Nelly Group AB (publ)

STO:NELLY

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for holding. Welcome to the Qliro Group's Interim Report for the First Quarter 2018 Conference Call. [Operator Instructions] Today's conference is being recorded.I will now hand the call over to Marcus Lindqvist, Chief Executive Officer of Qliro Group, who is joined by Mathias Pedersen, Chief Financial Officer.

[Marcus Lindqvist, Chief Executive Officer & President]

Thank you, operator. Good morning, everyone, and welcome to this conference call regarding Qliro Group's first quarter results.Let's start with a brief overview. Following the closing of the [ försäljningen ] transaction at the end of January, we now have [ structured the ambition ], which allows us to fully focus on transforming CDON into a leading Nordic online marketplace, accelerate profitable growth in Nelly as a leading online Nordic fashion brand, and further extend our offering of financial services to new consumers and merchants in Qliro. If we look at our businesses from a group perspective, we see our core assets as 200 million visits on our website that generates 3 million active customers during the last year, who in their turn placed 6.4 million orders with our merchants. On top of that, we have a partnership with some 1,500 merchants in CDON and Qliro, and this gives us a solid position and scale, as well as an ability to adopt a data-driven approach when generating our business.Moving on to the highlights of the first quarter. In the quarter, the group's net sales increased with 2% to SEK 716 million. Gross profits amounted to SEK 135 million. And our gross margin came in at 18.9 percentage points. This is down 1 percentage point compared to the same period last year, driven by return effects in Nelly. During the quarter, we continued to invest in technology, organization and marketing in order to accelerate our business going forward. These investments of course, sorry, impact our profitability short term but will help drive increased efficiency and profitable growth going forward. I will cover this more in detail further on in the presentation.Outside of these planned investments, our EBITDA was also impacted negatively, with SEK 16 million by returns in Nelly and by SEK 7 million through an organization change in CDON. Following the closing of the försäljningen transaction during the quarter, the group's net cash position at the end of the quarter amounted to SEK 324 million, which provides us with a good flexible financial position for the future. The divestment of försäljningen also contributed with SEK 140 million to our profit after tax in the quarter.Looking at the businesses, we will start with Qliro Financial Services. Qliro Financial Services is building a digital financial offering that is leveraging on low customer acquisition costs and extends the group's position in the e-commerce value chain. In the quarter, total operating income increased by 38% to SEK 68 million, while total operating expenses increased with 29% to SEK 59 million, showing scale in our business. Operating profit before depreciation increased by 79% to SEK 3.5 million, and it should also be worth noticing that the introduction of IFRS 9 resulted in an increase in the reported net credit losses of SEK 8 million to SEK 13.7 million during the quarter. Depreciation increased by SEK 4 million in the quarter, primarily from the roll-out of our technology platform. We can also report that external merchant volumes now account for 39% of total business volumes in the quarter.Let's look at the loan book expansion in more detail on the next slide. We have a loan book of over SEK 1 billion and we will continue to cost efficiently expand it. We mitigate the risks of our loan book expansion by operating in a Nordic creditor-friendly environment, where we use real-time internal and external data to perform prudent credit checks in order to identify consumers with reliable credit history. As a result, we can expand our loan book and, at the same time, leverage the balance sheet. In the quarter, our loans to the public increased 43% to just above SEK 1 billion, and our personal loans doubled since year-end and amounted to SEK 109 million. We continue to build our personal loan book from existing customers, giving us very low customer acquisition costs. And 95% of the personal loans issued -- has been issued to existing Qliro customers.Moving on to the next slide, we can see how our net interest income is growing. As you know, e-commerce volumes are growing. The red line in the graph represents e-commerce volumes from internal and external merchants. As you can see, the business volumes is increasing with clear peaks every fourth quarter. We believe that the business volumes will continue to increase with the growth of our existing merchants and by adding new ones. Some of the consumers chose to postpone payment, for instance, via buy now pay later or by opening an account, and that then becomes our loan book. As you can see, it grows faster than the business volumes, because of the fact that we extend the relation with the consumer over time. You can also see that the growth in the loan book is driving the growth in revenues, which is then represented by the light blue line in the graph. And by building the loan book, we are creating value for the future.Moving over to CDON Marketplace. CDON Marketplace is the leading Nordic marketplace and provides scale to the whole group. In the quarter, our external gross merchandise value grew with 13% to just above SEK 111 million. Our total gross merchandise value declined with 1% to SEK 476 million, and this was driven by a net sales decline of 3%. Our EBITDA came in negatively on SEK 21 million in the quarter. As mentioned, external merchants increased sales with 13% and now accounts for 23% of total marketplace sales. Our net sales was affected by Easter and the transformation to marketplace, where we, over time, will continue to move only inventory sales over to the marketplace business model. I will cover that a little bit more in detail going forward. Our EBITDA was impacted by investments in brand and the reorganization. Further on, we continued our investments in technology and fulfillment. That, in turn, will enable increased efficiency over time.During the quarter, CDON also released a beta version of a new site. We're very excited about the release of CDON's new site, targeting small and medium businesses. This is our first larger launch of our new automated IT platform that, later, will be used also for our consumer site. And this launch allows us to tap into substantial new market opportunity. The future success of the new site is built around fast and reliable deliveries, a wide assortment in combination with our marketplace and dropshipment business model and a high level of automation that will allow us for a low operating cost and, in turn, attractive prices. The launch of the new site will leverage on CDON's already 9,000 (sic - see slide 9 "9,300") active SME customers, which will be used as a base to build from. Our ambition with this lunch is to be the leading online one-stop-shop for small businesses in the Nordics over time.If we move to the next slide, we can take a look at -- on how the business are transforming. During the last year, we have accelerated our non-inventory based business model in line with us transforming into a marketplace. At the heart of things, the new business model is all about building an infrastructure, where we are investing in IT and merchant relations for consumers to be able to buy great products at affordable prices. To get systems automated and all processes refined is a rather complex project and will take time. We believe that we today still are in the beginning of the transformation and realization of opportunities that our new infrastructure will allow for. At the same time, we can see a large interest from the market to find new channels to consumers. Our transformation and partnerships with category leaders such like Adlibris, VidaXL, Furniturebox, and recent additions like Ellos, Cervera and Trademax proves that we are an interesting option for merchants. On this slide, you can see how the marketplace and dropshipment business model increased over time; and last year, this part of our business [indiscernible].Let's look at CDON's customer lifetime values. Overall, if we look at Q1, from the result perspective, it was a challenging quarter for CDON. But if we take a look closer to underlying KPIs, they are developing in line with our expectations. We are seeing a growth in new customers that exceeds our net sales growth, and at the same time, our customer base continued to grow. If we look at the customers that we recruit, you can see how they contribute and becomes profitable over time. As we now focus on a ramp up of our business, this will impact our results negatively short term, but, as you can see, long term, the investment will pay off. Also due to the rapid assortment growth coming from new large merchants, the majority of our marketing spend is focused on informing our customers of new categories. Based on this, the majority of the new customers that we recruit are recruited in the marketplace.Moving on to Nelly. The first quarter was, from a demand perspective, a strong quarter for Nelly, but at the same time, we are disappointed with the results, where our net sales growth with 3% in the quarter to SEK 276 million. Our EBITDA came in negative on SEK 14.9 million. During the quarter, Nelly continued to accelerate its marketing, which increased visits by 15%, number of orders by 18% and the total order value by 15%. However, revenue growth was limited to 3% due to Easter, unexpectedly high use of extended returns from campaigns in the fourth quarter, as well as increased returns in the first quarter. Further to that, orders for approximately SEK 13 million were delayed by the Easter holiday. Compared to the same period last year, earnings were affected by approximately SEK 16 million due to the increased returns; nearly half of this amount was a one-off effect from campaigns in the fourth quarter. During the quarter, product margin was 46% compared with 47% same period last year. The decline in margin was heavily impacted by the returns. The share of own brands increased from 37% to 46% in the quarter. Marketing costs increased by SEK 8 million to SEK 26 million corresponding to 9% of net sales, which is in line with or below our listed peers.Let's look at Nelly's customer lifetime values. As you know, Nelly is one of the most well-known online fashion brands in our target group in the Nordics. Nelly's core is its own brands and we complement them by a well-composed portfolio of approximately 200 external brands. Nelly's target audience is highly engaged, and over half of the purchases are made on mobile devices. Looking at profit contribution from new customers, in contrast to CDON, the Nelly customer is profitable during its first year. And when we now are ramping up our marketing investments to drive growth, this really impacts our profitability short term, but pay off already during the first year of the customer journey. As you can see on the right side of the slide, accumulated over a longer period of time, our profitability per customer will accelerate.That was my comments on the business. And I would now like to hand over the call to our CFO, Mathias Pedersen. Mathias, could you please comment on the cash flow and financial position of the company?

[Mathias Pedersen, Chief Financial Officer]

Thank you, Marcus. Certainly; and this time, we will have a look at the e-commerce business separate from the financial services.So starting with the cash flow within e-commerce. The cash flow for the first quarter came mainly as a consequence of the seasonal peak in the fourth quarter. So early in the year in January, accounts payable and VAT for goods sold late in Q4 were paid off. On the inventory side, there were no overall changes during the quarter as CDON decreased its inventory while Nelly increased ahead of its spring and summer seasons. We spent SEK 7 million in capital expenditures during the quarter, most of it related to investments in further automation in CDON. And furthermore, we invested another SEK 32 million in equity into Qliro Financial Services to support its further expansion. And then, we had a divestment of Health and Sports Nutrition Group, which brought us about SEK 370 million. And we ended the quarter with SEK 574 million in liquid funds within our non-financial business.Moving forward then to the balance sheet for e-commerce. So the net cash position amounted to SEK 324 million at the end of the quarter. Looking at net working capital, as mentioned, CDON decreased its inventory during the quarter and this was largely a seasonal effect. Over time, however, the transformation of CDON will enable growth with less inventory build-up. Nelly, on the other hand, increased its stock ahead of the spring and summer seasons, reflecting its need to build up inventory to support further growth. The divestment of Health and Sports Nutrition Group significantly strengthened the overall balance sheet, not only for bringing in the cash but by reducing goodwill with SEK 145 million and adding SEK 145 million in capital -- SEK 140 million in capital gains to our equity. So this is a strong balance sheet.Moving forward now to the balance sheet for Qliro Financial Services. On the asset side, as Marcus mentioned, we had a net lending just about SEK 1 billion. Personal loans grew to pass SEK 100 million. Furthermore, we had liquidity reserves of SEK 169 million to meet obligations for holders of savings accounts. On the financing side, the Swedish loan book was mainly funded by public deposit, the savings accounts, which about 2/3 had a variable interest rate of 70 basis points and 1/3 had a fixed interest rate of 120 basis points. The bank credit facility has been used mainly to finance the loan book denominated in other currencies to limit currency risks. Note, however, that it includes an additional of almost SEK 400 million in undrawn commitments, and that could be used for further expansion.Finally a note on regulatory capital requirements. The assets of Qliro Financial Services translates into a risk exposure amount of about SEK 1.1 billion. And the equity of the company translates into a capital base often referred to as own funds, which amounted to SEK 209 million, all of which was Common Equity Tier 1 capital. And the corresponding capital adequacy ratio was 19.1%, which is well above the total requirement of 14.1%, that is if we include capital conservation and countercyclical buffers.To conclude, we are -- in Qliro Financial Services, are well positioned for further growth of its loan book, supported by financing, through savings accounts, unused credit facility, excess capital and a well-funded parent company who could supply more capital when needed.And with that, back to you, Marcus.

[Marcus Lindqvist, Chief Executive Officer & President]

Thank you, Mathias. Let's summarize. In the first quarter, our transformation as well as the returns in Nelly affected our results. The divestment of försäljningen led to an inflow of SEK 368 million and the result after -- and supported a result of SEK 91 million after tax. We exit the quarter with a strong financial flexibility as the group's total cash amounted to SEK 602 million. Going forward, we see that Qliro Financial Services is ready for a loan book expansion using leverage on e-commerce volumes and scalability in their organization; that CDON Marketplace is ready for continued transformation, with growth and increased efficiency; and that Nelly will focus on driving profitable growth under its new management.So with that, we are ready to answer your questions. Operator, can we have the first question, please?

[Operator]

[Operator Instructions] We will take our first question from Nick Fharm from SEB.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

I would like to start by asking you, I mean, IFRS 9, all else equal, will increase credit loss provisions as of now on, going forward, yet you maintain your guidance for QFS EBITDA reaching SEK 150 million in next year. I was just curious to understand what is the offsetting factor? And -- or put it other way, why not take this opportunity to perhaps adjust the guidance if necessary, please?

[Marcus Lindqvist, Chief Executive Officer & President]

Nicklas, well, we don't see a reason to change the guidance as of today, based on the business performance and the plans that we have. So that's the short answer. I'm not sure if Mathias wants to add anything on the IFRS 9 effects, or...

[Mathias Pedersen, Chief Financial Officer]

Well, the actual numbers have not been known -- the change of the rules have been out there and known to us for quite some time.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Yes, sure. Would now be a good opportunity to perhaps just -- I know we've discussed it plenty, but if you would like to remind us of the bridge from -- going from the current loss making levels to the [ SEK 150 million ], which is quite a leap.

[Marcus Lindqvist, Chief Executive Officer & President]

I'm not sure if I can take you through all of that in detail based on -- on this call. And then, I think we need a longer discussion, Nicklas and...

[Mathias Pedersen, Chief Financial Officer]

Well, essentially[Audio Gap]to leveraging their loan book growth, in that the net interest revenue will increase faster than their costs in there.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Sure. Can I also ask you finally, before I leave the floor open for everybody else, when it comes to marketplace, it looks -- by and large, over time, it's been little bit of a restructuring story obviously, and now you're trying to optimize staffing and few other cost items. What do you think? Is that going to be more along the same lines for the rest of this year, or do you think that you have the proper clarity, the proper cost base to deliver on that?

[Marcus Lindqvist, Chief Executive Officer & President]

As we comment on that, as well as in the report, we see that, as we continue to move more and more into a marketplace business model as well as a dropshipment business model, we will be able to continue to streamline the organization even further going forward. And so most likely we'll see that the cost in relation to sales will continue to decrease over time.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay. And a final one. Have you any update, or any comment on the pending launch of Amazon in the Nordics?

[Marcus Lindqvist, Chief Executive Officer & President]

No. Unfortunately, they are not calling me to disclose what they're doing. So I don't have any insights on that. I read the magazines as everyone. We, however, don't see that as a major issue for us. We believe that there is room for many players in the market. We can see that when we look into how they operate and how the landscape looks like, where they are active. And it is not the winner takes it all game. There is plenty of room for everyone to take part in their acceleration of e-commerce in the Nordics going forward. That's how see it.

[Operator]

[Operator Instructions] Our next question is from Mikael Holm from Danske Bank.

[Mikael Holm, Analyst]

Yes. First of all, some questions on Nelly in the quarter. You're mentioning roughly SEK 8 million impact on earnings from delayed returns from Q4. And also adding this effect, I think it was SEK 13 million on delayed deliveries around Easter. I mean, if I would add that back just to get a sense of the trends of the business, it seems like sales would have been growing at a pace of more than double digit. Is that a fair assumption going forward regarding the trend on the top line in Nelly?

[Marcus Lindqvist, Chief Executive Officer & President]

I'm not going to comment on the trend forward, but I can say that typically our order value as well as net sales or booked revenue typically are very close to each other. That's the kind of normal pattern that they have, and we had a rather large carryover when it comes to Easter. And because of that, we ran that test during the quarter and we were very, very successful at the end of the quarter, and that's the reason why we were not able to deliver everything in time at the end of the quarter. On top of that, we were facing a rather large inflow [ of the returns ] that, of course, also took some attention in the warehouse. But in short -- the short answer is that typically order value and net sales is very close to each other. So it's a fair assumption on a quarter, but I'm not going to comment on the trend forward.

[Mikael Holm, Analyst]

And just -- I mean, this SEK 13 million that will be like a one-off boost to the second quarter then?

[Marcus Lindqvist, Chief Executive Officer & President]

Yes.

[Mikael Holm, Analyst]

[Indiscernible] on how you book sales then for Nelly, is it when you send things out, it's not when the things are ordered on the website when you book the sales?

[Mathias Pedersen, Chief Financial Officer]

You're correct. It's when things are sent out from the warehouse. You receive the order, and then only when it leaves the warehouse, you take the income from that.

[Mikael Holm, Analyst]

Okay. Also on CDON Marketplace, I'm just trying to fully understand that the picture on the value of new customers being negative year 1 and then becoming profitable, because when I look at the business, I mean over a few years, I mean it has been heavily loss making and it has added new customers. So could you give some more color on how those -- I mean, the metrics per customer adds up to, I mean, major losses for the business area?

[Marcus Lindqvist, Chief Executive Officer & President]

In short, and believe we have commented on that in earlier reports as well as in our [indiscernible], Mikael. The loss making comes from organization being too expensive to drive 2 business models at the same time. So when we are moving away from traditional business model to the new business model, we operate with more people and we will have to have when we are in kind of more into the new business model, and that will allow for our operating costs to decline over time, and that's how we will make this profitable. What is important in the slide that we show you here on the lifetime values is that you can see how we build a sustainable profitability out of the customer acquisition that we do over time.

[Mikael Holm, Analyst]

Okay. And just on CDON market -- I mean, you had this comment on sales on the impact from Easter. Is it possible to quantify the impact on CDON Marketplace from having delayed deliveries around Easter?

[Marcus Lindqvist, Chief Executive Officer & President]

For CDON, it was more around the fact that Easter happened in Q1; and last year, it happened in Q2, right. So you basically have a sales effect on CDON. Typically, CDON sell -- they have 1 to 2 day delivery and they haven't had any challenge here of delivering during quarter, it's more of lower net sales up until -- you have a few less sales days basically in Q1 than in Q2.

[Mikael Holm, Analyst]

Okay. And just finally on CDON Marketplace, I think this one now entering the business-to-business segment and basically you're starting to compete with your former employer, I guess. I mean, could you give some more, I mean, color on this business case? I mean, what kind of costs will be around it, what's the potential, and what's the -- I mean, why would CDON be successful in this segment?

[Marcus Lindqvist, Chief Executive Officer & President]

First of all, I don't say that I compete with my old employer. We're trying to build something that doesn't exist in Nordics, that's being a very, very proven offering to small businesses, basically everything from IT to office equipment but also general supplies for businesses. And the way we will build it is around the marketplace business model and through dropship. That will then be very, or highly automated and allow for us to drive that business without adding operational costs to the business. So you will not see any build up in costs when it comes to this business. It would be a very lean operation that will not carry inventory and will be very, very broad in its offering when it's kind of further on in its journey. And it will focus solely on small businesses. So they are kind of [ 0 to 50 ].

[Operator]

[Operator Instructions] We will take our next question -- follow-up question from Mikael Holm from Danske Bank.

[Mikael Holm, Analyst]

Just a follow-up on the balance sheet, I mean, more than SEK 300 million on net cash in the e-commerce business today, I mean, in a quarter normally being seasonally weak in terms of cash generation on the inventory build-up. I mean, do you see yourself as overcapitalized at this point? And also, I mean, into the growth plans you have for QFS, do you see that you need to do more equity injection in that part of the businesses to be able to reach the financial targets for QFS?

[Mathias Pedersen, Chief Financial Officer]

I do not think we are overcapitalized. We have a solid financial position that gives us flexibility. And one thing that we will continue to do is to put money into Qliro Financial Services, but we'll do that as they need it quarter-by-quarter rather than in one go. So that's one part of it. And then, given the level of the overall operations, I think it's just prudent to actually keep some cash on a reasonable level. So it's a solid financial position and we will have use for this cash going forward.

[Marcus Lindqvist, Chief Executive Officer & President]

Just to add to that, you need to look at the development on Qliro Financial Services over a longer period of time, and then that money will be used to -- as equity into QFS over time as we build the loan book. So, here and now, perhaps we have a little bit more, but over a longer period of time, for the next 1 to [ 3 ] years, we will -- [ we still ] have use of that in active contributions in QFS.

[Mikael Holm, Analyst]

And just roughly to reach the financial targets of SEK 150 million on earnings basically in QFS, how much more equity do you think you need in QFS to reach that?

[Mathias Pedersen, Chief Financial Officer]

That's a very good question, Mikael. I'm not sure I want to state a number on that, but it's certainly within what we have. So it's -- we [ don't ] need more than that.

[Mikael Holm, Analyst]

Okay. So, I mean, a few hundred million krona then?

[Mathias Pedersen, Chief Financial Officer]

Yes, I think -- yes, or less.

[Mikael Holm, Analyst]

Just a final follow-up, I think just on the central costs. I mean, you have roughly SEK 40 million as a run rate of central costs. I mean, considering that this is a, I mean, low margin business, do you see any potential to substantially reduce that cost level?

[Marcus Lindqvist, Chief Executive Officer & President]

Yes. We see a potential to lower this. Of course, one -- there is one need for central overhead when you have 6 entities or 9 entities as it was a few years ago, and you need another kind of structure when you have 3 entities. So for sure, absolutely, Mikael.

[Mikael Holm, Analyst]

And I mean, is it possible to, I mean, quantify anything about the magnitude of the potential saving?

[Marcus Lindqvist, Chief Executive Officer & President]

No. We will report on that when the savings occur.

[Mikael Holm, Analyst]

But it's not like it's a lot of cost that you think actually should be allocated to the different companies? It's -- I mean, it's a central overhead cost today?

[Marcus Lindqvist, Chief Executive Officer & President]

Of course -- the central teams, of course, did quite a lot of work in them. So there is -- it's not like it's totally isolated from the businesses, so it's more complex than that.

[Operator]

[Operator Instructions] There are no questions at the moment.

[Marcus Lindqvist, Chief Executive Officer & President]

Okay. Then, I believe, we will close the call. So thank you, operator, and thank you all for participating today and for your interest in Qliro Group. I look forward to seeing and speaking to you again soon. And may I also remind you that our Q1 -- no, Q2, sorry, report will be announced on July 30. And I also hope to see all of you on our Annual General Meeting on the 22nd of May. Thank you, and goodbye.

[Operator]

That will conclude today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.