Q1 22/23

Nov 8, 2022

Good morning, and welcome to the Revolution Race Q1 20 20 2, 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Prepared. Please note that this event is being recorded. I would now like to turn the conference over to the CEO, Mr. Paul Fishbein. Please go ahead, sir. Thank you, operator, and good morning, everyone, and welcome to this conference call where we will My name is Paul Fishbein, and I am the CEO of Revolution Race as of October 7th. And today, I'm joined by the company's CFO, Jaspru Al. For those of you who are not familiar with Revolution Race, I will first give you a brief introduction. Revolution Race is a happy outdoor brand offering a wide range of outdoor products for people with an active lifestyle. We operate with a digital D2C business model, meaning that we skip the middleman and sell our colorful products directly to our customers. By doing so, we can offer quality products with unmatched value. We are live with 18 unique and localized web shops, and we reach customers in more than 35 countries. What really makes us stand out is our engaged customer community. We know How to communicate with our customers, resulting in more than 400,000 unique product reviews and around 1,000,000 followers and fans on our social platforms. Now let's take a look on the highlights during the Q1. We see that net sales continues to increase by 8.5 percent amounting to SEK 276,000,000 despite a challenging start with lower sales in July August. At Revolution Race, we sell products for all seasons. And even though we do not like to talk about the weather seasonality, the fact that we had a longer period of warm weather during the late summer resulted in a slight delay in the demand. However, very important, we The stronger sales during September and also in October after the quarter ended. We note that our largest region, the DACH region, continues to develop well with the sales growth of 39% during the quarter. The rest of the world region also shows a high growth of 35%, while demand in the Nordics showed a negative growth of 27%. We are not satisfied with the sales decline in the Nordics in the quarter, But at the same time, we noted a stronger demand for our products in September October also in this region. EBIT in the quarter amounted to almost SEK 50,000,000 corresponding to an EBIT margin of 17.4%. This is below our long term targets, but should be seen in the light of lower sales during July August, lower marketing efficiency during these months and higher logistics costs related to inbound deliveries, higher inventory levels as well as increased costs to facilitate future sales growth. However, we end the quarter with a positive feeling as we experienced a stronger growth during September and also during October. And after the end of the quarter, we saw that sales momentum was stronger. And at the same time, ahead of the upcoming peak season, we We carried out a stock buildup aiming at facilitating increased sales in the coming quarters. So we are now entering a traditionally strong quarter with a wider assortment with many news in stock. So despite a very uncertain environment, we are entering the 2nd quarter of our fiscal year with a very positive view. Now moving on to some other operational highlights. And something that characterizes Revolution Race is that we are constantly looking for new creative ways to develop strengthen the brand and our awareness. During the quarter, we have initiated several exciting partnerships. One of them is with the organization, Genachumpep, where we were involved in the launch of Allermans Rettenstag. The initiative aims to increase the awareness of our Allamands Retten in Sweden and to inspire more people to spend more time outdoors. We have also launched a new concept consisting of a series on our YouTube channel, the Revolution Race. The program consists of Swedish profile and outdoor experts competing in the nature. The series is aligned with our motto Nature is our playground and aims at being an eye opener and increased interest in active outdoor life and of course Revolution Race and our products. 1 of Revolution Ray's most important success factors is our direct communication with our customers. For a long time, we have experienced a demand for products adapted for kids and teens, So expanding towards a younger audience is therefore a natural next step. Being able to make our clothes available to the younger generation is part of making nature available to everyone. Dog owners are also a group that appreciates our multifunctional outer products And we are therefore pleased that in October, we were able to introduce our first fleece collection for dogs. And in addition to these new categories, during the quarter, we continued to refine and develop existing product categories, including the launch of Another shoe model and by adding additional colors and functions to existing collections. And in fact, We also launched a new bag today, the duffle bag. Now Let's take a quick look at our markets in Q1. In our most important region, the DACH region, net sales increased by 39% to SEK 146,000,000 and that accounts for 53% of the total first quarter sales. The rest of the world region also reported strong sales growth of 39 percent to SEK 46,000,000 and we saw A weaker development in our most mature market, the Nordics, where sales decreased by 27%, but Worth mentioning again is the approved sales development in September October compared to August July also in the Nordic region. I also want to highlight one of the most of our most important KPIs, the average net order value, which increased to SEK 8 SEK 35,000,000 from SEK 793,000,000 mainly thanks to a favorable market and product mix. And with that introduction, I would like to hand over to the company CFO, Jesper Alm, who will present and walk through the financial performance. Well, thank you, Paul, and good morning, everyone. I will talk you through our financial performance during the Q1 of the New Year. And I will start off with our financial targets. Ahead of the IPO in June 2021, the Board of Directors established our long term financial targets related to net sales, EBIT and dividend. When summarizing the last 12 months, we conclude that we're developing towards the net sales target and the EBIT margin is just below the target at 24.8%. And as communicated in conjunction with the full year report for last year, The Board of Directors proposes a dividend of SEK0.77 per share corresponding to a payout ratio of around 30%. And the dividend is to be decided on at The AGM taking place on Thursday of this week. Moving on to net sales development during the quarter. And as already mentioned, net sales amounted to SEK 2 SEK76 1,000,000 corresponding to a 8.5% growth in SEK and 6.5% in local currency. Due to seasonality, Q1 is normally a smaller quarter And sales during July August were slow. But as pointed out earlier, the sales momentum was significantly improved in September. Despite the challenges in the macro environment, we're very pleased by the development in the DACH region and also the rest of the world with growth rates well above 30% in each region. Looking into gross profit. We noticed a good development with a growth of 7%, which is almost in line with the net sales growth. The gross profit in the quarter was SEK 190 SEK7 million corresponding to a gross margin of 71.4 percent. The gross margin was positively affected by a Favorable market mix, but offset by a slightly increased price reduction and to some extent by foreign exchange on inbound deliveries of new products and that is USD related. Moving on to operational expenses. We see an increase in personnel expenses compared to Q1 last year. This is in line with our strategic plan, which has been to future proof the organization to be able to meet future sales increases. This has driven costs both for personnel and other external expenses. Other operational expenses increased compared to Q1 last year, including higher marketing expenses due to low efficiency in July August and logistics related costs. EBIT for the quarter amounted to close to SEK 50,000,000 corresponding to an EBIT margin of 17.4%. The EBIT margin for the quarter was impacted by higher marketing spend due to the lower efficiency during the outset of the quarter and logistics related costs and also, of when demand for our products was significantly stronger. When it comes to the balance sheet, we see minor movements overall, but I will highlight some topics on the following slides. Net working capital as a percentage of sales increased in the quarter related to increased inventories. And this leads us to our next slide on inventory development. As discussed over the past quarter, We have performed an inventory buildup from unhealthy levels a year ago. The reason for the increase is to mitigate the supply chain challenges, but also to cater for 2 full warehouses as well as smaller hubs that we have. Obviously, also the weaker than planned sales development has affected the inventory levels. In this quarter, we've also seen an increase in order to meet the expected demand during our upcoming peak season as well as broadening of our product range. We're now entering a traditionally strong quarter and we expect the inventory level to flatten out by the end of this year. Cash flow from operating activities was negative and amounted to SEK 71,000,000 where the operating result was offset by increased net working capital. Cash flow from financing activities was SEK140 1,000,000 and that's mainly attributable to increased usage of the overdraft facility. Our net debt remains very solid and amounts to SEK 25,000,000. So I think that sums up my part and I'll hand over back to you, Paul. Thank you, Jesper. And so after the weak sales in July August, we see a clearly improved sales development in September October. We have an organization ready for growth. We have an inventory consisting of a balance between running assortment and new products adapted to the season and a competitive customer offer. So we have a positive view of the future. We have a clear focus on customer satisfaction and are pleased to see that it results in high engagement among our customers. We have a strong brand position. Our financial position is solid, as we just heard. And we now look forward to an interesting future where we believe that we are well positioned to continue to increase market shares. And that concludes our comments on the result. And before we finish, I would like to take the opportunity To thank the whole team at Revolution Race, our customers, shareholders and partners, I would like very much I look very much forward Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. And you will hear a confirmation turn that you have joined the queue. Our first question is from Benjamin Ballstead of ABG. Please go ahead. Thank you very much and good morning guys. So a couple of short questions from me. First off, I believe we can quite clearly see a delay in the autumn sales or the autumn season. Would you be happy claiming that we will see sort of like a bounce back in these sales for Q4? So I can start with that. We don't really guide for the Q2. But what we do see and have said in the report is that sales In September and also in October, that is after the quarter ended, was much more in line with our targets. And as you know, the target is to reach at least SEK 2,000,000,000 in sales during the fiscal year 2023 2024. Yes. So that feels very strong and we are very pleased with those numbers and we feel that we have a good momentum now entering the peak season with these 2 months behind us. Perfect. I believe that was a good reply. And I know this I don't think you've answered this. Is it possible to give us like a rough growth figure per month for Q3? Per month? No. What we don't really disclose The isolated months, but I think you can go back to what we said In the last quarter quarterly report where we actually mentioned how July was trading and we also do mention that September is actually Performing more in line with what we expect in order to reach at least the SEK 2,000,000,000 in 2023, 2024. That is what we have said. I think you can calculate around that. Perfect. Thank you. And We saw an accelerated decline in the Nordics versus last quarter. I was just wondering if you could give us a bit more flavor here. I know you've commented on a differing market allocation or marketing spend allocation rather. Would you say that this is the main culprit? Or are you seeing a more consumer overall in the Nordics compared to DACH, for example? It's a bit hard to say because well, I came on board in August. And what we have seen in September and in October is also That the sales numbers also in the Nordic region has bounced back to much better levels than we have had in the past. It's a bit difficult to say exactly why the patterns have been like that in the past, but we what we do see in our sort of Product mix, we see that definitely see that the fall season came in started later this year compared to last year. We can always speculate and we don't want to talk too much about the weather, but we do know that it was much warmer this year compared to last year. So that could be one explanation why the fall season started later in the Nordics this year compared to last year. Yes, perfect. So following up on that. Should we interpret your Nordics bouncing back? We interpret that as having positive growth for any of the months in the quarter? We haven't guided for what we what one can expect on a region level for the upcoming quarters. What we have seen what we do say is that we have seen much better numbers during September October compared To the numbers for the full quarter that we just disclosed. Yes, perfect. And another follow-up then. Is it possible to give A date or a rough date for when Revolution Race Autumn started? It's actually difficult To say because we're operating in 18 localized countries and but on a high level, I think you can say that sales more took off end of August beginning of September something like that. But it differs. It was as you can understand a little bit earlier in Finland compared to South Europe. Yes. So it differs for natural reasons. Yes, absolutely. Perfect. Those were all of my questions. Talk to you soon. Thank you. Thank you very much. The next question is from Julien Moteur of Pascal Advisors. Please go ahead. Yes. Hello, gentlemen. Just three questions If I may, the first one is could you talk a little bit about the conversion you saw in September? Is it coming back to Rather normal pattern, I guess, July August was very, very, very weak in terms of traffic to conversion. Yes. So if you could talk about that a little bit. 2nd question is on inventory. If you could Say a bit it decreased again, I guess, for the buildup, but is there a pricing impact? Is there also category expansion impact on this. So if you can give a bit more color on the increase compared especially to last quarter. And the last one would be On the share of, let's say, new products, so if you add shoes, bags and all the small things you've done, I don't think the dog thing Big thing, but how much that did it represent in the last quarter compared to Q2 before? Thank you. Yes. I can start with the first question and then I can repeat it Just to make sure I got it right and that was a question about conversion rate. And We definitely saw much better, you can call it, marketing efficiency during September and that continued into October as well. And as a result of that efficiency, you can say that you get much higher conversion per marketing Dollar spent. So the answer to that is definitely yes. But is it back to Past levels or still not? I think It's a bit tricky for me to answer that and it also differs between the different markets. But I think I'm pretty confident to say that it was much better than compared to what we have seen in the past months quarters. So but if it came back to exact levels in the past, it's a bit tricky for me to say how it was a couple of months ago. The second question is was about the inventory buildup. And as we said in the last quarterly announcement, we said that we have invested In order to have a fresh inventory now before the peak season, You can expect that inventory level from now and especially during the second half of this fiscal year to start to flatten out. And you asked something about the pricing impact also on the inventory level. We haven't really seen any pricing impact. And also I don't know Jesper, if you want to say something about the Potential currency impact on that as well? Yes. We've seen more of obviously a USD impact than a pricing impact And the USD has developed strongly against most currencies and definitely against the SEK. So there is a USD component in the Most recent period, but still very manageable. And on the third question, if I recall correctly, it was a question about The share of new products. And on a high level basis, you can say that RevolutionRail's product mix is very much based on the what we call the running assortment and that stands for roughly And it differs a little about from a seasonality point of view. But you can say in a high level like 75% 70% to 80%. That grows, which means that new products also grows. And obviously, the new products are taking some But the running assortment and sort of the base categories are still very, very important for us. Okay. Thank you. Thank you very much. The next question is from Niklas Ekman of Carnegie. Please go ahead. Thank you, Jens. Sorry, I joined late here, so I apologize if you've already elaborated on this. But we talked a bit about weather here, but what other factors here can you explain the big difference here between July, August September, October? Are there any Major strategic changes that you have done in this period that explain the acceleration towards the end of the period here? We mentioned one other aspect and that I would say is the what we call marketing efficiency. We have seen definitely seen a pickup on that during September October. So that is one thing to maybe mention and highlight in that sense. Okay. Fair enough. But is that due to any strategic Changes from you in I mean, you've achieved higher marketing efficiency, but how have you done that? Yes. We have sort of focused more our marketing investments And on a very high level basis, you can call it more converting traffic. So it's sort of a shift on a short term basis. However, on I mean long term it is important to always find the balance on how much you should sort of invest in short term traffic and also in brand More long term brand building activities. And we have also launched, as you may have seen, those type of initiatives such as YouTube series and we do some TV commercials and stuff like that as well. But definitely, you can see a shift in how we allocate our marketing spend into more converting traffic during September October. Very clear. Thank you. And I'm sorry for if I missed the first part here. And second question, Just when you talk about September and margins are kind of back to the around the 25% guidance, can you just To help clear, is there usually a large seasonal variation within the quarter? I mean, in the previous year, would July August be Weak months from a margin perspective and then September much stronger. Just to understand if this means that you that we can expect you as a group to for a full quarter to show a more solid margin development in coming quarters or Whether September should maybe in a normal quarter be much stronger than 25%, if you understand my question? Yes. I think I understand it. I'll try to answer it. You can say that I mean, as sales volumes are much higher in September compared July and also August this year, you of course get you see scalability in the EBIT margin. So that is, of course, related. Sales volumes are related to the EBIT margin. But Having said that so that's one component, of course, very important. The other component that I can mention here is, of course, The marketing efficiency component that we just discussed, where you get sort of a better return on every invested krona in marketing. So that I would say are 2 important components in order to get the higher margin in September compared to July August. And it is harder to get this kind of high marketing efficiency in July as Mark, the demand is not as high as it is in September for natural reasons. So there is some sort of annual seasonality effect within the quarter as well, more based on No, market size or sales volume. Yes. That makes sense. Thanks. And just following up here on the mix of new products. When you talked about the running assortment, it's like 7% to 8% Some kind of the more recent launches here. I assume we're still Maybe you can repeat the last two sentences, so we get to hold. Yes. Sorry, there's some static here on the line. Just on the new products like bags and shoes, can you quantify at all the share of sales Are we talking low single digit percentage point, I assume? But if you could just clarify how significant those new launches have been? We don't disclose the sort of new and smaller product categories for Commercial and competitive reasons, what we do say is that the running assortment is at those levels I just mentioned. So As you can imagine that the newly launched categories such as dogs, teens, bag shoes are fairly small compared if you relate to the full sales volumes. However, I mean, you can say that it is like when we enter into new markets, you sort of Dip your toe, you test it. You don't maybe invest too much in it when it comes to inventory. We saw the compared to how much we bought, we saw very strong sales development both when it comes to our fleas for dogs and also the shoes in the spring, which were more or less sold out immediately. So which means you have to sort of replenish and do some follow-up orders. And that takes time. It takes a couple of weeks or months to fill up the inventory. So it's more of a go to market strategy that we take it a little bit slow when it comes to very new product categories. Yes. That makes a lot of sense. Thank you so much. So that's one important. I will also but you can also What is also important with these product categories, which we, of course, expect to increase over time, it also strengthen our brand and makes it possible to enter into new sort of customer segments as well with these new product categories such as teens, which is an important component in our long term growth strategy. Makes sense. Makes sense. Thanks a lot. Thank you. Thank you very much. So we have no further questions in the queue. And I'd like to hand back to Mr. Fischmann for some closing remarks. Thank you, operator. And we are Seeing exciting days and look forward to the coming months. Sorry. Did we get any questions from the online? Okay. Sorry. So operator, can I just repeat? We got 2 questions online before we finish off. And the first question was if we are able to disclose how the situation is evolving in U. S. And in U. K. And we haven't disclosed that. What we do say is that we are growing in the Rest of the World region and that growth rate is at In the quarter, 35 34%. And the second question is, if we are still confident in achieve the 20 24 target sales for SEK2 1,000,000,000 and the answer to that is first that it is actually a target financial target for 2023, 2024 financial year and we are very confident about that. And as we saw that sales numbers in September and in October, we're more in line with what we need to see in order to Reached that means that we are confident with our financial targets. So with those two questions, We thank you all for participating today and for your interest in us. We look forward to speaking to you again over the coming weeks months. And may I also remind you that our Q2 report will be announced at the 31st January. So with that, thank you and