Earnings Call: Q2 2021

Aug 26, 2021

Hello, and welcome to the EurogVista Group Q2 2021 Report. Throughout the call, all participants will be in listen only mode and afterwards there will be a question and answer session. And just to remind you, this conference call is being recorded. Today, I'm pleased to present Michael Lindscoff, the CEO and the CFO, Henrik Bo Jorgensen. Please go ahead with your meeting. Thank you. Welcome, everybody. I hope everybody is everyone is doing well. We are Happy to have you online, and we are also pleased to present our interim report for the 1st 6 months of 2021. If we move to Page number 2, just to kick things off With a bit of a summary, the performance during the quarter was very much in line with our long term financial targets, Despite the tough comparable from Q2 last year as well as the somewhat unfavorable market conditions that we experienced during especially the second half of the quarter. If we look at some of the details, the growth continued And the it was growth across all of the segments. And we continue to use or Are still able to use the DACH region as the growth engine. And that's very much, of course, in line with our internal priorities. And also noticeable is that we are seeing some initial signs of recovery within the B2B segment, which did experience a significant Demand downturn during COVID. Margins continue to also remain at healthy levels. We managed to further improve our gross margin, which was again driven by category mix effect and lower average discount rates. We did have a slight offset from increased investments in growth, I. E, marketing investments. And 3rd, we are very pleased That the efforts we executed end of last year, especially is when those efforts were initiated in terms of restocking. We've previously communicated that our inventory levels have been on the low end of where we want to be. And now with the successful drive together with our partners, we managed to significantly rebuild and or restock our inventory. So we're well positioned for the upcoming peak season. And of course, we do have continued Outstanding customer satisfaction, which is, of course, our number one priority. And we, Across the entire organization, to be fair, continue to focus on what's important, and that is ensuring customers are happy when they buy from us. And as mentioned, we are progressing nicely on our strategic initiatives with the DACH region as the overall growth engine and we see continued progress with our Amazon initiative. If we move over to Page 3 and Page 4, just to look at some of the KPIs on Page 4. As we mentioned last time, we have a couple of select a couple of KPIs To track our progress towards our long term vision and number 1, the customer satisfaction level continues to be at outstanding levels. So we essentially had an unchanged trust pilot rating and our NPS It's still at world class levels of 66. Order Count is still growing, grew slightly above the total turnover and Customer acquisition continues to be at about that level as well. So overall, we are According to essentially according to plan on what we want to do long term as well. A little bit of a different perspective or highlight in terms of the inventory topic. What the slide on Page 5 shows is that we've Since actually end of last quarter, had a 50% increase on the number of items we have on hand. In the financials, of course, the focus is on the value of the inventory. We kind of wanted to also show you what it means in terms of the actual Number of carpets or rugs that we have available and that has actually increased by, like I said, 50% during the quarter, which puts us well positioned ahead of the upcoming peak season. So with that being said, I'll leave the word to Henrik to take us through the financials. Thank you, Michael. If we move on to the next page, starting with our top line, then on the left hand side, you can see our year to date development, where we have reported revenue growth of 47% year on year. And if we look at Our like for like growth excluding divested operations and currency effects, then we grew our revenue by almost 58%. Zooming in on Q2 in the middle of the slide. We had, as Michael mentioned, a more moderate growth level of just shy of 23% year on year, but still in line with our longer term ambition of reaching organic growth of approximately 20 And compared to Q1, which was quite outstanding, the lower growth It's driven by the fact that comparables in Q2 last year were tougher. We also have a seasonality set where summer half Of the year is the low season for us. And then last but not least, as Michael also alluded to, the second half The quarter was impacted by warm weather in general in most of our European countries as well as the easing of COVID restrictions. On a segment level, growth in our 2nd largest segment, B2B, which is approximately 10% of our net revenue in Q2 this year. The growth was especially satisfactory, as Michael mentioned, Given the fact that demand in general remains depressed due to the pandemic, But we managed to grow in certain customer segments such as interior designers where we saw a Noticeable increase in activity during the quarter. Our marketplaces and other segment, which is our sales through Amazon, was also satisfactory and grew at a strong pace of 54% year on year, and that was against the quite top comparables as well. And we see that as a testament that our To drive growth on Amazon is continuing to be effective. If we assume in on our largest segment B2C, on the right hand side, we see our development by geography. And as Michael also mentioned, DUC Continues to be our main growth engine there. However, we did also see strong growth in some other large Markets in Europe, such as France and the UK. And then in the Nordics, the picture was a bit more mixed with the differences between the various countries. So we came out a bit lower there. If we move on to the next page, we can have a look at our margin development. And if we start in the lower left hand corner, you can See our Q2 development versus last year, where we managed to improve the gross margin by roughly 2 percentage points to 64.1%. And this was driven by a favorable development in category mix as well as a lower average discount rate compared to last year. And together with the strong development in margins in Q1 this year, we ended the first half year just shy of 65% And roughly 3 percentage points higher than last year, which is quite strong, we think. On a segment level, if we look to the middle of the slide, the development was strong across all our segments, But I want to emphasize marketplaces and other, where we grew gross margin quite a lot. And this is also due to a lower discount rate and a push in assortment towards a higher margin design ROCs and fewer lower margin traditional ROCs. And we see that as a testament as well that or at least an indication that we are able to drive the profitable growth through 3rd party channels, despite of in general lower price points on Amazon compared to our own site. Now ending up with the adjusted EBIT margin on the right hand side. In the lower right hand corner, you can See our Q2 development, where we landed at 17.6% this year, which is a bit down compared to last year. However, still above our long to mid term mid to long term ambition of having EBIT margin of at least 15%. And it's worth mentioning that in Q2 this year and last year, there were no one offs. Year to date, our operating margin landed at 21 6%, which is a 4 percentage point improvement roughly compared to last year. If If we move to the next page, we can look at the underlying drivers for the margin developments. And starting on the right hand side with Q2, As mentioned, our gross margin development was favorable, but that, however, was offset by increases And other external expenses as well as personal expenses, which grew by 2.5% and 2.0 percentage points relative to net revenue compared to last year. And the development in other external Vences is, to a large extent, driven by higher marketing costs, where we saw an increased competition in the ad space. But it's also worth mentioning that last year Q2 activity was quite low. So comparables, you can say, were not super high. If you look at the personnel during the quarters. And then, obviously, a reduced scale effect since our Q2 net revenue is lower than our high season quarters, Q1 and Q4. So actually, if you look on a quarter on quarter level. Our absolute personnel expenses are down compared to Q1 this year. If we look at first half, just to summarize, our Good improvement in goods for retail was partly offset by higher other external expenses, driven by, as mentioned, the higher marketing cost in Q2 and then the IPO related one off cost of roughly SEK 10,000,000 which we had in Q1. Good. Then we will move on to the balance sheet. On next page, we have the development in our inventory value. And as Michael mentioned, we submitted several purchase orders in the second half of twenty twenty In foresight of the pandemic's negative impact on supply chain and lead times, not least in India. And as goods have started to arrive at our warehouses during Q2, we have seen an increase of SEK 27,000,000 in inventory value compared to Q1. And this means that our inventory level now is more or less in line with the target range we have, if you look on the right hand side, of being between 17.5% 22.5% of last 12 months net revenue. So that is quite satisfactory. Then moving on to the next slide. Obviously, the investment in inventory had a Negative impact on our cash flow, where we ended Q2 with negative operating cash flow of SEK 17,000,000. However, year to date, we still are in positive territory and our balance sheet continues to be in a very healthy state with a net cash position of CHF 120,000,000 by the end of the quarter. Then I will hand it back to you, Mikael. So if we do a little bit of a summary. So growth and profitability is in line with our long term ambition and targets. And as we've said, we are very pleased with our organic net revenue growth of almost 23% despite The tough comparable and somewhat unfavorable market conditions. We continue to see the gross margin improvements. And even though the EBIT was marginally lower compared to last year, it was driven by the fact that we continue to invest in growth and that resulted in slightly higher Marketing spend and Q2 also, as we said last year, was a bit of an outlier in terms of very low activity across different industries and that situation has not been the same this year. Then we are very pleased to also report that we have managed to execute according to plan in terms of our restocking efforts. And that ensures that we will be in a much better Positioning ahead of the peak season compared to last year. So that has been a tremendous effort from both the purchasing department and our coworkers in the warehouses in terms So getting everything received and put on the shelves. And our outlook for the rest of the year continues to be cautiously optimistic. We are facing a tough Q4 comparable, where we did see some Part where we did see some influence in terms of COVID, especially during the holiday period. We are also aware that the COVID post COVID era is, From my perspective, still not really here. If you look at the grand scheme of all of the European countries and there are there is uncertainty So what exactly consumers will do once all restrictions are over and may or may not happen this year. So That remains a little bit of an uncertainty factor. But overall, we are well prepared as an organization to face Any potential challenge, we are ahead of us and capitalize on the expected high demand season, which typically happens during the Q4 and Q1 period. So with that being Said, we leave the floor open for potential questions. Thank you. Thank you. Our first question comes from the line of Fredrik Iversund of ABG Sundal Collier. Please go ahead. Thank you very much. I have three questions. I'll take them 1 by 1. First, a more general question. Michael, you've been taking quite a few measures to improve the conversion rate lately. Are you starting to see any results from that work? We it's still activities which are primarily going on in the back To be quite fair, and we're still progressing according to plan in terms of the efforts To really ensure that we have a top notch user experience when visitors come to our shops And that's ongoing per plan and we hope to announce that through the world within not too far of a distant future. Excellent. Thank you for that second question. On the growth pace during Q2, it seems like it It decelerated quite significantly over the quarter. Would you mind sharing what you saw in July August? Was June the trough? For what's July equally soft or what did you see in terms of that? Last year, you mean or this year? This year. Like we've indicated that The second half of the quarter was negatively impacted by the unusually warm weather and That holds true. So we did have a more Our growth rate was higher during the first half of Q2 this year compared to the second half of the quarter. Right. I was more curious on July August actually. So was June the trough And you saw an improvement in July or was July equally soft? We've we continue to work on all of the various initiatives and Our long term ambition is around 20% net revenue growth. We are still working on that. We know for a fact that Q3 last year It was not as tough as Q4 of last year. And our ambition for this year and For this year and outlook for the second half of the year remains relatively unchanged versus what we previously communicated. Okay, perfect. And then last question from my side on marketing costs. I think the prices on performance marketing in the market has accelerated quite a bit lately. And curious to hear if you could Give us an update on what you're seeing in that market at the moment. Thank you. There are various sources, of course, in terms of tracking the general So the advertising industry online, what happened if we look at the 2 different effects That affected us this year. It's number 1 that Q2 last year, the relative activity within many industries was very low and subsequent to the 1st wave of COVID shutdowns. So that, of course, enabled us It's well capitalized and an online only retailer to gain additional visibility at relatively lower costs. And this year, we're that effect is not Same or that situation is not the same. So there is more players across different industries trying to grab the attention of online or people browsing online. And we've seen That has resulted in increases in both CPCs in terms of the search channels, but also in other channels, which where the general cross industry competition is also increasing. Our next question comes from the line of Karl Daehenburg of Carnegie. Please go ahead. Thank you very much, And good morning, Mikael and Henrik. So first, a follow-up question here on the Sort of monthly comparisons you're facing in Q3, could you elaborate a bit what you saw in demand last year in July, August and Amber, maybe month by month, I mean, the comparison in Q2 last year, you had 48% organic growth, Q3 was at 24%. So could you elaborate a bit sort of what kind of monthly comparisons you're facing now going into Q3? Yes. What happened last year was that Many European markets had a similar approach actually last year because the common So the leading year was regularly coordinated. So when and it was around the 3rd week of July when many markets Many big markets in Europe opened up the COVID restrictions. That, in combination with the warm weather, resulted in a significant demand drop until people actually got back to work, which happened towards the end of September and things started to cool off. So that's kind of the general outlook for how Q3 or the details of how Q3 developed, Master. Okay. Perfect. Very well. And then A follow-up question here on the marketing. You mentioned price hikes or surprise increases in the AdWords market, and that's also what we're seeing from Some other players in the market here. But would you say that despite sort of price increases, do you see conversion rates Sort of differ here in Q2, maybe sequentially from Q1 because it seems that maybe traffic is down, but that conversion rates are up. Is that the pattern you're seeing here as well? Yes. We are continuously working on buying We're working on trying to buy traffic smarter and one of those levers in terms of are we doing things smarter is Trying to buy high quality traffic that has high potential to convert. And so both in terms of what type of traffic we buy as well as how we develop the user experience once we get to our site, both of those where elements work together in terms of our overall efforts to ensure that we get The most bang of the buck for the marketing investments we do. Okay. Perfect. Very well. And a follow-up question on that one as well. So the state that you're seeing or saw here in Q2 on the marketing cost, do you see that as a fair level going Forward as well, is it fair to assume that marketing spend going into Q3 and maybe also Q4 will be sort of at this at a bit higher level as you saw in Q2 compared to last year? Q2 last year was an outlier. So it will be comparable for Q3 equipment as So as tough in that, that you can see in our report numbers, Whether how they all look for the rest of the year is, of course, uncertain. We do know that, of course, when consumers have a in general, have a Zoomers have a in general have a stronger purchase intent, which happens during the high season that That tends to enable everybody in a given industry to benefit from that with the year with a slightly sort of lower, of course, or relatively lower marketing spend ratio. Okay, perfect. Very well. And a final question from my side, a bit on the Supply chain issues. You're mentioning here in the report potential supply chain issues from rugs in produced in Afghanistan. And Could you say anything sort of a brief number of how much that stands for as in sales approximately? I think we said at IPO that around 1 third of your products, solar, are in the traditional category roughly. But could you say anything, sort of the share there, which related to Afghanistan? It is something we have in our assortment, and that's also why we We thought we needed to make sure that information is available for everybody. We don't know yet What the mid term or short term impact of the Taliban takeover would be on our partners that source and produce in those areas. In terms of but we are working closely and communicating with them and our other stakeholders in those areas. But the Afghan share of our assortment in single digits. So it's not an enormous impact, but it is something that we do offer as part of our Perfect. Thank you very much for taking my questions. Thank And there are no further questions on the telephones at this time. Please go ahead, speakers. Unless anything else, then again, we want to thank everybody for your attention. And Fully, we'll meet you again when we present our Q3 numbers in October, November. October, yes. Next time. Thank you very much and have a great day.