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

Welcome to the Synsam Q2 presentation. [Operator Instructions] Now I will hand the conference over to the speakers. CFO, Per Hedblom; Deputy CEO and Chief Innovation Officer, Martin Daniels. Please go ahead.

Thank you, and good day, everyone, and welcome to Synsam's Q2 2023 report presentation. In summary, Synsam had a very strong quarter, reporting record sales and earnings for an individual single quarter ever. Very good momentum across all countries, all 4 countries growing and improving profitability versus last year and very promising to see that after a couple of quarters, we have now achieved the financial targets and that is very promising. Lifestyle continues to be a strong driver of growth and success for Synsam. We're seeing strong intake of new customers and also the lowest churn rate we've seen since 2020. Synsam continued to take market share, drive growth in topline and combining that with an improved efficiency, both on a store level and operational terms and also a cost and restructuring program, which helps us translate that growth into improved profitability. EBITDA is bit in the high-level figures. We saw net sales of close to SEK 1.6 billion during the quarter, which is an increase of 12% compared to last year. The gross margin improved and reached 74%. Strong organic growth and a like-for-like of 7%. And as I mentioned, the cost efficiency initiatives have improved the EBITDA to SEK 401 million. And in terms of margin increased that to 25.3% versus 24.5% last year. And it's also falling down into earnings per share, which is much better than last year. Looking at the segment split. All 4 countries had strong growth during the quarter, some differences, of course, in terms of levels. Last quarter, as you may recall, Norway had a slightly lower performance than what we expect. It's glad to see that it's now a very strong performance from Norway. Sweden continues to be strong and Finland massive growth continuing quarter-by-quarter. Denmark also growing in a very tough market and all 4 countries reporting stronger or higher EBITDA compared to last year. So all in all, a very strong performance across the board. Going into the offering product split. Lifestyle, of course, continues to be strong important concept that customers are appreciating. We saw this growing by 14% compared to last year. And as you can see, it is growth across all 4 countries. And Lifestyle now represents more than half of the total net sales of the company. As you've seen in the previous quarters, we've been growing the net number of active subscribers by some 30,000 each quarter for the last couple of years. That continues also this quarter, and that is also paired with the lowest churn rate we've seen in an individual quarter in the last 3 calendar years at 1.86%. So that tells us that the subscription model continues to be strong and attractive even in terms of economic uncertainty. And in terms of retention even better this quarter than it's been in the previous quarters and years. That is the so-called lifestyle subscription. We also have, as you recall, the pure contact lens subscription, which is also continue to grow year-on-year and contributing to loyalty and also sales for SYNSAM. As we mentioned, of course, category gross margin varies a bit. This category has somewhat lower gross margin compared to the overall SYNSAM business. But strong drivers of like-for-like in existing stores. And as we mentioned before, the new store rollout plan that we've actively been working on is also a very positive and well-functioning initiative. As you see here, we've started to follow selected stores, as you may recall from the previous quarter. It's good to see that both in big cities, so-called mega or flagship stores, we see strong EBITDA and also in smaller cities in stores like Synsam shopping, which has only been open for 4 months. We see a very strong EBITDA margin. And that will, of course, be the future plan going forward will contain a mix of not only big cities, but a lot of smaller cities where even though the total sales might be somewhat less than a flagship or mega store the EBITDA margin and the ability to win in the local marketplace is very strong. To put that new store rollout a bit in perspective, looking back, when seen some started the transformation in 2015. We had 498 stores directly owned and also franchise stores. And actually, when we compare it to where we are -- at the end of this quarter, we've only added 38 stores in total compared to 8 years ago, which means that we've been able to shift a lot of franchise towards to new stores and the level of rollout has actually not been that aggressive. More importantly, on the right-hand side, we've seen we've been able to deliver a very strong growth in that store network and also a very strong growth in profitability. So what we're doing is not only opening new stores, but also improving the existing stores, expanding some areas and also relocating stores to better locations as other retailers are struggling, we're getting into more attractive spaces. As you can see here on the left-hand side, the old Synsam in a mall and a very visible right-hand side picture of an exterior of one of our new stores. We see that there's a lot of white space in the Nordic market. And our -- an additional 90 stores in the year 2024 to '26 remains. And we're seeing that we're able to grow these stores to profitability quickly, and we see a significant potential going forward with this initiative. With that, I hand over to Per to go through the financial development.

Thank you, Martin. And just reiterating what was mentioned previously, we had strong growth in the quarter, 12% nominal growth I want to highlight, though, the growth in our profit growth, EBITDA, 15.5% increase and EBITDA, 14.7% increase faster than sales there by resulting in higher margin. Martin mentioned the EBITDA margin also we have EBITDA margin increasing from 15.8% to 16.2%. So it's a quarter where we have improved on relevant parameters in the income statement. Also I want to highlight the like-for-like growth, 7% and you could see, of course, when we talked about the different segments that we grow on growing these segments. So of course, we have a strong like-for-like growth well, but in the group, and it's combined organic growth and 12% net sales growth is a strong quarter. Also I want to highlight the stable gross margin -- we have 74% compared to 73.7% last second quarter. Second quarter being effective always by some more or less. So it's a relevant comparison with the second quarter last year. And we have achieved this gross margin, although there's been, of course, high inflation and the measures we put in place from end of last year has worked and of course, contributed the stable gross margins, of course, contributed to our results. The cost and restructuring program is developing according to plan. And this purpose of this program is to balance out the increase in OpEx and to some extent, the increase in interest cost, and we have achieved these savings enabled -- which then reduced the impact of the high inflation, which is important. And this program is continuing according to plan, and we stick with our goals for '23 and '24. Even more important is that we have started -- this is a structure program 1.0, and we have started now cost restructuring program 2.0, which will provide additional effects in 2024 and this is being developed as we speak. And that will, of course, help us mitigate any further cost inflation. So that's important for us to be even more streamlined. Long term, we have had a strong financial development growth wise, of course, as you can see, going by every year more than 10%, part of course, from the pandemic year and 13%, increase versus LTM Q2 versus previous years LTM. We also see now an increase in profitability. So we have a 1,295 EBITDA LTM and also EBITDA is increasing once again. So a quarter and sort of also the LTM development with which points in the right direction, where that's promising. And also of course regarding cash flow, profitability is one part of cash flow. Cash flow in total has been positive, and we have increased cash flow from operating activities of SEK 386 million compared to SEK 345 million for the second quarter. The investment activity has been according to plan somewhat lower in the quarter and during the half year since we have reduced the establishment of new stores, we are rather focused on upgrading and moving stores during the quarter and the first half. We had 37 new store openings in 2022. So we saw an opportunity to actually focus more on upgrading and moving stores in this second quarter and half year. That has also helped us reduce investments also compared to last quarter a year ago, we do not have the same kind of investment activity in Ostersund. We built up our production facility last year. So according to plan, we're moving -- we have reduced CapEx, which is good help us cater wise. It's important to note that we have paid our dividend, SEK 253 million during the quarter. And even though we've done that, we have a stable net debt IFRS 16 and of SEK 2.95 billion, and that's very stable compared to year-end, although we have paid dividends, of course. And this IFRS 16 net debt is, as you know, that includes the effect from these contracts for permits and so forth. So strong cash flow in addition to good development of profitability and sales. By that, I hand over to Martin again.

Thanks, Per. Yes. To summarize then, the key findings from the quarter, very good for us to see that the sales growth continues to be strong and that we are able to translate that into, as Per mentioned and even better growth in our earnings. So promising to see that during the quarter, all 4 segments both continue to grow and improve the EBITDA. Strong cash flow during the quarter from continued operating, strong cash flow and efficient investment allocations. We're achieving the financial targets. Good to see that we are now above the 25% EBITDA, which we mentioned a few quarters ago was the plan to first get back to. Lifestyle an important one of the important concepts that we have in the market continues to be attractive for consumers despite the economic uncertainty. We're actually seeing the churn being the lowest in the measurable period since 2020. Which is very good. We're seeing good customer retention. We're also seeing the efficiency initiatives, both in terms of store operations and also cost control, translating to strong EBITDA profitability. Our initiatives to meet consumer needs changing slightly through a focus on lower price points and price guarantee is paying off. We're seeing good customer traffic. And as we said, the cost restructuring program 1.0, has had an impact and most importantly, we're seeing that we're continuing to gain market share, grow the number of lifestyle subscribers and being able to maintain them. And that translates into good performance and a good outlook going forward. With that summary, we open up for a Q&A session.

[Operator Instructions] The next question comes from Veronika Dubajova from Citi.

I have three, please. One, just curious pair, obviously, given where the margin is already in the first half of the year, what your thoughts are around seasonality, is there anything unusual we should be factoring in as we think about the second half? Or are there any unusual expenses or mix that we should be bearing in mind. I'm just looking at where you are year-to-date versus the expectations. I think sense has for the full year, and it would certainly given the strong performance year-to-date, implies some pretty meaningful margin deterioration in the back half of the year, which has not been the case historically. So that's my first question. Then my second question is on the new cost restructuring program, the 2.0 curious should we be reading this as a sign from you that you expect the inflationary headwind to remain elevated as we head into 2024. Any initial thoughts on the size? And what are some of the areas that you are exploring here? And then I have a follow-up after that, but maybe we can get these 2 out of the way first.

Yes. I try to answer I hope I got -- I will -- answer sort of all aspects of your questions. Otherwise, please remind me. So with the gross margin yes, I mean there is -- yes, is the seasonality in the second quarter, and that's nothing new. That happens here because the [ sam ] season affects the second quarter very much every year. But it differs from year to year, of course, but that's why it's important to compare second quarter with second quarter. That's one thing. That being said, I mean, we -- I mean, if you look at the components of that gross margin, we have had higher purchasing costs due to the inflation environment. But we have acted upon this from the end of last year, as you may recall, we waited with price adjustments and we took measures at the end of last year, and this has been necessary and such actions has, of course, helped us to mitigate the purchasing cost increase. We also have mix effects. And of course, the lens subscription effects to some extent, not very much, but it has a lower gross margin than the group in total. But we like the lens the -- contact lens subscription business anyway because it's quite OpEx efficient. So it's -- but it's -- if you look specifically gross margin, that's a negative mix effect. But otherwise, I would say -- I mean, not give you forecast for the full year. But I mean, we -- last year, we had -- we didn't take any action during which impacted Q3 regarding price adjustments. As you know, this started in Q4 last year. And now we have a process where we act upon these in a very precise way. That's a difference between now or last year and now, I would say. But -- so I mean -- otherwise, it's difficult to speculate on the inflation development. We are not -- maybe you're more an expert than we are recording the general inflation environment that's quite difficult to forecast, of course. If you look at the cost program, I mean, when we say -- I mean we need -- I mean, although we cannot make forecasts on inflation -- how the inflation will develop in the world, but we need to be prepared for continued high inflation. So that's why we -- and interest cost, of course. So that's why we are adding this 2.0 cost program in addition to the 1.0, which we have communicated, which is developing according to plan. That 2.0 program is I mean, structurally, it's quite similar to the 1.0. I mean we -- the 1.0 contains most element of OpEx where personnel cost is one important part. But when we look at all small details in the -- that make up OpEx. And that's what we're going to -- what we are doing here as well. We have identified -- I mean, we have learned during the 1.0 process to how to identify even more areas that we could be somewhat more efficient. And we are -- I won't say we are digging somewhat deeper. We'll look at new areas and which will affect most part of OpEx, I would say, by personnel cost is one area but not the only area. It's has begun, indeed, and it will give effect 2024. But it's ongoing. So that's why we will choose not to communicate the effect at this stage. And it's very much to balance out future cost increases in case the inflation would continue -- inflation rate will continue. Hope answer some of the questions at least hope that.

Yes. So I actually -- my question on the margin was not really on gross margin, but it was on EBITDA margin. If I look at you have a 24% EBITDA margin year-to-date. And normally, if I look at the history of your business, the second half margin tends to be pretty similar to the first half. In fact, in some of the prior years, the second half margin was better than the first half margin. And so I'm just looking at that 24% EBITDA margin you've delivered year-to-date and comparing that to sort of the '23 that I think something has my question was really, is there something unusual this year about Q2 or something unusual about the second half of the year, that means we should look at that historical seasonality in terms of margin progression to be there.

No, I would say well, I it's basically the second quarter -- I mean, this is obvious, and we have. But therefore, I repeat it, of course, that might not remember, we took costs of 30% plus, I think it was like SEK 34 million in Q4 ahead of the 1.0 Q4 2022 as sort of preparation, preparation costs, these weren't -- I mean, this didn't -- these weren't qualified as sort of 2 one-offs because within adjustment EBITDA or I mean, they affected all parts of EBITDA. But that being said, we said that these were costs that we took in Q4 2022, around '24, if I remember right, so that we could deliver efficiently on the 1.0 cost program, these SEK 34 million will not appear again this year. That we have said several times, and I repeat that, and that is, of course, you could look at that as being unusual then if you want to. And then if I may just add one thing, Veronika. As Per mentioned during the financial deep dive, we opened more stores last year compared to what we've done this year so far. So there are sort of fewer stores in the immediate initial ramp-up phase, which could theoretically have reduced the EBITDA margin slightly. So that's also a difference better last year.

Okay. No, that's very clear. And actually, that was going to be my final question for you, Martin, which is I know you're sticking to the 90 stores between 2024 and 2026. But I wonder if you can give us a little bit of your thoughts on the 2023 store opening number. And what you think that might look like? Obviously, you have pretty good visibility into your plans for the rest of the year. So maybe just give us some steer on what the number we should be expecting for 2023 in terms of [ period ] that's my final question.

Yes. As again I mean, generally -- I mean, we said that the first half would be a period when we look more at upgrades and moving stores or the new stores. If you look at the second half, I mean, we have more stores in the pipeline that we'll be opening. So I mean it's reasonable to assume that there will be more store openings in the second half. Some have already started actually. And that being said, we want to be -- we want to act in a smart way and not opening stores just to reach a certain number. Whenever we see that it's a better business proposition for us to focus on moving or upgrading stores that of rushing and opening a new store just to get a certain number of stores. We will choose what is most commercial and attractive for us at each point. So we want to rush or sort of dramatically increase the number of store openings, '23 just to reach a certain number. We do what is smart as for the business and for our customers in and as a whole. But I repeat, we have somewhat more stores in the pipeline now in the second half than we had in the first half year.

[Operator Instructions] So I hand the conference back to the speakers for any closing comments.

Well, thanks for listening in. We look forward to meeting you next time. Bye-bye.

Thank you very much.