Earnings Call: Q1 2021

May 12, 2021

I am glad and excited to be here today. And since this is our first earnings call, quarterly earnings call, we will the idea is that we'll go through 2 overall chapters with Chapter 1 being the a quick introduction, our business update, and then we'll go through the Niklas in financial updates in Chapter 2. If we move to the first slide, please, our second slide in the presentation. Just to kick everything off, I'd like to just do a quick summary. So Q1 was a period where we were really fortunate with very strong financials, and we made significant progress towards our vision of really becoming the center of gravity. And especially want to highlight, of course, our top line growth where we saw really serving as the engine. However, we do have to keep in mind that the comparables for Q1 2020, we're relatively weak and that rest of the year comparables will be a bit tougher. We also managed to achieve exceptional margins, to be fair, where we had positive category mix effects. We did improve on many operational efficiency topics Fik, that we've been working on in addition to the fact that just with the top line increase, we do get scale economics. And all of those factors in combination is what drove the exceptional margin profile. Then the main sort of challenge, so to speak, that year that we're facing and have honestly been facing is that we want to build our stock levels up, but haven't been fully successful in that due to the number 1, of course, the strong demand, but the ongoing supply chain challenges in India especially if it's hampering those efforts. And the issue, of course, with India is it's really twofold, where first, of course, we have the COVID effect where they've been forced to not around the facilities at full capacity. And second has actually been some impact from the sort of this global container crunch where getting container transfers it has been difficult. Despite these challenges, we continue to deliver very satisfied customers among those who actually buy from us. So that is, of course, very, very nice and something we that's, of course, our number one priority and continuously seeing the great feedback that we get it's really exciting. And as I mentioned, the strategic initiatives, DACH, of course, being the growth engine and we're seeing continued progress also on our Amazon strategy. If we move on to the next chapter and really with the business update. So we'll go to Page 4 then. Before we kind of kick off everything since this is our first call. I really want to introduce everybody to what our long term vision and what we're trying to achieve is really about. So we've defined our vision to really be the center of gravity for the European rug industry. And what that means is that at some point in the future when we want to be in a position where when a customer thinks about, okay, I need to buy a new rug, top of mind should be okay, I need to go to Rugged List and see what they have available. That's the kind of position we want to be when it comes to the consumer facing portion of it. But the vision also, of course, has an element of the other side of the on the supply side. So there we want to be in a position where every single supplier actually wants to work with us there. They regardless of whether it's a rug producer or it's a carrier, and they need to be they need to feel okay, rug vista is an account that I really want to win because these guys know what they're doing. They're market leader, category leader, all of those things. That's really what this vision is all about. And then we have, of course, defined a set of initiatives that we're working on in order to get to that to realize that vision and be it number 1, of course, being that we have seen and we do continue to see an opportunity to penetrate our core markets further. So that's what we're talking about here is really the big EU markets like Germany, like France and etcetera. That's where we see the next level of growth and where we, to a certain degree, have been historically a bit underrepresented. The second initiative that we're focusing a lot on is what I'm calling here, to showcase our assortment. And really, what this is about is the fact that a vast majority of what we offer and sell is our articles that we've actually produced or defined and then produced together with our producers and our articles that you can only find with from us. So we that you can only find with from us. And so we need to make that aspect more clear to those who come and visit our shops. So in terms of just how we present the assortment and making sure that the web shop is it has all of the usability features that you would expect from a modern web shop. And then I think the journey good to great is all about. We've done things quite well historically. Now we want to take it to the next level. We want to instead of trying to be the best to be an e tailer. We want to be one of the best or the best e commerce player in Europe. That means comparing ourselves to players like Zalando, Amazon, etcetera, and really doing everything at that level. And then finally, we do see that there is an opportunity to grow our marketplace business and that is specifically focused right now on Amazon, where we really see an opportunity to grow and leverage that quite loyal user base that Amazon has in the bigger markets like Germany and the UK. If you are a Prime customer and you have a tendency and that we see numbers on this that that most or a vast majority of all your online purchasing is done via Amazon. And in order to capture that demand, of course, we need to be on Amazon. So that's kind of the high level introduction to what we're trying to do here over the next few years. And then, of course, as an underlying theme is continue to ensure that we have high customer satisfaction ratings and use the data and technology to drive and fuel the growth. So if we move to the next page, please. We've identified here a set of KPIs to keep track of how we're doing on our progress in terms of becoming the center of gravity. And of course, like I said here, the first thing we focus on is customer satisfaction. So we have 2 different measures, the Trustpilot trainings as well as a net promoter score, which we started measuring early last year, so or during the spring of last year. And both of those values are, of course, outstanding. An NPS of EUR 60,000,000,000 which we achieved here during Q1 it's comparable to brands like Apple and Netflix, etcetera, and it's quite outstanding. The second initiative the second KPI is about increasing market penetration and a good proxy for that is, of course, by number of orders. So we continue we more than doubled our order count versus last quarter. And then, of course, we want to reach more customers. So the 3rd KPI is about attracting new customers and our customer acquisition count also more than doubled versus last quarter. If we move to the next page, we wanted to show a little bit of a deep dive in terms of where we acquire customers from a regional perspective. And as you if we start from the top left here, we have the DACH region, so the German speaking markets. We had 180 percent year on year growth during the period, which is tremendous and really highlights the fact that this is where we are growing the fastest and to be honest, where we also have the most potential because there are just more people there. And similar story when it comes to Southern Europe, which includes markets such as Italy, France, Portugal and Spain and also very popular populous markets where we see a lot of upside potential. So with that being said, let me move on to the financial updates and let's start on then on Page 8, where we focus a bit on the top line side of things, so the net revenue. As I mentioned, we managed to achieve a tremendous growth where we year on year in total grew our net revenue by 85%. If excluding the divested operations, we actually grew by 92% period over period. And all of the all of our reporting segments grew quite well. B2B, a bit below the other two segments, of course, and that's very much driven by the fact that a big portion of our B2B customers are interior designers and offline retail stores actually. And that's a segment that has not gone so well during the COVID period. And as I mentioned on the right hand side there, DACH being the DACH region really being the growth engine and that's very, very promising. Moving on to Page 9, focusing a bit more on our margin profile. We had really an exceptional development from both the gross margin and the adjusted EBIT. We almost doubled our gross profit, increased the gross margin by about 4 percentage points. The driver being the category mix effect in addition to actually having a lower discount rate this year versus last period. Add the and then in the middle, just breaking down the gross profit development across the segments. A similar story, tremendous growth in terms of absolute gross profit increase as well as the gross margin improving 3 to 4 percentage points across the segments. And then finally, the adjusted EBIT, we managed to reach right at SEK 50,000,000 representing a 24 point 2 margin EBIT margin percent and really the combination of improved gross margin as well as the operational efficiency gains and scale economic or scale effects from the top line growth is what contributed to that for those numbers. And just on the next page, on Page time we have a bit of a deep dive also on the line and cost line items. So here again, we see the good for resale, where we improved by 4.4 percentage points with the category mix and the discount rate reduction being the primary drivers. We the other external expenses actually increased if period on period, but that's it's driven by the IPO costs of about SEK 10,000,000. Personnel this is one area where we had where we benefited from scale effects. And then finally also the amortization and depreciation line item is also an area where scale effects came into effect. And the and this design item, of course, is mostly the usage rights amortization, so the facilities that we sit in and warehouse facilities, etcetera. And so finally, that gives us the adjusted EBITDA of 24.2, which is slightly above 8 percentage points, period on period increase, the EBIT even with the EUR 10,000,000 extra costs due to the IPO. The EBIT margin unadjusted, of course, then increased by 3.5 percentage points. Moving on to Page 11, a bit of a deep dive here into the topic of inventory. As you can see, we've actually our inventory on hand year on or period on period versus by SEK 37,000,000 and the right hand side is really the KPI that we keep track of internally and that's the inventory as share of the rolling 12 months net revenue. There we've gone from about 29% last year to about 13.5% this year and that is actually a bit below the ideal level we would like to be at, which is round about 20% plusminus a couple of percentage points. So that's where we stand on the inventory. And of course, as I mentioned, the challenges especially, I would argue, that we've had in with our Indian producers is what's driving that. And we've done a lot of work to try to secure inventory moving forward, but there is still some uncertainty in this regards. Moving to Page 12, taking a look at the cash generation, which is still very robust. Of course, with a strong operational performance, that's a natural effect when you have the type of margin profile that we do. So we, of course, more than doubled our cash flow from our operating activities period on period. And we have more than SEK 100,000,000 above what we had last year. So we're right now at €165,000,000 cash on hand. And that's despite the fact that we actually amortized our long term debt of €88,000,000 end of last year. Moving forward to Page 13, we have the net financial indebtedness, where we've year on year actually moved from a position where we had that net debt, positive net debt or yes, we were indebted, whereas now we were not, which is kind of short story on this one. And then moving to Page 14, before sort of summarizing and leaving the floor open to questions. I do want to remind also everybody and share our mid- to long term financial targets, which we've set together with the Board of Directors, of course. And our long mid- and long term financial target is to, number 1, to grow organically our net revenues by about 20% per year. We target to maintain an EBIT margin of at least 15%. And then finally, we will continue to invest resources into growth and developing the business and organization. In addition to that, we do aim to pay out up to 50% of net profits to shareholders. So concluding on on Page 15. We have as I mentioned, we had a very strong Q1 performance in terms of the financials. The growth trajectory it has been accelerating, but it was versus a weak comparable. The significantly improved margin profile was driven by the category mix effects, the efficiency gains and scale economics. That we do have a challenge when it comes to stock levels, which are below targets and something that we're working hard on in terms of trying to address. But of course, we are a bit left to sort of follow the COVID situation. Unfortunately, that's a bit out of our sphere of implants. And then finally, we do have a cautiously optimistic outlook for the rest of the year. The rest of the year comparables are tougher, especially with Q4 2020 having been partly influenced, we would argue, by the COVID travel restrictions that were in place across essentially all of Europe. However, we have seen that our initial Q2 numbers are promising, where we're delivering or seeing a growth well in line with our long term targets. And the fact that the offline to online migration has really accelerated that throughout this COVID phase is something we actually expect will be beneficial in the long term even that open up the floor to any potential questions. And our first question comes From the line of Frederik Iversen from ABG. Please go ahead. Your line is open. Thank you very much. Good morning, Mike. It grew in line with the financial targets. And I just want to clarify, is that including or excluding the divested entity? That is including so peer group performance. Yes, group. Okay. So organically, you grew even more? Yes. Excellent. And then a follow-up on that. I think in Q2, obviously, comps are getting more demanding. You grew 50% in Q2 last year. But And I would assume that there were some significant differences between the months. So I think it would be helpful if you could help us understand the comparables throughout the quarter, if that's possible. Yes, I think the what we saw last year was that the of course, March, that sort of the initial phase of COVID happened and things were quite crazy. People were buying toilet paper and paper in general wherever they saw it and etcetera. We, of course, did not sell those items. And so we saw more of the sort of spike in end of April and to a certain degree also in May, whereas the results in June were not outstanding. They were more to a relatively normal level. And then moving forward there, there were also instances in Q3 where societies opened up and then everybody kind of left their homes and did other things and shopping in general. So we had throughout Q2 and Q3, I would argue, relatively up and down demand actually. And then we'll see what happens rest of the year. Okay. So comp is getting easier through the second half of the quarter. That's good. And then on the gross margin, those are up slightly above 4%, as you said, and you mentioned mix and lower campaign levels as key drivers for that. Is it fair to assume that they affected sort of equally? Or did any of those two factors stand out? Slight overweight on one of them with the category mix being the more important driver versus the discount rate. Okay. Great. And one quick last one more for modeling purposes actually. But you mentioned that excluding Atlas Vista, you grew 92%. Can you help us out with the organic figure as well? So adjusted for FX too. Yes, we don't right now, we don't do the that fully organic, let's call it that. But we did I can say we had a little bit of negative impact actually of currency effects during Q1, but not a significant number. So that's kind of why we did not include this period. Got it. That's all my questions. Thanks a lot. No worries. Thank you. Our next question comes from the line of Niklas Ekman from Carnegie. Please go ahead. Your line is open. Thank you. Yes, a couple of questions, if I may. Firstly, on the inventory. As you said, the 29% of sales 1 year ago, now 13%, how quickly Do you think you can restore this to 20%? And also, India, you mentioned the problems there. What can you remind us the approximate percentage of sourcing that you do from India normally. Absolutely. In terms of starting with the first question, how quickly I mean, depends a bit on in terms of how quickly can we get to 2020 I would. There's multiple factors affecting that. Number 1 being, of course, how fast we sell. To add the then in terms of the other portion, we've worked very hard on secure putting in additional purchase orders. We have deliveries coming in. And but there's always a bit of uncertainty from India, especially where the container crisis is impacting lead times. So we're not 100% sure to be clear when we'll be fully healthy, but it is one of our top priorities for sure. And in terms of the relative split between the production sources, around about a third of what we sell is from India. Okay, perfect. And have you come to the conclusion that you've missed a material number of orders due to the low entry or is that a minimal effect this quarter? We definitely saw that during especially Q end of last year, not to the same degree, I would argue here during Q1, but to some degree, yes. There's always the risk of not having your best sellers on stock and people decided not to buy. We've partly seen a bit of buying something else, especially during Q1 over 100. But yes, it's hard to quantify always, but some effect in terms of lot sales has definitely happened. Can I ask on the EBIT margin as well? You are now obviously well above your target of at least 15%. Do you think considering where you are now, is this conservative target. Are you lagging significantly on OpEx or investments? Or How should we see this in terms of this kind of the scale of mix effect you've seen here? Do you think that they're sustainable or do you think it's temporary and likely to reverse and bring you closer to that at least 15% margin target. We don't have any sort of major exciting of our, let's say, fixed cost base in the plants currently. We, of course, have a bit of recruiting ongoing, etcetera, but it's not major elements that's going to affect the overall picture. And then the more than 15%, of course, gives a bit of leeway what that means. But to a certain degree, when we set that target, we wanted to give ourselves a we wanted to communicate and then that's also how we steer the business that the focus is to ensure that we grow our market share and that we really to own the rug category online and that the second priority it's maintaining very healthy margins. And there's always a trade off between growth in margin and typically we would deem towards ensuring that we grow versus not. Thank you. And just a final question and one that may be difficult to answer, but I'm just curious if you have if you're keeping track of your closest competitors. Are you seeing are they seeing growth rates anywhere near what you're seeing today? Are you clearly outperforming or is it just too difficult to track at the moment? It is a bit difficult to track. Of course, we have a sense that, of course, the offline to online migration is beneficial for many and that is on my focus and that's, of course, natural. We are still quite comfortable as long as that continues that we will grab more than our fair share of that online demand. Okay. Fair enough. Thanks for taking my question. My pleasure. Thank you. Our next question comes from the line of Karl Daehenburg from Carnegie. Please go ahead. Your line is open. Thank you very much, and good morning, Mike. So a few questions from my side as well, starting with the DAS region here. That's really sort of the main growth driver here in the quarter and also on the customer acquisition growth. But could you elaborate a bit Sort of what you have done here, some tangible initiatives here during Q1 that has been sort of the supporting drivers here. That any combination on marketing or if you could sort of give some more flavor on that would be really helpful. Yes. The essentially, it's been about implementing a bit more sophisticated marketing steering tools for how we spend our marketing. And second, continuously evaluating together with the team, okay, where do we see opportunities for additional growth and where do we see that demand is not there and then continuously moving that money from across the different marketing channels as well as across different markets. So that's really the main driver in terms of how we've been able to maintain a quite healthy margin profile at this level of growth. Okay, perfect. And my second question is on the average order value. It's down slightly or sequentially and also slightly down from 2020 levels. Could you explain a bit there? Is that a combination of sort of I guess that's a mix effect question, right, with more sales in the design category, which has slightly lower average order values, I would assume. Is that correct? That is correct. Okay. So we it's fair to maybe assume that The average order values should come down a bit also later in 2020 from 2020 levels, I guess, Focus more on the design categories? Not necessarily. It depends a bit. The Q1 last year was kind of the last quarter where we had a higher share of the traditional, whereas the rest of the year, the especially during the second actually. The category mix was relatively stable. And we're not seeing any sort of any trends right now, at least in terms of that changing. So we expect that it will be relatively stable. Of course, we're a bit under stock, as I mentioned, or we're going to say again, on the Indian assortment, which is kind of there in terms of our assortment in mid price point articles. So we're kind of losing out a bit on that area. And so that's a little bit what we'll have to see how that evolves with the margin or with the inventory levels moving up hopefully moving forward. Okay, perfect. And my final question is on the marketing spend here. Roughly 30% of revenues here in Q1, And we've been talking about this before that maybe that you see long term potential in sort of optimizing this as well, maybe moving a bit from Google AdWords into other sort of marketing channels that are maybe more sort of conversion efficient. How has that development been in Q1? And have you had sort of Has that been in focus here in Q1? Or is that something we should expect more focus on later on? We've started, but it's definitely more of a long term project, first to say right now the impact. So that is something we're working on sort of let's call it in the background. But in terms of significantly affecting our current marketing mix, we're not there yet. Okay, perfect. That was everything from me. Thank you very much. If there's nothing right now, I'll also I've got a question from the chat or via e mail where somebody is asking whether our low inventory levels will hamper growth in the coming quarters for whether we'll be able to meet and deliver to the strong demand that you seem to have. That is the question. We've we're number 1 prior right now and have been for quite a few months, has been to ensure that we buy and get additional stock. And we're seeing to make some improvements, of course, in that area. But it is a combination of both what we can get in as well as how much we sell. We've improved significantly over the last few months in terms of certain areas of the assortment and still challenges in other areas. So it's a bit uncertain, but we're it's an area where we're definitely working hard to ensure that we're fully in stock when the peak season starts again in the late fall. Okay. There are currently no more audio questions registered. So I hand back to our speakers. Excellent. So if there aren't any other questions, I would like to thank and appreciate the attention that we've been getting and hope to see you next time. Have a great day.