Earnings Call: Q3 2024

Nov 19, 2024

Welcome everyone to Sunssen Group's Q and A session as we release the interim report for the Q3 this morning. My name is Frida Loehm, and I'm Head of Investor Relations at Sunssen Group, and we'll moderate this Q and A session today. With me in the studio, I have our CFO, Per Geldholm and our COO, Per Jimi Engstrom, who will answer the questions. Those of you watching this live, you are welcome to ask your question in the YouTube chat online and we'll try to answer as many questions as possible. We have also our analysts from Citi joining us. So I would like to welcome in and hand over to Yang from Citi. Welcome, Yang. Hey, thank you, guys. Thanks, Frieda, for the introduction. I guess just to start off our call today, maybe can you talk to what you are seeing in terms of consumer behaviors? And I know we ask this question every single quarter, but I have a sense that the macro picture seems to be a bigger focus in the release this quarter. Can you talk a little bit to that? And also, please, can you elaborate on how you're seeing the customer willingness in terms of trading up to more premium products that you've seen this quarter versus last quarter specifically? Thanks. Yes. No, but what we've seen in the Q3 is that it's still the consumer sentiment has been a bit cautious. And but where we see now that the consumer is looking a bit more positively into the future with interest rates coming down and hopefully also the household income to improve. But so that has sort of been the picture for the Q3. Yes. And Consumer looks look at somewhat lower price points and so forth in the Q3. Okay. I see. And would you say that this behaviors of consumers looking for lower ASP products has increased in Q3 compared to Q2? Yes. No, it has been a focus on that. And we have seen that it has been important to have strong campaigns in the market, also in the 3rd quarter, to ensure that the customer finds the right offerings. And that has been a deliberate tactic from our side. We always, of course, follow the market, and so we have done also in the Q3. Thank you. And I noticed in the release that you called out negative sales mix in all countries except for Denmark. So I was wondering if there is anything else that contribute to this negative mix rather in addition to consumers trading down. And what is happening in Denmark such that the sales mix was actually a positive contribution in the quarter unlike the other countries? Yes. I mean, if we start with the mix effects, we have different kind of mix effects. 1 is sort of in the trading down pattern. If you select lower priced lenses, so that the lens frame combination in that combination, the lens has a lower portion. That is a negative mix effect. Otherwise, we refer to I mean, on the one hand, reasonably good sun season, with somewhat lower gross margins and also the online increase with somewhat lower gross margin. And I mean, the mix effects aren't the largest element. It's I mean that we have consciously contributed to sales growth through well thought through campaigns is sort of the largest impact in the quarter. Okay. I see. And maybe could you elaborate why it was the case in Denmark you actually saw positive mix rather than negative mix like in the other countries? I mean, what I could say is that since Denmark has faced a situation due to credit regulation with negative impact on lifestyle sales. They have our colleagues in Denmark have acted in various ways to improve the cash sales. And that might have contributed to some extent, but it varies quarter by quarter. Okay, understood. And since we are on the topic of Denmark, are you seeing the effect of the credit legislation changes dissipating throughout the quarter? I saw on the release that you're saying that initiatives such as the lifestyle cash is having a positive effect. Can you maybe talk a little bit more about the consumer uptake of this offering? And also, when I look at the Denmark sales adjusted for Calm, because comp this quarter has turned negative, it appears to have slowed down somewhat versus last quarter. Is there anything that you could comment on that? Well, I think when you compare sales, it's important to look at last year's quarter rather than sequentially. That goes for all segments, and that's quite important. So that's why we sort of we talk about organic growth and growth and so forth in nominal sales as well. It's compared to Q3 last year. And there we see a positive development in Denmark. That goes without saying. And the credit regulation, well, I mean, the credit regulation is here to stay. So over time, we believe consumers in Denmark and our personnel will get used to it. But I would say it's a slow process. What we see now in the Q3 is the Q1 we've had since the credit regulation was implemented where we can compare apples with apples, so to say. Of course, Q3 last year was impacted by regulation as well. Up until Q2, we face we compare to situation before that regulation was introduced. I see. And when you think of the lifestyle cash offering, is it relatively easy to get consumers on board? Did you have to spend extra time in the stores to explain how it works? Anything to the extent of how consumers taking it in? No. We see basically that the discussions with the consumers is very similar between the two offerings. So it's more a matter of choice which one would you prefer. And we have seen that the lifestyle cash offering in Denmark has been positively received by a lot of consumers. And that explains also why it has also grown. Got it. Got it. And then maybe let's talk to the subscription business. It's continued to grow quite well, but I have noticed that the churn rate has picking up for a few quarters now. What would be the implication of this? And is there anything to read into the health of the consumers? And then in addition to this, how do you feel the subscription business sort of, contribute to your businesses in the times of economic downturn? We see that the subscription businesses continue to grow. And I mean, in a broader perspective, we have a stable churn, and we are confident that it moves marginally over quarters and but in line with our expectations. And if we look between the markets for this quarter, we see that it's relatively stable for 3 markets, but it's more Denmark that it's coming up a little bit. And that is, of course, primarily due to the new consumer legislation. But as we see, I mean, the subscription offering now 683,000 customers, 817,000 subscribers in total. It is a large it's a lot of subscribers in total. It is a large it's a lot of customers choosing this subscription, and they are very satisfied overall. And of course, we believe that this is a fantastic offering and strongly appreciated by our customers in all markets, all towns, all customer segments basically. Okay. Got it. Thank you. And then still on the top line topics, I also noticed in the press release that you seem to place more focus on the competitive optical retail market in the Nordics as compared to the previous releases. Could you maybe comment a little bit on this, whether you're seeing intensifying competition? Or has it been roughly stable? How are you finding the effect of your marketing campaigns with regard to your market shares across different markets? So several questions. We try to answer them. Okay. So we have seen an opportunity to take market shares in this tougher market environment. And we have chosen to attract more customers. And we have increased market shares as well, look specifically at Sweden, for example. That has had an impact on gross margin, but we are in a stronger position. So although there's a tough market situation out there in Q3, I would say, Then we have taken market share and that has Barco according to plan. So it has paid off our focus of the quarter growth wise. Do you want to add anything, Jim, to that? No, no. I think it's exactly that picture. And of course, I mean, what we have seen in this weak economic times that is, of course, also opening up opportunities. And that is one of the reasons, for example, why we are have increased sort of the pace in when it comes to expansions and with new locations and great locations for establishment coming up to a larger extent. So we have seen also, of course, this as a period for of opportunity. Okay. Thank you. And maybe before we go to the topic of new stores opening, could you confirm whether you're seeing intensifying competitive environment sequentially? Or has it been sort of a stable picture so far in 2024? I will say that we it's been a competitive situation. But I mean, what we look at here is the growth we have achieved by investing in the market, I would say. So we have taken market share, thanks to our offerings. Competition, I would say, has been tough during the year and continue to be so. Thank you. And now moving to the topic of stores opening. So 9 months this year to date, you have opened 32 stores and you're still planning to do another 14 to 16. So that would definitely place you ahead of the implied run rate in your plan. And I noticed in the press release, you called out sort of the economic downturns as providing a good environment to acquire stores. So my question is whether this is a pull forward of store openings that you were already planning for the next 2 years? Or are we actually seeing maybe potential for higher store openings through to 2026 above the 90 stores that you've talked about in the past? It's a pull forward. I mean, we our target remains the same, 90 for the period 2024, 2026. So that means a lower number of store openings in 2025 and 2026. I see. And given the current economic environment, you mentioned that if there are more opportunities to open stores, having said that, how are you seeing the returns on the stores that you have been opening so far this year, just given the impact on consumer demand? And also how are you seeing the sort of profitability improvements across the stores that you have opened this year? Well, I would say that, I mean, we the fact that we've also selected smaller cities as targets has helped us quite a lot actually to quickly reach profitability. So I mean, that focus, since we which we communicated a few quarters ago, has continued. And we get very high market share quite quickly and good loyalty from the customers actually in these small locations and better conditions overall. So it helps us to shorten payback and so forth. So we don't see any real we have a positive development of our new stores, I would say. That's also why we have selected to increase the number of stores this year that we have good traction on them. Mind, overall, what is your store opening philosophies? Are you looking to broaden your geographic presence all over the different countries that you operate in? Or are you looking to focus in sort of more affluent areas, higher density area? How do you approach your store openings in the plant? No. I mean, we are, of course, seeing that I mean, we are reflecting our consumer base, and that is the entire market basically. And we see that our concept works very well regardless if it's in the city center of Stockholm or in the rural areas of any country in Scandinavia. So when we are opening now stores, we are, of course, opening many of them in smaller cities in Sweden and Finland. But there are also selective locations, for example, in Stockholm or other large cities like Copenhagen, where we see good opportunities. So we see that there are plenty of white space, so to speak, still ahead of us where we have room for further expansion. And with the focus on sort of expanding presence in the smaller cities, when the economy is finally returned to normalize level, would that have any implications whatsoever in terms of the kind of product mix or the mix of premium products that you could sell in those stores? Do you see, for example, I guess what I'm trying to get is do you see, you know, a higher SKU in a normal environment to more premium products in stores in bigger cities? And therefore, if you're opening more stores in smaller cities, that might have a more durable implications on your mix. No. I would say, I mean, one part is, of course, the frame. Another is the lens. And what we see is that the consumers typically appreciate a good quality lens and also some nice frames. But then when we have the subscription offering, it's increasing the affordability to buy more than one pair. So we see that all this works together. But of course, if it's a stronger economy with higher household income, more people would probably choose to trade up a little bit. That could be expected. Okay. Makes sense. Thank you. And maybe moving on to the topic of Sensam Eyewear because that also came out in the press release, specifically in Sweden and Norway with the rollout. Could you give us sort of a broad overview of where Sensam Eyewear is across different countries or what state you are at? And what can we expect in terms of the impact on margins from this rollout in Sweden and Norway heading into the final quarter and also into 2025? Yes, exactly. But before the main focus for CSM, I view, is Sweden and Norway. And the goal is, of course, to increase optician capacity. What we've seen through certain quarters in Q3 is that we have certain costs rolling this out. We have a dedicated team centrally and we have training efforts and so forth and license costs when this is implemented. And we still have some consultant costs, which will be reduced over time. But now we have a situation where we have double costs, you might say, for some period. So that is temporary. When this is rolled out, we will get lower costs from the implementation because we don't it's already implemented or the license cost will remain. We will get lower cost due to fewer optician consultants and more own consultants more own employees. So there will be, when we are rolled out, such a positive effect. I mean, we have talked about some magnitudes, but it will impact the margin to some extent. But the most important part is not the cost savings. Although they will you can we'll see them in the income statement when we rolled out. The most important part is the capacity increase where we can accommodate more customers and get higher growth since sufficient capacity will be higher, thanks to this ProSEN technology. Want to add anything, you mean? No, exactly. And I mean that is, of course, the key reason for why we're doing this. And we see that via the Sensam iView project, the capacity are increasing quarter by quarter, which, of course, helps us to also grow and also improve our availability or accessibility as well, which we find as an important task. Thanks for a very detailed explanation. Still on SensiVue, my first follow-up question is whether the rollout has been completely on track. Was there any hurdle that you might have not forecasted at the beginning that you came across? And then the second follow-up question is how long do you expect this period of double cost going to last? First question, well, it will be some additional quarters. We do want to get this rolled out fairly quickly. So there will be some additional quarters, but we're not talking about years, but some additional quarters. And well, I mean, we have a plan. We formed that plan, but there is a lot of training effort. And we need to ensure that, that is sold out in a way that people buy into this as well. We can't force it. But we educate our colleagues and get a positive reception, thanks to our measured rollout. But it will be rolled out. So no I wouldn't say hurdle, so all that we've taken have a careful approach rolling it out, I would say. Makes sense. I see. And would you be able to quantify perhaps the headwinds from this double cost in the quarter? No, we haven't quantified it. I mean, it's I would say, I mean, it's a cost of a central team plus a number of stores where we have training efforts when training optician assistance, so forth. So it's an order of 1,000,000, but I wouldn't quantify it in detail now. Okay. Thank you. And since we're talking about EBITDA headwinds and tailwinds, maybe would you be able to sort of rank which headwind has been the biggest in the quarter and which has been the sort of the smallest headwind in the quarter? I think in the press release, you called out a couple of things. So enhanced promotional activity, you called out the sales mix impact that we spoke to at the beginning of this call, you called out the rate of store openings and lastly, the iview rollout. So across these two headwinds, which one would you say has been the biggest in the quarter? Well, I would say that the I mean, all items you mentioned are reasonably important. If I should point out any of these, it's, of course, that the gross margin effect, of course, impacts EBITA margin. That goes without saying. And our focus on attracting more customers, thanks to offerings, campaigns is one important contributor one important factor, I would say, for this, which has indeed delivered growth as well. We should remember, we've taken market share and 9.5% organic growth in the quarter. That's important to remember. Thanks. Would you be able to run through the current market shares that you guys are having across different countries? We wish we could. We are taking market share in Sweden. We know that, although the data is still being processed regarding how many percentage points. We had we definitely take market share in Finland with that high growth rate. We do not have the exact market size figures for Finland at this stage. So we will get an update to you in the coming quarters on our current position in Finland, by the way, as well. So I mean but I mean overall, we're taking market shares in overall in the group, we do. Thank you. That's also helpful. And maybe just going on to the topic of promotion activities since you also brought it up a couple of times. Could you give us some examples of what are you actually doing on the ground? In what countries? And what kind of reception have you got from the consumers in those countries? Yes. I mean, this market is campaign driven. And I mean, it has always been that basically. That's a part of the market dynamic. So how we work with the campaigns is, of course, that we are always following the current pace. And then we are choosing different tactical options. And I mean that could be one example could be, for example, that we have 50% on the frame. There could be promotional activities in the lifestyle subscription sometimes, for example, with a package deal or something like that. But this is something that we are working with continuously. And that is part of sort of how this industry works and has always been doing so basically. Okay. Understood. And maybe I just have one more question actually. Is there anything that you would like to flag from this release in particular beyond the topics that we spoke to? So we spoke to the competitive dynamic. We spoke to the consumer behaviors and then your campaign to help with sales growth. Is there anything else that we should be talking about that we haven't? I mean the cost program, I think we haven't touched upon really, have we? No, not yet? No, no. We want to mention that. I mean, we don't really have any I mean, the forecast right now is that there will be a low inflation environment. But we just want to be prepared for any changes in the inflation environment, which might appear. So we are initiating a cost program now, the 3rd actually, the 3rd cost program in a few years' time, which will give effect to balance out any potential cost increases. A gross effect of SEK 75,000,000 when it's total implemented, most of which will actually be realized in 2025. And I want we want to mention that as well because that's important for us. Makes sense. And just to follow-up on this, even though I know I said it was the last question. I noticed that the corporate line item in your EBITDA is once again positive. I think it was plus SEK 11,000,000. Is there anything that you would like to call out? And how should we think about this line going forward? We don't want to call out any specific items in the quarter. It was positive, yes. It was positive last quarter as well. Not as positive this quarter as last quarter, but still positive. But I would say we and this could vary quarter by quarter. But we do have some certain positive items going forward. I mean, we our cost programs affect central costs as well to some extent. Also we have talked about our production and innovation facility, which was negative when we started up and also 2023. We have a goal of becoming positive. We are working very hard to achieve that goal. So we see in December whether we will succeed or not, but it's really moving in the right direction. So that has, of course, been a burden financially in the beginning. But our plan is, of course, that it will be positive over time. So there are certain factors speaking in favor of the central items. I don't want to exaggerate here, but I do need to mention these as well. Makes sense. Well, thank you very much. That's all my questions. For today, I'm passing it back to Frieda. Thank you, Jan. Great. We also had a question in the chat. So hearing units, do they have a different maturity path and margin level? And what's the first impression of these centers? Yes. They have a slightly different structure there. And we are currently continuing with the pilot. And we now have 11 units, and we opened up a new unit here in the recent quarter. And what we see is that I mean, the optician business, I mean, when we open up in a small town in Sweden, for example, with that will ramp up very quickly and become profitable just after a couple of months. It takes a little bit longer time when regarding the, of course, the Hearing business. But we are exploring with operating model, and we are continuously evaluating that business as well. Thank you. Great. So it's time to wrap up. But before we do so, anything else you would like to add before we end the call? No. I think I mean, we have had a strong organic growth of 9.5% in the Q3. We see a positive consumer growth development. And we have invested in with a new establishment ahead of plan and also, of course, with the soonest some iVIEW program, increasing our capacity for the future. And then what we can see is that we are delivering on all our financial targets year to date and that our market position is stronger than ever actually. So we look very positively to the future. Thank you. And big thank you to Jimmy and Per. Thank you for all of you watching this live. Thank you, and see you next time.