Welcome to the Rugvista Q2 2024 Conference Call. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to the speakers. CEO Michael Lindskog and CFO Joakim Tuvner, please go ahead.
Thank you very much. Good morning, everyone, and welcome to our Second Quarter Earnings Call. And we're happy to see so many participants this time around as well. This is Michael, and I got Joakim here with me as well. Let's kick it off and with a quick highlight regarding Rugvista regarding Q2. I think overall, what we see is that our order growth continues at healthy levels, but that the market remains quite challenging from multiple perspectives.
I think we want to start off talking a little bit about the strategic initiatives we've been working on over the past couple of years and then the effect that we're starting to see of those. So, we still are able to maintain a very high level of customer satisfaction, which is quite good. We are also in a position to grow our order volumes more than double digits. And this is in a market where the consumer sentiment, albeit in some of the major markets improved during the quarter, but remains at quite low levels.
And we also see that the inflation has made the purchasing power of the European households quite weak. And also want to highlight the outdoor rug season, which primarily constitutes the second quarter, and where we saw more than a 50% increase year-over-year in the sales contribution from that subcategory. From a revenue perspective, we essentially were flat, minus 1% versus last year or 0.5%, actually, versus last year, organically, -1%.
The reason the net revenue was a tad bit lower is due to the decrease in the average order value, where the customer price-sensitive behavior is negatively impacting growth. On the profitability side, the positive thing is that the variable profitability, so the major costs associated with orders or sales actually decreased year-over-year and quarter-over-quarter. So the items part of gross margin in addition to marketing being the variable costs.
However, the EBIT margin was significantly lower versus last year, and to a large extent, driven by a one-off cost related to reorganizations as well as a negative outcome in the line item operation expenses, which is very much related to currency effects. To note also, of course, is that the second quarter is our seasonally smallest. And then, like I mentioned, we're quite proud and continue to see our high customer satisfaction ratings as something proving that we're doing the right things for our customer. So with that being said, let's do a few quick deep dives.
If we look at the strategic KPIs that we follow, in terms of customer satisfaction, market penetration, and attracting new customers, on the NPS and Trustpilot, we still maintained very, very strong ratings. Order count and new customer count both grew in the lower double digits, and despite, like I mentioned, the quite tough market conditions.
We see in highlighting a couple of markets here on this slide that the consumer sentiment did improve slightly, especially in Germany, and remained flat in a couple of markets, highlighted here by France, but still at low levels when looking at from a slightly longer time series. And on the topic of average order value, on the left-hand part of the slide, we want to highlight how our price group of mix offering has developed over time.
So essentially, it's showing, okay, what do the consumers have available to purchase from us by price group, article price group? And what we can see here is that we during the course of the last year have actually slightly increased our offering within the higher price ranges, and have remained relatively flat when it comes to our offering within the price range below SEK 2000.
Despite this, we see a clear and have seen during the past four quarters, essentially, a clear AOV, average order value decline, which is very much driven by consumers to a much higher degree, compared to historically, selecting the lower priced items. And then I think the order growth that we've seen during this period does reflect that we have an assortment that is attractive for the consumers we try to reach. And of course, we will continue to develop our assortment offering over time, and one of the key areas that we're working on.
And that being said, looking a little bit into the outdoor assortment, where last year was the first year we made a specific or concerted effort to ensure that we improved that portion of our offering. We did further improvements for this season, and you can really see the impact of those efforts, where we actually grew sales within this subcategory by more than, or about 50%-70%, compared to last year. So with that being said, let me hand it over to you, Joakim.
Thank you, Michael. As Michael mentioned here in the beginning, we saw a good order growth during the second quarter, but the drop in average order make us drop in net revenue 0.5%, or organically, -1%. For the business units, to the left in the slide here, our largest segment, B2C, is down by 0.7%, and marketplaces and other, which mainly is Amazon, is up by 24.8%. B2B declined 3.7% in the quarter, where the larger drop was in smaller businesses, and that is a sub-segment that otherwise often replicate the trends in the B2C segment. In the graphics to the right, you can see the regional development in our B2C segment. DACH dropped 1.4 percentage points, although with double-digit growth in orders.
The Nordics still performing better, growing by 8.6%. The rest of world, which is mainly rest of Europe, we decreased by 4.2 percentage points. So we see growth in the Western Europe, but a higher drop in sales in the Southern and Eastern parts of Europe. So, moving on to the gross margins. So we dropped the gross margin with 0.6 percentage points versus last year, but we improved 1.4 percentage points on quarter one this year. That came out on 61.6%. So the margin drop versus prior year was driven by a higher share of sales on discount, and the improvement versus quarter one this year was mainly driven by a general price adjustment that we made in early April.
In the report, we say that the price increase was a few percentage points. If we go to the segments, the margin decreases in all segments, and the main driving factor is the higher discounts this year. In marketplaces and other, the drop is a bit higher by 4%, and this is our smallest segment. And here we tested new campaigns during the quarter, which negatively impacted the margin, but as you saw, positively impacted the net turnover. The B2C and the B2B segments are with 0.6% and 0.7% drop, respectively, which is explained by a higher share of sales on discounts. Moving on to cost ratios and the EBIT margin. The second quarter is our low season historically, so cost increases and one-offs get a higher impact with that lower volume.
And I just spoke about the margin variances versus last year, and the same explanations apply to the goods for resale. We've had higher discounts than prior year. And bear in mind here that the goods for resale percentage is not exactly 100 minus the gross margin, as the other income is included in the gross profit. There is a 0.4% difference here. In other external expenses, we have improved 0.8 percentage points, and this is due to our focus on marketing efficiency, resulting in lower marketing cost, which was 1.4 percentage points lower. And as the total improvement was 0.8, there are also cost increases driven by expenses related to preparations for the move to a new warehouse and office in the summer of 2025.
That is a smaller part of cost increases, and then we have increased IT costs. Personnel costs increased by 5.6 percentage points. Organizational changes resulted in one-time costs of SEK 2.5 million. The remaining cost increases were driven by a higher number of employees, general salary increases, and the transition of staff at the Berlin office from externally hired, that were in the cost before, to employed personnel on our payroll. In other operating expenses, we have the foreign exchange effects on transactions from the revaluation of assets and liabilities in foreign currency, and this effect was negative this quarter versus positive last year, and hence sums up to a total of 1.1 percentage points cost increase. Last, depreciation and amortization has increased versus last year.
It is driven by rent increases, the new warehouse that we contracted in quarter four, and the fact that we have started our amortization of our intangible assets, our e-com platform. This also implies that as from now, and as from the next quarter, any further development cost from our e-com platform will no longer be activated in the balance sheet, but directly expensed in the income statement. The bottom line here is a drop by 7.3 percentage points in EBIT margin. Moving on to inventory. Inventory increased by SEK 20 million versus the year-end number, and decreased by SEK 25 million versus the same period close last year. During this first half of the year, we are building inventory to be prepared for the high season in the second half, and this is a planned increase.
If you look at the right, we are within our target range of carrying inventory between 17.5% and 22.5% over the last 12 months of net revenue. We ended the quarter with 21%. We move on to cash. Cash flow from operating activities decreased due to the lower earnings, but mainly decreased due to the working capital increase. The inventory buildup for the high season is one part of that working capital increase, a planned increase. Another is decreased accounts payable to supplier, which could swing in a short period like this. Cash flow from investing activities is mainly the investment in our new e-commerce platform, and that was somewhat lower than prior year.
So the net cash position, that you can see to the right here, at the end of quarter two, was SEK 138 million, an improvement of SEK 56 million versus prior year. And during quarter two, we paid a dividend of SEK 37 million versus prior year, SEK 31 million. And it's not in this slide, but our cash balance at the end of the quarter was SEK 155 million, compared to SEK 104 million a year ago, an increase by SEK 51 million. So all in all, we have a strong balance sheet, we have no interest-bearing debt to financial institutions, and we have a good cash position. So I hand over to you, Michael.
Thank you, Joakim. So a little bit of a summary and outlook. And I think the key message there is that we continue to focus on navigating the market conditions in combination with continuously improving our customer offering organization, and of course, here in the near term, also preparing for the peak season starting towards the end of Q3. And we are quite pleased to see that the efforts on our strategic initiatives are paying off with the outdoor.
We talked about outdoor, as we talked about, continuous order and new customer growth and maintaining a very high level of customer satisfaction. During the quarter, we also focused quite a bit on enhancing our on-site or web user experience in the web shop, in addition to implementing a new email marketing platform, which is intended to enable us to drive even more organic traffic moving forward.
Moving on to the second point, I think the one-offs, of course, greatly impacting the profitability, but financial position remains strong, and we are able to face the uncertain outlook from a position of strength, so to speak. We of course see that the net revenue was essentially flat and very much driven by the price-sensitive consumer behavior. And it's a combination of multiple factors, but of course a bit of downtrending within categories, category mix, in addition to a higher share of sales on discounts.
The variable profitability improving, and then, of course, are the largest cost items within that, within that metric, in addition to the personnel costs, of course, and that we stay efficient on the variable costs is very important because that ensures that. And once we get further order growth, that is something that will roll down all the way to the bottom line. EBIT was SEK 2.4 million during the quarter.
A significant decline, profitability-wise or EBIT margin-wise, versus last year, and to a large extent, driven by the one-off costs we mentioned. Worth noting, of course, is the dividend payout during the quarter, based on the AGM decision, SEK 1.8 per share. And, in looking a little bit out, looking into the future a little bit, we see that the outlook remains uncertain. The development in the large economies in Central and Southern Europe being especially difficult to predict
Despite that, we continue to focus on navigating those conditions, of course, developing ourselves as an organization, our customer offering, and preparing for the peak season, which we're very much looking forward to. And overall, we feel that we are. We continue to improve our ability to capture demand, and satisfy a larger share of demand. So once the purchasing power of the household returns, we feel that we are in a very strong position. So with that being said, I'll thank you very much for the attention and hand it over for any potential questions.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. If you are following the presentation via the web stream, you can ask written questions by using the form below the stream. The next question comes from Benjamin Wahlstedt from ABG. Please go ahead.
Good morning, guys. So a couple of questions from me. Firstly, personnel costs grew quite a bit in the quarter. Could you take us through the FTE increase and give us an indication of what functions you are strengthening at the moment, please?
It's across all parts of the organization. So, a little bit most parts, not all parts, but multiple functions. And a little bit of the warehouse functions with the order increase, we've needed a bit more resources there.
And then on the office side as well, where we've had a few increases, for instance, in the team producing content, since that has been a large focus area during the last year or so, and a little bit, yeah, in technology and so forth. So there's a few different functions as we continue to evolve the organization with close to a 50/50 mix between the operational side and the office side.
Perfect. Thank you. I also interested in the restructuring cost, specifically, you mentioned a figure of SEK 2.5 million, I believe. Could you perhaps break out the subcomponents of this figure? And do you expect any cost savings moving ahead from this restructuring? I'm trying to get a feeling for the sort of run rate cost base here.
So we had a reorganization in the purchasing and design with the resignation of the lead in that function. The second point, that's something we communicated via press release towards the end of the quarter, somewhere around that timeframe. And then we're also in the process of, we did a reorganization with our performance marketing team, where we're establishing that in the Berlin office, and previously those resources were in the Malmö office.
And then, all of those costs, or those affected, those costs were booked here at the end of the quarter, so those are off the books moving forward. So if you sum it up, you can say we have a SEK 7 million increase in personnel costs, and a little bit less than half of that is non-recurring costs, and a little bit more than half then is recurring costs.
Perfect. I've also thought a bit about your assortment split graph. You've been talking about downtrading for some time now, and I know it's a smaller share of rugs within the SEK 2000-5000 range. Could you talk a bit about this? Is this share of the assortment too expensive for bargain hunters, while being too cheap for enthusiasts? Or what's happening here, please?
And it's the draft, since this is a share of total SKUs, so the one number, and that wasn't a part of it, is the total SKUs available to purchase, and that has increased and primarily within the higher price ranges. So, with that being said, the number of items or articles to select from in this sort of, yeah, the SEK 2,500-5,000 range has remained relatively consistent throughout the period. We are, of course, continuously optimizing assortment and designs that we see aren't selling. They will be discontinued, and then we add new things for each season. So there will always be a little bit of seasonal variance, but that is the explanation to the visual aspect of that graph.
Perfect. Thank you. I, I wanted to ask one final question. I want to ask about your NPS score as well. Like 62 is still world-class. It puts you up there with, like, Apple and the likes. But the NPS score has been on a slight decline for the last couple of quarters. Do you have any comments on this at all?
Yes. We, it's something we, of course, are working on, on an ongoing basis, but, a large reason or the one of the large reasons for it, is that we've had off and on issues with a few of our carrier partners, where the service level expectations from our perspective, as well as, of course, the customer expectations or perspective has not been fulfilled. So that has been a major driver for that development.
All right. Fair enough. I'll get back in the queue. Thank you.
Thank you.
The next question comes from Victor Hansen from Carnegie. Please go ahead.
Good morning, Michael and Joakim. Couple of questions from my side. Firstly here, I'm curious about sales in your various geographies. So the Nordics performed much better than your other regions, and I'm wondering here, is this purely based on macro differences, or how would you explain the relatively better sales growth in the Nordics, and do you expect this trends to continue?
I mean, a big portion, of course, is the macros. What we kind of saw, when if we recall the sort of last 1.5 to 2 years, a little bit of a recession almost. We saw that the Nordic markets slowed down faster than many of the other markets in Europe. And now we're at least seeing that the Nordic region over the past couple of quarters have outperformed most of the other markets in Europe.
There are, within the rest of the world or rest of Europe, one or two markets that are still going quite strong. But that is the general picture that we're seeing in terms of the Nordics being maybe a little bit of a leading indicator. In terms of the lag between the Nordics and rest of Europe, it is still very difficult to predict.
Okay. Understood. And then the second question here: You mentioned strong sales for outdoor rugs. I'm wondering if you could quantify how large this category is for you.
It's historically has been a very small share of the annual sales, and we essentially doubled it, doubled it last year, and then this year also essentially yeah grew it quite a bit. So it's now a significant portion of the sales within the especially during the summer period or spring and summer period. We haven't given a specific number on the share of total, but it is a relevant portion of our sales, especially during the Q2 period.
And I think also one thing I'd like to highlight when it comes to the outdoor assortment. It's items that are suitable for outdoor use. It doesn't mean that they cannot be used also indoors. So we also did quite a few improvements to that portion on the assortment last year already. And what we could see is that many of the best sellers within that range continued to do well throughout the fall. So we see that the consumers also find them suitable for other purposes, especially in kitchen areas, is what we're seeing.
Understood. Very helpful. And a final question here. I noticed that your average order values increased slightly sequentially compared to Q1. But do you think that AOV has bottomed out or here, or how should we view this?
Yeah. Typically, we see that the average item values are higher during the fall and winter as there's a tendency for the consumers to buy slightly heavier rugs. So, whether it's bottomed out or not, difficult to say, but if one looks at it from a typical quarter-on-quarter perspective, we should see it increase at Q3 and Q4 compared to where we ended up in Q2.
Perfect. That's all for me. Thank you.
Thank you.
There are no more phone questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.
So we have a few written questions.
Do you want me to read it or?
Yeah.
Go for it.
Okay. Yeah, I'll. So a couple of questions from Emil at Danske. The first question is related to our perspective on AOV moving forward. And I think what we just talked with Victor about essentially answers that. So the next question is: How has development of the new domains progressed in terms of ranking high enough on Google to drive organic traffic?
And then whether that is driving the lower marketing cost to sales ratio? The answer to that is that there are new platform and work on and efforts to build and publish content is definitely improving our organic rankings, and a large driver of the lower marketing-to-sales cost ratio. Yeah, 'cause we continue to see a relatively intense climate within the paid traffic platforms, such as Google and Google paid ads and our AdWords and on the Meta platforms.
We have a question here from Adam: Do you experience that you have lost market share in DACH and/or rest of Europe?
No is the short answer. Then, there’s always nuances to that type of questions, but overall, we feel that we’re more than holding our own when it comes to the online share. There have been dynamics in the marketplace during the past year that we’ve spoken about previously, with specifically, of course, a very large and aggressive new market entrant in Temu that has been very aggressive across Europe in multiple product categories, including home interior products.
We have a question here from Steven: Given that the consumer confidence bottomed out several quarters ago, not sure we agree with that, though, how comes that you see the declined AOV now and not earlier?
Yeah, it is, of course, I think Sweden, of course, is a microcosm and quite specific in terms of how the household, yeah, discretionary spending is used, and that where a very high share of the sort of monies into the household goes out for bank loans and housing in general. And those, like you, like we all know, takes a while before a couple of quarters before those interest rates hikes actually affect, even though the central banks change the rates.
It takes a couple of quarters or more, depending on how the duration of the interest rate's affecting. And that's a little bit Sweden and a few additional markets that have that type of profile. Rest of Europe is very much where we're seeing in general inflation on many of the core necessities when it comes to, yeah, heating, food, et cetera. And that's, I would say, a big portion of the sort of lag we're seeing, that p eople, yes, are a little bit more optimistic about the future, but still quite, quite hesitant towards making larger single item purchases here now.
Okay. Thank you. So we have a question from Jonas Reed. Staff cost is up almost 25% year-on-year. Please be more specific, what these new staff will do to make your company better? How and when will this investment drive sales?
So we talked a little bit about that, where we have, of course, invested in our content production functions and organic channels. We are already seeing the benefits of that in terms of efficiency, especially. We're, of course, only in the early phases in terms of what we wanna do within these areas when it comes to customer-facing activities. And so I would argue that we are seeing the benefits of it already.
And also, if you've kind of followed the experience and content availability in our web shops, there's been a tremendous development in that area within the past 12-18 months, which is partly the new platform, but very much the fact that we have more resources to produce content.
We have one more from or two more from Jonas. What can you, in the current environment, do to improve the average order value? Have you focused too much on budget products, on-site displays, campaigns, and so on?
I think the topic in terms of growing AOV in an economy where the spending power is low is always difficult, and that's for sure. I don't think. If I start with the second portion of that question, have we focused too much on the lower end lower price points? No. I think is the short answer there. We've historically been under penetrated within that market segment, and during the past around about two years have improved our position within those price ranges.
And doesn't mean that we haven't also made improvements to the other price ranges, which we saw on one of the slides there. But in the current economy, the consumers have selected to focus on the lower prices and or the highly discounted items. But what can be done on the AOV topic, of course, ensuring that we display and merch on-site merchandising in terms of what we feel are relevant options for the consumer.
And we are working on topics such as average items per basket, and during the second quarter, an additional feature on that in terms of ensuring that we recommend anti-slips and carpet cleaners was introduced as part of the purchase journey. So we are also working on that aspect.
Here's the last question from Jonas: Please describe the marketing cost environment in Central and Southern Europe during this quarter versus last year. How are the usual competitors behaving on customer product price? Any new competitor in the region?
Talked a little bit about that both in Q4 and in Q1, and I think I wanna very much reiterate many of those topics, 'cause they have very much been part of the environment also here during Q2, and from a new, so the new entrant in the market is Temu, and I think anyone who follows online retail to a certain degree has most likely seen the efforts they've done over the past year to enter the European market on a very, very big scale.
And that has impacted the dynamics of the market, where of course many have reacted and reacted in two ways is what we've seen is that in the paid channels they've increased their willingness to spend both from a visibility and of course click price. In addition to having quite aggressive promo discount offers available in external advertising as well as inside the different web shops. And that is a little bit the dynamic.
Despite this, I think it's an environment where we've had to navigate this and still year-to-date deliver a lower marketing cost to sales ratio. And that is very much driven or based on the fact that we have a larger share of organic traffic and sales compared to last year.
So we have what appears to be, now at least, the final question. It's from Philip: So in the markets that are not as heavily impacted by pressurized consumers, how does the AOV trend look in those markets? Are you confident that the decline in AOV is temporary?
We're very confident that the AOV is affected by the price-sensitive consumer behavior, that is for sure. Then I think the important thing for us is to ensure that we have an assortment that attracts as large of a portion of the European customers as possible, and that people want to buy those items. And of course, that we have items priced across all relevant price points, besides maybe some of the very, very low ones.
And with that being said, yes, increasing AOV could be beneficial, but at the end of the day, we need to adapt to what the consumers are willing to spend and make sure that our order economics remain profitable and that our overall cost base and internal efficiencies and margin or variable cost profile adapts to what the consumers are willing to spend.
And that we can maintain profitable growth also in that type of environment, whether it's temporary or not, that is difficult to say, but it is something that we need to adapt to a large degree. Of course, there are certain things we can do to try to drive the slightly higher order value, but at the end of the day, if a household has the wallet or the budget to buy something for EUR 300 , it's very unlikely that they will end up buying something for EUR 700 . So, with that, was that it?
That was the final written question.
So, with that being said, unless there are any other questions, again, I want to thank everybody for the attention, and look forward to meeting and talking to all of you again for our Q3 report. Thank you, and have a good day.