Rugvista Group AB (publ)

STO:RUG

Earnings Call Transcript

[Operator]

Good morning, and welcome to RugVista

[Audio Gap]

Today's conference call is being recorded on RugVista and Financial Hearings web pages afterwards.

Today, I am pleased to present CEO, Michael Lindskog; and CFO, Henrik Jorgensen. And with that, I will hand over to Mr. Lindskog. Go ahead.

[Michael Lindskog, executive]

Thank you, and welcome, everybody. This is Michael speaking. And Henrik is also here with me. I am happy to hopefully have a lot of you online listening in on today's call. If we start on Page 2, I'll kick it off with a few of the highlights from the quarter.

So overall, it was a challenging start to the year, but there are a lot of highlights, which I think is important to remember. So if we start off with some of the challenges that we experienced is number one, of course, the very turbulent macro environment as everybody is aware, the inflation or -- the inflation -- increasing inflation, the war has really caused consumers to be worried about the future, which, of course, has impacted both the available monies that they have to spend or discretionary spending as well as their confidence and willingness to buy slightly higher priced items is our take on the situation.

With that being said, we ended the quarter down -- in terms of net revenue, down 9.1% versus last year, and the organic growth was down 12.3%. One highlight, however, is, of course, that we remain very profitable still. And we ended the quarter at 11.6%, and that's still a -- from my point of view, a testament that we are still running a very profitable business despite or even in a very challenging environment. And also to keep in mind is that when looking at our 2-year trajectory, the growth and profitability development is still quite outstanding.

If comparing to Q1 2020, our revenues are up about 74%. We managed to more than double the order count and more than double the number of new customers we acquired during this past quarter compared to the first quarter of 2020.

Another tremendously exciting, I would say, KPI and all-time high is our NPS value, where we reached 68, which, of course, is a testament to the fact that we continue to invest in customer satisfaction and ensuring that whoever and whenever somebody buys from us, that we deliver an outstanding experience.

And finally, we are making progress on some of the more -- or the most important strategic initiatives. So RugVista Essentials that we introduced at the end of last year, has during the quarter constituted an increasing share of the total sales, and that's something we're very pleased about. And the website development is progressing, and we plan to release the next iteration of the site by summer.

If we move to Page #4, please. So we discussed already the NPS of 68. And I think some of the important things to note here is we know that there are differences in terms of how different carriers are performing and how consumers perceive carrier performance. And for a relatively long time now a couple of quarters, actually, we've actively invested in ensuring that we deliver the best possible experience despite that experience has costed us a little bit more in consumer freight cost or consumer deliveries.

We -- and that is, of course, an active choice but something we see at work will do. Then the order counts and the new customer count decline versus last year, of course, is related to number one, the tough comparable, but also reflective of the overall climate June Q1 this year, which was very challenging.

If we move to Page 5, a little bit of a deep dive into the topic of consumer sentiment. This slide highlights how the consumer confidence index across a number of our selected -- the number of key markets. So if we look at the top, where we have the Swedish consumer sentiment development during the quarter, which went down about 16 points -- percentage points during the quarter, which is a tremendous downward trajectory. And as most of you probably know, has continued to be rather depressed also in April.

Germany, a similar story, a very similar story and even potentially even worse story, where they have a slightly different way of measuring it. But that is the highlight here is that it turned a lot worse during the quarter in Germany as well. And in France being also a very important market for us, has been similar -- a very similar downward trajectory as well.

And we -- if we move to Page 6, just to also give a little bit of a flavor on what we call the advertising intensity and how that impacted us. So we have on Page 6 here, a little bit of a time line from the start of '21 on a KPI called cost per visit, which is essentially the sessions -- actually, it's per session over costs, right, and marketing spend. And what we see here is that in Q1 '21, that quarter was SEK 4.4 per visit that we paid. The -- and that represented a 5.5% increase versus the quarter before or the quarter of 2019, Q1. And then how that's developed over the past 5 quarters is what the slide shows. And what we can see here during '22 Q1 is that we've reached a very high number of SEK 6.1 on average in terms of what we are currently paying for each visit. And a big driver of this is, of course, the increased intensity in terms of more players and the existing players being more aggressive in terms of trying to attract traffic.

It should be noted that this, of course, is a very high-level KPI affected by category mix -- or sorry, channel mix, country mix effect as well as the share of earned versus paid and all of those things. But it is a big portion of what's going on in the market today.

And with that being said, I think the important thing for us on this topic moving forward is that we continue to monitor, ensuring that we get the best possible ROI on our marketing spend that we continue to find growth pockets. And when we know that or noticed that ROI isn't as high as expected on the spend that we quickly address that, and that's really going to need to be the focus over the next few periods and or until the current conditions change.

So with that being said, I want to hand it over to Henrik to do the financials.

[Henrik Bo Jorgensen, executive]

Thank you, Michael. Let's go to Slide 9, please. Starting with our net revenue. We ended the quarter at SEK 186 million, representing a decrease of 9.1% versus last year. And in terms of local currency, down by 12.3% with the SEK depreciating against almost all other currencies that we are exposed to in particular euro. And as Mike mentioned, market conditions were very challenging during the quarter. We had high inflation, especially energy prices eroding consumer purchasing power. And that, in addition to the situation on the war in Ukraine led to large decreases in consumer confidence that Mike also alluded to. And actually, we are at levels not seen since the financial crisis in '08, '09 in markets such as Sweden. This fact, in combination with the tough comparable last year, where sales was up almost 92% drove the negative net revenue development during the quarter.

On a segment level, B2B stood out with a positive growth of 5%, where especially our interior designer customer group continued to develop positively. It should be mentioned though that B2B did as slightly softer accounts compared to the other 2 segments. But nonetheless, positive growth for the quarter.

Then zooming in on B2C. On the right-hand side, you can see the development by our 3 reported regions and market conditions were challenging in all 3 regions, and we did see decreasing revenue in all of the regions. DACH net revenue decreased by 15.1%, as you can see in the upper right-hand corner, but it should be noted that the region did face particularly tough comparables with growth of nearly 121% last year. Lastly, also worth highlighting is Rest of World, where sales only declined by a couple of percent, and on a positive note, we continue to see markets such as Great Britain performing quite strongly.

Now moving to the next slide, a view on our gross margin development, where we landed at 62.3% for the quarter compared to 64.9% last year. And let me just quickly mention that the numbers you see on the left-hand side exclude other income and divested operations. So they differ only slightly to the reported numbers in our income statement.

Now the gross margin decrease was driven by higher product expenses as well as higher costs for customer deliveries, as Michael mentioned, and the product expense ratio was driven by category mix effect, while the shipping expenses were driven by, as Michael mentioned, the conscious decision to invest in carriers that were slightly more expensive but where we could uphold our high customer satisfaction, which we chose to do. And lastly, due to the increase in oil prices compared to last year, there has also been an increase in fuel surcharges by the carriers.

On the right-hand side, you can see the development by segment, and we did see quite some differences across the segments. What I would like to highlight here is MPO, where you see a decrease of 5 percentage points in the upper right-hand corner. And what that basically shows is the larger impact from the shipping cost that was explained previously, which is due to the fact that the vast majority of sales in MPO is outside of Sweden and the Nordics.

Lastly, in terms of gross margin, I would like to highlight that Q1 2021 was an all-time high. Q4 2021 was at a similar level, but that included the one-off impact on the reversal of U.K. tech. So Q1 2021 is the all-time high. And if we compare to 2020, then our gross margin is still up 0.7 percentage points.

If we move to the next slide, look at our operating profitability, which landed at 11.6% for the quarter, as Michael mentioned, compared to 19.4% last year. And on an adjusted basis, excluding IPO-related costs at 24.2%. Now the decrease was driven by the deteriorated gross margin as explained on the previous slide as well as the higher marketing costs that Michael alluded to. And then looking at our OpEx, we also did see an increase in our personnel cost, which was driven by negative scale effects due to the decrease in the net revenue compared to last year as well as new hires joining the company according to plan. And then lastly, also worth noting is higher other operating expenses, which is basically currency differences resulting from the SEK depreciating.

I will move to the next slide, a view on some of our balance sheet items. Here, the inventory value, where we headed into Q1 with a very solid inventory position. And that meant that we only added limited goods on stock worth SEK 2 million during the quarter. And if you look on our right-hand side, you can see that we still remain well within our target range of having inventory as a share of last 12 months. Net revenue of 20% plus/minus 250 basis points, where we ended the quarter at 21.6%.

Lastly, look at our cash flow, starting in the upper left-hand corner, you can see the cash flow from operating activities, which landed at minus SEK 18.6 million for the quarter. And compared to Q1 2021, it was negatively impacted by the lower operating profitability. We had a higher tax payment compared to last year and an increase in working capital with the latter being driven by a lot of supplier payments being due during the quarter.

Moving to CapEx. We have started to capitalize tech development costs. And this practice has been initiated to get a higher degree of synchronization between the cost we have in tech and the income derived from the development projects, which have a multiyear revenue stream profile and with a lag compared to when the costs are held. Further, we did observe that if we benchmark to our online listed peers, then more or less, all of them do capitalize their development costs. And as such, we now have a better comparability to them now that we are also capitalizing our development costs. The CapEx for the quarter amounted to SEK 1.6 million, of which SEK 1.4 million related to the tech development costs.

Now lastly, on the right-hand side, I look at our net cash position, which decreased by $26.9 million compared to year-end, which is due to the operating cash flow. In addition, I would like to highlight that the Board of Directors has proposed a dividend payout of SEK 52 million to the AGM, which is to be held on May 20. But nonetheless, even accounting for a potential dividend payout, we do still have a very healthy cash position still.

So with that, I'll hand it back to you, Michael.

[Michael Lindskog, executive]

Thank you, Henrik. So if you move to Page 13, just to summarize quickly. So again, Q1 definitely impacted by the tough macro environment and of course, the tough comparable for last year. And it is -- those are to RugVista are things which are difficult for us to affect. But despite this tough situation, we do show continued good profitability and also want to actually reiterate what Henrik mentioned in terms of our strong balance sheet. We are very well capitalized. We have no loans or debt to banks or the like. So we are very sound and capable of maneuvering through this period.

And again, when looking at a little bit more than just this short time frame on one quarter, our trajectory is still very strong, both in terms of top line development as well as the underlying development on profitability. And we are making strong progress on our strategic initiatives. We continue to develop RugVista Essentials. It is showing very good early signs of doing what we expected it or wanted it to do in terms of what that portion of the assortment was proposed to attracting new customer group, and we're seeing indications that, that is happening. And our tech team is working hard on every most -- a lot of people within the organization working hard on getting the next iteration of the web shop ready for one more market in the -- by summer.

So with that being said, the short term is uncertain, the war is still ongoing. The inflation and consumer confidence are still macro KPIs or factors that are affecting us. We are, and I am still very confident in our long-term outlook and the ambition that we have for the long term is still very much in place. We continue to do the right things, working -- and really working on enhancing our total consumer value proposition, so that we continue to develop in becoming an even better retailer and product expert as well as a better organization.

So with that being said, we would like to open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Carl Deijenberg from Carnegie.

[Carl Deijenberg, analyst]

So a few questions from my end. First, a bit here going into Q2 and maybe hearing a bit what you see in April. I mean Q1 was the last quarter for you of exceptionally tough comparisons. So I'm just curious on what you're seeing here going into Q2. Could you say if you're back to organic growth or sort of the trajectory compared with where you ended Q1 would be interesting to hear?

[Michael Lindskog, executive]

Yes, the -- we're not doing an annual forecast, of course. But the situation, if one looks at very publicly available factors. The consumer confidence and inflation is still sort of relatively unchanged compared to the end of Q1. I would argue if we're looking at Sweden and Germany and some of the other bigger markets. So the situation is still very uncertain and how long the current situation and the situation experienced during a large portion of Q1, how long that will remain it's a bit -- or it's very uncertain. And hopefully, once everybody has become a bit more used to at least this current economic climate, I think will sort of progress. But as I said, it's very difficult to predict.

[Carl Deijenberg, analyst]

Okay. Fair enough. Maybe let me put the question in a different way. Do you see any sort of -- I mean, you share this very good slide of the consumer confidence on the month -- or the quarter there on the different countries. And I'm just curious, do you see any incremental improvements here going into Q2, you're speaking so generally in the market? Or is sort the general outlook in March compared with April is unchanged.

[Michael Lindskog, executive]

There's, of course, within specific markets, both positive developments as well as a more sort of frame of what happened in Q1. But in total, I think it's a bit -- it is too uncertain to put a very solid statement out there that we're seeing things changing or becoming worse. So it's very uncertain at the moment.

[Carl Deijenberg, analyst]

Okay. Fair enough. Then I have a question on marketing costs. Accelerating here in Q1 as a percentage of sales. And we also had that cost per visit slide in the presentation. Maybe if you could share a bit your views here what you're seeing going into Q2, I mean, there are -- at least from what I'm seeing, there are a few signals that maybe average prices have started to come down sort of incrementally here in April and at the beginning of May. I'm just curious if that is something that you're seeing as well or we continue to see sort of an unchanged outlook on that side compared to Q1, Q2?

[Michael Lindskog, executive]

I mean, of course, we're -- we have essentially a real-time perspective on that topic. What I can say is that we noticed relatively early in the quarter with the data that we have available that there were strong signals that demand was falling. The -- those things or that data from my perspective, did not necessarily translate into quick actions from, let's say, the industry as a whole. And -- and hopefully, when everybody sort of participating in the various marketing activities that we also participate in once they sort of see the impact and what's going on in the market that they will sort of also react accordingly.

[Carl Deijenberg, analyst]

Okay. Fair enough. And then my final question with regards to competition. I mean, given that you're one of the largest pure online players in the space here in Europe and given the development that you faced here in Q1 also going into Q2. I'm just curious of what are you seeing in the competitive landscape here in the last months? Do you see that competition is coming down as a result of depressed sort of profitability or if you could elaborate sort of your views on physical versus online competitors here going into 2022?

[Michael Lindskog, executive]

I think the sort of landscape in itself has been relatively the same over the past 3 to 4 quarters, I would argue. And what I mean by that is that the online pure players are relatively the same. They've -- a lot of those guys have been very aggressive during this period. The second aspect of -- for the participants in the market are the multichannel players. Of course, during COVID, as we've mentioned before, had -- during COVID they had to divert more of their marketing spend to drive traffic through their online proposition. And of course, that has increased the number of -- not necessarily increase, but they become more aggressive as well, I would argue. So it's not a lot of new, but it's same and those players being more aggressive versus before or have been on a sort of more longer or midterm perspective.

And as I said previously, the -- when everybody sort of has the opportunity to really assess what's going on with consumer demand. My -- of course, they need to take their own decisions, but let's see what happens in terms of their willingness to maintain those levels of marketing activities. I think it's also worth noting that as we mentioned that there are between market differences. On average, I would argue that we're more than holding our own in terms of market share from consumer interest perspective and that is what we continuously attempting to do and, of course, continue to grow our online share as well as attracting more offline equal to the online buying situation. But at the moment, the future outlook, at least in the short term, is a bit uncertain.

[Operator]

Our next question comes from Johan Brown from ABG.

[Johan Brown, analyst]

So 2 questions from me. Firstly, touching a bit on the last question here in terms of the CPCs and the CPC slide, which was very helpful. So just looking at the multichannel players and pure online players and the rest of the competitive landscape, who would you say are the main cost per visit driver here? And if you were to compare your unit economics and profitability compared to those, how do you stand?

[Michael Lindskog, executive]

I think the -- number one, that's important to remember is that the -- there's really only, I would argue, one pure player that sort of has a major presence across most of the European markets. And that, as we've mentioned before, is [indiscernible] out of Germany. And then second is that the only sort of offline or multichannel player with the pan-European presence would be IKEA. So the landscape is very fragmented across the different markets we operate in.

And then what we do know is at least focusing on selling rugs only. We do know that our average order value is on the high end, among the participants in the market, which of course -- and that coupled with our healthy gross margins gives us the opportunity to invest quite a fair amount in marketing and still maintain a good level of profitability. And how that compares to others, of course, if you have a lower AOV with the same gross margin, of course, your absolute money available or contribution to for other expenses will be lower compared to ours.

[Johan Brown, analyst]

And a follow-up on that one. So would you say it's these players that have more of a broad geographical reach that are pushing prices? Or would you say it's the local competition that does?

[Michael Lindskog, executive]

A little bit of both. It is the answer to that. So some of the pan-Europeans are, of course, being more aggressive. But in general, it is a category that has a lot of local diversification or whatever the right term is. So it is more that we, in a given region or a given markets have a local competitor set that we need to adapt to, and that differs between the markets and regions.

[Johan Brown, analyst]

Great. And then a question on the gross margin as well. And you're mentioning different reasons here to the gross margin coming down a bit. But yes, looking at the current situation and the current sort of -- current climate, would you say the 62% gross margin is a reasonable level going forward? Or what's the trajectory and building blocks going forward for this one?

[Michael Lindskog, executive]

I mean the 2 main items in our gross margin. First is the product cost and then the customer deliveries. We've mentioned before, if I start with the shipping expenses that we, from a strategic perspective, are looking at localization. And that, of course, part of that localization is finding and identifying local carrier here also deliver here to do that type of deliveries. Once that is in place, I expect that, that will put us at a better position in terms of offering a better customer proposition as well as a cost profile from a cost per delivery.

The second aspect in terms of the gross margin being the product expense or where we previously have mentioned that seems the items or the articles that we sell are exclusive to us to the vast majority. We have a relatively high degree of pricing power compared to retailers selling third-party brands and that gives us the opportunity to compensate for potential price or cost increases in terms of purchasing prices of the product.

[Operator]

Our next question comes from Niklas Ekman from Carnegie.

[Niklas Ekman, analyst]

Just a follow-up here on -- if you can elaborate a little bit about the trend you've seen during the quarter. A lot of other online retailers seem to indicate a decent start, and then things fell off a cliff around the 24th of February, and then it gradually improved a little bit since then. Is that something you recognize in kind of the sales trend during the quarter.

[Henrik Bo Jorgensen, executive]

To a certain degree, yes, I think it's important to remember that maybe this side -- outside, maybe not -- maybe not so much in Sweden, but even to a certain degree in Sweden, energy prices really started to become an issue for many households already towards the end of last year, thinking about electricity, thinking about gas, et cetera. So it wasn't at the start of the quarter from that perspective, what all fine and then to be fair. Then, of course, the overall sentiment during the quarter had an increase in the downward trajectory here.

[Niklas Ekman, analyst]

Okay. And the second question is just if you have any insight into how physical retail is doing? And I'm curious how much of the weakness we're seeing here is just a shift from online back to physical retail after COVID restrictions were removed and how much of this is a general drop in sentiment? Do you have any insight there?

[Michael Lindskog, executive]

Not any specific insight. Of course, there are a few anecdotes that have picked up and observed, so to speak. I think in general, it seems that value for money, it's an increasing -- it's becoming very important for consumers. And of course, that from a just pure logical perspective, it makes sense that when discretionary income becomes tight, most households really start looking at, okay, where can I get the most value for money and those propositions in general seem to fare the current climate slightly better than others.

[Niklas Ekman, analyst]

Okay. And the third question is if you can provide some more information here about Henrik leaving the company after a fairly short period of time. Can you elaborate a little bit about the reason for leaving the company?

[Michael Lindskog, executive]

Sure. Henrik?

[Henrik Bo Jorgensen, executive]

It's sort of mutual that Michael and I have been discussing for a while. And for various reasons, we do not think that it's a perfect fit on either end. So we're both better off separating and going our separate ways.

[Operator]

[Operator Instructions] At this time, there are no further questions. I will be handing over to the speakers. Go ahead.

[Henrik Bo Jorgensen, executive]

Thank you. We have received a question via e-mail. And the question is, given your strong cash position, positive earnings and falling share price, do you consider buying back shares and options.

And the short answer is yes, but it's unfortunately not possible with us being listed on the NASDAQ Premier growth market, it's not an option.

[Michael Lindskog, executive]

Nothing else then? Okay. Now so then we will end the call here. And again, thank you, everybody, for listening in and looking forward to also interacting with you moving forward. Thank you, and have a great day.