Earnings Call: Q3 2021

Aug 10, 2021

Hi, everyone. David here from Stockholm. In Helsinki, we also have Robert Berning with us. He will shift the slides. Today, we're going to go through the Q3 report. We have the first the Group Development, then we're going to go through the segments then we're going to go through the financial and the market outlook. So if we jump into the first pages, mostly is continuing the strong growth. Net sales increased with 20.2 percent to EUR 82,700,000. We are, of course, very happy with that growth, mainly driven from new customers and we are continuing taking market share in all three countries. Sales in like for like was 11.6% in total, strong like for like in the stores came in at 10.7% and online with 14% like for like. We were meeting very high comps in the online part due to the COVID-nineteen impact last year. The group adjusted EBITDA increased with 13.3% do €7,300,000 in Q3. Adjusted EBITDA margin was €8,800,000 versus last year, €9,300,000 last year's Q3 cost structure was possibly impacted by the COVID-nineteen pandemic. And this year, quarterly adjusted EBITDA margin development was in line with periods prior to the COVID-nineteen pandemic. And Robert will go through this more in detail later in the presentation. Cash flow from operations was very strong and came in at €10,100,000 versus last year €2,200,000 Also here, Robert will go through the details. Something that is extremely important for us is, of course, the number of loyal customers that grow to 1,260,000, which is approximately 14% versus last year. If we include all the online verticals, including then the loyalty program we came in at 1,480,000 customers. So from a growth perspective and also from customers' perspective, we are extremely happy with the development. And the important also to mention here is that the Monster's underlying growth has continued to be very strong after the quarter. So let's move in and look at the growth drivers. One important driver for long term growth is puppies, and we are seeing all time high figures. Since April last year, we have seen strong growth in puppy registrations. During Q3, growth was 10% end second year growth, it's 26%. So we're meeting strong comps. But even though we're seeing these strong comps. We are seeing a high growth. And especially in July, registrations in Sweden increased with 21%. And in number of puppy, this was all time high with over 8,000. So from a puppy registration view, there is all time high figures. And the second important part is how many of these puppies coming into our system. And it seems like our concept is tailored for puppy phase and for pet parents. And most is getting much more than our market share when it comes to new puppy customers. And here you can see that the Q3 growth in new puppy food customers is 38% versus the registration that is 10%. So from a group perspective, we had the growth of 38% of new puppy food customers. In May June, we have had all time high levels and the importance of this is they will hopefully stick around in the system the coming 10 years. Next, more about sales. Net sales increased by 20 point 2%. Once again, a very strong quarter, 11.6% like for like, strong growth in all countries. Finland, our mature market, as we call it, had 13.2% growth. Strong growth in stores and a bit lower online due to that we were meeting very high comparison numbers last year due to COVID-nineteen, as I mentioned. Sweden, 20.7% growth. Here, strong growth in stores and also here a bit lower online, same reasons as in Finland. Norway, 51.9% growth, very strong growth in both stores and online. In the rolling 12 months, sales came in at €326,000,000 And per segment as in their strategy is that Sweden and Norway is taking a bigger share. And Finland had 44%, Sweden and Norway had 56%. So if we look in a longer perspective on next slide. So mostly this growth has been steady at 40% on a 2 year basis. All the important indicators supporting strong and sustainable growth are going into the right direction. We are constantly winning new customers. The average spend is going upwards. Customer satisfaction continues to stay on a high level and share our sales on our own exclusive brands is going the right way. And here we can see that the last four quarters, mostly this growth has in around 20%, an uplift since Q1 2020. If we look at the 2 year basis, has been a step change the last two quarters. So if we look at a 2 year basis, the growth has been 40% the last two quarters, come in from 30% to 35%. So we see that the trend is very favorable and stable and very strong at the 2 year basis 40%. So this takes us through margin and the profitability. So one thing that we want to highlight, of course, in this report is that we have been able to increase the gross margin even though we have extremely strong growth. So something that we are very pleased with is the uplift in the gross margin. The gross margin increased to 45.4% from last year 42.6% as a result of more efficient marketing campaigns. EBITDA increased with 13.3%, as mentioned, to EUR 7,300,000 with an 8.8% margin. It's a bit lower than last year, but it's also including about 3 100,000 related to warehouse consolidation. Important to point out here is that the comparison period's cost share what's atypical for a Q3 due to the COVID-nineteen pandemic. Quarterly adjusted EBITDA margin development in Q3 '21 was in line with periods prior to the pandemic. And we have also, in addition, had strong focus on growth, and that has been a bit impact on the profitability in a short term perspective. Robert will go through this later. Operating profit was 5.3%, an increase with 25.6% versus last year. And now Robert will go through Q3 EBITDA more in detail. This 29 this year's trend It's clearly kind of in line with the pre pandemic periods. And you also see that actually the Last year's pandemic actually had an impact on especially this Q3 quarter. Q3 is normally the quarter where we have the lowest profitability, mainly driven by Lower volume and also kind of a pricemix that is kind of unfavorable From a margin point of view due to the fact that the season is like that. So in that sense, You see that the Q3 last year really kind of stood out as an exception from this trend. If you look at the EBITA growth on a 2 year basis, we actually grew by 74% now in Q3 compared to 60% in Q2 and 77% in Q1, Which we are actually very happy about, also due to the fact that actually this quarter included some extra costs relating to kind of actions where we see that we have or kind of areas where we see that we can actually have a longer term impact if we now invest in a bit more kind of costs. This mainly relates To the ecosystem that we have been talking about for now a couple of quarters, we also increased marketing On a long term brand building and marketing a bit this quarter compared to the same quarter last year. And also one thing is that on a year to date basis, our EBITA margin is increasing As it was also last year. So we have a good trend there and which is actually driven by the scalable Platform we have in place and the strong growth that we see in the business. If you then go into the segments, Starting with Finland. As David already mentioned, Finland, we had a sales increase by 13.2%, out of which, 10.7% was driven by the like for like growth. I would say a very strong performance From our most mature market and driven by the same kind of areas where we have seen earlier, both new customers, increase in customer base, but also then a favorable trend in the average spend. Adjusted EBITDA increased by 7.6%, landed at 7.9%, 21.8%, Slightly lower than last year. But last year in Finland was one of the 2 countries in our group that were Kind of impacted from COVID-nineteen last year. So here, we also have very strong comparables. On top of that, actually, the situation has been fairly kind of the same as earlier also in Finland, meaning we continue to have a strong grip on the cost side. We have good efficiency and the scalability is there. In terms of the store network, we opened 2 directly operated stores in Finland. And also during the quarter, we announced that we had signed kind of I think or have signed agreements with all our franchise Stores in Finland to be taken over now during Q4. So more about that then in the Q4 report. Then if you go into Sweden to the next, Sweden also continued to have a very strong sales growth, 20.7%. Like for like was 10.2%. This year, we also had a Positive impact from the stronger SEK rate, but that has had didn't explain the full increase. The full increase the biggest part of the increase actually came from the like for like and from the development of the new stores. EBITDA also continued to increase compared to last year, Now 12.4%, 4,500,000 compared to 10.5% last year, 3,200,000 Driven by the same elements as earlier, strong operating leverage, increasing efficiency in marketing, campaigning And then a very high store efficiency level. Also in Sweden, We developed a store network. We opened 2 directly operated stores and acquired 3 franchise stores. And then finally, Norway, again, extremely high increase in sales, 51.9%, 21% driven by like for like growth, Slight impact from FX rate, but mainly then coming from the strong ramp up of the stores that we have opened during the Last year so in essence, very positive trend continues there, even though we start to have here as well Positive impacts from last year from the COVID-nineteen situation. That's especially visible in the increase in EBITDA, Now 16.3% compared to 15.7%. Last year was impacted But positively impacted by COVID-nineteen, our cost savings in relation to that. Also in Sweden, in Norway, store efficiency continued to be on a high level. And during the quarter, we opened 3 directly operated stores in the country. Then going into the financial position. Cash flow from operations, as David said, was Strong, SEK 10,100,000 compared to SEK 2,200,000 last year's Q3. However, last year, We had increasing inventory in order to kind of make sure that we don't have availability issues in connection with the pandemic, this year, we actually had an decreasing inventory level, which then released some net working capital And generated cash. Also Gearing was on a good level, 73.6% now compared to 61.8 End of the last financial year, net debt, SEK 112,800,000 out of which About SEK 76,200,000 was relating to leasing. Net debt in relation to LTM EBITDA was about 2% now. And the liquidity of the group remained strong, SEK 13,500,000 cash and cash equivalents in the group. Also investments increased now to 3.5% compared to 2.2% last year, mainly relating to the development of our Store network and also the kind of development of our e comm and kind of omni and data Processing capabilities. Then I hand over to David. Thanks, Robert. Thanks, Robert. And so, Muesti Group is well on track to reach the net sales and margin targets set in May 2021. Growth net sales to reach at least 500 at 2024 as be communicating earlier. Profitability, mid- to long term EBITDA margin at least 13%. And then the capital structure net debt in relation to adjusted EBITDA below 2.5%. And we also then have the dividend policy to pay dividend corresponding to 60% to 80% net profit. Well on track. So if we do a summary of the quarter. So sales increased with 20.2%, mainly driven from new customers. All three countries showed strong growth. More or less all the KPIs that we're looking at, the important indicators supporting strong and sustainable growth are going in the right direction. Store sales increased by 23.8%. Online share of sales was 24. EBITDA increased with 13%. And as we mentioned, the comparison period cost structure was atypical. We look more on the quarter before the COVID-nineteen. The gross margin that we are very happy with increased to 45.4 versus last year for 2.2%. And as we said earlier, mostly underlying growth has continued strong after Q3, and we are on well on track to reach the updated net sales and margin targets set in May 2025. So with that, I think we hand over to Q and A. Top line was good as expected. So first question is regarding the increase in group functions. You referred to I mean, there was warehouse costs That are one off of €300,000 But there was also investments into the ecosystem. And could you quantify these and perhaps indicate how much of that this is one off and how much is temporary How much is one off and how much is will stay there? Robert, do you want to take that? Yes, I can take that. So I mean, first of all, what it relates to is kind of about increasing personnel costs and other costs, kind of external services on that. Also as also said, we have also increase marketing this quarter compared to the same quarter last year. I think that impact was this Quarter was about 1.5 percentage points from as a percentage of sales higher than last year. And so that's about 400,000, 450,000. Then The costs relating to the ecosystem, they are I would say, I mean, in order for us to continue working with that, we need to have Couple of more heads to focus on it and some cost of it. So some cost also. And that part, of course, It's kind of something where we it's not temporary as such. It will continue going forward. But then Also at this stage, we have used kind of a consultancy that we see more as a temporary recourse. Exact quantification on that, it's a bit kind of even hard to say exactly how much of that Yes. I would say that from those costs relating to ecosystem, it's probably a split between 50 percent is temporary, 50.20 percent is kind of continuing. Then in terms of marketing, there this that we had now for about 4.5 percent of sales, that's clearly kind of higher than normal. And we normally actually have been even below 4%. So in that sense, that's temporary. Okay. Thanks. That's very clear. And then perhaps the other question Is regarding can you quantify the impact of the lower personnel costs that clearly at least I did not manage to capture into the numbers. How much lower were the personnel costs in Q3 last year compared to this year. I mean, if you you need to kind of look at cost from kind of efficiency point of view as we are also always increase in the cost base with the 20% sales increase as well. I think a good indication of the level All of impact from that is actually what we have on Slide 9, where you see that normally in 2019, Q3 was about 1 percentage points lower in margin compared to Q2. Last year, it was 1.2% higher than Q2 and this year 0.5% lower. If you would assume that it the Q 2019 was kind of a representative also for 2020, so that Margin would have been SEK 7,100,000 also last year, then the impact would be SEK 1,500,000. Probably that's a bit too high. It's probably a bit lower. So I would say that the impact there is could be maybe EUR 1,000,000 SEK 1,000,000 to SEK 1,500,000 last year. Thank you. That's very helpful. And the Geographical distribution of those. You said that it was mainly Finland and Norway. There was no impact from Sweden. No. Biggest impacts, we are clearly in Finland and Norway. Sweden, Sweden, we didn't see that much of an impact last year from COVID-nineteen. And the online sales growth in Q3, were you was it as you expected given the Tough comps. I mean, at face value, they look low, but clearly, the comps were very high. Yes, continue, David. Yes. I mean, I think, first of all, we were with the platform consolidation that we also had some impact end up meeting extremely high comps. So if you only look at the 2 year base, it looks much more stable. So it was especially April May last year where online was going sky high. Okay. Thank you. And then regarding Norway, I think you answered that question already. But Norway margin improvement has been quite strong, but this time or this quarter, it improved from 15 0.7000000000, 16.3000000000 year on year, and that's clearly a quite slow development, but it must be explained by the lower personnel costs last year mostly. Yes. That's exactly what he's explaining in. We are actually very happy with the development in Norway at the moment, and this ramp up continues to be very strong. Okay. That's all from me. Thank you very much. Thank you. The next question comes from Maria Ekstrom from Danske Bank. Please go ahead. Your line is now open. Thank you. Can you hear me? Yes. Yes. Okay. Perfect. Yes, I think Swann addressed Some of the things that I know as well. But then I mean, I think I mean the gross margin, obviously, I mean, was good in this quarter and up Significantly from last year. And I think I mean this I kind of confirms that you guys have you have invested in marketing, but I mean this Sales growth has not been done with like pricing actions. So just tell me a little bit if you could discuss About the like the gross margin improvement and how much is of that is, say, like the pricing conditions and how much would you put to like a Increasing share of the private labels. And what was behind the gross margin improvement in the quarter? I can take that. I can take that. So first of all, everything has to do with the number of registration of puppies that we talked about and also the type of customers that is coming into the system. Interesting is that we are able to serve and sell the products do a full price. We don't need to do campaigns. 2nd is that the mix has been favorable. A lot of accessories and also a higher share of sales of own and exclusive brands, if we look at those trends are going the right way. And then, of course, we have an impact of that stores has been performing very well and there has been a bit slower growth online. That has an impact as well, of course. But I would say that the overall is that the demand has been very, very high and we are able to sell to full price without any campaign. Okay, perfect. And then my Other question is on the your puppy customer growth. And obviously, you are exceeding the growth that we see in the market. And what is your strategy there then? I mean, how you get these new puppy customers? So is this Like communicating with the breeders or like what is your what has been like your winning strategy to get such a bigger share in these new puppy customers? Have it right. But first, I think we have launched a lot of new puppy programs. We have done a lot of content marketing. We have relationship and communication together with breeders. We're doing specific investment marketing also related to the things that we talked about. So we think it's a good strategy now to try to get as much of these puppy parents into the system and that will assure us a longer and stronger growth going forward. But it's a part of the ecosystem. It's everything about training and giving away birthday gift, etcetera. But also looking a lot in our data and see when the puppy customer is coming in, what do we do the 1st weeks, months, etcetera, to keep them sticky. But it's obvious that total concept that we've launched is working very well. Due to that, we are taking more than our market share. And then maybe finally, I mean, you talk a lot about the ecosystem, And that's like part of the report as well. Just thinking a little bit aloud here On that, do you see any the like would you need like new acquisitions to grow your ecosystem on this Be offering more services to best parents. And is that something that we should expect in I mean, in the coming years? Yes, so I think the there are some things that we can do internally, but of course, if the goal is to be all you need is mostly in the end, the one stop shop that can serve the pet parents with all the needs they have. I think we will see some acquisitions going forward in this specific area, we can't tell, but of course, we will have a problem to deliver everything internally. Okay, perfect. I don't have more questions At this point. Thank you. Thank you. Our next question comes from Jonas Haya from OB Financial. Please go ahead. Your line is now open. Yes. Hi. It's Jonas Salla from OP. Just regarding the franchise stores that are to be acquired in Finland. Could you please elaborate a little bit about the financial impacts on the Finnish business, I. E. To sales and profitability? How has the profitability been at the acquired stores? And what kind of synergies are you able to get from those? Shall I take it? Yes. So yes, yes. We now acquired 16 franchise stores. The kind of a sales Impact on those is about EUR 3,000,000 on a yearly basis. Need to remember that also prior to the acquisitions, they were kind of in our figures through the fact that they acquire a big part of their products from our wholesale from our central warehouse, and that was kind of a sales impact. And then, of course, also the franchise fees. On an EBITA level impact is about EUR 500,000 on a yearly basis. We are these are kind of asset deals. So what we are taking over is the store, and that also gives us The kind of opportunity to really, really kind of generate or actually transfer them do the way we want to have the stores also with all the systems and concept we have we want to have there, which means that actually the kind of integration will be very fast in terms of these stores. So €500,000 a year. And the Cost of this acquisition was about EUR 2,000,000. So kind of a multiple of a 4 is what we are paying for them. Yes. All right. That's clear. What about The channel mix outlook for Q4, share of online was at 24% in Q3. Last year's Q4 looks a little bit lower, 22%. How does it look going into Q4 this year? Yes, I can take that. So what we saw last year was that April May was extremely high growth numbers online and a bit opposite in the stores because of the COVID-nineteen restrictions. What we've seen is that we have lower comps that we're meeting lower comps say last year in the online parts, especially from yes, in this quarter, Q4. We believe that online growth will come up again to more normalized levels and that will also increase the share of sales a bit. What we need to have in mind is that we are getting more stores now also into the system in these franchise acquisitions and also that we are opening stores. So that will have an impact, of course. Okay. And finally about product availability and cost inflation, are you seeing any issues at the moment with those? Thanks. Robert, please. Yes. Availability, not any nothing kind of Significant. There are some delays in certain areas. We have tried to kind of be have safety buffers for those earlier already in order to make sure that we don't have any bigger availability issues. But of course, there are Certain products where we have it. Also, of course, depending on things that we couldn't foresee as to higher kind of Very warm weather this summer and so on. In terms of cost inflation, So far, no kind of a bigger impacts of those. We see as any as many other companies as well, we see that the freight costs From Far East are increasing. They have had some impact on our figure so far, but not very big. And still the our purchases in Asia are still a very small part of our sales. So I would say conclude that no significant price increase or inflations so far. But Of course, this is a thing that we are constantly following up. And of course, then if needed also consider what to do with our sales prices if needed. Okay. Thanks. That's all I have at the moment. Thank you. And as there appear to be no further questions, I will turn the conference to the speakers for any closing remarks. Okay. No more questions, and we thank everyone for listening to us today. Thank you very much.