1% organic growth in first 9 months, positive like-for-like important and somewhat increased profitability in Denmark. Norway, slower growth than Sweden, but the same type of impacts on OpEx and profitability as in Sweden, opticians, some new stores, not as many as in Sweden, but some new stores and then increased marketing costs in order to drive growth. Finland is a special case, over 40% organic growth in Q3 and the first 9 months. And by the way, also very strong like-for-like over 11%, both Q3 and first 9 months. So it's not just new stores, although these have affected the total sales, of course. But also like-for-like important. So although we have increased significantly in our 45 stores in Finland, no new stores in the third quarter, by the way. We have increased EBITDA and are at the same level as last year, we got in our first 9 months, even though we have added a lot of new stores in Finland. And with that -- by that going to store overview, and this is -- as we said, we wouldn't open new stores in the third quarter, and we didn't. So say a number of stores. However, we have -- well, we have started 5 new stores already in Q4 and the plan for Q4 is to increase totally in Q4 by 11 to 14 new stores. And we have a goal, as you may recall, of 90 new stores 2021 to 2023 in total. You could average 30 per year, but 90 is a total. And now when we didn't have any openings in third quarter, we will have even more than in the fourth quarter. That's basically what bought my last point. So we'll go into then Q&A.

[Operator Instructions] And our first question comes from Carnegie.

Hello, can you hear me?

Yes.

My question relates to the cost structure. You mentioned here in the report that you had taken measures to compensate for increased costs. Can you specify what type of measures you have taken? And what kind of impact can we expect from these measures?

Yes. We will be, of course, work on 2 fronts here. One is adjustment of prices. We need to have value for money offering. But in these times, we have needed to adjust prices. So that's one of the measures to compensate for increased costs. Yes, that's 1 measure. And with the impact in -- starting in Q4. But of course, when we have financial targets, medium that we -- in the medium term, we should adhere to. So we're also looking at our cost structure in the OpEx part of our income statement. And that is an ongoing process, where a surgical method where we look at what type of costs do not really add to sales in long term, and that's an ongoing process, and we can really quantify that. It's more like an ongoing operation that we even more and more cost focused from now on. And these are the measures. And I wish I could quantify them for you. But what we have -- the only thing I can say is that with the price adjustments we have tried the best possible way to compensate for price increases. And there's a limit to how much we can adjust because we need to be value for money. That's very important also in these times when customers or thinking very hard about where to spend their money. Also, if you look at the mix effect, that's not something we can control, so we can't really price adjust for the mix effect. Not able to quantify unfortunately, but that's the answer I had for that question.

[Operator Instructions] And we seem to have no further questions on the phone line. So I'll hand back to the speakers.

Okay. So thanks for listening in. We -- as we have said, we are seeing a slightly more competitive market. But the investments we're doing, the initiatives we're doing on strengthening the business continues to be our focus, and we look forward to meeting you again next time. Thank you.

Thank you.