Earnings Call: Q3 2021

Nov 30, 2021

Summary

Q3 organic growth reached 21%, with an 18.1% like-for-like increase and a 28.3% adjusted EBITDA margin. Subscription sales, store expansion and improving cash generation supported performance, while the post-quarter IPO converted close to SEK 4bn of shareholder loans to equity.

Good morning, everyone, and welcome to this interim report for Q3 2021, the first report for Synsam Group as a listed company. My name is Martin Daniels. I'm the Chief Innovation Officer at Synsam, and I'm joined here by Per Hedblom, CFO at Synsam. We will go through the results for Q3, followed by a moderated Q&A. If you go to the next page. This is shortly the agenda. We'll provide an update on the overall business, the financial development, and then summarize the key points before we open up for Q&A. Let's go directly into page three and give you a brief summary of the key points from quarter three. We've had a very strong quarter, both in terms of growth and profitability, an adjusted EBITDA of 28.3%, and perhaps more importantly, a very strong organic growth of 21%. Comparing the quarter to a third quarter 2020, which only to a limited extent was affected by the pandemic, but to a greater extent affected by an IT attack in September 2020. One of the key drivers of growth has been our lifestyle subscription, and we're seeing strong continued growth also in that offering. If we go to the next page, or page five actually, we can go a bit more into details on the Q3 numbers. Underlying the 21% is a very strong like-for-like growth of 18.1%, and this has been the result of continued work of implementing the new strategy that was implemented from 2015, where we're continuing to focus on a customer-oriented innovative offering, continuously developing our store concepts, rolling out new stores, continuing to invest in digital tools, house brands, and continuous success with the subscription model. We're seeing an improved gross margin in Q3 compared to last year, and also an improved EBITDA margin of 28.3%. If we look at the last 12 months, we see, of course, a strong overall development of growth and EBITDA, and of course, comparing to a COVID-affected previous year. If we go to the next page, slide six, we can see that one of the key drivers, strategic initiatives to drive growth that we've pursued over the last couple of years, continuing to pursue, is the store network expansion. During the year to date, we've opened 14 new stores, and we are looking back one year, 20 stores more than Q3 2020. In total, we have now 495 stores. Expansion continuing across the entire regions of Sweden, Norway, Finland, and Denmark. We go to the next page. We are continuing to develop our store concepts, store formats. As with all the offerings and parts of our business that we're focusing on, we're continuously developing and refining what our store concepts looks like. We now have four Flagship stores. The first one launched in 2019. From that Flagship store concept, which had a much bigger square meter area and also a much bigger assortment, we developed a smaller version called the Mega Store, which has been a very good success for us in the past. Taking some of the best parts of the Flagship stores, such as a broader assortment, a broader capability to do more eye exams, working as a very strong destination and attraction for customers. We have 11 stores per last of September this quarter. After the period, we've opened six more stores, and we're seeing a strong reception in the market from customers. Recycling Outlet concept, six stores by the end of this third quarter, and two additional stores being opened from last of September up until now. To repeat a bit the concept, this is a complementary offering in the marketplace where we are tapping into the strong trend of sustainability in the Nordics and combining that with very attractive price points. The assortments in these stores consist of sustainable eyewear at attractive price points. It is secondhand frames, refurbished spectacles handed back from lifestyle subscriptions, and this is a complementary offering, and we are seeing this concept attracting a lot of new customer groups to Synsam. If you go to the next page, another important driver of growth during the quarter and also historically has been the lifestyle subscription model, which is the best offering that we can provide customers, assuming that they have a need for more than one product. It has been now live in the market for over five years, and we are seeing continued success across all four countries, and we see now total sales from the lifestyle subscriptions representing 45% of total net sales for year-to-date 2021. If you go to the next page, slide nine, of course, the success of the lifestyle program is based on a number of different variables, such as, of course, understanding customer needs, finding needs for each and every individual customer, and finding products to fit those needs. Customer satisfaction would probably be the most important metric for us to continue the success of the program. That means attracting more customers to the program, growing the base of customers, and we are seeing that continue throughout 2021 and also in Q3. We are now at 361,000 subscribers end of quarter three 2021, and we are seeing a low and stable churn rate of around 2%. These are, of course, two very important aspects of continuing to drive growth in this concept, attracting more customers and also keeping them in the program with a high customer satisfaction. This is, of course, hard work to both attract and retain, and that is something we are focusing on to continue the success. Related to the lifestyle subscription, which is primarily focused on spectacles, but also including contact lenses, is the standalone contact lens subscription. If you go to slide 10, we are seeing that this category, which historically has gone a lot more online, we are seeing that with the contact lens subscription and with the way we are combining great products, attractive price points, and the services that we can offer with opticians in the stores, we are seeing continued growth in this offering, representing 3.5% LTM September 2021, and growing rapidly. We now have over 90,000 customers in the contact lens subscription program. Highlighting a couple of initiatives we have launched under this umbrella is a broadening of the offering under the EyeQ brand, which is a house brand in contact lenses, strengthening that unique Synsam subscription offering, as well as also launching a specific, more of a niche product called MiSight, which can actually slow down the progression of nearsightedness in children. Those are some examples of recent development in contact lenses. Going to the next page 11, we are an omnichannel business. We have, over the last five years, invested a lot in developing digital touchpoints to facilitate the customer journey, to make sure that we are at the forefront of integrating digital solutions in our business. We have, throughout the year, launched a number of additional functions in our online channel, and the most recent developments during the quarters include a My Page functionality launched in Sweden, Denmark, and Finland, which adds a customer-friendly interface for our subscription customers to manage their subscription and see a lot of information that they previously couldn't see. This is also an ongoing work where we are continuing to refine and develop and improve our digital offering. Last point on page 12, if we go to that point before we go into the financial development, on page 12, the topic of sustainability, which is an integral part of who we are, our vision, and our business model. We are continuing to also innovate in this space and focusing initiatives on things that attract new customers, that create loyalty and brand attractiveness, as well as drive profitability. Made in Sweden is, of course, a major initiative that we are actively pursuing, and where we are following our plans to start production in the north of Sweden in Q2 2022. We are seeing also, as I mentioned before, seeing some Recycling Outlets with the sustainable sort of angle of the offering, working very well with customers and being an important part of our expansion to date. With that, I hand it over to Per to go through the financial development. Thank you, Martin. We can go to next slide again, please. Thank you. A summary of our segment performance. As you know, we have four segments: Sweden, Denmark, Norway, Finland. All our segments have shown strong growth during the quarter and year to date, and we have also strong profitability development in all segments year to date. Just to remind you, we do have a number one market position in Sweden, number two in Norway and Denmark, number five in Finland, and that is the 2020 market position. Should mention as well that Finland being number five, we are going very strongly there, so catching up very quickly in Finland. Over 223 stores now in Sweden, over 120 in Denmark, more than 110 in Norway, and now 33 in Finland as of September 30th. That's our footprint. Next slide, please. For a financial overview, a little bit repetition to what Martin has mentioned. I do, however, want to highlight the strong growth. I mean, mention organic growth, also like-for-like growth you mentioned, but it's 18.1%, something I want to underline. Also want to go into some details regarding gross margin, where we have increased gross margin from 75.4% to 75.8% in third quarter, and that is a combination of a lot of different factors. Two major factors explain this increase is, or the increased share of prolongings within Synsam Lifestyle as we sell, as the customer base becomes larger and larger and prolongings becomes a more important part of our lifestyle sales. Technically, there is an increase actually in gross margin thanks to that. This is some effect of that in the quarter, as well as positive effect from favorable supply negotiations with effect during the quarter. Also want to explain this adjusted EBITDA versus regular EBITDA. In Q3 here, it is only related to our cost regarding our IPO process, so nothing else. These are costs which we do not normally have in our business, therefore it is adjusted. Going forward, I will just talk about EBITDA even though it is adjusted, because we believe that is our underlying results, so to say, when we strip out this IPO process-related costs, SEK 23 million in the quarter. We can go to next slide. Looking at our long term since 2018 financial development, we can see here now that our strong growth and profitability is a continuation of the trend we have seen last years, where we had 14% growth in net sales in 2018, 11% in 2019. Then came the pandemic year, of course, where we delivered positive growth, although we closed down our stores in Norway and Denmark during certain period in the first half of 2020. Now we see a strong rebound to 19% LTM compared to 2020. This is a continuation of the strong growth trend we have seen going back several years. Also, in terms of profitability, the 27% in LTM EBITDA margin, I mean, that is an improvement, not only compared to the pandemic year of 25%, but also compared to 2019. Should remember here that this is IFRS 16 EBITDA and EBITDA margin compared to pre-IFRS 16 for 2018. Not only do we have a stronger EBITDA, SEK 1,232 adjusted EBITDA, but also in terms of adjusted EBITDA, we see a strong increase in our SEK 1,232 million EBITDA and SEK 837 EBITDA LTM September 2021. Next slide, please, on the cash flow. I want to go into some details here, not just regarding cash flow, but also regarding the IPO process and the balance sheet we actually show in the quarterly report. First though, the cash flow. We have seen a positive development in cash flow from operating activities, SEK 252 million in the third quarter 2021 compared to SEK 121 million in 2020. If you look at the first nine months of the year, one gets the impression that it is quite stable, SEK 587 million versus SEK 576 million last year in cash flow from operating activities. However, one should keep in mind then that we had, during the first half, part of these nine months in 2021, repaid government loans, which were at the new year SEK 196 million. That has been repaid. That is part of the cash flow, actually, the pandemic loans we got from the government in 2020. If you look at the cash flow, one should keep in mind that during the first nine months, actually during the first half, we paid down debt of SEK 295 million. Going then into this IPO process, when we look at the current income statement, the balance sheet, I mean, that reflects the situation as of 30th of September. We made the IPO after the period, 29th of October, meaning that the balance sheet, the net financials and so forth reflect the situation before the IPO. Some main effects of the IPO is that we do not, I mean, the shareholder loans were converted. That is actually close to SEK 4 billion, were converted to equity. They were not converted to equity 30th of September. Therefore, in the balance sheet, not in this slide, but in the balance sheet in the quarterly report, you can see that we had shareholder loans, but that is 30th of September, now converted then to equity. We also have new financing in place after IPO, so the old financing is what is reflected in the 30th of September balance sheet and financial costs. That should be kept in mind. Also being kept in mind when look at earning per share, that we do have today 150 million shares. When we look at the report, it is actually 30th of September situation regarding number of shares. However, adapted for split, share split which was made. The 150 million shares are not reflected in the earnings per share, but that is how it is in this report. Net debt, we have, I mean, thanks to our strong cash flows, we have reduced net debt. It amounts now to slightly more than SEK 2.5 billion compared to almost SEK 2.9 billion September last year. And we have reduced our net debt to adjusted EBITDA to 2.06. It was more than 3.2 September last year. And we now have a low debt level in the company compared to our financial targets. A strong cash flow and low debt right now. With that, I hand over to Martin for a summary. Yes. Thank you, Per. If we go to slide 19, let us just summarize the key points from the third quarter. Again, very strong growth and profitability. We want to highlight the organic growth of 21% and also a strong continued positive development of the lifestyle subscription sales. And leave you with sort of the underlying strategic initiatives that have sort of supported this growth over the last couple of years and also during this quarter, where we are continuing to expand our store network and adding a broader range of products, a high degree of innovation, both in terms of digitalizing our business, investing in house brands tailored to a Nordic customer in terms of design, materials, look and feel, as well as the launch of the subscription model and the continued development of the subscription model offering, which we believe is unique in the industry. That strategy has been very effective to date, and we are continuing to develop all of those aspects of our offering and the Synsam business. With that, we wrap up the presentation part of this meeting, and we hand it over to Simon to moderate the Q&A session. Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. We will take a brief pause while questions are being registered. Our first question comes from Veronika Dubajova with Goldman Sachs. Please go ahead. Hi, good morning, and thank you for taking my questions. I have two, please. One is just the retention rate on the churn rate on the subscription business continues to increase versus the data we saw last year, and I just was hoping maybe you can give us a little bit of insight into what's driving that and how confident you are about remaining in this 1.5%-2% range that you have discussed in the past. My second question is just any impact you are seeing in terms of trading, your current trading from the renewed fears around COVID, and in particular the last couple of weeks as we have seen the case count grow in a number of European countries. Has that had any impact on visits? Thank you. I can start with the Hi, Veronika. I can start with the churn rate. This is, of course, a key focus area for us, and we are continuing to develop the offering, fine-tuning it, making sure we drive as much customer satisfaction as possible, and trying to, of course, keep the churn rate at this very low level, which we think is a good testament to the attractiveness of the lifestyle subscription model. We think that we have a strong level also in Q3 with 2.06%, but we are continuing, of course, to focus on keeping that churn rate low also in the future. You want to add anything? No, no. I was about to dive into the COVID. Yes aspect. I mean, this is how should I answer this? This is all the way new to us as well, this new variant and what is happening in Europe right now. All I can say is we are following the situation closely. There are differences between the responses, have been differences historically, and could be differences this time as well in responses from different Nordic governments on how to act. We follow very closely the government authorities' responses to this and the public responses. What I can say is that we weathered the COVID situation in 2020 quite well relative the market, and we have the ambition to serve our customers in the best possible way, whatever the situation. That's how we view it. We, unfortunately, cannot speculate right now on the development of these new COVID variants. We have too little visibility, which I think you all have. Yeah, I guess let me rephrase the question. Up until today, or I guess maybe last week, were you seeing any softening in patient visits or conversion rates in the business? Well, we haven't really since the COVID situation had an impact on us up until, well, in the first half, during the first half of 2020. We had minor effects in Denmark, Norway in the beginning of 2021. There's a little bit softer traffic flows in Denmark and Norway in the beginning of 2021. Otherwise, we have not seen a meaningful impact of Well, these were the impacts, but otherwise, we have not seen any meaningful impact of COVID up until recently. That's how we can view it. That is very clear. Thank you. As a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. As of right now, there are no further questions. I hand back the word to our speakers. Well, thank you. I mean, if there are no further questions from our end, we thank everyone for participating and, yeah, wrap up. Thank you for your attention and thank you from us, basically.