Tonies Se Reg A

Hello everyone and a warm welcome to the Tony's full year 2023 earnings call. I'm Manuel Bösing from Investor Relations and also today we will lead you through a presentation and afterwards we encourage you to use the Zoom Q&A function to ask any questions you may have. It's great to have our new CEO Tobias Wann on the call today for the first time and of course our CFO Dr. Jan Middelhoff. And now over to you Tobias.

Thank you, Manuel. First of all, a warm welcome to all of you from my end as well. Today is a special day for me as the new incoming CEO of Tony's. My first earnings call with all of you. I have already seen there are a lot of familiar names and faces on the list today. So welcome. Thank you for dialing in. I promise it will be an interesting presentation. As many of you know, I joined the firm in January of this year. Looking back at my first 100 days, I can say it was nothing short and exciting. Tony's is an excellent business with a wonderful team. Tony's is a category creator with a stunningly beautiful product that excites kids and parents around the world every single day. This alone is very special and makes up for a great story but what is truly unique around the self-created category with its great products tony's has built a fantastic business model and this is what we are going to show you today over the next 60 minutes or so first i'll provide a quick recap of the tony's story and then give an extensive overview of our business in 2023 jan will lead you through the financials in more detail and afterwards I'll come back and provide an outlook of 2024. At the end, there's ample time for Q&A as always. So let's recap on the Tony story. What is Tony's? If I had to put it in one sentence, Tony's has built the largest interactive audio experience platform for kids in the world. But very importantly, we're just getting started. This incredible map is one of my favorite slides from my first 100 days. I come back to it time and again. And I do know I've shown it to many of you when I met you in person or over the screen during the last weeks or months. It shows where in the world Tony boxes have been activated. As you can see here, we are not only operating successfully Out of five and soon six markets, we have active Tony boxes in more than 100 countries. Tony's is a global phenomenon, and I'm sure everyone agrees that we have achieved product market fit on a global level. We have sold 6.8 million Tony boxes since our launch in the fourth quarter of 2016. And on top of those 6.8 million boxes now sit 82 million Tony's figurines. But what is most important with this, we probably lightened up over 100 million eyes during the last years. Let's dig a bit deeper. We are creating value beyond just selling 6.8 million boxes and 82 million figurines. There are probably... Five things that you need to understand about our business, and I'd like to run you through them. First, we are a category leader with unparalleled stickiness. 268 minutes average weekly playtime. This is almost 40 minutes per day per box. We are the largest platform of our kind in the world. We are taking our successful blueprint that originated in Germany and now roll this out internationally market for market. Third, we operate a profitable repeat purchase model with almost subscription-like cohorts and a superior customer lifetime value of more than 290 euros. On average, Tony's customers buy 20 figurines over a four and a half year lifetime with us. We have also defined very clear value drivers that we pursue since 2020. I already mentioned that we are rolling out our profitable DACH blueprint internationally. We are improving our growth margin year over year through second sourcing, product or price optimization. We are developing and successfully selling more and more own content. I'll talk about this in a moment. We are constantly seizing product and channel mix opportunities across all our markets and you're generating significant operating leverage. If also more details on this later in the presentation. And finally, something that is very close to my heart. We are a true love brand. We have a huge fan base that results in strong word of mouth effects. and very strong net promoter scores. For example, more than 70 in our daily US e-commerce transactions. And what we are most proud of as a management team, we have delivered on all our promises made to you since the IPO. So without further ado, let's look at the 2023 numbers. We've seen another record year for Tony's. Revenue grew 40% to 361 million euros. And for the first time, we have seen more revenue from international markets than from DACH. In 2019, international revenue was only 2%. And four years later in 2023, it was 54%. Our international expansion strategy clearly works. We are also now officially a profitable hyper-growth company with an adjusted EBDA margin of 4.0%, which is equivalent to a pure EBDA margin of 2.4%. When we say adjusted, please note that we are only adjusting it for share-based compensation. Our free cash flow is at the brink of break-even. with a very strong improvement of 83 million euros compared to last year. Our cash at the end of the year 2023 was 74 million euro, including unused credit lines of 15 million. Jan will talk about this in more detail in a second. So where is this coming from? We have an incredibly strong business model that builds on the exceptional growth of our installed base. Picture this, 70% of all Tony boxes ever sold are still active at the end of 2023. That is remarkable. In 2023 alone, we have sold more than 1.9 million Tony boxes and 23.4 million tones. Let's take a look at the Q4 of last year, which was our most successful quarter ever. In Q4 alone, we added 169 million euros of revenue, which came both from Tony's and Tony boxes. Out of the 1.9 million boxes that we sold in 2023, we sold 500,000 within only 10 days of a Black Friday week. That clearly demonstrates we get our commercial moments right. We know when to excel and we deliver on it. You also see here our top 10 Tonys from Q4, including globally loved IP like Paw Patrol, Peppa Pig, Disney characters, Spidey, but also our own characters. Our first 360 brand campaign in the US has reached more than 1 billion impressions worldwide. And we included many of our great partners that I just mentioned in one single campaign. I can tell you this only happens on the Tony's platform. Now let's dive a bit deeper into where our success comes from. 54% of our business is now international. And this is the result of a very well planned and successfully executed international expansion strategy. We launched in the UK in 2018, many of you remember, then in the US in 2020. We added France in 2021, launched the European webshop in 2022, added Hong Kong in the same year in October, and then launched Canada late last year. By now, we are in 25 countries and there's more to come. By now, we also know it takes about three to four years to take a market profit. And on the back of this, as you've seen, the group has now turned profitable again. Let us take a closer look at the Dachmann. You're still growing mid single digits, even though already every second child in Germany owns a Tony box. But what is more important here is our growth in DACH is increasingly based on a growing share of high margin Tony's, as you can see in the chart here. In DACH, we are also seizing opportunities to implement various value levers. For example, our channel mix, where we are continuously increasing the share of our direct to consumer business, that is marketplaces and web shops. At the same time, we expand our wholesale for We are very proud to announce today that we have now reached more than 10,000 point of sales in the DACH market. This excellent market position is also illustrated by an aided brand awareness of 84%. Let's move to the U.S. I know this is very important to many of you. The U.S. will be our biggest market in 2024. Since our launch in the fourth quarter of 2020, we have sold around 1.5 million Tony boxes. A couple of weeks ago, we've been approached by Amazon and they told us that we are now the best selling German brand that has started trading on Amazon in Germany and then moved to the US. Two very impressive data points that show the impact that the Tony's already have in the United States. But you might ask, how exactly are we conquering this market so successfully? As you can see, due to our start during COVID, we come from the opposite channel split than in Germany, which proves that we can also execute a direct-to-consumer-first approach. Now we see the wholesale channel picking up. That channel, as you know, is particularly important to us because it allows customers to learn and try the Tony Box product and later supports Impulse Buys. Let me explain. Generally, our success in retail is depending on two factors. Footprint or number of stores and shelf space. And I'd like to demonstrate this to you with the example of our retail partner, Target. And you can follow my words here with the pictures that we are displaying. In 2020, we started online, a relatively risk-free way for Target to test the waters with us. We performed well, and they gave us store space in 2021. In 2021, we performed so well that we moved from 400 to 1,100 stores at the end of 2022. And we got half end caps with them. After another strong performance in 2022, we got to more than 1,500 stores in 2023 with full Tony's branded end caps. Now for 2024, I can proudly say that we will be in more than 1,750 stores and double our shelf space in 1,300 target stores. This recipe we are repeating with all our other retail partners, for example, Walmart. Now that we've spent some time on our markets, I'd like to focus a bit more on the success of other profitability drivers. One important lever is the reduction of licensing. And that happens through partner negotiations, new products, regional effects, but also with own content or franchises. Let's take a look at our own content. Here you see our top five best-selling franchises in the world. And when I say franchises, I mean, this means for us a group of characters, for example, Sleepy Friends, where we have three characters. As you can see, in terms of volume sales, two out of the top five are own franchises. And number five is particularly remarkable, the mentioned Sleepy Friends franchise. Because it took us only 18 months from launch to making a top five franchise, a great testament to our content team. It is also the result of Tony's being a very data-driven tech platform. Why? Because the platform generates a lot of valuable insights. Sleepy Friends, for example, the mentioned own franchise, is based on the bedtime routine, something that we identified as a top use case from the customer data that we saw. And we also now have three golden records on our wall, something I personally always dreamt of as a kid. I can definitely testify. Let's look at category leadership. As I said in the beginning of this call, we have created this category. And we are leading this category by innovation. Last year, we've been very vocal about being the first company in our field who have implemented a trusted AI application with our AI story generator. Now, over Christmas, more than 80,000 stories were created with this AI tool. And I can tell you, it really brought a lot of joy to our little customer. I've seen very, very fascinating stories. Our nightlife on the top right went from zero to hero with great sales of more than 2 million euros last year. And lastly, I'm super excited about our new clever Tony's category that is addressing kids in the age group of five and above. That's what you see on the lower right. We launched Levertonis in the US last year and in February of this year in DACH and in the UK. And I can tell you from feedback that we got from retail and our own customers, it is overwhelmingly positive. I think this is a really, really big step ahead for us. And with this, I would hand it over to Jan, who will go through the financials. I'll come back later. Thank you.

Yes, good morning everyone and thank you very much Tobias. I think we also wanted to speak a bit about our working capital and the efficiency we see coming through in our inventory management and steering. Those of you who have been on our call and tracking us for some time and listened in during H1, remember that we said we deliberately chose to ramp up our inventory in order to get ready for the second half of the year for the Christmas sales. And given we get some questions, we just wanted to show kind of the conceptual shape of a kind of general inventory ramp up that we do seasonally. And you can see here from a certain baseline of loadings, Throughout the year, for example, Easter peaks and towards summer, we're building up inventory, which then gets sold out during the busy Q4 period. As we ship into retail, we have the important commercial moments around Black Friday and Samba Monday weeks. And I also want to caution that inventory levels also always depend on what our loading at year end is relative, for example, to Chinese New Year, as we also need to make sure that we have sufficient stock then for the new trading period hearing up towards Easter. And in general, it's important to understand that we only have a good inventory. What I mean by that is we're not having any fresh goods or seasonal items that could go bad. It's rather important for us to hold inventory to fuel the growth because our business model is to be as explained is based on having a platform, having the Tony box, and then continuing to bring those subscription-like cohorts with a high predictability. And they are making the profit for us in a good way out to consumers. And that requires launches. That also requires availability on top sellers. And therefore, for us, holding inventories is good. But of course, we're always optimizing our working capital in our inventory. Holding and see a few of those effects today also in our free cash flow translating. And I'll speak about that a little more a little later. I also want to mention that... We're very, very proud that we could substantially refinance this growth through a syndicated loan that we closed over summer this year with very reputable partners. You can see the logos of our bank partners here. And it's a lot of confidence for us that those partners provide us with a €30 million syndicated loan that we use for this working capital financing. We could top it up by another €10 million. Currently, I don't see us doing this over this year, but we'll come to that in a minute. With this, I'd like to spend some time on the financial results. And Tobias has said it before, it's been a record-breaking year for Tony's. And we couldn't be any prouder of the team and the results because they are sensational. We show exponential revenue growth and we achieved a profitability break-even. And this admits some macroeconomic turmoils that still prevail. And you can see it here, 40% year-on-year growth. That's just sensational. That's outperforming our guidance of €354 million. So we came in at €361 million. You can see that all markets are growing. And it's important for us because also our mature dachmark, that's really the cash cow business for us. And you see that a little later. It's growing with single digit. These are great results. The U.S. is doubling and the international share of 45% is an incredible development. If you take into consideration that this company just four years ago was essentially 98% DAF business. So our strategy of international expansion clearly works. Checkmark. Adjusted EBITDA and also clean reported EBITDA margin is positive. 4% adjusted EBITDA margin, 2.4% EBITDA margin. These are incredible improvements. They come on the back of a structural improvement of our contribution margin. I'll speak to that. Greater 35%. Unit economics are improving nicely. That's a high priority for us. But we also see leverage effects coming into the mix. Free cash flow. That's probably the figure that is exciting for some of you. We always said we will and want to be free cash flow break even in 24. This is a clear goal, but we also saw due to several effects I'll speak about in a minute, free cash flow coming in at minus five, which is an 83 million year on year improvement. and it translates just into a very very healthy cash available position of 74 million that is cash at hand and that's also unused credit lines so a very strong financial position and for our company and one of the facts that's not really financially related but it does so is we introduced for the first time a segment reporting and i know from the conversations with many of you in the last two years, two and a half years, that this is of high interest, especially understanding our margin structure in our mature markets versus our growing markets. And what is, I think, has been out that we always said we have a double digit margin in the DACH business. And today I can tell you it is greater 16% EBITDA clean. So we have a highly profitable DACH blueprint. And this is the 100% confirmation of what we're trying to do. And that is an action of trying. We're doing it. We're bringing exactly this blueprint to our focused international expansion strategy. So overall, very exciting. And I'd like to run you maybe briefly through the P&L. It's difficult to digest now. You probably have done that if you looked into the presentation already. You can do it afterwards. But you can see essentially on the right-hand side, the development versus prior year. And I just really want to call out an incredible improvement on our clocks. It comes on a mix of pricing, product channel mix, better sourcing and such effects. We also see our licensing costs are coming down further. There is a mix of better negotiation, bringing our own content that Tobias spoke about. But it's also a regional mix. Please remember, DACH has historically and is historically the most expensive licensing market we operate in. So as we're shifting towards more international markets, we got tailwinds here. And there's also one from the H1 that we reported. We released a provision of 3 million euros with the collecting society. Fulfillment, you see a negative year-on-year development, but clearly this is planned because please consider we are raising our D2C share overall on the company level. So we plan for an increase in fulfillment costs and it comes in nicely. And this is the driver behind our strong 35.3% contribution margin. I run a little bit quicker below. You see that on marketing, we have further improved relatively versus prior year. That comes on the back of a very good word of mouth effect. We see our products translating into the markets. We have seen efficiencies overall and some great work by the teams. I don't want you to go over optimistic on the marketing budget though going forward because always consider as we're working now, the mass of the US to be as talked about, we're in mass retail across the United States. Of course, there's brand building. Of course, there's marketing support needed for our wholesale business. Therefore, I think it's a great result. And we will, of course, also going forward, take care of our brand and invest into our categories. Personnel, you see some nice leveraging effects coming through. The one that sticks out is OPEX. There are some disproportionate one-off effects, and I'll speak to them in a minute, concerning legal costs, some FX headwinds. There are some provisions in there, but nothing structurally wrong. We have adjusted in the past for our own capitalized work. It's now fully capitalized, and we have some other result effects on it, which translates then in the EBITDA towards adjusted EBITDA. I want to make one call out. Tony's has historically adjusted for very few items. Last year, it was only on tech development and share-based payments. And this year, you only find share-based payments being adjusted. So that is an EBITDA, we only clean off share-based payments according to IFRS 2. Let's dissect a bit the revenue development. Don't want to spend too much time. You probably saw that already. It's close to what we released in our preliminary figures. Growth in all markets. U.S. business doubling, more than doubling in effect. The rest of the world becoming already a third of the DACH business. DACH growing mid-single digit. And we spoke about the incredible 54% international revenue versus prior year, 39%. If we look a bit into the product category as well, we see all product categories are developing nice and healthy. Of course, as a CFO, I love if everything grows, but also Tony's surging up in growth is good news. That is the driver behind our profitability. So consumers are looking for our Tony figurines, and that is, of course, benefiting the profitability of the company. Let's briefly look also into Q4. Tobias spoke about it, highly successful, highly dense and intense moment for us. Tony's is really good at delivering this commercial excellence. You can see it here. Maybe I'll start with North America because you can see that the business almost doubled in three months versus prior year. And that's an incredible, incredible effort also from the team making that possible. And if you look at that and see this slightly negative effect, it's a clear, just a clean baseline effect. Remember, in 2022, in Q3, DACH, German customers were very nervous about the UK war and gas prices and where they would have electricity and heating over Christmas. So very slow overall wholesale and retail sentiment over the summer. It fully caught up in Q4. And this year in 2023, we saw just a normal seasonality again, meaning that the Q3 was stronger than the 22 and the Q4 was already back in line with the previous year's Q4. So it's just a shifting between two quarters. So very healthy and good. Also for Q1, as I see revenues coming in, it's coming in nicely, just as planned. Due to some baseline effect, it will be lower than what you will have seen in 2023 Q1 in comparison. Again, baseline effects between loading, retail entries, and so on and so forth. Nothing to be worried about. If you see them, it's all good, but just a little bit lower. And I want to caution you on the call. Then let's look a bit more on the new segment reporting that we're bringing. And what you can see here is we have three operating segments that you know from us. It's DARPA, it's North America, and it's the rest of the world. And they are totaling up in the total operating segments. We have a classical headquarter, a cut, some reconciliation, then we have the Tony's Group. And what you can see here is that in the DACH business, you see a very strong EBITDA margin. of 16.3%. And this is what I said before. This is the blueprint. This is the cash cow of our business. DACH shows what it is, what the inherent profitability is in our business model. And that's what we're replicating in other markets. You can already see North America towards a trajectory towards profitability um if you compare with the contribution margin here and you know we talk a lot about contribution margin due to the unit economics effect you can see that it is lower and that makes a lot of sense that is influenced influenced by product mix so we're selling more boxes versus tony's uh boxes less margin versus tony figurine we have channel mix effects but that's all um all good and uh as planned And I think it's exciting to look at these figures because that really shows that the staff blueprint that we're operating is something that we see unfolding now internationally. Rest of the world, of course, we're investing, we're growing, and we've always said that we're investing in our international growth. So I think that is a very exciting news for you to take away, that you understand the dynamics in our profitable DAF market and what we're replicating. Let's maybe look at the build up of our EBITDA. I spoke to most of the facts already. Here is the very, very strong improvement in our Cox position. And I already saw a few questions rolling in on that. It is indeed driven by the price increases that we implemented in 2022, but majority in the DACH region. And that was in May, 2022. So some effects in 23. We have fundamentally reduced our air freight. So that is important to take in 2022. So we saw large amounts. So we have been taking rather inventory then on taking inventory at the expense of therefore reducing air freight needs. We have a favorable channel and product mix also that is helping us and it's just also negotiation with better prices and better management by the teams. Licensing costs I spoke about, country mix effects, better negotiations, own content coming into the mix. Marketing we spoke about as well, or for women as planned marketing we spoke about, personnel we spoke about. RPEX is the one I said I'll speak about a little more. What you have in here are FX effect, negative FX effects that we have seen hitting us. So with the FX effects, you have positive effects then on the other bucket. But you also have additional legal costs, a few provisions in there. So there is some periodic effects that just inflate a bit here, the OPEX. On capitalized work I spoke about, so I think you see nicely 6.4% improvement year on year on adjusted EBITDA. And I also want to say that if you take out the 3 million of licensing provisions that we released in H1, it's still an incredibly strong structural improvement that Tony's has been showing. So this is I think very, very good news that we can show you today. Maybe let's briefly also look at our cash position. I don't want to spend too much time on it, but you can see it is healthy. We've increased it versus prior year. If I factor in also the unused credit lines, it's the 74 million I spoke about previously. And I think what is even more exciting is on the next chart, looking at our free cash flow development. Because here you see a fundamental improvement from 21 and 22, 22 being minus 88, we improved towards minus five. This is on the back of a few great developments at Tony's. One is clearly we're managing our working capital much better. So improving payment terms, we are forecasting our inventory better. It also comes with a higher profitability. So operating cash flow is much better. And we have overperformed. So we sold more inventory than we planned in our guidance. So this is positive effects that we see, but it's also very good structural improvements. And also in comparison, I want to call out in 2022, and I spoke about it before, we had a higher inventory position at year end. and then shifted it into Q1 and sold out. That was a bit when there was inventory shortage. We had the lower profitability and non-optimized working capital. So therefore, I'm very positive for our promise and Tobias will speak about our guidance in a minute that our free cash flow will break even in 2024 and we see it being greater than 10 million euros. With this, I'm coming to the end of my section, handing over back to Tobias and looking forward to your questions in just a short while.