XXL ASA

OSE:XXL

Earnings Call Transcript 2021-Q2

[Tolle O. R. Groterud]

Hello, ladies and gentlemen, and welcome to the presentation of the second quarter and the first half year results presentation. My name is Tolle Groterud,and I have the pleasure of guiding you through the presentation. And our CEO, Pal Wibe; and our CFO, Stein Eriksen, will take you through the results and the key drivers. And followed by a Q&A session. And for media, there will be an opportunity to perform separate interviews after the presentation and then using the digital channels. So please direct your request to our press contact.So without further introduction, I turn the floor over to you, Pal.

[Pal Wibe, Group Chief Executive Officer]

Thank you, Tolle. As you might remember, 1 year ago, we were here. We presented the best ever quarter results of XXL. It was a fantastic quarter. So I'm very, very proud of the team and the efforts we've done in the second quarter this year. We actually presented or delivered 97% of that record results last year in this year, so it's a huge effort by the team. Very, very proud of that. That being said, we actually still think there are things we can do even better, and I'll come back to that. If you look at the headlines for Q2, there were solid results despite closed stores and challenges on product availability. The quarter started off quite challenging with more than 50% of stores being closed in Norway and Austria and also what I would call the perfect storm hitting the bike market, which is a huge category for us in Q2. That led to unsatisfactory top line and market share development. But with good gross margin work and cost control, we have been able to basically deliver the same record results as we did last year. So very, very proud of it in there. We have also continued the implementation of the strategic projects at the same time as we have been handling COVID situation, closed stores and a lot of turbulence in the market. And we are, as Stein will come back to you later, in a strong financial position. Last time we talked about wanting to refinance and get back to the dividend policy. And we are very, very proud and happy to be able to announce that today, of course. We think that XXL as a concept has -- is strong and has the capabilities needed in order to succeed also in sort of post COVID, and we'll come back to that. Q2 highlights. As I said, operating revenues down 15% due to these factors we talked about before, hitting us extraordinary high since we are in the big cities. Bike is a huge category for us. And as you might remember, last year, we had this clearance campaign that impacted the comparable figures. Strong gross margin in the second quarter driven by better campaign execution, a much more healthy inventory and a lot of category work and a positive category mix. Of course, gross margin is slightly on the extraordinary high side. And that is also, of course, the revenue is on the low side. And we think that the ideal balance is something more in between. But despite all this, we delivered NOK 392 million in EBITDA. This is the second best ever in the history of XXL and very, very close to last year's record results. This is the area where we're not satisfied, the market share development. As you can see on the bottom right, we took market share in all markets in 2020. So the sort of negative market share development has happened in the last 4 months since February, which is basically a lot to do with the clearance campaign we had last year in the comparables as well as the store closures especially in March, April and February as well as the bike situation. But we also think that there are things that we can do ourselves, and we'll come back to that, in order to revive sales. On the segment and the growth in the EBITDA, as you said, a negative top line growth in all markets, but we are comparing -- on the EBITDA, we are comparing ourselves to the best quarter ever. So for example, Finland, which has had a tough quarter, with NOK 22 million lower EBITDA than last year, it is still the second best quarter EBITDA-wise in the history of XXL in Finland. So it's not a bad quarter, it's just worse than last year. The positive on the segment is Sweden. As you might remember, we launched the Sweden Full Potential project internally last sort of winter. It's still very early. We are focusing on operational improvements, marketing innovation, store footprint reduction. As I said, many of these things has not fully implemented. It will take a long time to implement all of it. But the early signs are positive, and Sweden is actually the segment performing the best both on the bottom line and on the top line in this quarter. We talked about the bike markets. I will not bore you with the talking more about the bike market, but as you have read in the papers and in the different media, last year, there was a worldwide boom in the bike market all over the world, basically. And that has led to a shortage of bikes available. In addition, the pandemic has disrupted the production facilities and the transportation lines and the containers. And that has led to what I call a perfect storm in the bike market, and that is, of course, hitting us extra hard. And the reason why it's hitting us at XXL extra hard is because bike is a huge category for us. Last year, in Q2, it was 26% of total sales. And of course, if you -- if 26% of total sales is disrupted in a quarter, that is tough. It's a little bit like if you're selling Easter eggs for Easter and you don't have any Easter eggs, it's tough to succeed in the quarter. The good thing is that bikes are starting to come in, in huge volumes even -- so we are better prepared now for the next few months than we were in the last few months. With that, I think I'll hand over to Stein, who will take us through the financial figures, and then I'll come back and sum up.

[Stein Alexander Eriksen, Group Chief Financial Officer]

Thank you, Pal. Good morning, everyone. So let's take a dive into the main financial items for the second quarter of 2021. As Pal said and as we stated after the Q1 results, we aim to refinance the group in order to increase flexibility, improve the existing terms and return to a long-term dividend policy. And therefore, I'm happy to announce that we have agreed to prolong the arrangement with our existing bank syndicates, namely Nordea and DNB. Flexibility is secured through one big RCF of NOK 1,650 million with a maturity of 3 years and a slightly improved terms. In addition, we also have an overdraft facility of NOK 150 million. And with a new loan structure, XXL will, from Q3 2021, return to leverage covenant structure and will be in position for dividend distribution. And therefore, the Board of Directors of XXL ASA proposes a total extraordinary dividend NOK 9.98 (sic) [ NOK 1.98 ] per share through an Extraordinary General Meeting to be held on 16th of September 2021. And the dividend will be splitted to 2 tranches of NOK 0.99 per share to be paid out in September and December 2021, respectively. The total dividend distribution is NOK 500 million, and the 2 tranches will have separate ex dividends and record dates. Yes, also net interest-bearing debt for year-to-date ended at NOK 83 million. We have liquidity reserves of NOK 905 million. And leverage ratio in Q2 ended at 0.8 -- no, 0.1x, sorry. XXL will return to its long-term dividend policy with a targeted payout ratio of 40% to 50% of the group's annual normalized net income. That being said, let's move to the P&L and the main elements in the quarter. Total revenue ended up to NOK 2.4 billion, down 15.5% or NOK 445 million versus a strong last year and where the main explanations for the decline were store closures. That explained about NOK 200 million. And we were also, like Pal said, severely hit by a late delivery of bicycles. And sales in this category alone was down with NOK 250 million. Gross margin ended at a strong 41.8%, up from 37% last year, while OpEx percentage ended above last year but while OpEx in kroner ended below last year. Despite the top line decline, XXL ended EBITDA in the second quarter at NOK 392 million and as Pal said, the second best quarter -- second quarter in the group's history. We already touched upon it, but the gross margin in the quarter ended at a strong 41.8%. And XXL has now, for 4 consecutive quarters, delivered gross margins above 40%. And as you can see from the slide here, the improvement was broad based with all segments delivering strength in margins. The high gross margin in the quarter was driven by campaign execution, a more healthy inventory situation and a positive category mix due to significantly lower sales of bicycles. Also, last year's gross margins were -- was affected by several clearance campaigns with high volumes but at lower margins. That being said, we believe that the gross margin in Q2 this year is extraordinarily high. And as stated earlier, we think that the gross margin level above 39% -- about 39% is more sustainable going forward. Moving over to OpEx. As I said, OpEx percentage increased with 2.8 percentage points impacted by negative like-for-like growth hampering scale in operations. But in kroner, it decreased with NOK 35 million, partly related to reduced consultancy costs and a reversal of a bonus accrual of NOK 30 million. So the group EBITDA in the second quarter 2021 ended, as I said, at NOK 392 million, where the reduced top line was partly compensated with strong gross margin. EBITDA margin ended at 16.2% versus last year's level at 14.1%. And of course, Norway, Sweden and Finland all delivered their second best Q2 results ever. Net debt development from NOK 71 million in net debt by the end of 2020 to NOK 83 million in -- by the end of the second quarter. And as you can see, EBITDA is the main driver of the development. Somewhat contracted by somewhat higher inventory versus year-end. CapEx ended up at NOK 125 million. And as you can also see, we bought back some shares of NOK 77 million. Overall, of course, we are still very pleased with the financial position of the group ending, as I said, at the net interest-bearing debt at NOK 80 million and liquidity reserves at NOK 900 million. And even after the dividend distribution in the second half of 2021, XXL will still have a strong financial position. So to sum up the financial. Second best Q2 results in XXL's history. Closed stores and lack of bicycle were compensated with higher margins, continued rock solid balance sheet, and we have refinanced our loan facilities and proposed an extraordinary dividend of NOK 500 million in the second half of 2021. And of course, we are returning to our long-term dividend policy. So Pal, handing over to you for some final remarks.

[Pal Wibe, Group Chief Executive Officer]

Thank you, Stein. Yes, so to sum up, many has asked us about what's going to happen after COVID. We believe that XXL is in a much better place after going out of the pandemic than we were going into the pandemic. And you also have to remember that the market is very different, especially in Norway and Sweden. If you go back to 2019, we were actually -- first of all, XXL was leading the competitive pressure in the industry and the downward spiral margins and prices. And our main competitors was actually in the middle of a bankruptcy sort of panic. As we go out of the pandemic, the market is much more consolidated. We are in a very different position, and the main other players are also in a different position. So we believe that the sporting and outdoor market is in a very different position coming out of the pandemic. And XXL, as the biggest player in the Nordics both online and offline, is in a very different position. And we believe that we still have a lot we can improve, but the market and we are very, very different. We talked about the strategic portfolio. There's a lot of things happening at XXL. And as I said, I'm very proud of the team's capabilities in executing on all of -- not just all these and many other projects at the same time as we have been handling COVID restrictions, store closures, ever-changing pandemic situations. So really, really big thumbs up to the team for an extraordinary effort. There's a lot of projects there. I would like just to highlight some of them because some of them is going to come be positive and be with us for a long period of time. And especially on the category side and the supplier relationship, we are doing a lot of good work at the moment. These are long-term things. We are now discussing things we're going to do next summer, so this is things that is in the pipeline for a long period of time before being executed. But I have personally been involved in many of the conversations with our supplier partners, and we see a strong improvement in our relationship with the main brands. And we can also see it in the availability of products. In this quarter, we have increased the availability from Asics, one of the leading running brands, but also from many other running brands that we are extending our assortment. Last quarter, we had Marmot being reintroduced at XXL, and I can assure you that there are more things to come in the quarters to come. So very, very good work on the category development and the brand supply relationship. And this is something that is maybe one of the main drivers of that long-term journey at XXL. Our long-term sort of guiding and ambition is that we are going to grow -- take market share over a longer period of time. We have not done that over the last 3, 4 months, but we will do it in the long run. This will also improve gross margin from sort of the stabilized 2020 level. So as Stein said, above 39%, maybe not as high as we had in this quarter at above 39%. And we have a lot of efficiency improvement that is partly done, partly on its way, which will decrease the cost ratio and increase the quality of our operations. So this is a long-term journey. There's a lot of improvements we need to do. And many of the things we're going to do is not going to happen in 1 or 2 quarters, but these are the long-term guiding that we give to the market. So to close up, extraordinary quarter, second biggest -- second best quarter -- Q2 in the history of XXL and in tough conditions around us. The priorities going forward is to sharpen the campaign activities in a controlled way. We want the top line to grow, focus on improving the category and concept offering and also accelerating our strategic e-com plan. As you know, e-com has been the engine of our growth in the last 12, 18 months. We have had a fantastic development. We are not satisfied. We think we can do even more. And this is one of those areas where even if you've sort of been growing a lot, you need to do even more because it is one thing that we have learned from the pandemic, it is that e-com and the e-com growth is here to stay. We also need to improve our efficiency on all the core processes in the company, and this is long-term work. And as Stein has talked about, optimize inventory and the cost base, and that is a continuous work. We've done big strides over the last 18 months, and we still have some fine-tuning to do. So overall, we are sort of positive going out of pandemic. Many challenges ahead of us and a lot of improvement areas, but also, we think that the big box that are here to stay and win, we think that the big e-com players in the sport and outdoor industry are the winning concept. And we think the unique combination of being the biggest pure player in the market in Nordics and the biggest brick and mortar is a unique combination that we have at XXL. So with that, I think we will open up for questions, Tolle.

[Tolle O. R. Groterud]

Yes. Thank you, Pal. So then we open up for questions, and I call upon the conference host for further introductions.

[Operator]

[Operator Instructions] We currently have no questions coming through. [Operator Instructions] There are no questions in the queue, so I'll hand the call back to your host for any closing remarks.

[Tolle O. R. Groterud]

Thank you. So crystal clear then. So we will, of course, be available for questions during the day. So both Andreas on the press side and myself from the Investor Relations, so please contact us. And then that ends our session then. So then thank you all, and enjoy the summer holiday.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.