Earnings Call: Q4 2020

Feb 4, 2021

Well, thank you so much, and good morning, everyone, and warm welcome to this call. Finally, the very first call for Nelig Group. I am hosting this together with David Granhardt, our Group CFO. And who am I? My name is Cristina Lucas. Pretty new to you all in this context. I joined Neligroup as CEO 31st March last year. And as Neligroup was born as of 6th November this last year, I now hold the chair as Group CEO. Looking very much forward to having your attention for a short period of time today to talk about the company that I have fallen in love with, Nelly. I will start off by taking you through the main headlines for this quarter linked to the split up of the group and the structure for the relaunch of Neli. I will follow by taking the opportunity to put the light on us and briefly share who we are, our strategy and our foundation. I will also present our ongoing relaunch program, including key operational highlights from that in the past quarter. David will thereafter take us through the financial highlights and results. And then I will give some closing remarks on 2021. Moving to Slide 2. The quarter marked the creation of an independent fashion brand, Nelly. We now have full focus on Nelly after Cliro left the group in October and CDON was listed on First North. We also changed our name to Nelly Group. We have the structure for the relaunch of the Neli brand and our operations with focus on our core and pave the way for our next journey. I am now the CEO of the group. I have a new team on board. And not only my team, but the entire business, we're gathering in the birth town of Nelly, and I would say the fashion and e commerce heart in Sweden, Poros. So moving to Slide 3, couple of words on who we are. We are customer focused and technology driven company that offers a vibrant world of fashion. We are a Nordic fashion brand with €1,300,000,000 net sales in the Nordics, close to €600,000,000 worth of sales in our own Nelly brand. And this position we have built over more than 15 years since the company was founded Imburoz in 2004. We are an inspirational online fashion destination. Back in the days, a lot of consumers flicked through fashion magazines to get inspiration. Today, we offer them on in our world, on our sites and in our app. We have more than 108,000,000 Nordic visitors, 1,300,000 social media followers, And they are engaged and committed and like to stay in our world, 94% completion rate on social media. So our consumers hang out with us, but they also form a very loyal base of consumers. We have 1,300,000 social media followers and 1.1 consumers or customers in the Nordics, and they like us. We have high net promoter scores and high engagement rates. And proof of the pudding of that is that 83% of our orders come from returning customers. So we have some really good assets in our brand and in our loyal consumer base. We are now taking all those assets and build on them through our relaunch. We are working with a renewed brand promise where we promise our consumers to always celebrate the Fab Her. We are also relaunching part of our operations, moving to an automated warehouse in Boros, so automation of all our logistics and optimizing all parts of the value chain, so throughout our operations. Some examples you will see in results from in the past quarter. So moving to Slide 4. This is our strategy in a one pager. We go to work every day to create and further build her most loved fashion brand. And we promise our target group to always be on point with a full head to toe look that isn't breaking her bank account and always celebrate the Fab Her. In our strategy, we have 4 pillars or 4 focus areas, starting off with the consumer. We call it NELI traction, where our ambition is to gain the love from our consumer. 2nd focus area we call the Nelly verse. It's all about the complete offering. So adding value to our consumers all through the offer, every from the site to the outfits we show and sell to the delivery. We measure that in sales. 3rd area, we call Nel Efficiency. It's about ensuring that we create value in everything we do and take costs low as share of our sales. Since we are a value driven company, Our 4th area we call Nelified and measure that through engagement rate with our employees. And I would also say with all of our partners and friends working with us, we want them to love NelI. The results we're aiming for is to gain shares in the Nordic. We're all saving for higher stock turnover to make sure that our stock is always fresh and improved profitability. If I move to Slide 5 and take us back to the quarter and some operational highlights in the quarter for Nelie. I talked about our strengths and our assets, one of them is our position in the Nordics, and we have put a lot of focus on that in the quarter. We show 4% growth despite a pandemic that we're in the middle of. We know that the fashion market and shoe market is in dramatic decline, and our position where we Our strong in party and nightlife has been hit hard during the pandemic. Despite that, we show growth in the Nordics. We're also the 3rd largest brand in Sweden and 2nd in Norway in our target group in the quarter. I also want to highlight the increased gross margin, and you see a positive trend in several of our operational KPIs in the quarter. We show higher efficiency across the value chain, Lower direct selling costs by 20% with higher efficiency due to several activities and process improvements and a gross margin that continues to improve this quarter with 3.8 percentage points. So if I go to the next slide, our lower return rate is another highlight that I would like to mark out. 5 percentage points lower in Q4 2020 versus 2019. And that's driven by a number of activities, but also events in the quarter. The pure fact that we're focusing on the Nordic Category mix, but also a digitalized process and exclusion of bad returners that heavily abused our return process. The 4th highlight is around our inventory turnover. We show 32% lower inventory in comparison to last year. We have a significantly higher inventory turnover, much thanks to new processes for purchase and logistics and actions throughout our organization to lower inventory. If we move to Slide 8, I hand over to you, David. Thank you very much, Kristina. Having been through the highlights of the quarter, let us take a look at the income statement. The income statement reflects Nelligroup. Previously, we reported 3 segments and Pirugrupp had the quarter separately. From this quarter and onwards, we report Neligroup as one group, including center functions, which will be integrated in Burrows. Net sales amounted to SEK 394,000,000. It's lower than last year, but it increased 2% in local currencies. Gross profit increased 18%, and we see the 2nd quarter in a row With higher gross margin compared to last year. In Q4, the improvement was almost 4 percentage points. EBITDA clearly on the positive side due to higher efficiency, focus on the Nordics, lower return rate And lower cost of central functions. The result of discontinued operations included a positive effect from the distribution of CDN in the quarter, Amounting to SEK 529,000,000. This is an accounting effect that does not impact cash flow or tax for the period And the capital gain does not impact equity. However, it does mean that the result of the tax for continued And the discontinued operations amounted to $509,000,000 Moving on to Slide 8. Cash flow during the quarter. The business had a positive cash flow during the quarter. This was mainly due to the seasonal pattern, which usually includes inflows in the second and the fourth quarter. This gave us a cash position of SEK 230,000,000 at the end of the year. As we leave the peak season, Next inventory levels decreased $45,000,000 in the quarter, and we see a continued good inventory turnover, as Cristina mentioned. We did not utilize our credit facility and have no interest bearing liabilities. Overall, we have a seasonal strong cash position, Sufficient for coming season and as you might know the coming warehouse automation is financed via Kessina. And now back to you, Cristina. Thank you, David. And on to the next slide, where I promised to talk a little bit about 2021, where we are in the middle of the start of relaunching Nelly, building on our core strengths and assets to create a profitable foundation. We're working to optimize our form, where core assets are data driven digital sales, influencer marketing, where we have been the pioneers and we continue to strengthen our position and fashion savvy purchasing and efficient operations. Culture is in its core in the work we do in 2021. We want to build on the winning culture within NelI, but gear up performance and result orientation. And we do that when we gather all of our functions in Boros and then hence also closing our Stockholm office. Needless to say, logistics is in the center of 2021. We are aiming to move our warehouse from Falkenbaj to an automated warehouse in Boroas during the summer of 2021. We not only moved to an automated warehouse, but improved processes and work on strengthening a sustainable value chain. I want to finish off with maybe the most important part of it all, and it's putting the consumer in the center of everything we do. We're relaunching the Nelly brand, making sure we celebrate the fab view every day, not only on a Friday evening, but even on a rainy or today, a snowy Thursday morning. And we do that with a much tighter target audience, 15 to 25 year olds in the Nordic, who have the need to feel fab every day. Thank you so much for listening in. And Thank you for maybe celebrating the Fabio. Our re launch has just begun. Thank you. Thank Okay. We've got a couple of questions coming through. The first is from the line My name is Kaite Ozlem from Habit Magazine. The focus is much on Herb, Fab Herb, but What about him? I wonder how Neli Mann develops and what's your plan for Neli Mann? Well, the core and the large part of our business is Nelly for her. So we have not communicated previously the split of the business between nelly.com and Neli Mann, but we have a clear focus on her. Do you want to develop it? The revenue for Neli Mann and the development? So the revenue for Neli Mann and for Neli.com, the split we have not communicated? No. Okay. Okay. Thank you. Thank you. Thank you. Our next question comes from the line of Nick Frome of SEB. Please go ahead. Your line is open. Thanks, operator, and good morning, everyone. I have to confess, I missed your presentation because I was tied up in another call at the same time. So sorry if I have to ask a few questions that you may have actually answered already. But here we go. You can hear me? Absolutely. Yes. All right. So I think starting out with sort of Q4 results, in a way, the first kind of More, let's say, clean NelI quarter reported. I was just going to ask you to start. So returns have been sort of an ongoing theme for Nel for many, many years, and they have been Certainly, going both up and down. And in this quarter, it was quite impressive improvement in return rates. And My question is really where do you think you should be in terms of returns as a percentage of sales? And yes, let's start there. A very good question. And this is an area that we need to constantly work with its part of the business model that we're in. The decline in return rate in the quarter derives from a mix of reasons, one of them being our focus on the Nordics with lower return rates in the Nordics. 2nd is category mix. 3rd is automated processes and then general improvement of the process of the return process. And 4th is that we've looked around 2,000 bad returners. I see. I see. Seems to be a little bit of an industry phenomena actually. I'm talking about Boost and others As well doing the same thing. Can I ask you, when you say category mix, is that more specifically relating to less Party dresses being sold in the quarter where presumably return rates are higher? Yes. I don't think it's presumably. It's in part the or occasion dresses per definition has a higher degree of return rates due to the nature of the category. Yes, yes. All right. Thanks for a very clear answer. A little bit along the same lines, Where do you think your inventory composition is? And where do you think inventory or stock in trade levels should be, either as a percentage of sales or in some other metric terms, please. If I start off, I'm looking at David to see what we have communicated previously. But if I just Start off by referring to our strategy, where one of our key KPIs is inventory turnover indicating that, that is a key area for us, and we are happy with the progress, both with the decline of inventory by 32% and the fact that we have a significant improvement of the turnover rate. And the reason for that is that we want to have fresh inventory to stay relevant to our consumer here and now. If that answers the question in a more general term. But the figures and the targets we have when it comes to absolute turnover figures is not something that we have shared yet. And I mean, it's the same as Most areas within the business, I mean, we're continuously working with operational excellence. And this is just one part of it that We will continue to work with this area, and we're happy with the progress, and we will try to improve every day. Yes. But is that the same thing to say that the I guess what I'm asking is the actual delta in Q4 Stocking trade levels, is that something we should expect sort of year on year going into Q1, 2021, Q2, etcetera, etcetera onwards For the full year as well? Or is this exceptionally sort of good Working capital management in this particular quarter that we're looking at right now. I mean, it's referring to the you referred to the working capital in the quarter. I mean, It's both a seasonal trend, I would say, that we have 2 quarters with higher inventory. So that's one part of it. But then you I would say that you can see the decline quarter over quarter In inventory, as we've seen before, as we took down the inventory heavily in Q2. So we're more focused on the inventory turnover. Right. All right. Let's move on. I don't know if there's a huge line The other questions coming up for North Bernd, but in interest of time, when I look at your disclosure, you're talking about direct sales costs as sort of separated from cost of goods, right? And my question is, yes, I assume then that within the direct sales costs, you would have items such as fulfillment costs, right? Correct. Yes. So my question is, would you care to give us an update on sort of fulfillment cost to sales Or some development here. And also would be very happy if you could So let us in a bit more on the planned for installation of the Order store system in this year and how you think that will actually impact fulfillment cost ratios? Yes. I tried to write down the questions, but I think there were 5 or 6 in a row. So let's see. No problem. But if I again start off and then David can continue. I'd like to start off with the targets of why we are moving our warehouse from Falke and Bair to an automated warehouse in Bauroa. And the rationale behind that are a couple. One is to create a more efficient and sustainable operations there through automation, but also by the pure layout of the facility. 2nd is to ensure flexibility in size of inventory. And third is to ensure quicker and more diverse opportunity for consumers to get delivery. So is that sort of gives you the rationale behind the move as such? But then back to the development in quarter when it comes to fulfillment as a part of direct selling costs. I mean, we don't give any breakdown specifically on the Fulfillment as part of the direct selling cost, but we can say definitely see that we've seen efficiency improvements in fulfillment during the quarter. And I mean, it's safe to assume that you expect a significant reduction in fulfillment Also once your order store solution is up and running, otherwise you wouldn't be investing in it. But could would you share would you like to share any sort of KPIs that you expect to provide out of these investments? I think we will have to come back to that. And I think, yes, it's fair to say that we're expecting a significant decrease. But if I would comment totally on direct selling costs. I mean, we're talking 20%. So of course, it has a lot to do with process improvement and the work that we have initiated when it comes up to gear up performance and be very clear on the targets and ambitions we've set throughout the organization. Yes. Perhaps just one final question on this particular line. Is there Also a corresponding decrease in marketing to sales in this quarter, which explains some of the 20% decline year on year? You don't have marketing in that line item. Okay, excellent. Okay, thanks for clearing that. Then we move on to the next slide, and I take the same question. How did marketing to sales develop in the quarter? Thank you for that question. I mean, historically, we have not Commented on marketing. Just to clarify, it's in our reporting below gross profit. So Okay. All right. Can I also just assume that the decrease in sort of private label share of sales Has more is probably linked to the sort of implications from the pandemic and the Occasional dress category developments? Or is that a sort of strategic change that we should be aware of going forward? Well, no, it's not a strategic change. I would say it's linked to mainly two reasons. You can add on, David, if you want to. One of them is our agile action related to the pandemic, where we put a very strong focus on our total inventory. And of course, the speed in external brands, we can be quicker to move both to put the gas on and to break. That is one reason. The other reason is that we are strong in part and location dresses in our own Nelly brand. And those are, of course, categories that have suffered as a consequence of the ongoing pandemic. Okay. Okay. Would you like to share any sort of target level for sort of the medium term outlook in 2022, 'twenty We use something like that in terms of your wished for private label share of total Neligroup sales. No, not at the moment. Okay. Okay. Then I think just I'm sorry? But we take the question as an input going forward. Yes. I appreciate that. Thanks. Final question on sort of Q4 results. The U. S. Dollar has been sort of quite volatile for all importers In reporting in Swedish krona for the past year, obviously. And I was just wondering if you comment on the sort of gross margin bridge. Is there any Specific impact from the U. S. Dollar in upstream sourcing that you would like to mention? I mean, the biggest effect we have on currency is more towards the At least in terms of sales is towards Norwegian krone. All right. All right. Well, I think I'll stop there at least for now and see if there's other questions. Otherwise, I may come back into the call. Thank you very much. Thank you. Thank you. Okay. There seems to be no further questions apart from Nick. So I'll reopen your line, Nick. Please go ahead. Thanks, operator. So just coming back with a few more final questions, if I may. Now going into 2021, obviously, Neligroup is now Neligroup and there will be some changes to Overheads and sort of previous central function cost lines, I suppose. What do you expect in terms of Costs or overhead, headquarter costs for running Neligroup sort of on a clean basis The quarter of the year going forward. You're referring then to the so called central functions that we Mentioning the Yes, David. Yes. I mean previously, we have said that we are on a €30,000,000 rolling basis last two quarters. I think we see in the report now that we are At a level of around 20 now, this will continue down. I mean, I will be leaving end of March. And so we'll the remaining of the People that working at the center functions. And these functions will be integrated in Boruas. So I would say it will continue to go down During the year, and I will say second half of the year, you will see Continued lowered central function costs, and we will report on it going forward. Or actually, we won't report Going forward, but It should be a rather significant reduction, of course. Yes. It will continue to go down. Yes. Okay. Final question. I know it's early days for you as sort of well, I mean, you by definition have always been listed or at least for a long time, but without your former sisters and brothers in CBN and Cliro. And I guess my final question is, Are there any discussions within the management team or on a board level to introduce sort of an updated set of Financial targets and objectives for Neligroup. Well, yes, there is a discussion just as well as a discussion around KPIs to share. I think this quarter is a mix of previous Kiela group and the Neligroup, and you can See that in the report as well that we've taken a small step into clarifying and giving as much relevant data as possible. I am sure that we will continue those discussions in the quarters to come. Yes. Looking forward to that. It will be very helpful. And I think if you consider breaking up SG and A costs into Fulfillment and marketing and whatever, what the other peers are doing in the industry, I think that too would be very, very helpful For us outsiders trying to analyze the company. Yes. I think I very much appreciate the input, and that's also part of the process now. We are I mean, thank you so much for giving your thoughts on that at this at the time period that we're in. Thank you for taking all these questions. Speak soon. No problem. Thank you. Thank you. Thank you. And as there's no further questions on the line, I'll hand back to our speakers for the closing comments. All right. Well, thank you so much both for listening in to the presentation and great for us to be in the limelight on our own a little bit today. And also thank you for some great questions. Food for thought for us going forward. Looking forward to Maybe seeing you again soon. Thank you.