Desenio Group AB (publ)

STO:DSNO

Earnings Call Transcript

[Fredrik Palm, executive]

Thank you, operator, and welcome, everybody, to Desenio Group's Q3 Results Presentation Conference Call. As usual, with me today, I have our CFO, Anna Stahle. So we will start by presenting the outcome of the quarter and the Q&A session will follow after the outlook.

In Q3, we delivered the second quarter in a row with growth after a long period of decline. Sales was particularly strong in July and August, but slowed considerably during the heat wave in Europe in September. It is common for us where colder weather than normal is positive for sales and vice versa. In addition, we delivered a stable cash generation as a result of continuous efficiency improvements despite higher marketing costs. However, we run the company with a challenging balance sheet, which includes the senior secured bond we issued in December 2020 of SEK 1.1 billion, which matures in December 2024. Therefore, we have started a project to actively work on evaluating our balance sheet and how we can optimize our capital structure to reduce our interest cost and net debt. To help us, we have mandated ABG as financial adviser to evaluate the options available. There's not much more to say about this for now, but we'll, of course, comment on the development of the project going forward.

Looking at the numbers in the quarter, we can conclude that net sales grew by 7.5%, amounted to SEK 228 million. It is also encouraging that the number of visits rose by 7.7% and that the average order value increased by 6.1%. We saw increase in net sales in the Nordics and in the core markets in Europe as well as North America, where we had net sales growth of 45%.

The lower net sales in Rest of Europe is a consequence of our staff reductions last year where we decided to focus on the Nordics, Core Europe and North America. Marketing costs in relation to net sales increased from 24.8% in the third quarter last year to 30.2% in the third quarter of this year. And that is excluding the depreciation of the Poster Store's customer database of SEK 8.3 million for the quarter. And this is a result of our focus on strengthening or defending our market positions.

However, cost is high, since the consumer in the current market climate is less inclined to buy, which forces us to sell more of market than we would like to. In North America, we invest to build our market presence. One initiative is our colab with the YouTube influencer Lone Fox in North America who, as an ambassador for Desenio and in collaboration with our design studio has created a collection that is communicated with films and interviews online.

We already see positive signs from this operation and plan more initiatives to improve the selling position in North America. The cost reductions and improved efficiency is key to manage our growth ambitions. Here, we are successful partly because we reduced the workforce last year and partly because we are continuously more efficient in fulfillment.

The cost ratio from fulfillment decreased from 27.6% to 26.4% as a result of our investments in an efficient logistics structure. The cost ratio for admin decreased from 18.1% to 4.6%. However, it should be noted that during the third quarter last year, part of the cost for fulfillment approximately SEK 4 million were reported as admin costs. So from the fourth quarter last year, this cost is instead included in fulfillment. And adjusted for this change in cost allocation, admin costs during the quarter fell from 16.1% to 14.6%, so 1.5 percentage points. While cost for fulfillment fell from 29.5% to 26.4%, which is 3.1 percentage points.

Profitability during the third quarter was slightly lower than the corresponding quarter in 2022, mainly as a result of higher marketing expenses. EBITDA amounted to SEK 25 million compared to SEK 28 million last year, and the EBITDA margin decreased to 11%. Cash flow from operating activities amounted to SEK 9.1 million to be compared to SEK 40 million last year. At first site, this could be [indiscernible] and looks like a big decline. But in reality, 2/3 of this difference is explained by a noncash flow affecting reclassification of leasing and of reversing a provision related to the reduction of staff last year.

In addition, last year, we had a refund from the Swedish Tax Agency positively affected cash flow. It is satisfying that our cash position is stable. As of September 30, cash amounted to SEK 128 million, which is SEK 3.6 million higher than at the end of the previous quarter. At the beginning of the financial year, cash amounted to almost SEK 156 million. Most of the decrease in relation to the end of the third quarter is explained by the repurchase of the Desenio's bond of the market in June 2023. And that was corresponding to -- sorry, 3.2% of the total outstanding bond loan. The purchases were made at an average repurchase amount of 70% of nominal value, for a total amount corresponding to SEK 24.5 million.

To summarize, we grew in the quarter, the gross margin was slightly lower. The EBITDA decreased slightly, and the operational cash flow was much lower than in Q3 last year, partly as a result of the lower result before tax, but mainly as a result of special circumstances last year.

Here, we analyze the impact of our work to decrease cost levels and increase efficiency. We see that our further reduction of salary costs tick out with a positive impact of 3.5 percentage points, and our improved efficiency in fulfillment at another 2.2 percentage points, while marketing costs had a negative impact of 5.5 percentage points compared to Q2 last year. Again, please bear in mind that during the third quarter of last year, part of the cost from fulfillment, approximately SEK 4 million, was reported as admin costs.

Now let me comment more in detail on the development of the business in the markets. By looking at search trends in comparison to sales development in Germany and U.K., we can see that our sales continue to trend higher than the market search volumes in Q3 since the low point in June. And if you look at this with our perspective, the data shows that we are much more dominant as a player in the market now compared to 2019. And comparing the Desenio Group to few of our biggest competitors, we see that we, during Q3 increased our share of voice in both Germany and the U.K. So our higher marketing spend gives us higher market shares.

Our conversion rate for the Desenio Group websites was in Q3 this year, lower than last year. But less volatile between them all and above 2020 and 2021. The traffic in Q3 was higher than last year for the quarter as a whole, but slightly lower in September. As I mentioned earlier, we believe this is due to the unusually warm weather in Europe in September.

The group's gross order intake in Q3 was 7.5% above last year and 21% above 2019, which we see as the most recent normal reference year. As mentioned earlier in this presentation, the sales development varied across geographic markets. In the Nordic, net sales rose by 11%. And in the Core market in Europe by 20%, while the rest of Europe decreased by 23%. Rest of the World grew by 29%. And in North America, which is included in the Rest of the World, net sales increased by 45% compared to the third quarter last year.

This slide shows customer highlights. We see that our active customers decreased, while our traffic and orders increased compared to last year, which is positive. So our sales growth comes from a combination of increasing visits and increased average order value. I now hand over to Anna for the financial update.

[Anna Stahle, executive]

Thank you, Fredrik. In the following slides, we will take a closer look at some financials. As Fredrik mentioned, net sales increased by 7.5% compared to Q3 last year. Gross margin decreased from 83.8% in Q3 last year to 83.3% in Q3 this year, driven by increased campaign intensity in the quarter compared to last year. Despite stronger sales in Q3 this year compared to Q3 last year, we did not quite manage to reach the same profitability level as in Q3 last year.

EBITDA in Q3 this year was SEK 25 million compared to SEK 28 million in Q3 last year. And the EBITDA margin was 11% in Q3 this year compared to 13.3% in Q3 last year. In terms of CapEx in Q3 this year, it was lower than last year. CapEx in Q3 this year of roughly SEK 200,000 is related to smaller investments in our warehouse in the Czech Republic. Last year's investments refer to investments in the warehouse in the Czech Republic as well as in the U.S. We see that the net working capital of minus 8% of the net sales for the last 12 months was in line with Q3 last year. Inventory levels and current liabilities have decreased while current assets are somewhat flat compared to the corresponding quarter last year.

Our operating cash flow in the quarter was positive by SEK 9.1 million, which is further explained on the next slide. Here is the breakdown of the operating cash flow. The operating cash flow during the quarter was, as I said, positive by SEK 9.1 million. We had a positive EBITDA of SEK 25.1 million in the quarter, including amortization of Poster Store customer database, we are at a positive EBIT of SEK 16.1 million in the quarter.

The bond interest payments amounted to SEK 26.5 million and noncash items include the depreciation and amortization of fixed assets, intangible assets, and leasing assets, altogether, SEK18.6 million.

Paid tax in the period was SEK 7.6 million and inventory levels decreased by SEK 5.6 million and changes in current assets and liability positively affected cash flow in the quarter by SEK 6.1 million due to higher liabilities because of higher sales in Q3 compared to Q2. So in summary, operating cash flow during the quarter was positive by SEK 9.1 million, mainly driven by lower inventory and increased current liabilities. I now hand over to Fredrik again for a summary.

[Fredrik Palm, executive]

Thank you, Anna. So to summarize the third quarter of 2023, the growth trend has been positive in the recent quarters. This was the second quarter of the year with growth. We have a business with increasing efficiency with a fully integrated web platform and efficient distribution, which, together with our data-driven design and marketing means we continue to have a leading position.

We see good growth opportunities, especially in North America. But at the same time, we can recut that the consumer purchasing behavior is not certain in light of the macroeconomic and geopolitical development. However, there's no doubt that the Desenio Group is a well-managed company in our industry. We operate to fully-integrated business with an efficient web platform and distribution, data-driven design and marketing, and we have highly competent employees.

And last, but very important, we have started evaluating our balance sheet to optimize capital structure. 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] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Fredrik Palm, executive]

Thank you very much, operator. And thank you, everyone, for your time and to listening in. And as usual, please don't hesitate to reach out to us if you have any questions or requests. So, speak soon. Stay safe.