Komplett ASA

OSE:KOMPL

Earnings Call Transcript

[Kristin Hovland, executive]

Good morning, and welcome to the presentation of Komplett Group's Fourth Quarter Results. My name is Kristin Hovland, and I'm Head of Communication at Komplett Group. Today's presentation will take approximately 20 minutes. And during the presentation, you're welcome to post questions via web, and we will answer them at the end, together with the questions from the audience.Before we present the results, I would like to welcome our Chairman of the Board, Jo Olav Lunder, to the stage for announcement.

[Jo Olav Lunder, executive]

Thank you, Kristin, and good morning.Before I give the floor to Lars on our Q4 presentation, I would like to share a few comments on the second announcement that we made this morning. Today, the Board of Directors has appointed Jaan Ivar Semlitsch as our new CEO, and he will take up the position tomorrow.But first and foremost, I would like to take this opportunity to thank Lars for his contribution since he became CEO of Komplett in 2018. Lars has been very instrumental in developing the Group. And under his leadership, we have taken important steps to consolidate our position as the leading online-first electronic retailer in the Nordics. The Group has been strengthened through both an IPO and also through important acquisitions. More recently, we successfully completed a private placement and a refinancing. Lars has led all this work which gives Komplett a much stronger position now compared to when he took over. And on behalf of the whole world, I would like to thank you, Lars, for your time, dedication and results.At this point in time, the Board believes that Komplett is moving into a new stage. And going forward, we would like to focus on developing the organization. We would like to build on the strong market position that has been created. And we would also like to continue to extract synergies from the combination with NetOnNet. We believe the company needs a different management profile to successfully do all these things. Jaan Ivar Semlitsch, he holds an extensive industry experience. He has an excellent track record, and he has senior executive experience. We thank Lars for the work, and we warmly welcome Jaan Ivar as the new CEO of the company. We're also very thankful that Lars will be available as an adviser in the transition period. And we will now do everything we can to make sure that we have a smooth handover of power in Komplett. I'm also available for questions after the presentation. But with this, I'll now give the floor to Lars for the Q4 numbers and highlights. Thank you.

[Lars Olav Olaussen, executive]

Thank you, Olav. All right. So the fourth quarter is a quarter where challenging market conditions put pressure on our top line. But the fourth quarter is also a quarter where all other parameters are showing positive improvements. Our gross margin is increasing and is ending out at the same level as last year. At the same time, the synergy realization from the combination with NetOnNet is well underway and will yield effects in 2023. As can be seen on the lower graph on the yellow line, our industry-leading cost position is sustained if we exclude net on the acquisition of NetOnNet. Including NetOnNet, in there, we have made significant interventions on costs last year, which will yield also effect going into 2023.Our cash flow from operations for the year lands at NOK1.1 billion, driven by both the factoring agreement and a successful reduction of our inventory levels, and we've successfully also completed the refinancing. So as we move into 2023, we are well on track with the synergy realization and the gross margin is improving. We have a solid cost position intact. We have our balance sheet well refinanced and healthy inventory level. And the Group is well positioned both for a market recovery, but also to handle the more challenging market conditions in the current inflationary environment.Looking at the top line for the quarter. There is, of course, a big step up in revenue driven by the combination of NetOnNet. But on a pro forma basis, revenue decreases by disappointing 15%, driven by, first of all, the challenging market conditions, but also the fact that the share of online trade has been returning to pre-pandemic levels over the quarter. This impacts us negatively in the short term, but the long-term trend, we remain confident that the online share will get back to growth and long term continue growing.On gross margin, the trend is positive for the quarter. As can be seen on the graph, we are closing the gap towards last year and ending the quarter at the same gross margin level as last year. And we're delivering also the highest gross margin level for the year. The positive development in gross margin is clearly supported by the diligent work that's been done to reduce inventory. The total inventory level is down by NOK600 million year-over-year. And the inventory composition, which is also an important parameter is in a much more healthy state than we were a year ago. Further, the supplier negotiations following the combination with NetOnNet is well on track and progressing according to the previously announced plan.On EBIT, we delivered a total of NOK70 million for the quarter, and this is well supported by strong and solid cost control. If we exclude the M&A of NetOnNet again, we have a 1% decline in like-for-like operating expenses, landing at an industry-leading 10.2% OpEx share for the quarter. In addition, as previously announced last year, we conducted significant cost measures in NetOnNet that will give an effect of SEK70 million to SEK90 million gross savings with effect in 2023. And then as we move into a more inflationary environment, which we all see in our daily lives, our online-first business model will provide us a partial hedge for the cost increases that is bound to come in 2023. In sum, we deliver an EBIT margin for the quarter of 1.5%.If we look at the segments, the weak market trend continued in the B2C segment with an 18% pro forma revenue decline. And as previously said, this is driven by a very weak market environment where consumer confidence is at an all-time low level. And that the online share is returning to pre-pandemic levels during the quarter. The gross margin is trending positively, driven by improved inventory levels and is closing up on the gross margin levels we saw during the pandemic. And then supported by strong cost control, our EBIT for the quarter lands at NOK51 million and is up at 1.5 percentage points.In the B2B segment, we also now start experiencing the effect of more slow consumption, especially the SME segment is showing lower demand over the quarter. Despite this trend, we see also here clear improvements in the gross margin. And as you can see on the top graph, we land a gross margin of 19%, which is the highest gross margin we've seen since 2019. This is a gross margin increase also both 2.9 percentage points quarter-over-quarter versus quarter 3 and is supported again by a healthy inventory level. Combined with strong cost control, we delivered a solid 9% EBIT margin, which is 3 percentage points better than quarter 3 and a total EBIT of NOK37 million.In the distribution segment, an overall weaker consumer sentiment also impacts our customers in the distribution segments taking down the revenue somewhat for the quarter. Here as well, our gross margin is also impacted by mix effects as the smaller retailer, which are more profitable ones, have a softer demand development than the balance of our customer base. And we have a less favorable product mix. But again, we continue to exercise strong cost control, and we have a model where we scale our business, both in the face of increased volumes, but we also scale our business and cost base in the face of a more softer volume base. And this resulted in an EBIT of NOK19 and 2.3 percentage points. Krister, I'm going to hand over to you now to go through the financial performance.

[Krister A. Pedersen, executive]

Thank you, Lars. As Lars has already been through, we delivered growth in the fourth quarter in operating revenue, but that was mainly driven by the combination with NetOnNet. For the full year, we had a net turnover of NOK14.6 billion, which is up 32% against last year. However, adjusted for the combination with NetOnNet, we have a decline of 11%. This is mainly driven by a soft online consumer electronic market. On the positive side, we have strong cost control. We see an improved gross margin trend. And in Q4, this is a result of the work we have done in the previous quarters.In the end of Q4 and the following quarters, we have the inventory level, which is much better than 1 year before. The adjusted EBIT in the fourth quarter is down from NOK118 million last year to NOK70 million this year, mainly driven by softer sales in the B2C segment. We have 2 one-off items in the quarter. The first one is related to the cost cut program in NetOnNet announced in the third quarter presentation and a change in accounting principles in NetOnNet to correspond with the accounting principles in the rest of the Group, in total, NOK20 million.Net financials for the quarter was negative by NOK41 million and is mainly driven by interest cost and IFRS 16 effects. Profit on discontinued operations was NOK4 million for the quarter and NOK10 million for the year and is related to the Comtech closure back in 2019. On taxes, we have a tax income of NOK47 million. This is a tax deduction recognized from the closure of Marked Gruppen back in 2018 and booked now in 2022. Profit for the period was NOK59 million, but for the year, negative NOK32 million. And the Board will propose to not pay dividend as earlier announced.Cash flow from operations was NOK560 million for the quarter and NOK1.1 billion for the year, which is up from NOK65 million last year. The improvement is a result of the reduced inventory of NOK600 million and implementing factoring with effect of NOK380 million. The investing activities amounted to NOK77 million for the period and NOK1.7 billion for the year. The latter is driven by the combination with NetOnNet.I will come back to the financing activities on the next slide. In fourth quarter, we had an equity issue of close to NOK1 billion. And together with the factoring agreement and existing cash flow, we have repaid the bridge facility by NOK1 billion in the end of '22 and the remaining NOK0.5 billion in the beginning of 2023. Further, we have secured new bank facilities consisting of NOK1.3 billion of a revolving facility and overdraft facility of NOK400 million. The overdraft facility is NOK100 million higher in peak season in Q4.Net interest-bearing debt, including IFRS 16 was NOK1.4 billion, up by NOK558 million from last year. However, the increase excluding IFRS 16 is lower and is NOK310 million. The liquidity reserve was NOK1.3 billion compared to NOK0.5 million last year. And the leverage ratio including IFRS 16 was 3.7 compared to 1.7 last year, and the main reason is lower EBITDA.In sum, we have during a difficult year succeeded to improve the balance sheet, and we have secured financing for further growth. Back to you, Lars.

[Lars Olav Olaussen, executive]

Thank you, Krister. All right. Some key takeaways for the quarter. As said, it's a quarter where very challenging market conditions hampers our top line, but also a quarter where all other parameters are moving in a positive direction. Our gross margin is continuing to improve and is back at last year's level. We're continuing to work well with our cost and our synergy realization is on track. And our cost leadership position is, of course, sustained during the quarter.The work we've done to reduce inventory pays off. The inventory level is down by NOK600 million, and the stock composition is much more healthy now, allowing for the gross margin expansion we see. For the year, the cash flow is improving by NOK1.1 billion, driven by a new factoring agreement and the inventory reduction. And the balance sheet is also then much improved in addition to the private placement being completed and the long-term credit facilities in place.If we take a look forward, our January sales figures indicate that the demanding situation on the top line will continue also into the first half of 2023, whereas the development for the second half remains uncertain. But we remain also confident that over time, demand will recover and the share of online trade will also get back to growth as markets normalize. Our gross margin is trending positively, and we expect the gross margin performance to improve going forward, also supported by the realization of cost synergies following the acquisition of NetOnNet. As previously announced, we target NOK200 million of cost synergies whereas NOK100 million of them should be realized during the course of 2023, and we are well on track to deliver on those targets.As we move into 2023, we have our cost-leading position, and we will see the effect of the cost reducing initial reduction initiatives that was implemented last year in NetOnNet, which should yield SEK70 million to SEK90 million gross savings over the year. And we have an online-first business model, providing a partial hedge from the negative effects from the inflationary environment we're seeing.As this is my final presentation as a CEO, I would just like to make a small closing remark. The Komplett Group is now a fantastically positioned company in my personal point of view. We have solid brands and leading positions in both Norway and Sweden. We have fantastic cost synergies on the way from the combination with NetOnNet and a leading cost position to support us. And as we move into 2023, we have a healthy inventory and a good stock composition. And I'd like to take the opportunity now to say I'm extraordinarily proud of what the team has delivered over the last 4.5 years, and give a big thanks to all my colleagues at Komplett. And thanks to the Board for 4.5 inspiring and very fun years and thanks to everyone who's invested in us and placed their trust in us as a company. Thank you. Kristin, over to you.

[Kristin Hovland, executive]

Thank you, Lars. Thank you, Krister. I will now hand it over to [ Elisa ] for the Q&A session.

[Operator]

Thank you, Kristin. Before we open for questions from the audience here in Oslo, we have already received a few questions about the upcoming CEO change, which we will address first. So the first one goes to Jo. Is the CEO change related to the share price development since listing?

[Jo Olav Lunder, executive]

The share price?

[Operator]

Yes.

[Jo Olav Lunder, executive]

No. It has nothing to do with the share price. In fact, I think Lars has handled the market conditions very well. And as I said during my intro, the Board is pleased with work and the performance. And I think the last quarter of '22 also shows good progress. It has nothing to do with the share price.

[Operator]

Thank you. And does the CEO change involve a change in strategy for Komplett going forward?

[Jo Olav Lunder, executive]

Change in strategy, no. First of all, I think it's important to then confirm that the Board and Lars has been very aligned on our strategy. And I think our strategy has been executed well. I think, as I said also during my intro that we would like now to have more focus on how we develop the organization, how we develop the market positions that Lars has created and how we utilize synergies and potential from the NetOnNet acquisition. And we simply believe that Jaan Ivar is the right person to lead that stage of the development. So it has nothing to do with disagreement on strategy and strategy is what it is. There's no change.

[Operator]

Last one on that note. You say the change will happen already tomorrow. Why is there such a rush?

[Jo Olav Lunder, executive]

It's not really a rush. But when we in the Board decided that we believe the change of CEO profile could be beneficial for shareholders and the company and a capacity like Jaan Ivar Semlitsch is available. He's right in front of us, and he can start quickly. Then I had a conversation with Lars and we agreed to make the change quite quickly, I have to admit that. But it's coordinated, it's friendly. Lars will advise, and we will make sure we have a smooth handover. We think 5 years ahead now, and we believe Jaan Ivar will stay along with the company and help developing the company and also in Lars benefit, he's a shareholder.

[Operator]

Thank you. We will now move on to questions concerning the financial results. And we will start with questions from the room here in Oslo, if there are any. So please raise your hand if you have a question. and wait for the microphone. No. We will then move on with the rest of the questions from the web. First one is from Hakon Fuglu at SEB. Within B2C, are you seeing differences on purchasing power within the different countries?

[Lars Olav Olaussen, executive]

I think, yes, there are, of course, differences. But I think a key driver now is that if you look at, if we start by discussing the Norwegian consumer, the purchasing power of the Norwegian consumer is not dramatically reduced in a way that should in itself allow for the variation or the negative market sentiment we see. But the consumer confidence is a key parameter. And I think that is sort of the similarity we see between Norway and Sweden with an extraordinarily low consumer confidence. And once you have that consumer confidence, what you do is you stop investing in luxury goods, you stop investing in capital goods and you stop investing in products that where you aren't forced to replace them. And if you look at Komplett Group, we have a lower exposure towards more forced replacement categories like white goods. So if your washing machine stops working, you buy a new one, even though your consumer confidence is low. But you might postpone the upgrade of your TV or your gaming equipment, which is where we are more exposed. So I would say that is sort of the relevant trend to address it through.

[Operator]

Moving on to 2 questions from Joachim Huse. Will regular seasonality lead to a margin decline quarter-over-quarter in Q1 2023? Or do you expect continued margin expansion in Q1 as well, both in terms of gross margin and EBIT margin?

[Krister A. Pedersen, executive]

I can answer that. We see a positive trend on gross margin. Last year, we had 2 months of good sales figures for the first 2 months. And then we have that the market was opened up after COVID in March. But on gross margin, we see a positive trend from the standpoint we are today. However, on EBIT margin, we need to see that in combination with sales.

[Operator]

Thank you. With inventories substantially reduced, will this impact the sales in 2023? Or do you feel that the current levels are sustainable?

[Lars Olav Olaussen, executive]

If the inventory levels will impact sales? So I'm not really sure if I get the question while I'll try. We have reduced our inventory level, which I would say is not only a positive for us in terms of cash flow and the balance sheet, but it also puts us in a position to buy fresh stock. And I think it's important to realize that consumer goods is also something that goes out of date quite quickly. You need to have the newest product in stock to sell well. So I think it puts us in a very neat position where we can have a really up-to-date offering for our customers. And as volumes are low in the market, I think being in a position where you want to buy stock from our suppliers also gives us a very favorable negotiation position. So I think it's a fantastic place to be, and we have no strength in our cash right now to make the necessary purchases to support sales. So I would see that as a pure positive.

[Operator]

Thank you. Now we have 4 questions from Ole Martin Westgaard, DNB. First one is, can you please add some color on how you see the competitive landscape?

[Lars Olav Olaussen, executive]

It's I think we're seeing a market where the first, what I see in, when we monitor pricing development in the market, I think we're seeing a combination that some retailers, they still hold high stock, but it's beginning to be more balanced when we move into January, where I think prices are starting to move slightly upwards in the market. And for me, I think that is sort of the key parameters of the competitive landscape now as the consumer electronics industry maybe is one of the last one who hasn't pushed all the inflation that set us over the last year through to consumer pricing. And we're seeing somewhat increase in that now. So I think that is sort of the key driver at the moment.

[Operator]

Are your positive outlook comments on gross margin dependent upon a recovery in the market?

[Lars Olav Olaussen, executive]

They're primarily dependent on us succeeding with realizing the synergy benefits from the NetOnNet acquisition.

[Operator]

And that brings us to the next question. What is the current status on the synergies with NetOnNet? How much have you been able to crystallize so far? And can you add some more color on the phasing of the remaining synergies?

[Lars Olav Olaussen, executive]

Yes. When we talk about the synergies, I think you need to split that work into 2 parts. One is negotiating a lower price on paper with our suppliers. And the other one is sort of realizing the EBIT benefits in our P&L, which happens when you procure the volume and you sell it at the right pricing, et cetera, et cetera. I think we're far advanced and somewhat ahead of plan, I would say, in the negotiation with our suppliers. But we're slightly sort of on track but slightly behind, I'd say, on the realization. And the reason for that is basically that we've spent time clearing the inventory and creating a new stock composition. And then it takes a bit of time. So there's a bit of sort of lag in those systems before you get the fresh stock bought at new prices out into the market, and we can start realizing the benefits. But that is more of a time lag rather than an issue anyway. So I leave with great confidence and same from understanding I leave somewhat pressure on the next guy.

[Krister A. Pedersen, executive]

We have also announced the effect of NOK100 million this year. So I think that is half of the effect, and that's a good start.

[Lars Olav Olaussen, executive]

Yes.

[Operator]

How do you see your cost position develop relative to peers in the current inflationary environment? What should we expect from underlying inflation for Komplett in 2023?

[Lars Olav Olaussen, executive]

We haven't been specific on that. But I think what we see is that our online-first model benefits as well as we have much fewer stores in relation to our sales, and we have also less employees in relation to sales than our peers. And as salary inflation now hits, electricity prices and index-driven adjustments on rent comes to effect, we have with our online-first, a partial hedge towards all of those effects, which should give us a relative advantage towards our competition.

[Krister A. Pedersen, executive]

Yes. And then further also in sales price, we haven't seen any inflation on consumer electronics yet. So that might also come for the next year.

[Operator]

Final question so far. Can you comment on the development in general campaign pressure in the market? And any contribution from this on the online share of revenue?

[Lars Olav Olaussen, executive]

I think we've seen a period of very aggressive campaigning now related to stock clearance. But as said, I think as I subscribe eagerly to all news letters in the business, and I have received quite a few of them also recently. So it continues the stock clearance activity, which is of course putting pressure on the profit of the industry. But I think during the next couple of quarters, that will ease off and that should pave the way for a more normalized margin level and a more normalized promotion level in the market as well.

[Operator]

Thank you. Is there any more questions from the room in Oslo? No. There seems to be no further questions. I give the word back to you, Kristin.

[Kristin Hovland, executive]

Thank you. We will be back presenting our first quarter results on the 27th of April. Thank you all for joining us today, and we wish you all a great day.