Earnings Call: Q2 2021

Aug 18, 2021

Welcome to the Desenio Group Audiocaster Teleconference Q2 2021. Today, I am pleased to present CEO, Frederic Palm. For the first half of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. I'll now hand the floor to Frederic. So thank you very much, operator, and welcome, everybody, to the San Diego Group's Q2 results presentation Conference call. And a special warm welcome to new shareholders. So the number of shareholders Increased by more than 80% during Q2. And as usual, the presentation materials are available on our website and the Q and A session will follow at the end. So Page 2, please. So performance in the second half of Q2 was, As communicated on July 8, the disappointment. Still, I feel confident that the slowdown seen is temporary Caused by the abnormal effects when reopening societies. We now see Q3 moving towards More normal seasonality and customer behavior. And we're still well positioned to capture huge growth opportunities that lie ahead, Our medium and long term targets remain intact. So I will go through many of these things in more detail in a few minutes. But before I do that, I would like to quickly just give you an overview of the Sanrio, our story and the investment case. Next slide, please. So the Zener is today the leading online provider of affordable art. So we have successfully established ourselves in 36 countries with the latest country being Greece. And that really shows that Our tech based, data driven strategy and innovative unique product offering sets us apart from competition. The expansion has been done, while at the same time, growing our profits and generating significant cash flows, which demonstrates the attractiveness of our strategy and business model. And then as I mentioned, we are in a great position in the market to really capture the enormous growth that lies ahead. Next page, please. So now let me turn to the Q2 performance. So net sales increased by 5% And organic sales growth was negative 28%. Active customers were at the same time up 79%. Gross margins were at 81.1 percent. And adjusted for PONTO store, the gross margin for Decenio only was 82.5%. Adjusted EBITDA landed at 11.7% And that's mainly impacted by lower sales. Next page, please. So Q2 net sales increased by 5%, as we have said, to 266,000,000, But organic growth was minus 28%. So we guided for negative organic growth already in our Q1 report on the back of very challenging comparisons and reopening effects. However, as communicated in our market update, July 8, The sales performance in the last 5 weeks of the quarter was strongly impacted by greater than normal seasonality due to the ease of COVID-nineteen restrictions. Therefore, it's tough to truly compare against the previous year Since the strong results of Q2 2020 benefited from COVID-nineteen related restrictions such as lockdowns. And if we dive into the U. S. Development, So the recruitment of local team is still ongoing. It's still a bit delayed due to the travel restrictions, But we hope to sign a general manager for the U. S. During Q3. And the U. S. Sales have followed the European trend. But what is the underlying growth? It is much higher than average. We have Actually, 49% growth in the U. S. In Q2 and well, only then minus 10% organic growth. And for July, you guys showed 58% growth, and We're back on positive organic growth already in July. If we then look at the gross margins, So they were 81.1 percent and 82.5% adjusted for Post Store. And the reason for this is that the sourcing synergy effects has not reached its full effect yet. And we also had higher than normal campaign activity during the period in order to generate more sales. In addition to that, we also have some extra costs For environmental certificates and also somewhat higher freight costs from Asia. I can imagine here that to mitigate the Somewhat higher freight costs and also somewhat higher material costs for wood. We have increased pricing of frames with approximately 10% across the board on average from mid July. And The lower sales volumes in Q2 have impacted adjusted EBITA, which ended at 31,000,000 with a margin of 11.7%. And as I mentioned, margins, In particular, we're boosted by restrictions and lockdowns in Q2 last year. And I'll explain why It was not only the top line, it was also the margins. So we relocated the warehouse in the end of Q1 last year, and we couldn't ramp up our warehouse operations Fast enough to cater for the COVID inflated sales volumes. So we actually had to pull the brakes by running no discount campaigns during the majority of Q2 And also cut down on marketing. For example, we cut declines in marketing Q2 last year by 50%. And running no campaigns Means that we have higher average order value, and that makes all cost lines below that More efficient, such as fulfillment and marketing, which were all lower relative to sales. And therefore, I think it's easy to understand when bridging the margin difference from Q1 this year. So the adjusted EBITDA margins in Q1 was 22.7%. But then due to the lower Volumes in Q2, the difference was roughly well, first, the gross margin, 1.2 percentage points Fulfillment, 0.5 percentage points. And that's because we fulfillment is The majority of costs in fulfillment are variable with sales, but we have some fixed elements there. And then we have the operational marketing. And when I say operational marketing cost, I mean that's Excluding the amortization of the Post Store customer database, which is around SEK 8,300,000 per quarter. So excluding that, the actual marketing spend we had in the quarter, that's another 2.8 percentage points. And then admin and other, excluding one offs, that's actually the largest difference. That's 5.9 percentage points compared to Q1 this year. And the reason for that is, of course, that we have a Fixed cost base here of around SEK 43,000,000, SEK 44,000,000. And in short term, that's fixed. So with lower sales volumes, the relation to sales is higher. Next page, please. So again, we have successfully expanded our customer reach. We were now active in 36 countries, and active customers increased by 79% to 3,500,000. Saksvig since then increased, well, only by 3% to SEK 22,500,000 And capital orders grew by 13% to 5 So more customers have chosen the same as their destination point for affordable art, Which shows that our continuous efforts deliver best in class experience payoffs. So The one thing that we I think we do well is that we have a very strong creative process, We are creating new unique in house art, and that continued during Q2. So with the trend tools we use and our data driven creative approach, we launched several successful design drops during the quarter. For example, Ocean Breeze and Stay Golden at Postersdal and Studio Zest, a new colorful photo collection at the San Diego. And the in house design studio we have also launched an art collection, Including 5 different design teams in close collaboration with the Senvios ambassadors from Sweden, Germany, the UK, the Netherlands and France. Next page, please. As you can see to in the graph to the left here, the Zenu is capitalized with a very limited need for CapEx investments. But then cash flow for the Q2 is normally the weakest for the year. 2020 was again an exception due to COVID-nineteen. But historically, cash flow in the Q2 has been around 0. So we carry payables for periods of considerably higher sales levels, which means high levels of VAT and accounts payables. And due to lower than expected Q2 sales, this had an extra negative effect in Q2 this year. So cash flow in Q2 was impacted negatively mainly by a EUR 12,000,000 increase in inventory, And that's a direct result of lower than expected sales in the period. And we had Minus €61,000,000 change in current liabilities, of which €41,000,000 is lower accounts payables And 28,000,000 are sort of ordinary VAT payments. And we ended the quarter with a net debt position of €970,000,000 Next page, please. So Page 8. So if you now dive a bit deeper into what happened in Q2 and how the start of Q3 is trending. So as you know, we saw a deep dip in demand and sales from the last week of May. We actually saw stable conversion rates throughout the dip, so it was a traffic issue. Both demand and sales trends looks more positive in July, and the current trend He will take us towards more normal seasonality during the second half of Q3. Next page, please, Page 9. So these graphs show brand search volumes of Google in Germany, as an example. And this is then for from the top left, it's the Sanyo, Fosustor, Unique, Wayfair, West Wing. And then in the bottom right, that's the search volumes for the keyword poster, Which is the most important keyword for us in Germany. And so The graphs are indexed individually, which means you can't really compare the compare them in absolute numbers, But it's to compare the trend for each brand's search volumes. So I did this really to illustrate the patterns that are still very similar between the different brands. So all brands experienced A dip in late May that continues throughout June. And in July and this is, I think, very interesting year. So in July, There is a difference between affordable and art focused players such as the Cerneo, Posture and Janique and players with a broader selection of furniture And interior design, such as Westwing and Wayfair. So the vehicle is actually stronger for the pure play Affordable art players such as Sesernia Prosthesis or NGENIC, as you can see in the graphs. And next page, please. So Page 10. So if we put the graphs together, it looks like this. So again, very similar index search volume development With solar recall for affordable or pure players such as the Savio in July. Next page please, Page 11. So this graph shows the top graph is the conversion rate for all the value websites. And the bottom graph is sessions or traffic for all the same new websites. So as you can see here, the conversion rate has been fairly stable over the period, which and Meaning that the website is still performing as it should and visitors are still ordering the products. And then the logo graph, as I said, that's the traffic to websites, and that's really what has been affected during Q2. So the traffic usually decreases in Q2 from Q1 due to seasonality. So Q2 is normally our low season. And again, Q2 last year 2020 What's very special when traffic increased due to lockdowns and other COVID related restrictions. So for Q2 this year, we expected negative organic traffic growth compared to the previous year, But not to the extent that we have seen. Next page, please. So Page 12. So this year, 2021, started with strong order intake, As you can see, that black dotted line. But then as you all know, we took a deep dive in Q2. Due to reopening of societies accelerating the normal negative seasonal trend, But then we see a positive trend for July and that continues and accelerates in August. Next page please, Page 13. So if we look at July, which is the Only full month we have so far in the Q3. So July net sales It's trending upwards. And this is for the scenario only since all the graphs have been the scenario only. So this is also the scenario only. So July net sales trending upwards with being 23% higher compared to June. And as a comparison then, this number well, the increase from June to July was in 2017, 8% 2018, 7% 2019, 28%. That was special because June that year was lower than normal, and that's why we had a much stronger July. And the reason for that was Weather. So if I remember this right, in June 2019, there was a heat wave throughout Europe. That also, I think, almost quite severe in some countries. And then as you know, 2020 was a very special year with Q2 being very strong. So we actually saw a decline from June to July last year. So we have reported sales growth of 6% in July and negative organic growth of 22%. And as a comparison, in June, the organic negative growth was 45%. There's only half of that in July. So July, much better than June, but Still clearly affected negatively by the easing restrictions and the opening of societies. Then from the 2nd week of August, the positive sales trend is considerably stronger and more robust than in July. So we're back on organic growth month to date. And it currently looks like we're moving towards more normal customer behavior going into the second half of the quarter. And after the market fluctuations caused by COVID-nineteen related lockdowns and lockups, We are convinced that the new normal post COVID shopping behavior will support the Cenu Group's continuous growth with trend and affordable art as a role. And the main reason, why we think that is that people will spend more time at home than before the pandemic. So next page please, Page 14. So this then brings me to our strategic highlights and the Post Store acquisition, which closed on December 16. Postal Store generated net sales of EUR 340,000,000 with an EBITDA of €69,000,000 in 2020. And the integration of PonsiStore is continuing well in line with the plan. So we still expect AMOL synergies to be approximately SEK 50,000,000 of which we will Realized approximately SEK 25,000,000 already this year. The plan is that both companies will continue to operate under their respective brands as they expand across Europe, the U. S. And Asia. Sil, this acquisition was strategical, and I see significant opportunities to share best practices in things such as marketing, curating affordable and great looking art That customer's love. Also, the semi group continues to attract driven top talented people. So maybe recruited Christian Justine as Street's Financial Officer, and he will be joining us during the fall. So, Christian is presently CEO and former CFO at R&B Retail and Brands listed on NASDAQ in Stockholm. And in June, we also welcomed Cecilia Marlowe, she's an experienced and growth oriented consumer expert. Sarah Koos, she is American and the founder of the very successful New York based Company, Swell. So they are new board members. And all these recruitments will bring much experience A strategic and operational competence to the group. And being a fast growing company with operations, As I mentioned, in currently 36 markets, the semi group's the semi group continuously improves our logistics and customer service. So next page, please. So as we have mentioned and also Press release earlier this year, the new logistics center in Bor in the in Czechia is under construction. So starting in Q4 or Q1 next year, December will initially handle deliveries to Europe's markets outside of the Nordic So we expect shorter lead times for the delivery, less environmental impact and reduced strategic costs with the strategic initiatives. So we expect to our main markets In Main Europe, 1 to 2 days shorter lead times. And then the salary cost In Czechia, it's approximately 30% lower than Sweden. Also, rent per square meter is Again, around 30% lower than compared to Sweden. And we expect Postage cost reductions of 5% to 15% for larger European markets compared to what we have today shipping from Stockholm. So next page please, Page 16. So if you look ahead, I still see a perfect match of a vast, very fast growing market and our outstanding business model that has proven its strength for More than 5 years of uninterrupted saw growth. So the global market for affordable art of frames It's estimated to be approximately €15,000,000,000 And online specialist, Sascha Sesenio, take market shares. And after the market fluctuations caused by COVID-nineteen related lockdowns and lockups, we're convinced that a new normal post COVID shopping behavior will support the Zenerg Group's continuous growth. And the main reason is that we think people will spend more time at home than before the pandemic. And as communicated on July 8, we have changed our short term targets Due to the weak Q2 performance, so The targets are well, we maintain the targets from that we communicated in July. So and those should really be seen also in light of And the Q2 performance in particular should be seen in the light of the semi group's track record, where we have grown sales from SEK 28,000,000 SEK in 2015 to close to SEK 1,300,000,000 pro form a in 20 20. And that is a CAGR of 115%. And also To put Q2 in perspective and compare it against Q2 2019. So Q2 2021 was up 70% from Q2 2019. So our persistent medium term targets are to deliver an annual organic sales growth of approximately 30%, While maintaining our adjusted EBITA margin of approximately 25%. Long term, we expect to reach up to 30% adjusted EBITA margin. And our goal is clear. We intend to maintain and grow the position as the leading online provider for affordable wall art in Europe. We see significant growth for continued expansion in Europe, but we're also making inroads to the U. S. As well as Asia. So we continue to invest in new and innovative ways to build even deeper relationships with the customers on existing markets across Europe, U. S. And Asia, while preparing expansion into new markets. While still early days, the opportunity to accelerate the U. S. Is very exciting. I will take this opportunity to thank you all on the call for your interest in the Sender Group and for the support that you're providing during our NASDAQ listing process. It means a lot to us. So that concludes our commentary on the results. And we'll now be more than happy to take your questions. So over to you, operator. Panm. Our first question comes from the line of Johan Brahm of ABG. Please go ahead. Your line is open. Thank you. Good morning, Frederic. A couple of questions from me, and I'll take them 1 by 1. So firstly, regarding the organic growth in August, We see that it's clearly improving. Has this been lumpy in terms of growth rates? Or are growth rates continuing to improve week by week? Yes. So that's correct. The 1st few days of August, We saw trading at approximately the same level as July. But after that, it has improved. And so the trend is Definitely pointing upwards. Great. Thanks. And regarding margins on This growth, how expensive has it been to return to organic growth again? If we compare So what we saw in June, the margins are considerably better. We In Q2 and June then in particular, we had high marketing costs in comparison to sales. So that looks much better now in Q3. Great. And then Also another question on this current trading topic as well. Are there any differences in the geographies That are worth mentioning any typical geographies that are driving this one. I what I've noticed recently or during the summer is that I think weather is affecting us more than normally. So normally, good weather equals, well, lower sales and opposite. When it's raining and cold, People spend more time indoors and shop more interior design. So this summer, It's been quite consistent, very hot weather in Southern Europe. Southern Europe has not performed as well as Northern Europe. But then luckily, our largest markets are in Northern Europe. So that can help me. Yes. Great. And then last Question from me regarding the new warehouse down in Europe. How large a share of volumes do you think you will be able to move down to that one? And you mentioned the salary strength and postage costs are lower. I guess what I'm looking for is the fulfillment ratio on an order in Germany, for example, before versus after the new warehouses live here? Yes. I think it's still too early For us to communicate exactly how much volumes and so on and when, because we're not going to be in a hurry To push volumes to that new warehouse, we do it in a safe manner. So With that, if everything goes according to plan, I would say that First half of next year, we will have considerable volumes Outside of the Nordics in that warehouse. But I am I'd rather come back later to communicate more about that. Yes, that's great. Those were all my questions. Thank you very much, Frederic. Thank you. Palm. That next question comes from the line of Christophe Lilleberg of Carnegie. Please go ahead. Your line is open. Yes. Thank you. My question also related to the Trading state and particularly so Slide 12. If you have organic growth now, as you said, in August, does that mean that sales in absolute Terms are back above the level you had in April May. It seems so if I interpret that graph correct. That's correct. Of course, we've only seen the first half of August So far, but well, it looks like the trend supports what you say. Okay. And also, you talked about the larger impact from Werder than before. Is there a risk here that the improvement you have seen now in the career last week maybe in better sales is driven by Colder and more rainy weather in the Nordics, could you say if you have seen an improvement in Southern Europe as well? I think generally in Q3, and That would probably also be the case this year is that weather development is in our favor because fall is coming in Europe And people spend more time indoors and care more about Home Decor. So the sort of The weather factor in Q3 will be in our favor as it always is the decision. But then, of course, I mean, Certain days or certain weeks, it could be spikes in that trend with that worse weather or better weather That could affect us short term, yes. Okay. But is that what you think you have seen now? Because it seems to have been a pretty sharp The improvement in the very last week here in August versus the quarter. Yes, that's correct. But It's also normal. Just to explain a bit the seasonal effects on us is that In Q2, we know that spring is coming with better weather and higher temperature sometime in Q2, But sometimes it's early and sometimes it's late, the same for Q3. So Sometimes, fall or the fall weather comes early and sometimes it's late. And that The sales sort of the when the sales trend gets stronger in Q3, That depends a lot on when the fall is actually coming. So to answer your question, we have seen in parts of Europe Weather going from very warm to rainy as we have, well, here in Stockholm today, And that helps our sales short term, definitely. Okay, very clear. Thank you for that. Thank you. And we've had one further question come through. That's from the line of Manuel Janssen of Danske Bank. Please go ahead. Your line is open. Thank you very much. Hello. I have my questions regarding the marketing costs. And where do you expect the marketing ratio to be in the future? And why doesn't you see a bigger effect on the top line numbers? Yes. So I don't want to speculate in future marketing Spend levels, but we so you know, why don't we see Larger top line effect of the marketing spend we had in Q2, was that the question? Yes. Yes. So I think the reason for that is The lock up or reopening effects that we have seen that in Many of our large European markets, for example, UK, who actually had quite strict lockdown, they went from that To opening up societies similar to France and similar to the large cities in Germany, That all happened in from end of April to end of May. So with that, people went from Being inside, to go outside at the same time as spring was coming or summer was coming, Which is also normally the has negative effect on our sales. So the lock ups Really accelerated that normal negative seasonal effects. And that's why we have difficulties Attractive customers, even though we tried hard with more marketing, with more campaigns. But I think a large difference Now well, the 5th July, but in particular now in August, is that Now customers respond to the activities we do with marketing and campaigning. Okay, perfect. Could you give me some idea what the marketing cost or the ratio was in 2019 year on year or the full year at least? Yes. It has been so 2019, it was Around 20%. Okay. Perfect. And just one last question. On the search Index Development, why do you think the pure players have been better upward trend lately than those sort of broader assortments? Yes. It's a good question. I Without any deep thoughts around that, I think that Selling affordable art or maybe more buying affordable art, you can be more spontaneous and react faster And then if you buy more expensive and also larger pieces of home decor furniture. So I think with lower icon values that we have, People can react faster both ways. Yes, sounds fair. Thank you very much. Thank you. Thank you. Okay. So it seems to be no further questions. I'll hand back to Fred for the closing comments. Right. Thank you very much, operator, and thank you, everyone, for your time and questions today. So we'll be hosting virtual digital roadshows over the coming days, and we look forward to speaking with as many of you as possible during this time. So please don't hesitate to reach out to us with any questions that you may have. We have a unique story to tell, So thank you for your time and for your interest. That's it for this call today. So goodbye for now.