Komplett ASA (KOMPL) Earnings Call Transcript

Good morning from sunny Oslo, and welcome to the presentation of Komplett Group's second quarter results. My name is Kristin Hovland, and I'm Head of Communication at Komplett Group. We will start today with our CEO, Jaan Ivar Semlitsch, who will go through the highlights for the quarter. Then our CFO, Thomas Rokke, will give you some more details on the financials. At the end, Jaan Ivar will summarize the quarter and give you some perspectives on the outlook. Today's presentation will take approximately 20 minutes, and you are welcome to post questions via web, and we will answer them at the end together with any questions from the audience. So Jaan Ivar, the floor is yours.

Thank you, Kristin. And again, here from sunny Oslo, which is great. The results presented today reflect weak markets and actions to meet strong competition in select product categories. At the same time, we've had good progress with our commercial initiatives, improved liquidity, and a more solid financial position. Before diving into the quarterly numbers, let me share a few highlights as a backdrop. The weak demand seen in our core categories is largely driven by headwind from product related innovation cycles. Last year, new launches and product upgrades had a positive impact on demand, and we haven't seen this effect so far in 2024. In parallel, competition has intensified further, especially in Sweden, and we have faced this through deliberate price investments and by increasing our campaign activities to defend our market share. And in a challenging market environment, we have gradually built down stock and adjusted our stock composition, also in preparation for back-to-school Q3 and for the peak season Q4. We have revised covenants in place with increased headroom for the coming quarters, and our liquidity has benefited from improved credit and payment terms. Moving forward, improved consumer confidence is expected to gradually translate into increase demand, and the year-over-year effect from fewer new product launches is expected to be less pronounced in the second half of the year. Now let me share the highlights for the quarter. Sales declined by 5.9% from Q2 last year, but showed an increase from Q2 this year -- Q1 this year. The year-over-year effect and decline was driven by weak demand in our core categories as mentioned before and the impact was most evident in Sweden. The gross margin decline resulted from deliberate price investments and campaigns to defend our market shares in a competitive environment as well as our efforts to reduce and clean up inventory. And in May, our consistently high customer satisfaction was once again demonstrated and confirmed when we were ranked as #4 among all companies in Norway in the customer index, [indiscernible], an increase from the ninth place the year before, both initiatives, and we reduced our operating costs by 7.8% on a like-for-like basis. However, the adjusted EBIT result was impacted by lower sales and lower margins and ended at negative NOK 38 million despite the cost savings. The group's commercial and strategic initiatives are progressing well and expected to continue supporting the underlying margin development going forward. Now a few words about our actions to secure financial, commercial, and operational benefits. In a challenging market environment with weak demand, high competition, and inflationary pressures, we have put even more power behind our commercial, strategic, and cost reduction measures. And let me start with NetOnNet. In NetOnNet, we are continuing our expansion in Norway. Our store opening in Stavanger in April has had very good traction, and we're about to open in Bergen in the second half of 2024. And moreover, in Sweden, in Sodertalje, we are also opening up the second half this year, where we have a white spot. Operationally, we are introducing an improved online checkout functionality for delivery and payments, and that will improve the conversion online. And we have implemented tools for more active price management. And I'm glad to see that July has been off to a good start, both in Norway and Sweden for NetOnNet. Having the right assortment for basic retailing is key, and we are strategically strengthening our core as well as selectively expanding our presence in adjacent categories such as MDA and SDA. And the NetOnNet leadership team is now fully in place with the effect from mid-June. In Webhallen, mobile with subscriptions will be in stores from H2, together with a wider private label assortment. Since June, our assortment also includes a full Samsung TV lineup and Sonos sound systems, brands and products that are really important for the growth and for Webhallen. From Q3, we will also have an extended component range. We have come a long way in optimizing the store footprint and reducing our cost base in Webhallen, and we continue to actively manage our cost base in Webhallen. Moreover, the refined concept for gaming, telecom, and sound has been off to a good start with our flagship store in Sveavagen in Stockholm opening up the 2nd of May. And we're rolling this concept further out and Gothenburg will be the next city in August. Finally, in Komplett services, we expect the headwind from product cycles to gradually turn into tailwind as new models will launch in Q4 '24 and Q1 '25. We are seeing great success with the Komplett PC rollout, also to our other brands, NetOnNet and Webhallen and will be targeting new market segments in H2. As laid out in our strategic priorities, we'll increase our presence in core and adjacent categories. And we see strong momentum in MDA and SDA as we engage and increase the supplier base and the product offerings. And we will continue to selectively apply marketing tools to build on the strong brand recognition and the high customer satisfaction in Komplett among our consumers, customers, both B2C and B2B. An upgraded and improved search engine is now live for Komplett, and we also offer improved freight alternatives. And we are excited to launch a new loyalty program for Komplett B2B during Q3. And we've had a soft launch since 1st of -- the 4th of July, which has been very promising. Finally, improved commercial terms across the group. Our commercial team has been in place since March, led by Andreas Westgaard, and has already negotiated several new group-wide agreements with key suppliers where we utilize our scale to achieve better terms and the right brands. The back-to-school plans Q3 and the peak planning Q4, they are all well on track. The positive effects from these measures are expected to have a more meaningful impact as we move into the second half of the year. And with this introduction, I would like to leave the floor to Thomas, who will take you through the details of the financials.

So thank you, Jaan Ivar, and good morning to you all. I will use a couple of minutes to walk you through the last -- results of the last quarter. As you can see here from the first page, we have completed another challenging quarter, driven, as Jaan Ivar alluded to, mainly by weak sales, soft margins, but with improved cost position, but nevertheless, affecting the bottom line. If you look at the sales, it has been down 5.3% currency adjusted, i.e., an improvement in development compared to Q1, but still a negative development. And this development has been driven by mainly 2 factors, one of them being kind of product cycle related, I will come back to that. And the other one being market-related, albeit in a slightly improving market in some of our segments. The other part, let's say, the other 50% of the shortfall in gross profit is driven by margin decline. This is the result of deliberate price investments and campaign activity to fend off in certain core categories, mainly in the B2C segment as we'll come back to. We're also, as Jaan Ivar alluded to, doing a certain pruning of our inventories. I think it's very important to stress that this is not a fire sale, but a disciplined and timed development, both to kind of cater for the weak demand in the market, but also to cater for the fact that we are improving our assortment based on the new central commercial team. On the cost side, which is partly compensating by improving NOK 27 million year-on-year and mainly reflect a certain success in our continued effort to combat the cost inflation, which is still there. And while we do see that some of the elements are one-offs last year, as we reported at the time, the majority here is definitely operational and with a very limited extent of FX development that we also saw last year. On the result of this, you obviously can see that the decline is from NOK 0 to NOK 38 million negative. And for those who actually had time to go through the report and go through the presentation ahead of this, the largest part of that is obviously in the B2C segment, which coincides or represent basically the whole shortfall. Going into the B2C segment. As you can see here, there has also here been a fairly strong combination of a sales shortfall and a margin shortfall compensated by a better cost position. Here, the sales development, as we can see, is different across the geographic regions with Norway being the best, Sweden being the worst, and Denmark very positive, but obviously a relatively moderate part of the total. In Norway, we can see that we are benefiting from the rollout of the new stores and the efforts in the NetOnNet brand, but we're also here obviously exposed to some categories that are quite difficult in the current market, albeit a general market development improvement. In Sweden, you can see that we are down 10%, which basically reflects both the combination of categories and a continued difficult Swedish market. And also, this weakness is observed across the brands. As you know, some of the brands are fairly highly exposed to computing and gaming, which is a problematic category. Other parts of the brands are highly exposed to the Swedish market. So both -- of all of these brands are basically affected year-on-year from this development. On the category side, as Jaan Ivar alluded to, we did see last year, and you may recall the very positive developments we had in particular in Norway in Q2 by the innovation cycles. They are kind of led by 2 different factors. One of them is basically the release of gaming consoles and games, which had a very positive development last year, partly from release and availability of these types of products going into Q1 and Q2. The other was the release of new graphics cards, as you may recall from our presentation last year, with the launch of the RTX 4000 Series in Q1, which both led to strong demand for these type of products, but also to adjacent categories, driving up the computing and gaming demand fairly strongly last year, and we have not seen the other side of this, this year. On the contrary, we are also seeing that some of our sophisticated buyers are holding off, knowing the innovations which are coming out now in Q3 and Q4, which are both numerous and also fairly widespread, albeit we are not expecting, as Jaan Ivar alluded to, to see a major effect from those before end Q4 next year. When it comes to the gross margin, there has been a general pressure with quite some geographic and category specific developments. It's obviously most challenging in the Swedish market, where we have a combination of tough market and tough competitive situation after the changes in the competitive landscape there, but it's also been driven by typical traffic-driven categories. So it's not been widespread across all the assortment, but targeted towards categories that generally drive traffic into the stores and also some of our core categories where we have them deliberately chosen to fend off the competition by adapting our price structure. On the cost side, we are progressing, as you can see, with a positive development, partly based on the restructuring in the Webhallen brand, as we alluded to in Q1 and Q4. But this is also contributing to finance to build up these measures. So also the new stores have been -- that were launched in Q4 last year and also in Q2 this year have been launched cost-neutral. Nevertheless, this combination of margin sales and cost improvement obviously lead to a significant fall in profitability year-on-year. On a bit more positive, but still challenging note, you can see that the B2B segment continues to operate at a decent level, slightly down year-on-year in EBIT terms and also in margin terms. But here, being more affected by the underlying weakness in the PC demand, which is one of the core categories here, obviously, than by competitive moves, albeit the market being still a challenging market. We're also seeing here a slight shift in the product mix, which contributes also to the margin decline, but which can partly be compensated by a better cost position in the year, so in the quarter, which means that the results remained stable and also improved somewhat since last quarter. Last but not least, on the segment side. You can also see that the distribution business, which is tied to different dynamics than the other 2 businesses, both in terms of customer composition, but also in margin dynamics, has been able to recover from the last quarter and now back to last year levels based on good sales and also on improved margins. So contributing now positively in the quarter. Looking a bit further down in the profit and loss statement. There has not been any major changes, which means that the net profit for the period is mainly affected by the operational elements we described previously. As we can see here, there is a slight increase in the depreciations, which is mainly related to the IT rollout last year, which increased those and the one-off costs remain at a very low level. What we're seeing here is also a combination of new measures being undertaken, costing money, but also more efficient deployment and more efficient execution of already reserved -- measures being reversed and hence compensating for those factors. Net financials remain in line with last quarters, and also the tax basically reflect the changed circumstances when it comes to the profitability. Net working capital has been reduced Q-on-Q, improving the cash flow and being the main contributor to actually lifting the operational cash flow to NOK 283 million. In the period, we also have undertaken the investments in line with our plans. And most of this is going into IT upgrades. And in this respect, quite a lot of it is going into an upgrade of our IT infrastructure in parts of our Swedish business, which will be rolled out in the second half of the year. Apart from that, when it comes to the financial items, it's mainly a rebalancing of our liquidity facilities and a certain repayment of lease liabilities of NOK 62 million driving that. As you can see, the net working capital has declined Q-on-Q and also towards last year with the inventory being now under control and going down. And also, with the payables on its way up. And in the payables, you will see a certain month end effect in the sense that the last 2 days of June were on the weekend, but most of it is actually driven by improvement in our payment terms, and we do expect to see more impact of that going forward. That positive development on the working capital side also contributes to a healthy liquidity in the quarter. As you can see here, we are now on par with last year with approximately NOK 1 billion in free liquidity. And that also is in line with last year, if you correct for us discontinuing a facility that was no longer needed around consumer financing. It should also be noted that it's still being supported by the postponement of the tax payments in Sweden as we -- which is customary and as we have alluded to on previous occasions, that for those who actually read the report is also a facility that can be applied to extend for 36 months. And I think also this is what we intend to do in these terms to apply for an extension as long as possible, which is open to all companies in Sweden. The net debt interest-bearing debt, if you look at that, also supported by, obviously, the better liquidity is now also stable year-on-year, which leads to a leverage covenant of 3.0x, which is also an improvement towards last quarter. As Jaan Ivar already alluded to, we have revised the covenant structure for the rest of the year. That has been done to both cater for the market uncertainty. There is still uncertainty out there, but also to deal with other uncertainties, including the Swedish tax obligation here, which will potentially affect the capital structure in the coming quarters, but which we think we have with our financial partners been able to compensate. Equity ratio is still on a solid 38%. So overall, we think we have a good financial position and even improved during the quarter, and we also feel comfortable that this is sufficient to cater for the challenges in the coming quarters and also to help us continue developing the business as usual and as we've set out in our strategic plans. On that note, I will give the word back to Jaan Ivar, and thank you very much for your time.

Thank you, Thomas. I'll sum up with 2 slides before we open up for Q&A. Our performance in the quarter continued to be impacted by product-related innovation cycles, weak markets, and strong competition, especially in Sweden, and Thomas also illustrated that now in his presentation. But actions are taken to meet competition and to build down inventory, and that had a negative impact on the gross margin, which offset the positive results gained from our commercial initiatives. Despite the ongoing cost inflation and growth measures, Komplett Group effectively reduced the cost base during the quarter. And against a challenging backdrop, our commercial and other efforts translated into improved liquidity, and we achieved a more solid financial position with increased headroom for the coming quarters. As we now are approaching the peak season, we are well progressed with strong commercial plans for back-to-school Q3 and Black Week, Black Friday peak season, Q4, really looking forward to that. But competition is likely to remain intense, but we expect that the negative impact on gross margin will ease somewhat. Our commercial initiatives will continue to have a positive impact on product availability and sourcing terms. We continue to keep a close eye on our cost base and the financial position to mitigate cost inflation and handle other uncertainties also mentioned by Thomas. While the timing of a pronounced market recovery is still uncertain, we expect improved consumer confidence as well as innovation cycles to gradually become more supportive, especially as an increasing share of computers and equipment and graphic cards is approaching the need for replacement. And that's both for B2C and B2B. We remain dedicated to our strategic initiatives to leverage the group's efficient and scalable platform for growth and initiatives to drive growth and profitability towards 2026, '27, and '28, and we are well underway. Our brands; NetOnNet, Webhallen, Komplett are well positioned in fundamentally attractive channels and categories supported by strong underlying drivers. And with that, we will open up for Q&A, and I will be joined by Thomas and Karina.

All right. So we have a few questions on the web. So the first question is, what was the factoring level in Q2?

The usual question from '22.

How much was the positive timing effect on liquidity in this quarter?

Very limited, less than 100, between 150.

What should drive the improvement margins?

Well, I can start off and Thomas can comment as well. I think it's been rather intense in Sweden, especially from some of the competitors, and we have deliberately done price investments to defend our market share. We think that all players, they need to show profits and good development in the second half. So I think that in itself will have an impact. Then also our sourcing terms will continue to be there and have an even bigger impact as we go into Q3 and Q4. So -- and we've also, although it's not big in the numbers, we have done a cleanup in our inventory. So we have a good stock composition for Q3 and Q4 into both back-to-school and to the peak season. But perhaps would you like to comment also, Thomas?

I think that sums it up quite well. I think one needs to realize that we're also facing or expect to face less headwinds. What we're seeing year-to-date is mainly strong exposed categories being targeted, which means that we will likely to see some relaxation around those. I think also on the inventory, as we said, we are managing that carefully, both to handle demand situation and also to handle the new assortment, but expect to be able to handle that in a fairly neutral manner going forward.

Do you see any changes in the competitive landscape?

Well, I think the competition has always been intense in this industry, probably for the last 50 years. But we see some pure players being more active than before. So we are defending that position. And again, we have seen some campaigns from some competitors, the traditional competitors being rather aggressive in Sweden. That's been rather evident during Q2, which I would expect not to sort of be the long-term campaign activity.