Good morning, welcome to the Desenio Q2 report. If you want to ask a question, you can write it in the message board on the webcast. Analysts will be able to ask audio questions. Today, I'm pleased to present CEO Fredrik Palm and CFO Kristian Lustin. Speakers, please begin.
Thank you very much, operator, and welcome everybody to Desenio Group's Q2 results presentation conference call. With me today, I have our CFO, Kristian Lustin. Presentation materials are available on our website, and a Q&A session will follow them as usual. Page three, please. During the second quarter of the year, we continued to experience a challenging market with a decreasing online demand for affordable art. As a result of this, we decided to take necessary measures to adapt the business to the current market conditions. Therefore, a cost savings program was implemented to ensure future profitability and cash flow. Our focus now going forward will be to not only defend but also strengthen our current market shares in Europe and continue our path of expansion in North America.
We still believe that the North American market has great potential for us, and the plan is to be breakeven in terms of cash flow in Q2 2023. Next slide, please. The cost savings program was implemented in June and is set out to reduce costs of SEK 32 million on a yearly basis. The full cash effect of these reductions is planned to be reached during Q4 this year. A non-recurring cost save program is taken in Q2, now, 2022. Next slide, please. Now, let me turn more in detail to the Q2 performance. Net sales decreased by 31% to SEK 183 million . Gross margin increased compared to the previous year and now amounts to 83.1%. Adjusted EBITDA margin decreased to -4.6% compared to 11.9% in Q2 last year.
Active customers, the number of customers who completed an order during the past 24 months increased by 4%. Slide seven, please. Despite the weak market mentioned earlier, we see a relatively strong performance for Desenio Group. By looking at the search trends for two of our most important markets, so Germany to the left and U.K. to the right, we see that we either follow or outperform the overall performance of the market most of the time. Next slide, please. Comparing Desenio Group to a few of our biggest competitors, we see that we either maintain or increase our share of voice in Germany and the U.K. Share of voice here is the share of searches for the brands. This is a good indication of demand for the different brands.
This indicates that Desenio Group is maintaining or increasing market shares in this challenging market situation. Next slide, please. Conversion rate for the Desenio sites has historically been rather stable, as seen in the upper graph. However, as we also see in some previous quarters here, comparing to last year, we also see a slight improvement. The traffic on the other hand has decreased during the quarter. Next slide, please. Looking at the gross order intake, we see the same declining trend as last year during the second quarter. However, we're still 45% above Q2 2019 pro forma. Next slide, please. The sales development during the quarter differs quite a bit if you look at the different geographical segments. The net sales decrease in the Nordics was 24% compared to 32% in core Europe.
Then in the segment, rest of the world, which is the vast majority in North America, here we actually saw an increase. The operating margin increased in both of our largest markets or segments, both the Nordics and core Europe during the quarter. Next slide, please. In this slide showing customer highlights, we see that both the traffic and orders followed the same pattern. Traffic decreased by 31% and the number of orders by 30%. With that, I will now hand over to Kristian to go through the financials more in detail. If we jump to slide 14, please.
Thank you, Fredrik. In the following slide 14, we will take a closer look at some financials. As Fredrik mentioned, net sales decreased 31% in line with the lower activity in our markets. However, during the quarter, we had an increased gross margin, 83.1% compared to 81.1% in the last quarter, previous year. This is due to price increases, lower shipping costs, and exchange rates. Adjusted EBITA margin amounted to -4.6%, which can be explained by low net sales and that marketing and fulfillment costs were higher in relation to net sales. Next slide, please. Our cash flow from operating activities was positive with SEK 9.3 million, and the positive cash flow is mainly due to reduced inventory levels and repayment of earlier preliminary tax payments.
Our net working capital is in line with previous quarter last year. Slide 16, please. In the next slide, we see a further breakdown of the operating cash flow. The graph contains deviations from the cash flow statement in the financial report due to reclassification of tax-related items and internal balances. We have also separated the interest payment on the bonds. In Q1, we paid preliminary taxes for the year 2020 of SEK 17.5 million. Of these, we have now received back SEK 9 million, so net paid preliminary taxes in the year is SEK 8.5 million. In the graph, we have adjusted for a tax payment made in Q1 that was wrongly classified as current asset in Q1. The inventory was reduced with SEK 22.9 million.
For the asset and liability changes, if we exclude reclassification of internal balances, the positive changes is due to less accounts receivable due to lower sales, which is offset by reduced accounts payable, which is a consequence of lower costs, which is mainly fulfillment and marketing. I now hand over to Fredrik again.
Thank you, Kristian. If we jump to page 18, please. To summarize the second quarter of the year, we're still experiencing a weak online market for affordable art. We have, as a result of that, implemented a cost-saving program to better adapt to the situation we have currently. With that said, we believe that we're now better geared for the future, and we'll continue to focus on strengthening our market shares in Europe and continue our journey of growth in North America. Thank you all for listening, and we'll now be more than happy to take questions. Over to you, operator.
Thank you. If you wish to ask a question, you can write it in the message board on the webcast. The first question comes from Johan Roslund. How large are the costs for U.S. expansion in Q2?
Oh, yeah. All right. If you speak about the cost side, well, obviously, the variable costs are variable with the sales. I assume that you're after the admin and other costs of the OpEx here. We assume some SEK 5 million fixed costs or OpEx in H2 in North America. Oh, sorry, in Q2. I thought you said H2. In Q2, the OpEx was less than SEK 1 million, so around SEK 950,000.
Okay, thanks. We have another question from Johan Roslund. Assuming a steady state as per now in perpetuum, what would be the minimum cost base in this EBIT?
If you want to model this, you can assume a GM, too, so after fulfillment margin of just north of 50%. Then below that is of course the admin and other and the fixed cost. Then the question is, if we don't aim for any growth, what would the admin and other costs be? I mean, it's before the cost-saving program, that was around SEK 43 million-SEK 44 million per quarter. It will now, with the cost-saving program, take that down by SEK 8 million per quarter. Roughly SEK 35 million. If we wouldn't aim for any growth, it's a bit hypothetical because we could do that in different ways, of course. One would be to say that we wouldn't do the North American expansion. Another would be to say that we keep a steady state in all current markets, which of course would not be the case, I think.
Okay, thanks. We have two questions from Carl Deijenberg . With regards to the cost savings program you announced earlier in June and the one-off that you're taking during Q2, should one expect further one-offs related to the cost savings program, or was all of that taken now in Q2?
No, everything is taken in terms of cost in Q2.
Secondly, is on the cash flow effect with regards to North America. You're talking about roughly SEK 7.5 million in H2. Will that be fairly evenly distributed between Q3, Q4, or what do you expect that distribution to look like?
Yeah. The plan is to have the fulfillment center in the U.S. operational in the end of Q3. That means the majority of the cost will be taken in Q3, but most likely, the majority of the cash flow will be taken in Q4. Wouldn't that be right, Kristian?
Yes. It means that we have to build up, inventory investments, etc. , in Q3, and we have most of the revenue in Q4. Negative cash flow in Q3 and more positive in Q4.
Yeah, that's correct. The net cash effect will be more negative in Q3. Yeah.
Yes.
Thanks. The next question comes from Kristin Risthaus. Good morning. Could you please provide the non-recurring cost items in Q2, e.g., relating to the cost savings program? Could you please expand why fulfillment costs order have increased so significantly?
The non-recurring items is the reserve for the people.
That's just that everybody that was laid off in this program did quit in Q2.
Yeah.
We have of course most of them have 3- 4 month notice period in which period they will get salary. That's the cost that is taken in Q2. Just below SEK 11 million.
Thanks. The next question comes from Johan Brown . Okay, sorry.
Regarding fulfillment error.
Yeah.
Yeah, that's a good question and very relevant question. If we break that down, the increase in the fulfillment cost ratio from last year, Q2, and this year, the gap is filled by volume, which was lower this year. That accounts for 1.5 percentage points increase in postage or shipping costs, mainly due to extra fuel surcharges. That's another 2 percentage points. Then we have some energy-related surcharges in the fulfillment, like gas and electricity. That's 0.5 percentage points. We have a corrected IFRS 16 leasing cost that was actually too low in Q1.
2.8 percentage points here in fulfillment is a one-time cost that was actually should have been taken in Q1. The total effect of this reclassification here of costs is 3.9 percentage points in Q2. That's if you follow all that's a total of 7.9 percentage points. The ratio in Q2 was 34.8% - 7.9 percentage points. We end up with 26.9. In this analysis, if you compare that to last year, the fulfillment cost was actually lower this year. The reason for that is the lower cost that we have in fulfillment in Czechia.
Thanks. We have three questions from Johan Brown. The first one, how sustainable would you say the 83% gross margin is?
Well, that's not a good question. I mean, what we've seen the last few years is that we have been able to increase gross margin from roughly 81%- 83%. So far, what we've seen from price increases is that we have never seen any negative effects in terms of decreased conversion rate, for example, which would be natural if people would think the price is too high. We still believe that with the affordable art that we sell, the price points are quite low in a way. The most important is that you actually find something that you like. If you pay a couple of euros extra for that or not, we think that doesn't matter that much.
Second question from Johan Brown: What can we expect in terms of the inventory position during H2?
The inventory will increase as it always do in the autumn before the high season in Black Week. It will go up from early September, late September and forward.
Yeah. We can say that also, if, again, if you wanna model this, I think historically we've had inventory levels on average of around 5% of sales. Going forward, with more fulfillment centers, that will increase slightly. That's just a hint of where you can model the inventory levels.
Thanks. The last question from Johan Brown: Is it possible to get a status update on your view on the current leverage levels and the plan for the bond?
Yeah. Well, the status update on our view, well, our view is of course in line with everybody else's view that the leverage level is much higher now than for what we planned when we took out the bond. The bond matures in December 2024. There's still quite a long time until it matures. We of course are thinking about different scenarios.
Thanks. The next question comes from Andreas Jaufer: Can you please provide a month-by-month development in terms of, one, visits, two, orders, and three, average price realized? I'd be particularly interested in the June exit rate and how that compares to 2019.
I think we won't talk about the monthly development here, but we can say that since well the whole year the trend has mainly been pointing downwards. Q2 is always the lowest quarter for us. Normally in Q2, a normal Q2, which I think the last, the most recent normal Q2 was in 2019. 2019 and the years before that, usually the three months in Q2 are quite even in sales. Could be that June is slightly weaker, but quite even. This year the trend has been downwards, so April was considerably higher than June.
Thanks. The next question comes from Stefan: Could you talk about changes in your marketing mix and also elaborate a bit about what you're seeing in the influencer side?
Yeah. The influencer side, if you start with that is of course an important part of a marketing mix. It doesn't necessarily have to be influencers, but the top funnel where we inspire people. 'Cause in surveys we've done, we've seen that around 1/3 of our orders actually derives from people being inspired, and then it's affordable enough to buy quite spontaneously. So what we see in influencer marketing and what we've seen the past year or so is that the actual reach is declining. Of course that can have different reasons. That could be, well, different reasons. One is that the platforms, if we speak about Instagram, for example, that could be that Meta is actually changing the algorithms.
They haven't communicated this, but it's not too far-fetched to think that they want to take part of the paid side of influencer well all the influencer marketing. The latest news around that is that they are launching their own influencer platform. We haven't seen it yet, but that's a talk in the market. That could be positive, I think, because if that would work as ads do, for example, it would be a much more accurate and data-based pricing. I think for the influencers, the world is changing now. The prices will come down to align with the actual reach that influencers actually give now. For us, that means that we'd need to work with more influencers or find other top funnel channels.
Yes. Sorry.
The marketing mix historically has been roughly 50% top funnel, so influencer for example, and 50% search. Now it's leaning more towards search.
Thanks. We have another question from Stefan. "Can you please provide an update regarding the effects of the distribution center in Czech, and what savings you have seen so far from this project?
Yeah. If you could follow the fulfillment breakdown I did in the previous question here, you could say that with the Q2 volumes, the savings so far is around half a percentage point. The reason for that being, well, not being higher is that currently we have the Poster Store volumes, the European volumes outside of the Nordics in the Czech warehouse. During Q3, we will relocate the total groups volumes outside of the Nordics, well, the European volumes outside the Nordics to Czech. Also of course that there has been a startup period where the efficiency is increasing. We still haven't reached the full potential.
Thanks. We have no more questions at this time, so I hand the word back to you, Fredrik and Kristian, for some concluding remarks.
All right. Thank you very much operator, and thank you everyone for your time and questions. We'll be hosting virtual digital roadshows over today and tomorrow, and we look forward to speaking with as many of you as possible during this time. Please don't hesitate to reach out to us with any further questions. Speak soon and have a great summer.