Welcome to the Rugvista Q3 2024 conference call. For the first part of the conference call, the participants will be in listen-only mode. During the Q&A session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to the speakers, CEO Ebba Ljungerud and CFO Joakim Tuvner. Please go ahead.
Thank you very much for that introduction, and good morning everyone. Nice to see so many of you here for this call. This is our quarter three call, and also my first as CEO for Rugvista. My name is Ebba Ljungerud, and I have our CFO Joakim Tuvner with me here by my side. We will have three parts to this call today. First, a business update, then we will go through the financials, which you will do, Joakim, and then last, but of course not least, we have a Q&A. To kick it off, let's go straight into the business update. The market climate. The consumer sentiment we feel has improved slightly during the quarter. Germany continues to be very tough, and as you know, that's a big market for us, but the Nordics especially look a little bit better.
We don't necessarily see so much change in the purchasing structure or purchasing patterns yet, but we still see this as a positive sign for the future. It also means that we need to be quite flexible in following the markets where they develop and where we invest in marketing spend, etc., to match the customer. If we look here, you can see the consumer confidence. It has improved slightly, especially in Sweden, which is the top one, and France is keeping at least stable, a little bit up. Germany, as you see, is still very, very low. That's not a huge change from the last quarter. We also, as I said, we have price-conscious consumers, and we also see this because they tend to trade down.
So basically what that means is when they come in on our site through an ad or through an email, we see a tendency to enter on one price point and then trade down slightly in what they decide to buy. Moving over to our net revenue. In the quarter, it was quite affected by AOV, which means average order value. Our net revenue was almost SEK 145 million, and that's compared to SEK 160 million last Q3. That's a 9.3% drop versus last year. And the organic net revenue was also negative on - 7.1%. The average order value went from almost 3,200 to 2,950. So that's an almost 7% drop from last year. So this is, of course, a very driving part in the drop in net revenue. As I wrote in the report, we're very aware that this is a drop that we need to stop.
We have been really good at driving orders, and we are very good at driving new customers, but we can't fully make up for the drop in AOV only through that. So we need to work a bit more structurally on the AOV going forward, and that will definitely be a focus area for us. If we move over to the order count, the growth in 2023 was very high compared to 2022. So this year we actually dropped compared to last year, 5.3%. We totaled 68,000 orders. But if you compare it to Q3 2022, it was actually up 36% this year. So it just proves that we have fairly tough comparables from the last quarter, and we will look at new customers. We had almost 50,000 new customers in Q3 this year, which is a drop of 8% versus last year.
And then you have seen this slide before in the presentations. This is the first chart to the left describes our assortment, and you can see that there is, if you look at the very light gray bar in the bottom, you see that there is a slight increase in the absolutely lowest cost segment, but we are fairly stable if we look at the whole offering. So the drop, when we talk about the drop in net revenue, comes more not so much from what we have offered, but more from the drop in order and also the average order value. And of course, as I said, we will focus a lot on average order value going forward, which also means that we will look at the customer journeys on site and how we present our assortment.
Then if we move over to the EBIT, that was affected by one-off costs. We have a very stable gross margin over time, and this is something that we balance. So it's on a good level to cover all our costs, but it's also not pushed too high to have a too expensive offering out to the customer. Our marketing efficiency improved by 2%, which is very good, especially for this quarter. That really comes from three factors. The marketing percentage tends to fluctuate over time, but we have seen a drop if you look at the rolling 12 for some time. We have, first of all, we are working a little bit differently with our channel mix. If you look at the sessions for this quarter, you see that the sessions on site, so the numbers of sessions on the site have gone up quite a lot.
That's partly because we have focused on pushing higher up in the funnel. Basically means that we get more customers in. The conversion drops a little bit, but bottom line, it looks better. We also, and this you've heard about before, but we have, since we switched the site more than a year ago, we have worked very consistently with organic growth and SEO, and that continues to help us. And last but not least, we are working much more actively with our customer base today to communicate with everyone and give them great offers. And that also helps with the marketing percentage. Looking at the EBIT itself, it was SEK 9 million compared to SEK 18.6 million last year, and this is 6.2%. There is a one-off cost in this, which has to do with Michael, our former CEO, leaving the company. So that has affected the result.
Then if we look forward, we do have a very strong balance sheet, and that gives us opportunity to drive our strategic agenda. The first thing is, of course, that we are now in the middle of Q4, which is our peak season. So we did spend time and also, of course, money in investing in our inventory. So we have a great offering to the customers when they come onto site. And then you have heard about our office and warehouse move. This is progressing well. It's a very big project for us, and it's a very important project for us. This is, of course, for us to enable future growth. It will require investments. So that's also why it's important that we have a strong balance sheet. And last but not least from this is, of course, that we continue to focus on our customers.
We are, I would almost say, customer-obsessed in Rugvista, and having come in and now working every day and operationally in the company, it is so true, and I really like this about the company, that people talk about the customer, we focus on the customer, and just to show you a little bit what that means in reality is we measure both NPS, which means Net Promoter Score, and we measure Trustpilot for every single customer who makes a purchase, and the Net Promoter Score goes from - 100 to 100. We have consistently been over 60. 62 was the number for Q3, which is an excellent Net Promoter Score, I must say. We're very, very proud of this, and Trustpilot, the same. Trustpilot goes from zero to five, and we were on 4.7 in Q3, and this is also very, very strong.
So that, of course, doesn't mean that we relax. It means that we continue to work on our offer in terms of qualitative and beautiful rugs, and also that we continue to work on site and all the way from the first touchpoints in our marketing to make sure that we have good customer journeys and really funnel the customer to the exact rug that they are looking for. So with that, I hand over to you, Joakim.
Thank you, Ebba. So like Ebba earlier mentioned here, we had a very good quarter in the prior year with high comparables with plus 43% in order growth, and we got another plus 10% in net revenue due to the weak Swedish currency in a positive currency impact, and subtracting then the drop in average order, we had a 25% growth in net revenue in prior year, so I think we need to bear that in mind when we look at the sales performance for this quarter. Net revenue declined by 7.2% organically, that is excluding the currency impact, and 9.3% including the currency impact. Our largest segment, B2C, is down by 9.2%. B2B, though, is down by 17%, whereas we sold quite well to the trade partners, but we dropped in the smaller business segment, which more tend to follow the B2C.
MPO, which is mainly Amazon and our smallest segment, is up by 38.4%, driven by new campaign types. In the table to the right, you can see the regional development in our B2C segment. DACH dropped by 18.3% with high comparables. Nordics continue to perform better with a slight growth of 0.3%, especially Sweden standing out on the positive side. The rest of the world, which is mainly then the rest of Europe, we decreased by 10.5 percentage points. I move on to the next page and the gross margins.
Great.
We have a stable gross margin with a minor drop of 0.3 percentage points. The cost for customer shipping expenses had a minor increase as a share of net revenue. That is despite our drop in average order value and our improvement efforts to streamline customer deliveries is having a positive effect. If you look at that cost over the past three quarters, we have lowered the cost in every quarter, and that is despite the drop in average order. As a reference, the total gross margin for the first half was 62.2%. Last year was 62%, and the year before 62.0%. We have a stable gross margin. It can vary between the quarters.
If I then take a look at the segments there to the right, MPO, where it's negatively impacted, but we have this discounting, which is the new campaigns that we have tried out in the period, which gave a good impact on the top line. The B2B segments have more been aligned with the patterns that we see in the B2C segment, where a significant part of this segment is smaller businesses that buy from our websites and are not trade partners, and in B2C, we have a small margin improvement, so overall, a stable gross margin, so I'll move on to our cost ratios and the EBIT margin, and I just spoke there about the margin variances, so the same explanations then apply to the goods for resale percentages.
Bear in mind there that the goods for resale percentage is not exactly 100 minus the gross margin, as the other income is included in gross profit as well. In other external expenses, we have improved by 1.2 percentage points. This is due to our focus on marketing efficiency that Ebba mentioned, resulting in lower marketing costs. Personnel costs, we have had the major cost increase here by 6.6 percentage points. The organizational change here with accruals for the cost for the CEO departure was SEK 4.8 million, or equaling 3.3 percentage points. We also have these negative economies of scale when we decrease in sales, which explains 1.1 percentage points. The remaining cost increases, which we haven't split out, is the higher number of FTEs. We are nine more this year compared to prior year.
It's the transition of the staff at the Berlin office, which is included in there also. They were formerly on an externally hired, and now on our payroll in our German subsidiary. And also in this line, we have the general salary increases for this year. In other operating expenses, we have the foreign exchange effects on transactions and from the revaluation of assets and liabilities in foreign currency. And this effect was positive in this year versus negative in last year, rendering a 1.6 percentage points positive difference. Depreciation and amortization has increased versus last year. It is mainly driven by that we have started the amortization of our intangible assets, our e-comm platform, and we started that by the end of quarter two. Also rent increases, the indexing of the properties that we rent to three properties.
And also in the end of last year, we contracted a new warehouse in quarter four. So all in all, we are 5.4 percentage points lower EBIT margin. And for the variable components in the P&L, I think we have a good development. We see three consecutive quarters with a decreasing shipment cost. We also see that in each three of the quarters this year, we have a lower marketing cost as a share of net revenue for each quarter. And then we have the high increase in personnel cost, which is driven partly by non-recurring cost. If we look at the personnel cost compared to quarter two, we have a drop if we take out the one-offs. So I move on to the balance sheet, starting with a big item, inventory. So the inventory increased by SEK 30 million versus the year-end. And this is according to plan.
It's almost on par with prior year. And this is to have good levels for the high season now in quarter four. And as you can see to the picture in the right, we are at the higher side of the target range, but this is where we want to be when we start quarter four. Last but not least, we have an improved net cash position. We have been through the part of the lower earnings, which affect our cash flow, of course. And then on the working capital side, we came into quarter three prior year with quite high levels of inventory. We also sold a bit more than expected. And that made that we decreased in last year the inventory of 10 million versus in this year, we have a planned build-up of 10 million. And this is the main explanation why the working capital is changing.
On the cash flow from investing activities, we activated the development cost for the e-comm platform until end of quarter two in the balance sheet, but then this quarter this is expensed. All the development cost for the web platform is expensed in quarter three, and in quarter three we instead have the investment of fixed assets of SEK 3.5 million, which is part of our moving project where we moved to a new office and warehouse building in the summer of 2025.
Yes, that would be nice.
Yes. So the net cash position at the end of quarter three was SEK 137 million, like Ebba mentioned, an improvement of SEK 25 million versus Q3 prior year. So to summarize this, if we call it balance sheet part, so we have a good level of inventory. We have no interest-bearing debt to financial institution, and we have a good cash position. So I think it's fair to say that we have a very strong balance sheet, Ebba.
I do agree with you on that. And yeah, to summarize what we talked about, we continue to work on our strategic initiatives. This very much focuses on the customer and making sure that we continue to have our high customer satisfaction levels. We also continue to drive new customers and orders as we have done before, but balancing this somewhat more going forward with making sure that we stabilize our average order value. The customer journeys on site also continues to be a focus, especially building differentiators depending on where you come in and what you look for when you come in. And as Joakim mentioned, office and warehouse move, of course, continues. So net revenue is down 9% year on year, but Q3 was exceptional. We still see the price sensitivity in our customers.
There is, of course, a concern around the large Central European and to a certain extent the Southern European markets, but we do see a slight improvement in the Nordics, which we hope will continue going forward. We are very excited about the Black Month that we are in right now. We know that customers tend to wait with these big purchases until they see good discounts. Of course, this is something that we have been looking forward to and working towards. I would also like to say that it's been a very great first month as acting CEO of RugVista. It's really great to see the teams, how hard everyone works.
And I would like to extend a warm thank you also to Michael for all the hard work that he has done for the company over the years and also how he's helped with the handover to me. We are recruiting for a new CEO, and that process has kicked off. So you will, of course, hear more about that when we have more information to share. And I think with that, we are finished and we can move over to the Q&A, right?
Great.
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. The next question comes from Victor Hansen from Carnegie. Please go ahead.
Thank you, Operator. And hi, Ebba and Joakim. A couple of questions here. On the Outlook, Ebba, you mentioned early signs of an improvement. I'm wondering, is this based on your internal data, such as order data or anything else, or is it more macro-based?
It is based on both what we see in sales for the Nordics. There was a slight uptake, as Joakim shared, and also what we see in the macro trends. I showed a slide of consumer sentiment, and it is stabilizing and even slightly positive in the Nordics.
Okay, great. So it's a combination.
Yes.
And then, yeah, I saw that you lowered the marketing spend here by two percentage points of sales, and you mentioned it a bit here. And you pointed to increased marketing efficiency. I was hoping you could give us a bit more color on this and if we should expect these greater efficiencies to remain going forward.
I think it's important to point out that this KPI tends to fluctuate over time, so it's not a straight line, which is important to remember. Q4 tends to be fairly expensive because it's a competitive market. But over time, yes, we do see an improvement. It comes from three sources, really. The first one is our site that is much more SEO-compatible, I suppose you could say, since the shift that we made. And SEO is a continuous work, so it doesn't stop ever, but just the fact that we can work with it and continue to work with it helps us over time. The second one is that we are working much more actively and more focused with our customer database, especially the active customer database. We have tools today that are better at segmenting and projecting what customer wants, so to speak.
And then the last one is that we have shifted a little bit in our marketing mix. Not a huge shift, but a bit of a mix to meet the potential customers higher up in the funnel, which basically means that we bring in more people to our websites, which you can see in the sessions. Conversion drops a little bit, but if you look at the total number, we end up at a lower cost for the marketing. So those are really the three areas.
Okay, perfect. And a final question for me, if I may. Your AOV continued down year on year. I'm wondering, is this mainly from further trading down, or is it more from your discounting? Because I've seen some quite heavy discounting from your emails. And do you expect AOV to start stabilizing from here? Because it's been relatively similar now for between three and five quarters in a row now, depending on how you look at it. So is it starting to stabilize?
Joakim.
Yeah. It's not from that we are offering higher discounts. That is not why the average order is going. However, we see that consumers within the categories are trading down both to cheaper rugs, and one example of that is, for instance, that the volume in square meters actually goes down. We don't think people might not live in a smaller place, but they actually trade down in size, trade down in price, and to a larger extent to seek to buy with the discounts. They hunt for the discounts that we offer. So it's not that we are offering higher discounts, at least not in quarter three.
Okay. Any comment on if you think AOV is starting to stabilize?
I think what you have, I would say that we recognize that it has to stabilize. So we have to work more actively with this going forward. So it is a focus area for us going forward. We don't want it to continue to drop.
Perfect. That's all for me. Thank you very much.
Thank you very much.
The next question comes from Benjamin Wahlstedt from ABG Sundal Collier. Please go ahead.
Hi, Benjamin.
Hi, good morning, Joakim and Ebba, and welcome, Ebba, to RugVista. I want to follow on some of the questions. In the CEO statement, you state you saw positive early signs for consumer confidence. And that makes me a bit confused as European consumer confidence has trended better since October 2022, basically. So I was wondering if you could be more specific about what signs you are referring to, perhaps internally then?
So as I said to Victor now, it's very much that we see that the Nordics are stable and even grow a little bit, as Joakim showed in one of the charts. I'm not sure exactly what page it was. And you can look at Europe as a whole, but as we are a portfolio company in the sense that we are in so many different markets, it is important for us to look at the individual markets. And when some of the very big markets continue to be negative, like Germany, that does affect us, even though maybe if you look at the aggregated level of Europe, it might show a different picture, if you know what I mean. So for us specifically, the Nordics help us to feel more confident in this, but we're not seeing it everywhere.
Yeah. May I add also, consumer confidence there, Benjamin, has improved slightly, but still at very low levels. Also, we looked at our biggest market, Germany, where the propensity to buy still is very, very low, and the propensity to save still is on high levels, and in particular, then when it comes to discretionary spend.
All right. Perfect. And then I was wondering if you could perhaps expand a bit on the AOV. What are some of the levers you can pull to improve the AOV from here? You talk about working structurally with the AOV, and I was wondering if you could be more specific. What does this mean, please?
It really means the flow in the company as a whole. It starts with the designs, of course, and then it's what do we push in our marketing, what types of products, what do you then meet when you enter the site, what are recommendations of other rugs on the site, and then the flow all the way to the checkout with what types of offers can we potentially add when you're in the checkout and when you want to pay. Sorry, so there is no silver bullet here. It's much more about reviewing every step of the way for the customer. That's how we see it.
All right, and sort of following on that then, it would be interesting to hear your thoughts on the conversion rate. It's 30 basis points lower year on year, roughly, and higher AOV might sort of impact that even more. Do you have any thoughts on that dynamic, please?
Yeah. It's very much due to the channel mix and the fact that we have changed our strategy slightly there to push higher up in the funnel, which means more people come into the site, but the conversion is lower. And as long as the total mix goes in the right direction, we are fine with that switch.
It has helped us to improve our score with Google, and that is also one of the reasons why you see a lower marketing cost to share net revenue.
Perfect. And then finally from me, I was wondering about your thoughts on the CDPO role. Is it not needed going forward, do you think, or what are your thoughts there on hiring?
I would say it's an extremely important role, but we have a very strong team in place who are working with that. So currently, they are filling those shoes in a really great way, I have to say. So I'm not saying we're not going to recruit a new head of design and purchasing, but we're not seeing a rush in that area. And considering we are recruiting for a new CEO, it might be that that's something that the new CEO will have to decide on when he or she enters the ship.
Perfect. Those were all of my questions for now. Thank you very much.
Thank you.
Thanks, Benjamin.
The next question comes from Johan Fred from SEB. Please go ahead.
Hey, Johan.
Yeah. Hi, good morning, guys. Hi, good morning. Welcome on board, Ebba. Thank you for taking my questions. First one on the organic growth. It declined 7% year over year. Could you elaborate on the split and drop between what's driven by price and mix and what's volume, please?
Yeah. And when you say volume, do you mean like square meters in volume or?
Yeah, units.
Units. Okay. I mean, you see that you can follow that if you look at the orders because it's not that we have a huge number of carpets for each order. So basically, one order, you can put equal to one item. So there you can see the volume drop, if you call it that, a bit more than 5%. And then the remaining drop comes from the average order. As goes with the price, it's not a major increase in discounting, and we have increased the prices throughout the year. In quarter two, we said that we increased with a couple of percentage points in the beginning of quarter two. And we have also made some minor adjustments on a certain collection. So there is a price element up in a few percentage points. And yeah, and then there you have the rest of the equation.
Is that answering your question?
Yeah, great. That was really yeah, yeah, yeah. That was really my question, how much was driven by price increases. Very clear. Thank you. And a follow-up on the current trading. You state that you are very excited for Black Month, and Q4, of course, is an important season for you. Thus far into the quarter, what have you seen in terms of consumer demand and purchasing behaviors leading up to the sort of campaign-heavy November and December? Are there any sort of consumers waiting until the Black Week, or are there any tangible differences between the regions?
So we don't disclose on this month, but I can tell you that we have a very strong lineup, both in terms of how our marketing material is looking and our channel mix. We also have a very strong lineup when it comes to our offering to the customers. On a general note, we know that these types of big investments that interior design articles are, they tend to come when there is a discount and people actually wait to buy. But we will talk more about that in our Q4 report.
Okay. Okay, got it. And the final one on marketing, sort of building on the prior question. How has the overall sort of market campaign activity developed during the quarter? Are you seeing any differences across regions there? And sort of how much of your or if it's possible to quantify how much of your lower marketing costs year over year are relating to your internal changes? And if any, how much is relating to an easing campaign pressure?
I wouldn't say it has to do with an easing campaign pressure. The big advantage of being a portfolio in the sense of portfolio of countries is that we can follow where we get the best return on investment on what we're doing. And the more knowledge we have and the more skill we have, the better we get at doing that. And that, in combination with this differentiated channel mix, is really what's driving it.
Yeah. And if you want, I can add you asked on the regional development. This is the work that is done weekly and actually daily where we put the money where it's best working for us. So it's really hard to say. It could be one week here and one week there or even days and weekends at different places where we focus. So it's really hard to give something general about the regional development there.
Okay. My question is really alluding to prior quarters. You have reported strong competition in terms of, yeah, competition for marketing, especially from Chinese players. I know for reference, Temu has been reported to have acquired roughly 30% of all Google ads last year. How has sort of that competitive environment in terms of online marketing developed?
I think it's fair to say that we are always in a very competitive market. So of course, in a specific market, one competitor can push prices in one way and different in another market. But overall, what remains our focus is to look at the ROI, as Joakim said, on a day-to-day basis. So we can also shift to, how to put it, work against our competitors, so to speak. Yeah.
Okay. Thank you. Those were all of my questions. Thank you so much, guys.
Thank you very much.
Thanks, Johan.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.
All right. We also have some written questions, right?
Yes, so I can go and read them. And I think we'll try to skip those that already been answered. I have a question from Alexander here. Can you elaborate on OpEx growth in 2025 and 2026 and also in comparison to revenue growth? Well, the short answer is no. We don't give forward-looking statements.
But we can say that it's, of course, something that we keep a very close eye on. And we want to make sure we balance the revenue growth and the cost growth.
Exactly, and also, we have stated that we will have one-off costs. We had those in quarter one, which is specified for the move to a new warehouse, and we'll be incurring some in the quarters to come on top of the investments that we'll make, but then, as Ebba says, we will, of course, monitor both personnel costs and other external expenses so that we are rendering a good profitability, then we have some questions about average order development. We have a question from Adam. We can take that because the question is, is that across the board, or is it a decrease larger in DACH? The answer there is we don't give those comments, but an average order in DACH is low, but we see a drop across the line.
Then we have a personnel cost increase in 2004. Excluding the one-offs, what should we expect going forward? Are you fully staffed for now for the foreseeable future? I think you can see when you look at the development quarter over quarter, you can see that it is quite stable now. And we don't see, of course, we will grow in smaller areas or certain areas where we need to, but we are not expecting to have big chunks of hiring going forward. That's the correct answer, would you say?
Yes, absolutely. And then we have a last question here from Emanuel Jansson at Danske Bank. Can you please elaborate on how you will improve the average order value, and don't you think the upper funnel strategy might negatively affect the average order value?
So I did elaborate a little bit on the improvement of the AOV. I think the important thing is to remember no silver bullets. It's very much a work that needs to go on all throughout the customer funnel or customer journey with us. And then when it comes to the upper funnel strategy, it might negatively affect AOV. I would almost say the opposite because what that means is that we increase the awareness of our brand over time. This is not either a short thing. It's more over time that more people see our brand, and we can also build on what the brand is with those people over time. But that's not something that you will see in a quarterly report like this, I would say.
That was the final written question.
All right. Well, thank you very much. Thank you all for the questions. And thank you, Joakim, for today. We will have our Q4 report on the 6th of February, so we hope to see and hear all of you there. Thank you very much.