Rugvista Group AB (publ)

Thank you and welcome everyone to our earnings call presentation for the first quarter of 24. Myself is Michael and then Joakim is also joining. So let's kick it off with a few highlights in terms of the first quarter. I think overall, it is a quarter where we've shown a lot of strategic progress on our initiatives, but that the overall market remains challenging. We continue to be excited about the fact that our customers love what we're doing. We're reaching more of them, and we continue to develop our customer proposition according to the strategic agenda that we've set forth. However, of course, the consumer sentiment in many of our larger European markets is challenging where the average order value has contributed to the decline in the net revenue and the lower AOV is very much an indication or a consequence rather. of a continued price sensitive consumer. We are also pleased to see that the investments that we've done over the past few years in number one, the developing the new e-commerce platform has enabled us to really start to see traction in our efforts to also create content. and thereby getting more organic traffic onto our platform, which contributes to the marketing efficiency gains. So a little bit more about the numbers. We landed on 176 in terms of the net revenue, a slight decline or a couple of percent down versus versus last year. I think the highlight here is also that we're seeing differences across the regions and markets. And of course the decline is very much driven primarily by the lower average order value. On the main items when it comes to the profitability, I think it's important to to highlight the aspects that the major variable cost items, which is, of course, the product cost, the freight to and from customers, and the marketing line item, marketing spend line item. We are continuously working on those and are showing progress on all of those line items, even with the lower AOE. However, the EBIT margin is down both from a sort of absolute level as well as percent versus last year and very much also driven by the lower scale effects on the more fixed cost base due to the lower turnover. in addition to our investments into organizational development and preparations ahead of the move to the new warehouse. So that's kind of what I wanted to highlight there. If moving on a little bit to the business updates, I think we talked about the order count. So we increase our orders by 15%. The number of new customers we acquired was 16% higher versus last year. And we continue to maintain very high customer satisfaction ratings, both in our net promoter score survey as well as on Trustpilot. The consumer sentiment or consumer confidence is slightly improving in some of the markets we operate in. Some markets remain very challenging, but the overall picture is that there are some positive signals, but the consumer confidence is still at very low levels overall. When talking a little bit about the average order value and the price sensitive customers, and also the items that we can actually control, and yes, we have ensured that we have a more appealing offer on the slightly lower price points, and that's kind of what we can see on the left-hand side of the graph. where our offer to the customers is slightly higher in the lower price brackets. But overall it is a relatively minor increase in that share of our assortment. So what's really driving the AOV is the fact that customers here during the past few quarters have really down traded, which we've seen in terms of selecting slightly smaller rugs. We've seen that they're taking or choosing to buy the discounted items and that type of behavior versus a major change in terms of how we have constituted or developed our offering. Also want to highlight a little bit about with our outdoor assortment, even though the weather can be what it is, but Q2 especially is the season for outdoor rugs. We've, over the past years, continued to develop that offering. to ensure that we're also relevant during this period. And what we've seen is that we continue to see progress in this subcategory and then also what I want to highlight here is with the new platform we're able to really highlight and present new introductions in a very different manner or enhanced manner compared to what we were able to do historically. So with that being said, let me hand it over to Joakim to go into some of the deep numbers in detail.

Thank you, Michael. I'll start with the top line. So like Michael mentioned, we had a good 15% order growth despite the decline in sessions. So as we had an improved conversion during the quarter. However, the change in average order that we saw starting in the second half of last year still persists in all regions. Actually, in total, our net revenue declined by two point four percent. If you look at the regions, we had a big difference between markets also within the regions. So that declined by four point six percent. The decline coming from Germany, Nordics, where we have the majority of sales in Sweden, Denmark and Norway. It grew by 13.1%. And rest of the world, which is mainly rest of Europe, we had a decline of 6.1%. But also there, some markets performed well, like UK, but in the southern parts of Europe, we had larger drops. So I move on to gross margins. So going back to quarter four of last year, we reported 60.3% gross margin, and in quarter one this year, we have 61.6. So quarter on quarter, we have improved by 1.3 percentage points, mainly due to less discounting. Versus last year, quarter one, our gross margin was down one percentage point, and also that is then due to higher discounting than previous year. MPO improved 2.1 percentage points from a level margin prior year that then was related to a less favorable geographical sales mix. So in B2B, where we also have the smaller businesses and also in B2C, the margin drop was driven again by higher discounts and the customers to a larger extent opted for the discounts that we offer. So to the big picture, we have an EBIT margin decline driven by investment into the organizational and business development. And I said earlier, the larger discounted share of sales rendered a higher product cost percentage. The freight costs, which is included in the goods for resale, was somewhat lower than prior year and also prior quarter, despite the lower average order. So we have decreased the cost per order. In other external expenses, the next line, we have the marketing expenses, which were decreasing versus prior year with 1.1 percentage point. So the increasing costs in this line were consultancy costs like we have in Q4 for our new warehouse design and also IT costs, the split in between them being about 50-50 of the increase. Personnel costs increased due to the general salary increases and also due to the higher number of FTEs from the recruitments that we made in the second half of last year. Other operating expenses contains the FX effect on the revaluation of assets in liabilities in foreign currency, and this is 0.8 percentage points lower than last year. Depreciation and amortization in this line, we have the right of use assets for IFRS 16. So this is increased due to the inflationary adjustments of our lease agreements or the indexed leasing agreements, and also for the new warehouse that we took on in quarter four of last year. So in total, this then sums up to a 2.8 percentage points lower EBIT margin as explained above, and also due to a minor negative scale effect due to the decline in sales. So I move on to inventory. So we ended the quarter four last year with 126 million in inventory, and this was a low number at the bottom of the target range we have provided, equivalent to 17.9% of the last 12 months of net revenue. So we increased our inventory with 7 million during quarter one, and that gave a total of 19.1% of the last 12 months. So this is still in the lower side of the target range, and we can expect this to gradually grow as we approach the next season, the next peak season in quarter four. Last but not least, cash. So at the top left on this slide, you see your cash flow from operating activities have improved over last year. So in last year, we had an extra tax payments due to the then releasing the formerly deferred taxes. The positive changes is net in networking capital this year mainly derives from the increase in credits from suppliers. Cash flow from investing activities mainly consists of intangible investments from the development of our e-commerce platform. And this was slightly up versus prior year, 0.3 million. So our net cash being then the cash they have at hand, minors are leasing debt for the right of use assets, landed at 209 million. which is then up 93 million from previous year quarter one, and it's up 23 million versus the last quarter. So all in all, we have a solid cash position, no interest bearing debt to financial institutions. And hence, we are prepared for the inventory build up for the peak season that I mentioned, the dividend that the board of directors has proposed, and that is subject to a decision in May at the AGM. and also for the investments that we will make related to the new warehouse. So that sums up to the financial update, and I hand over to you, Michael, to sum it up.

Thank you. So just a little bit of a summary and a quick outlook for the rest of the year. So I think we continue to focus on really realizing our strategic initiatives and of course navigating the market conditions. Q1 is a quarter where we have seen progress on multiple of our strategic initiatives and that of course continues to be a large portion of our focus. because that will really ensure that we continue to develop, we continue to improve our proposition for our customers and positions us for continued profitable growth. The Q1 numbers, of course, are a bit challenging where we did see a bit of a decline, a couple of percent decline in the net revenues. That is, of course, something we're not super pleased with. And we have also, as mentioned, taken actions to to improve that overall position and trend. However, our gross margin did improve quarter on quarter. We continue to see improved marketing efficiency and we continue to optimize our freight costs to and from customers. In addition to the fact that I think it's important to mention that we We deliver a relatively healthy EBIT margin, despite the fact that it is a decrease versus last year. And then, as Joakim also mentioned here, our financial position is very healthy. We have a strong net cash position, and we are still in a position where the board can suggest a dividend of 1.8 SEK here at the upcoming AGM. But looking a little bit ahead towards the rest of the year, I think the outlook, of course, remains quite uncertain, both from this sort of global security aspects with the situations we have still in Ukraine and now also down in the Middle East. We have an overall macroeconomic climate that continues to be challenging, which has impacted the European households in terms of cost inflation over the past few years. And of course, in the near term, we expect the situation to to gradually improve, hopefully, but it is very uncertain. And also considering these conditions, we did initiate some specific actions to improve our margin position, which included some price adjustments. We also initiated and focused on cost optimization in terms of operating our new e-commerce platform. Both of these initiatives have given positive impact since being implemented. And that is, of course, something we'll reap the benefits of moving forward. But overall, I think I want to reiterate the core business in terms of us improving our proposition to the customers is on track. We're growing our traction with customers. We will continue to, of course, focusing on navigating the current conditions as well as building and preparing for the future. So with that being said, I'd like to hand it over to the audience for any potential questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Benjamin Wohlstedt from ABG Sandal Collier. Please go ahead.

Good morning, guys. So a couple of questions from me. One is price adjustments they did during the quarter. Could you perhaps elaborate on magnitude and, if possible, compare it to the magnitude of price hikes that you did in Q3 2022, please?

Absolutely. The price adjustments were a level two to make a difference. They were slightly lower than the ones we did back in Q3, 22 actually. So still not sort of low single digits, but not double digits or somewhere in between.

Perfect. Thank you. And then I have a question. You also in the SEO statement point to the implementation of Google's consent mode to have a negative sales impact. I was wondering if you could quantify this further, please.

We, of course, the implementing and fully implementing that has been something that's been going on for a while internally. When that was fully implemented, we did see a period where the efficiency in our paid marketing channels did and did decline and that also to a small degree affected our ability to drive traffic and then of course that impacted the top line during a couple of weeks around about during the quarter. Yes.

All right. And I was wondering as well about the new checkout solution. Do you have any early takeaways, any learnings from that, please?

Overall, we're pleased. We're almost done. There's a couple of markets or domains which haven't migrated yet to the new checkout, and that is a few minor technical issues we're still trying to solve. But overall, in the markets where we have introduced the new checkout, we are seeing stable checkout completion rates. Of course, some differences between the markets, but overall, we are pleased with the performance of the new checkout so far. I think it's important to keep in mind it's still a very early version of what we intend to do in this area moving forward. But overall, we are pleased with the checkout completion rate so far.

Perfect. Thank you. And then one final one, maybe. You talk about AI-based functionality being launched towards the latter half of the year. What is this in concrete terms, please?

We've started to leverage of course AI in some of our content production efforts. We have started to leverage this new technology in some of also our customer service area team or in our customer service team. It is of course a technology that can be leveraged across multiple functions to a larger degree than today and that is something we are focusing on and will continue to focus on in terms of introducing and rolling out a new technology which leverages AI both in terms of consumer facing functionality as well as internal facing functionality.

Perfect. Those were all of my questions for now. Thank you very much. Thank you.

The next question comes from Johan Fred from SEB. Please go ahead.

Yeah. Hi. Good morning, guys. Thank you for taking my questions. First, could you just clarify something on the average order value for me, please? You write in the report that it decreased by 15.5% while On the slide in your presentation, the average order value is stated to decrease by roughly 18%. Is the 15% decline in constant currencies?

No, it's unadjusted, and there's a typo in one of the areas. That's going to be in the presentation, but not in the report.

Sorry about that.

Sorry, the presentation is the correct number, so it's 18% decline.

No, the report is the correct number.

Yeah, so the full report, so the earnings call presentation is the incorrect number.

You also state this number in the report as well.

Yeah, I used that one. We will double check here which is the correct number with our internal data.

What have you seen in terms of market price pressure and campaign activities from competitors during the quarter? Have you seen any change in the trend throughout the quarter or how would you assess the market price pressure?

It's definitely continued to a large extent in terms of being quite intense. Of course Q1 is not as intense as Q4, but Q1 this year versus Q1 last year did see a higher intensity on the price related campaigning efforts. We also had The start of Easter fell more into Q1 this year and many home interior type companies have invested quite heavily in price offerings ahead of the Easter period as that is the kickoff for the outdoor season.

And going into Q2, are you seeing any, are the pressures easing or how should we think about this going forward?

Yeah, I mean, at the end of the day, the consumers are for sure seeking value for money and maybe to a somewhat large extent than we've seen historically. and then, of course, some new entrants into the European scene with Tiamo specifically. Of course, that is something that the entire industry in Europe needs to react to. And what has been the case is that many have focused on price offers in many of the sort of communication efforts we've seen so far this year.

Got it, thank you. And just to follow up on the Google consent mode update, is this the same update as what's been referred to as the Google's core March update?

No, no. So the consent mode is a reaction from Google. in terms of the European GDPR and then also in the second step that's where Google has been classified as a it's called a very large player or gatekeeper is kind of the term often used so with that being said they have ensured that all of their advertisers meet the standard that the European regulation has set and then of course that has increased the standards they put on us where we over the past few quarters have prepared to ensure that all of our setups in performance marketing meets those standards. Then in terms of what you were referring to, that was a major core update to the algorithms in terms of how they present the search results. It's been a while since they did a major update like they've done here over the, it was really initiated towards the end of the quarter and then completed during the first few weeks in Q2, actually.

Yeah, have you seen any impact from the core March update? I've read some industry reports saying that, well, platforms with quality content should benefit more. Have you seen any any impact?

We were seeing not a sort of major up or down when we look at it from a total perspective. Of course, there are certain of our domains where we're seeing positive effect and in certain areas where we're seeing some issues, but overall it has not been been super positive or not super negative either. But it is something we're still in the sort of process of adapting to because it is a gradual rollout across the different domains for us and them as well.

Okay, got it. And could you just please quantify the impact of the Google consent mode implementation on the sales in the quarter?

We had a couple of weeks where we had some issues in terms of being able to fully operate our paid marketing efficiently or effectively, which impacted the top line and efficiency during that period to a certain degree. Okay, got it.

Thank you. And the final question from me. The implemented profitability enhancement measures that you took during the quarter, you write that you've already seen the desired impact from these initiatives. Could you please just quantify what you mean by that and also the impact you expect going forward?

the um so we we mentioned specifically some price adjustments uh that of course um uh has had a slight impact on on the top line um where we've seen since we've seen limited to no impact on the on the willingness to buy actually uh so that is uh that is good and then of course with uh with a slightly higher price our gross margin profile has has improved when it comes to the optimization of the hosting of the platform or the new e-commerce platform. That is something we'll see the benefit of ongoingly. In our world, a relatively large improvement in the cost structure for hosting and operating the platform. And that is something we will see going forward. I've talked in the past about when you build new tech products, you build features and making sure that those features get out. And then in step two, you start optimizing the data flows, which is really what drives the cost to a large extent. And that effort is what we've started now during the course of Q1 and then got implement towards the end of the quarter.

Got it. Those were all of my questions for now. Thank you, guys.

Thank you.

The next question comes from Nicholas Ekman from Carnegie. Please go ahead.

Thank you. Yes. Can you help me understand the sequential trend here? I'm curious, why did your sales grow 14% organically in Q3 and then 9% in Q4, and now they fell 3.5%. Can you just explain what's the difference here? What's changed? Is the deterioration here, is that mainly due to comparisons being extremely easy in H2 last year and now tougher comparisons? Has the market actually deteriorated or is there any strategic changes from your end? If you could just elaborate a bit on that topic, it would be interesting to understand what trends you're actually seeing.

Absolutely. I think the Our most important market is Germany and what we saw with all of the sort of within Germany issues that started to emerge towards the end of Q4 really impacted the German consumers too. especially for, I would argue, our category. So we've seen that, yes, the consumer sentiment has stabilized, but the willingness to spend is at all-time lows. So, i.e., the savings rate is extremely, or at actually all-time highs. And then we've seen the seen some weakness in many of our southern European markets during the course of Q1. So that's the, whereas the Nordics continues to perform quite well. So we would to a certain degree argue that the different markets, different regions are on slightly different sort of cycles when it comes to the macroeconomics and then specifically Germany having some issues with all of the strikes and all of those things related to some of the stuff going on down there during Q1 and Q4.

Okay, very good. Thanks for clarifying. Second question, when you're talking about price hikes, did I understand correctly that you're talking about high single-digit price hikes? And is that across the board, or are we talking about selected SKUs? So basically, are we looking at high single-digit price hikes on average for your assortment?

And mid single digits across a large portion of the assortment is correct. Not every single item, of course, but a large portion of the assortment very similar to what we did in terms of the portion of the assortment included very similar to what we did back in the mid 22.

Okay, very clear. And just how this aligns with the market being very price sensitive. Is it right to assume that kind of your markdown levels are kept at a similar high level, but from a higher starting point because of the price sites? Is that kind of what we're seeing right now?

We continue to optimize and navigate the consumer sentiment and also the continuous trade-off to a certain degree between growth and profitability. And then what we've implemented here recently is of course a little bit more focus on ensuring that our profitability stabilizes considering the fact that the market is somewhat uncertain. Then also I think it's important to mention now going into Q2 we were coming into the summer season of course that means with our efforts on on improving our assortment, we are coming in with quite a few new introductions to the outdoor assortment. And of course, when we introduce new things, we want to charge a full price for those items. So overall, the mix going into Q2 is slightly less focused on price offers for sure.

Very clear. Thank you for taking my questions.

Thank you.

The next question comes from Emanuel Janssen from Danske Bank. Please go ahead.

Good morning, everyone. So just a few questions from my side, and I think we have touched already upon it to some extent on the Google consent input. costs, et cetera, but you mentioned IT costs and consulting costs. I don't know if it's possible to quantify all of these costs together in Q1, and should we expect similar costs coming in the coming quarters here near term?

Yeah. We said that half of the increase is the consultancy cost and half of the increase is IT costs. And the consultancy cost for the new warehouse is, let's call it the non-recurring costs. And the IT costs are, I mean, additional costs for IT licenses and services as we utilize, as we get better tools for our new platform.

And then I think the important aspect is some of those cost items, of course, is our investment into the future, our future ability to drive the business. But then the second aspect, of course, is the hosting and optimization of the sort of operating the platform. And there's where we've done quite a bit of efforts during the course of Q1, especially to optimize that cost base. And those cost reductions, of course, will be something we can benefit from moving forward.

Okay, perfect. Thank you. And regarding lead times, there may be transport costs, freight costs, etc. Did you experience any issues at all on the Red Sea supply chain?

From that aspect, of course, we have a fair amount of our production in India. The lead time on those vessels has increased due to the Red Sea. Many of the vessels we're using are now driving around Africa instead of using the canal. And that is something that we've had to take into account for especially the stuff coming in summer, but also some of the deliveries that we are planning to have for fall season actually. The production in Turkey and in that region has been relatively unaffected by the Red Sea issues.

Okay, cool. Thank you. And yes, final question from my side here. Given the uncertain markets and you also stated that you maybe focus more on optimization and also have made some price adjustments, is it fair to interpret that you are focusing more on profitability over sales here near term going into Q2 and Q3?

We want to make sure that we have a customer offering that is attractive and that we continue to maintain our fair share of the market. Some of the effort, however, what we've seen here and what we've done is that We want to also ensure that our larger variable margin components are at levels that we are comfortable with. And that's kind of the background to some of the initiatives that we've taken here over the course of the last few weeks and months.

Perfect. Thank you very much. That was all of my questions. Thank you.

as a reminder if you wish to ask a question please dial pound key 5 on your telephone keypad there are no more phone questions at this time so I hand the conference back to the speakers for any written questions and closing comments so I can read out the questions here so we have a

Question here from Philip. How much of a threat is TEMO? Obviously, service, delivery time, return conditions, et cetera, are very poor compared to RAKVISTA, likely also very significant on quality, but price is extremely low. Have the very low prices from TEMO affected your average order price and setting, or what is the effect of TEMO entering the e-commerce market also within RAKVISTA?

So we talked a little bit about I think if you talk about, if you can keep up with some of the sort of trade press, they've been extremely aggressive starting end of Q3, I would say from last year in terms of them investing enormous amount of money in advertising and other areas during Europe overall. It has, I would argue, impacted the total retail industry in Europe that it is a new player that everybody has to take into consideration. And of course, consumers are exposed to those price points that the TMO platform offers and to a certain degree, most likely has an impact on on what consumers expect to pay for a given item across all product categories and as well, including rugs. So that is something we've had to take into consideration. but we still believe and we know rather also that our products from a sort of objective perspective is of much higher quality. We believe that price is not the only thing that a large portion of the customer base is looking for. So they're also looking for design, they're looking for value for money, not only low price, And that is something that we continue to focus on in terms of ensuring that we deliver outstanding value for money across multiple price points.

Okay, so I'll read out the next question here, and that is from Jonas. I noticed a table in the report regarding if CarpetVista's domains are in the new platform or not. Is the plan to migrate CarpetVista to a new platform?

That is something we're still discussing internally in terms of the carpet vista domains. Historically, the carpet vista domains have been focused on serving the needs of the traditional hand-knotted rugs and customers. However, since really the past five years, we bought and sold those items via the Ragvista domain, and then we'll see and evaluate over time in terms of whether we want to maintain both brand names or not.

Okay.

So somebody hasn't muted the phone there. I have a question here from Kaj Erik. Hi, have you seen any changes in the competitive landscape from quote pure play unquote online rug players on the intense marketing climate or intense marketing climate? Is this from similar players like Rugvista or mostly from a border online marketplaces like Temel etc?

I would argue it's the It's mostly from the larger, broader category players, both when we talk about the larger home interior players in Europe, we're talking about someone like Otto, we're talking about people like Wayfair, Home24, etc., where they, of course, sell multiple product categories within the home interior space. Us and one or two other of the pure players are not at the scale of these companies. So we're mostly reacting to that to a certain degree. But what we're seeing from the pure players is very similar to what we have also been doing is trying to ensure that we are also attractive for the total market, for the total consumer, but maybe not to the same extent that we've seen from some of these larger multi-category platforms.

Okay, we have an additional two questions here from Philip Olosinski. So, NPS drop? Still on a high level, but a drop. Anything specific that investors should be aware of that drove the MPS down compared to the last two years of quarter one MPS score? We'll take that first.

The MPS, of course, is one, if not the most important KPI that we have. We did see a little bit of a drop. very much related to some challenges we had, especially in the beginning of the quarter with some delivery promises not being met. Primarily that's something we've had to address and have addressed during the course of the quarter. But they're still overall, the customers are still overall very happy with the products and the total buying experience that we can deliver.

Thanks. And the second question, how strong a competitor is Teppish World from your point of view?

It's a German platform. They do some good stuff, very much focused on Germany. We see them as a relevant reference there. Of course, our sales mix from a geographical perspective extends well beyond Germany. But of course, in Germany, they are a relevant reference.

Okay, we have two final questions here, both from Jonas. The first one, what is driving the weak development in the rest of the world?

What we talked about there is a little bit the Southern European markets, which have been performing quite well for us historically. But we did see some weakness in that region during Q1. UK is another market which is part of the rest of the world, which of course is mostly the rest of Europe. The UK is a market where we continue to progress quite nicely and actually are seeing growth. So we're seeing overall quite a big difference between how the markets have performed recently.

And the last question here for the day then, also from Jonas. How much of your traffic is organic now compared to before you launched a new platform and what do you target?

We have and probably will not in the near term or ever be extremely specific in terms of the mix between paid versus organic. What we can say is that we're seeing the organic share increase and the increase is relatively significant and it is also very much driven by the efforts we've been working on during the past few years. Number one, of course, with the new platform. Number two, with the increased And then, of course, number three, making sure that that content is indexed and also engages the customers both on our own site as well as on external platforms. So our ambitions within the content marketing or the content space is still very high. We are only at the start of that journey. and hopefully we'll continue to see an increase in terms of the impact on the sales numbers that those efforts will have. I also want to point out that we will parallel to this, we need to ensure that also we develop our capabilities and our efficiency within the more paid marketing channels. And that is also something that we continuously work on, because paid traffic will be part of the mix into the foreseeable future, and we need to be competitive in that arena. But with a more balanced approach, our expectation, of course, is that over time we can have a total marketing spend ratio that decreases. With that being said, I think there are no more questions. whether you can expand on the organic traffic efforts that are starting to show. It's a question from Adam. What we're talking about here is really creating and publishing content such as guides, how-tos, and also backgrounds to different trends and then the collections that we have developed. and that content and also category descriptions to ensure that the content engages the customers that come to our site, but also that that content enables us to improve our organic search rankings across the different search platforms and And that is kind of what we're doing within that area. Thank you. So unless there are any more questions, we would like to thank everyone for your attention and any interest. And looking forward to seeing all of you for our next earnings call. Thank you.