Desenio Group AB (publ)

STO:DSNO

Earnings Call Transcript

[Fredrik Palm, executive]

Welcome, everybody, to Desenio Group's Q1 Results Presentation Conference Call. So with me today, I have our CFO, Kristian Lustin. Presentation materials are available on our website, and a Q&A session will follow at the end.

Based on the previous quarter, the market during the first quarter of 2023 was stable with customer behavior in line with our expectations. In this environment, it is gratifying to see how the measures to streamline operations that we completed in 2022 are now having a positive impact on profitability. Net sales decreased by 9.5% to SEK 260 million compared to the same period in 2022. The lower net sales is explained by the fact that the sales in January 2022 during the end of the pandemic was extremely strong compared to 2023. However, during the latter part of the quarter, sales were at the same level as the year before.

We invested in marketing in the quarter, which led to marketing expenses in relation to net sales, increasing from 25.5% in Q1 last year to 28.5% in Q1 this year. The higher level is explained by our investment in marketing in Europe but also in North America where we build our brand and continue developing the business.

Furthermore, we are very pleased that Anna Ståhle has accepted the position as new CFO of Desenio Group. Anna will assume the position as of 1st of August. She has a broad experience from leading consumer companies as CFO, financial manager and in addition with sales supply-related responsibilities.

Profitability for the quarter was higher than in the same period last year despite lower sales and higher marketing expenses. This is, among others, because of warehousing and shipping costs being clearly lower than before as a result of our development of our fulfillment setup, resulting in increased efficiency. The cost for fulfillment decreased from 30% in Q1 last year to 26.4% in Q1 this year. In addition, costs for Admin & Other was SEK 7 million lower during the same period last year -- sorry, during Q1 compared to the same period last year, mainly due to staff reductions made in Q2 last year.

Adjusted EBITA for the first quarter, therefore, increased despite the lower net sales to SEK 42.1 million compared to SEK 36.5 million in Q1 last year. This means an adjusted EBITA margin of 16.2% compared to 12.7% in Q1 last year. And this was the fifth quarter in a row with increasing margins. The operating cash flow during the first quarter amounted to SEK 42.6 million. In Q1 last year, operating cash flow was minus SEK 49 million. Kristian will, in the financial section, explain the large difference in cash flow. As of the 31st of March, cash and cash equivalents amounted to SEK 193 million compared to SEK 156 million at the beginning of the year.

To summarize, we still experienced negative year-on-year net growth in Q1, but on the other hand, higher gross margin, higher adjusted EBITA margin and strong operating cash flow.

Here, we analyze the impact of our work to decrease cost levels and increase efficiency. We see that the improved efficiency in fulfillment has had positive impact of 3.6 percentage points. And that higher product margin, lower employee costs and other costs, in total, also amounted to an additional 3.6 percentage points. Well, pure savings compared to Q1 last year.

So now let me comment more in detail on the development of the business in our markets. By looking at search trends in comparison to our sales development, we can see that our sales continue to trend higher than the market search volumes. So this year's Q1 search volumes were lower than last year's, which also reflects in our sales compared to last year. However, coming into low season in Q2, search volume trend looks slightly more positive than last year.

Comparing Desenio Group to a few of our biggest competitors, we see that during Q1, slightly increased the share of voice in Germany and the U.K., our 2 biggest markets. This indicates that in this still rather challenging market, Desenio Group is still increasing its market shares.

Our conversion rate for the Desenio websites has, in Q1, been well above 2020 and slightly above 2021. The traffic in Q1 was well above 2019 and towards the end of the quarter, in line with last year, but on a more positive trend going into Q2.

As already mentioned, the gross order intake started the year lower than last year but caught up towards the end of the quarter to be in line with last year. And the trend looks much better than last year going into Q2. And it's also encouraging to see that this level is considerably higher than what it was in 2019 before the pandemic.

Our net sales showed negative growth in 3 out of 4 segments. In the Nordic region, net sales fell by 11%; in our core markets in Europe, fell by 9%; and in rest of Europe, it fell by 15%. But positive is that in the Rest of the World, net sales increased by 9%. In North America, our net sales actually increased by around 17%.

So here we see some customer highlights. We can see that our active customers have decreased as well as traffic and orders compared to last year. Both traffic and number orders decreased by 19% each.

With that, I hand over to Kristian for the financial update.

[Kristian Lustin, executive]

Yes. In the following slides, we take a closer look at some financials. As Fredrik mentioned, net sales decreased 9.5%, in line with the lower demand in our markets. However, during the quarter, we had an increased gross margin, 84.3% compared to 83.2% in quarter 1 last year. This is mainly due to lower shipping costs and positive FX effects. Compared to the first quarter of last year, the EBITA margin improved despite the lower net sales. Adjusted EBITA margin amounted to 16.2%. The improvement is mainly explained by the effects from increased fulfillment efficiency and the cost saving program implemented in Q2 last year.

Now CapEx in the quarter and the CapEx last year was also on a low level. The net working capital was very high in Q1 last year, but has been improved every quarter thereafter, and it continued in Q1 this year. Compared to the year-end, demand change is due to decreased inventory levels. The ratio is now slightly above 9% on 12-month rolling net sales. The main difference between Q1 last year and Q1 this year is decreased inventory and less current receivables. The high current receivables were reduced in Q2 and Q4 last year, and one large explanation was the tax receivables that was paid out in Q2 and Q4 last year. Our operational cash flow in the quarter was SEK 43 million, which is further explained on the next slide.

The operating cash flow during the quarter was positive SEK 43 million. Bond interest payment was just over SEK 22 million compared to just under SEK 16 million previous year. Noncash items consists of depreciation and amortizations on fixed assets, intangible assets and leasing assets. A reduction in inventory contributed with SEK 19 million in the quarter. Current liabilities increased by SEK 10 million, but this was offset by tax items of SEK 12 million. The overall picture of the quarter's cash flow is that the low short-term liabilities at the year-end had a positive effect on the quarter's cash flow. And last year, it was the opposite. The focus on more efficient inventory management that started in 2022 had a positive effect in this quarter as well with SEK 28 million less inventory than at the end of March last year.

I now hand over to Fredrik again for the summary.

[Fredrik Palm, executive]

So thank you, Kristian. To summarize the first quarter of 2023. We are still experiencing a rather weak consumer market, which is reflected in our net sales. However, we are on a positive trend coming into Q2, which is in line with last year towards the end of the quarter. Cash position strengthened by almost SEK 38 million in the quarter. And the uncertainty we lived with during 2022 will continue during 2023 as a result of hiking interest rates and inflation, leaving every consumer with a thinner wallet. This uncertainty becomes even bigger depending on how the downturn in economies will affect employment rates. Nevertheless, we see continued positive development in North America, but it will still take some more time to reach meaningful sales levels as it often does in new markets.

So thank you all for listening, and we are now more than happy to answer your questions. So over to you, operator.

[Operator]

[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABGSC.

[Benjamin Wahlstedt, analyst]

So first off, quite an impressive inventory reduction here. How should we view the stock and trades or the inventories rather going forward, would you say?

[Fredrik Palm, executive]

So I didn't quite get the question. So how we view the inventory levels. Was that the question?

[Benjamin Wahlstedt, analyst]

Yes.

[Fredrik Palm, executive]

Yes. I think during the whole of last year, we've had too high inventory levels due to the fact that we didn't really sell as much as we expected. So we worked during last year, and we're still working to reduce inventory levels. I think we're about to reach the balanced inventory level for the sales that we have now. So well, the answer is you shouldn't expect that the inventory levels will fall this much every quarter now.

[Benjamin Wahlstedt, analyst]

Perfect. And then I noticed that you don't report any organic growth this quarter. Would you say that 15% is good or 15% decline is a good approximation?

[Fredrik Palm, executive]

So I get here that we have. So can you please repeat that? 15%?

[Benjamin Wahlstedt, analyst]

Yes. Absolutely. Is a 15% organic decline a good approximation of the organic development in the quarter, please?

[Fredrik Palm, executive]

Do you mean going forward or in general?

[Benjamin Wahlstedt, analyst]

No, in Q1. I couldn't find anything in the report for organic growth.

[Fredrik Palm, executive]

Okay. So you mean without the FX effects?

[Benjamin Wahlstedt, analyst]

Yes, exactly.

[Fredrik Palm, executive]

Yes, yes. We can elaborate a bit more on that. Please do that, Kristian.

[Kristian Lustin, executive]

We estimate the FX effect to be 4.4% in the quarter.

[Benjamin Wahlstedt, analyst]

All right. Yes. So 15% is not that far off then. Could you, as well, if possible, discuss your development compared to the market overall, if you have any understanding of peers' performance?

[Fredrik Palm, executive]

Yes, I mean what we basically look at that is the slide that I showed where we compare the search volumes for -- and share of voice in the marketing landscape for different brands. And it's still the same as it's been during the whole downturn that we believe -- even though search volumes in the market declines, we believe that we still take a bit of market share in those markets. And we also see -- I mean, already during Q2 last year, we saw that many competitors, well, were not as visible in the digital marketing landscape. And so that's also a sign that we are taking market share.

[Benjamin Wahlstedt, analyst]

Perfect. And then on that note, could you perhaps discuss marketing allocation slightly? So marketing costs are up. Is this an effect of sort of reallocation and then also increased marketing prices? Or is this just an effect of just adding on marketing spend in North America?

[Fredrik Palm, executive]

It's a bit of combination. But I would say, in general, the search volumes are still down. We actually need to spend a little bit more to maintain volumes higher than the market, so to speak. So we are actually investing a little bit extra marketing to gain market share in this market. And on top of that, we're also spending more in North America to fill a brand and to really grow.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for questions from the webcast or closing comments.

[Fredrik Palm, executive]

Okay. I don't think we have any written questions or -- no? So thank you very much, operator, and thank you, everyone, for your time and questions. So please don't hesitate to reach out to us should you have any questions or requests. Speak soon, and stay safe.