Nelly Group AB (publ)

STO:NELLY

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Nelly Group Webcast with Teleconference Q1 2022. [Operator Instructions] Today, I am pleased to present Kristina Lukes, CEO. Please begin with your meeting.

[Kristina Lukes, executive]

Well, thank you, and a warm welcome to the quarter 1, 2022 report for Nelly Group. My name is Kristina Lukes. And as usual, I host this call together with John Afzelius, CFO for the group. So let me start off by setting the scene, where are we heading and who we are before we will talk you through the quarterly results with a final Q&A session.

Where are we heading? Our vision is to develop Nelly into the go-to Nordic community for the young fashionista, leveraging on the core strengths of the company and the brand, the inspirational top-of-mind community for our key Nordic target group.

Current focus is on setting the foundation, build a profitable core to enable our future profitable growth journey. So our strategic bets are on improving our customer experience, building frequency on our large and engaged customer base. And last but not least, with the high volumes and large growth numbers, we believe in continued efficiency gains in our offering and throughout our operations.

Nelly is an integral part of the young women's everyday life. We were founded in 2004 in Borås built through influencer marketing and the go-to destination for 1.2 million customers. Our core customer is the young fashionista, who looks for inspiration and solutions to look and feel fab every day. So speaking of core assets, our relationship with our core target group, 2.1 million members on nelly.com, and 1.3 million followers on social media.

Moving on to Slide 4. So who is our core target group? Denise is represented by -- or she is represented by the news. She shops 18 times per year for her appearance. Currently, twice per year at Nelly, sort of signaling why retention and increasing frequency of our core customer is at the heart of our strategy. So to the focus of today, the first quarter of 2022, and we summarize it. We started off the quarter fairly slow. So a strong uplift in February. And a setback in March, low traffic and high competition resulting in a disappointing decrease of sales of 4% in our core Nordic business for the quarter.

We are happy to see the effects from our warehouse investment with lower fulfillment costs overall and a share of turnover. We are investing in marketing in the quarter to strengthen the relationship with our customer. And in the future, of course, decrease dependency on paid traffic. Our investments show first positive indications, especially in influencer marketing with our focus on TikTok and new ways of working in social media.

If you move to the next slide, some highlights on the core of Nelly, which is all about for the rainy Tuesday, for the Friday after work, for the graduation celebration, for every day, even though we can't state that we're out of the pandemic, restrictions are gone and society allows for celebration party and nightlife. And we are happy to see that despite 2 years with a lot of restrictions on party and celebration, we are considered the #1 party destination and growing in our target group according to NEPA and list it to party wear on-site increased by 25% year-on-year.

Even if party is on again, the effect is not fully seen in our sales since we suffer from delays and late arrivals on party and occasional wear. Some words on marketing, our investments in marketing in the quarter has generated positive tendencies, new ways of working with performance marketing and increased reliancy in paid social has improved performance -- has improved performance cost of sales, I'd say, despite inflation in the market.

I'm also happy to conclude a 9% increase in direct traffic in the quarter. Our target group lives in the physical and digital world simultaneously. And 90% of our target group use social media every day, a total of 3 hours. And out of those 100 minutes are spent on TikTok.

And we built on our innovative thinking this year, influencer marketing through new takes focusing on TikTok and hosted a Nelly house that generated 17 million views on content from our studio. I'd also like to highlight that our work with our own app that we have, for example, activated in new ways on site has increased direct traffic by close to 60% year-on-year. And also good news to share that our app was ranked top shopping app during the quarter in Norway.

Handing over to you, John, that can take us through some more details on the financials in the quarter.

[John Afzelius-Jenevall, executive]

Thank you very much, Kristina. Please let me go through the P&L and the financials for the first quarter then. Net revenue fell by 8% in the first quarter. Underlying sales before returns in Nelly's core, i.e., the Nordic D2C, direct-to-consumer market, grew 2% in the quarter. This was driven by a higher average order value mainly. At the start of the quarter was characterized by lower demand. However, after the COVID-19 related restrictions were lifted, sales grew rather markedly. The end of the quarter was weaker with a more cautious consumer behavior, possibly affected by the war in Ukraine. The lower net revenue has 2 main components. Firstly, the return rate bounced back from historically low 30% that we recorded in the last -- in the first quarter last year.

The higher return rate was partly mix driven, but primarily a result of a more normalized return behavior as the pandemic impact of return behavior in other ways than only category mix changes. And the 35% return rate was recorded in this quarter is, however, still 2 to 3 percentage points below the levels we saw in Q -- for instance, Q1 '19 and 2020.

And the markedly lower return rate compared to the prepandemic levels is explained both by the sales mix, but all the active measures such as excluding customers with an unsustainable return behavior, something that we have continued to do throughout the year.

Secondly, net sales fell due to lower B2B sales, and this was as deliveries to Zalando fell in Q1 2020 compared to last year. And Nelly's own brand has since 2019 been available to European customers on Zalando. And this wholesale business had since been small, but a sensible add-on to Nelly's core Nordic D2C business, and it's a way to supply European customers after we exited the Continental markets in early 2020. And while demand for our own brand on Zalando has been growing. Zalando is transitioning away from the -- or towards really a marketplace model. And we have so far decided not to accept the offer to transition to that model.

Additional B2B customers are expected to at least partly offset the lower Zalando volumes going forward. So if I move on to the gross margins, important in line for the company and markets. It increased from Q2 through -- to 44.3% compared to 43.7% last year. The main reason for the higher gross margin were continued low levels of older inventory implying low inventory write-off synaptic sales, and we continue to effectively manage inventory levels in keeping -- by keeping the levels of old stock down. And a major driver for Nelly's gross margin is the share of our own brand sales. We saw 34% in Q1 2022, which is 2 percentage points lower than last year mainly again due to the lower volumes of B2B sales, which are exclusively owned brands.

We also saw delays in deliveries of some Nelly-owned assortment, which also had a negative impact on the sales mix. And the level that own brand sales that we have seen during the last few quarters, they have been lower to 43% by 45% that we've seen and generated historically and it remains a clear target to increase the share in 2022 and also beyond.

And as a consequence of the lower net revenue, gross profit decreased by SEK 9 million despite the higher gross margin. I will then proceed to go through the cost side of the P&L. Fulfillment and distribution costs were SEK 5 million lower than last year and decreased somewhat also if you measure it as a share of sales.

Fulfillment costs fell both in absolute and relative terms due to the new automated warehouse in -- here in Borås. The core processes of the new automation solution achieved the targeted efficiency for most of the quarter and peripheral processes there continue to be adjusted and the work to realize the targeted cost savings during the year is going according to plan. The other part of the fulfillment and distribution cost line item is, of course, distribution cost.

And distribution cost grew somewhat during the quarter, driven primarily by a higher proportion of parcels than latter, but also fuel surcharges, which resulted in slightly increased outbound freight expenses despite the lower volumes that we delivered in the quarter.

But in summary, the entire line item was SEK 5 million there. Proceeding to marketing cost. It amounted to SEK 36 million in Q1 compared to SEK 32 million last year. Changes in working methods within Performance Marketing led to flat performance marketing cost year-on-year despite higher pricing in that market. The increase in the total cost line though is related primarily to investments in influencer marketing and social media. For example, as Kristina, just mentioned, the TikTok event Nelly has, which was held in the quarter.

And the last cost line is admin and other operating costs. It's amounted to SEK 66 million, a slight increase compared to last year. We had 2 main effects. We saw higher lease-related IFRS 16 amortizations during the quarter compared to last year since the new automated warehouse entered service formally in October 2021. This was, however, largely offset by lower expenses for group functions as these were because -- basically the administration of the Nelly Group company, as these functions were fully integrated in the broad-based administration during 2021, and we'll see the full effect of that from -- in August 2021.

So in all, EBIT in the quarter was SEK 9 million lower than last year, and the fall in operating profit was primarily a result of a reduction in sales, which was behind the fall in gross profit as the operating expenses were in total unchanged. And please remember that the first quarter is seasonally Nelly's weakest quarter, which implies that the operating leverage is at its size. The lower net revenue consequently hits operating profit, particularly hard in Q1. So if we continue to the next slide, please let me just shed some light on some other financial aspects over the quarter.

While we, during the quarter, spent about the same amount of kroners on performance marketing over last year, the higher performance marketing pricing implied that we -- there are a few sessions to our sites were generating. And the investments that I mentioned in influencer marketing and social media, they have a longer lead time to impact, and they have not compensated the low number of sessions generated by performance marketing in the quarter. So with a flat conversion rates, this implies that the number of orders fell by 6%.

On the other hand, though, the AOV increased despite lower number of orders and the -- sorry, the gross revenue increased despite the lower number of orders. And this is explained by a 7% increase in the average order value. And the average order value in the quarter was primarily driven both by product mix, but also a stronger Norwegian kroner and euro compared to the Swedish kroner.

Secondly, inventory turnover remained at attractively high levels in Q1. Inventory share of sales amounted to 17.3%, which is slightly higher than the 16.1% coming to the last year, but it's still markedly lower than the pre Q2 2020 levels of above 20%. The share roll stock continue to be historically low. A low volume of older inventory or in other words, of fresh inventory implies a more attractive customer offering and a lower risk of loss-generating outlet sales as demonstrated in the quarter.

Finally, cash flow in the quarter was minus SEK 147 million and was dominated by negative working capital changes of SEK 120 million. And in seasonal terms, the first quarter had lower sales than other quarters and involves building up inventory ahead of the second quarter, in which sales are seasonally strong. And we closed Q4 at a strong cash position and have since built up inventory ahead of Q2. And after having been through the seasonal cash low point of the first half of 2022, we expect to build up cash through the course of Q2.

And to summarize, cash at the end of the quarter amounted to SEK 51 million, and we did not tap into our credit facilities as per the 31st of March. We have no interest-bearing debt, apart from a remainder of the government tax credits after having done repayments during the quarter.

So having rushed through 2 slides of the financial highlights, Kristina, I'm handing back to you again.

[Kristina Lukes, executive]

Perfect. Thank you. Well I'd like to finish off with a reminder of the fact that we reached our sustainability goals for 2021, and we work on our 3 core focus areas, empowering femininity, respect the planet and fair and equal. And I'd like to take the opportunity now to share our overall sustainability targets going forward.

If you move to the next slide. In 2022, so in this year, all of our own branded products will only be made by externally inspected factories. And next year, we aim to achieve a net 0 in our own operations. 60% of thick size products will be made out of the same raw materials in 2025. And in 2030, emissions of greenhouse gases in the value chain will have decreased by 50%.

All right. I think now is the time to open up for questions or questions that we can answer, but I'd like to just summarize by saying that we are recruiting more followers to our community and creating more direct traffic in the quarter. While we are unhappy with the lack of growth and profitability, we do believe in our future. And that's why we are intensifying our work towards increased efficiency of our customer offering with clear actions, both short and long term, all in order to build and strengthen the go-to Nordic community for the young fashionista. Thank you.

[Operator]

[Operator Instructions] First question is from Mr. Nick Fhärm from SEB Equities.

[Nicklas Fhärm, analyst]

So Kristina and John, I think the first and most important question will relate to sales development. And I obviously heard you elaborate a bit on that. But it would be great if you could put this into context. On the one hand, we have the Swedish overall apparel market being up by 11% in January, 22% in February, 36% in March, which is a quite, quite different picture from what you're reporting today. So I would be very interested to hear your thoughts on market share development. I would be very interesting to hear your thoughts on sort of your collection and your market position in the current market environment, please?

[Kristina Lukes, executive]

Yes. If I can start off, you can fill in, John, if you wish to. I think the quarter has been -- every month has been very different. So we started off quite slow and with a much stronger February and ended up with a weaker March. And we believe that a lot of the effects of -- in February, not reaching to the same growth levels as the rest of the market is, of course, linked to letting go of restrictions and the fact that traditional retail physical stores grew a lot. That's one part of it. Then if you look at the totality of our business, we are seeing a growth in party and occasion wear, but with very high turns on our inventory. So we believe that we could have sold even more party and occasion wear with higher stock levels.

[John Afzelius-Jenevall, executive]

Yes. Just building on that, I think that the 2 main components. If you're looking at the market in total, if we back up the tape, I mean, going into the pandemic, the physical market -- the physical stores, I mean, they fell like a brick and our sales did not. Now you can see a proper bounce back in the physical trade because of the numbers you mentioned include all of those taking off pretty -- I mean, showing very nice growth rates.

On the other hand, we are not falling at the brick when the tide is turning. So Nelly -- since we have no physical stores, that pattern is, of course, less relevant to this. Secondly, you have the mix and the -- what we talked a lot about during pandemic -- going into the pandemic, we saw a huge headwind on party wear of course, that being our largest category going into the pandemic.

At this point, I mean, even though we see double-digit growth in party wear, we should remember that we're still more than 50% down from the levels we saw 2 years ago. So even though we see healthy growth there, I mean they're still open to grow. So I think it's wise currently, when we see this huge shift to really differ between the physical market and also -- and the online market. And as you -- I'm sure you must have seen the statistics for the retailers is quite dramatically different than the total figures that include physical stores. Does that make sense, Nicklas? It was a lengthy answer.

[Nicklas Fhärm, analyst]

So as a whole, that is. Anyway before you...

[John Afzelius-Jenevall, executive]

Sorry. We lost you that. We just heard as a whole.

[Nicklas Fhärm, analyst]

Okay. Do you hear me now?

[Kristina Lukes, executive]

Yes.

[John Afzelius-Jenevall, executive]

I can hear you well now.

[Nicklas Fhärm, analyst]

Okay. So I was just saying that according to my data, the Swedish online market as a whole was down about 13% in Q1 at an average.

[John Afzelius-Jenevall, executive]

Yes.

[Kristina Lukes, executive]

Exactly.

[Nicklas Fhärm, analyst]

So yes. All right. Can I ask you looking at the quite significant working capital in this quarter? How much of the SEK 120-odd million in inventory till now affecting working cap is actually due to, say, late deliveries because of supply chain issues and what is actually the result of loss or sort of well, loss sales. I mean certainly, you had a different expectation than negative 8% going into this quarter, I'm sure.

[John Afzelius-Jenevall, executive]

Yes, definitely. Well, actually, we're not -- as you can see from the inventory levels and the inventory share of sales going out of the quarter, we're actually not building old stock or stock dramatically. So we're building stock. Yes, but not dramatically. So looking at the -- I mean, dissecting the work of capital components, of course. There are -- we are building inventory, but not dramatically. Also other -- I mean, on the debt side of the working capital, we are repaying corona credits.

We also have some other debt elements that were outstanding 31st of December that have been repaid during the quarter. So we had a very strong cash position going out of 2021, and we're almost hitting the trough going out of the core. So that's why I was keen to comment that, yes, it is a quarter when we are building working capital as we always do it was more this year due to several of us, including the ones I just mentioned. But going into Q2, we passed the trough on we are building cash as we increase sales in the second quarter. Does that answer your question?

[Nicklas Fhärm, analyst]

Excellent. My final question, and then perhaps I may come back into the call later on. So could you help me understand if the share of private label sales are actually down 2 percentage points, which is just quite a bit and a bit unexpected to have to admit. Why did return rates increase by almost 5-odd percentage points year-on-year. Could you just us through the dynamics here, please?

[Kristina Lukes, executive]

Yes, I think one part of private label share going down is the fact that we're decreasing our partnership with -- or the sales to Zalando which is 100% own brand. And that business is also no returns, since we're selling. So that's one element.

The second element is -- and I think we mentioned that going into the pandemic as well, the overall consumer behavior around returns was affected during the pandemic because people just didn't go back and hand in returns again. So remember that we are on a lower level than pre-pandemic levels, I think 2 percentage points or so in relation to 2020 and 3 percentage points in Q3 something in relation to 2019. So those are the 3 main factors. I don't know if you want to add.

[John Afzelius-Jenevall, executive]

I can just decouple them and put some numbers on it. The 2 percentage point lower share of our own brand sales. If you decouple that more than half of that decrease in share comes from lower deliveries to Zalando. The other half -- well, it's less than half -- less than 1 percentage point comes from underlying lower own brands now. That, in turn, is fully related to late deliveries of the own brands. So -- but -- so that's the share of own brands bridge, if you may, from Q1 last year to this year. And then the question, why do your return rates pull up 5 percentage points, was a very relevant question.

Firstly, if you look at how large is the mix and it's actually less than 2%. So I'd say on the order of magnitude is 3% is due to the fact that Q1 2021 was really an outlier when it comes to return rates. If you look at our numbers historically, we can explain the share of that by mix changes. But most of it must -- we then -- must be related to changes in behavior in the way basically people being afraid to go to the post office to return their parcels. We saw that in April 2020, clearly. And we also saw it again around November, December, January, February, around -- well, a bit more than a year ago. So lengthy answer again, just trying to be clear on it.

[Nicklas Fhärm, analyst]

Very appreciated. So just before leaving then the floor for this time. I mean the market is where it is. The comps are what they are. This is what you have reported now for Q1. Should we expect -- because I guess your business-to-business platform will continue to decrease throughout the year. Do you think this is likely sort of ratio between private label share of sales and return rates also going forward, i.e., for the rest of the year? Or do you expect that to change for any reason?

[John Afzelius-Jenevall, executive]

Shall I -- firstly, on the B2B side. We are -- we've seen this -- I mean we peaked our B2B sales in Q3 2021. And we've now seen 2 consecutive quarters of lower B2B volumes. As I mentioned briefly, we're working in terms -- we're working rather intensively to broaden that customer base. And so we are excepting to at least partially mitigate that decrease from lender with new customers. So that's firstly -- question on the B2B side. And then -- sorry, I didn't listen properly. I lost your second question.

[Kristina Lukes, executive]

And so the share of private label.

[John Afzelius-Jenevall, executive]

The share of private label. Yes. And the return rate as well. If I'm starting with the return rate, should we see plus 5 percentage points also going forward year-on-year. No, we don't expect that. 2021, Q1 was an outlier. I don't expect those kinds of things year-on-year. I mean I expect more mix driven. How should I say, the normal change year-on-year, i.e., increase in higher return rate risk we should see, but nothing like the 5.0 percentage point increase that we saw this quarter.

[Kristina Lukes, executive]

And I can add to the -- I mean the core of our strategy is our own direct-to-consumer sales on our own site. But we've also been very clear that share of own brand sales, we want that to increase. So that's, of course, an ambition we have to improve that or increase that quarter by quarter.

[John Afzelius-Jenevall, executive]

And finally as I mentioned just briefly here, there is an effect of the delay in the share of the own brands. So all else equal, if we manage to sell those in Q2, that should all else equal increase the share of own brands in Q2.

[Operator]

Next question is from Ebba Bjorklid from DNB.

[Ebba Marie Bjorklid, analyst]

So my first question is, I just want to hear about what you've seen in terms of changes in the consumer sentiment. So especially going into Q2 and during April? And what have you seen so far? Is it a similar trend to what you saw in March or is looking a bit more positive?

[Kristina Lukes, executive]

I can't really comment on Q2. However, if we look at the first quarter, the market as such, there are quick terms. And just looking at the first quarter, opening up and strong effects from new demand for party and occasion wear and other types of categories in February and then a shift again in consumer behavior in March.

So we're follow -- I mean, if -- the -- without commenting on the performance in Q2, what is clear is the need for us to make sure that we can act as quickly as possible. And I'm happy that we've built in more flexibility in our supply chain with the suppliers that we have, even though we've suffered from delays, we've been able to maneuver okay on key categories despite the turmoil in the world around us.

I think if I comment on consumer behavior, our target group was highly affected in -- during the pandemic because a lot of young fashionista didn't have their extra job being a bar or in a restaurant and they basically had there the cash that they could get from student loan or CSM. And now there are opportunities to actually make extra money. There is an inflation in the market, but there is also a need to reboot and refill your closet and because of the need to go out and spend, go clubbing and parking and be out there again.

[Ebba Marie Bjorklid, analyst]

Perfect. It would be interesting to hear, and I know would you -- or I'm aware that you can't comment too much on Q2. But just thinking about how are you thinking in terms of deliveries going forward and potential delays, et cetera. You were talking about these increased flexibility that you've built into the supply chain. So when we're thinking about the months or even quarters ahead, how are you able to give some indication of where you predict given where we stand right now?

[Kristina Lukes, executive]

I think that the market -- I personally think that we will have hiccups in the market for a longer period forward because these hiccups will have they won't just pass directly. So again, I think I will reply in the same way. It's back to how we are prepared to handle and a more uncertain situation with calculating with additional delivery times and building in as much flexibility as possible, not only in delivery but also in the commercial plans to be able to maneuver around the deliveries that get to us. I think we've proven a couple of times that we had some major campaigns during the end of last year, where we didn't get the products that we were supposed to sell. That was sort of the first tough trial how to work around that because I think that the future will hold more of those challenges.

[Ebba Marie Bjorklid, analyst]

Yes. And one question I have, and this is linked to a little bit more to the broader strategy for the company, but you are focusing quite a bit on increasing frequency. And it would be interesting to hear both the near term but also a little bit more longer term, how you are thinking about driving this? And also, if you can give any indication of if we increase funding 2x out of the 18x, where can we get?

[Kristina Lukes, executive]

Well, I think the key areas to focus on are focusing on the existing customer, members following -- follower base to make sure that we continue our dialogue with them with relevant offerings to hold their hands throughout their journey to conclude one more purchase. So that's one area. I talked about retention when I started off this call. That is a key focus area for us. And the gross numbers when we're talking about 2.1 million members at nelly.com and 1.2 million active customers, the gross, now we are at large, it's huge. So the keys that we -- and I could say that we yet have not found.

There is still a job for us to do to find the right key to increase frequency. The other area is, of course, around the concrete product offering where we during the pandemic has broadened our offering to target 3 different occasions. Now when there is party, nightlife is back, then, of course, for us to continue develop and stay relevant in all different categories that are relevant for the 3 different occasions.

[Operator]

So we have no other questions. We have another question from Nick Fhärm from SEB.

[Nicklas Fhärm, analyst]

Okay. I missed part of it, but this is Nicklas again. Was it my turn?

[Kristina Lukes, executive]

Yes.

[Nicklas Fhärm, analyst]

Yes. All right. So my follow-up question would be, if you could -- because I just read this is in my notes from the Q4 conference call, and we discussed the marketing strategy. And then my question is pretty much the same today. What should we expect you to do in terms of the marketing to sales? Because at some stage, you clearly want to do sort of changes to your strategy, which hopefully will, in the end, create a better ROI. But we also discussed whether we should expect an overall increase actually, at least as a percentage of each kroner in sales for this year. What's your comment to that exact same question today -- given sales development, et cetera.

[Kristina Lukes, executive]

Well, I mean, strategy remains. We need to build a stronger dependency on direct and organic traffic and to decrease the dependency on performance marketing. So if I start off with the tactics and the strategy around performance marketing, we've managed to stay flat or actually decrease the performance cost of sales in the quarter, 2 new ways of working.

And some of the investments that we've done in the channels that we believe in, especially influencer marketing, but also a much higher variation and specific -- specifically targeting different categories in paid social, we see a higher share of direct traffic. I think an increase of 9% or so in the quarter. So we believe in the activities and the focuses we have. And now it's about making sure that we put more fuel where we see a positive effect and continue to innovate and develop our channels together with our customers.

[John Afzelius-Jenevall, executive]

Can I just add on that, Nicklas, just briefly. And tying back to the Q4 comments and the developments. And if we back up the take 2 quarters to Q3, and firstly, focus on performance marketing. We clearly had a very disappointing performance marketing and figure in Q3. And we said in Q4 that we saw during the quarter improvements in how we handle performance marketing. And we have now seen a full quarter of that. So that's why we were pleased to see a flat cost in a market where we see significant price inflation, even though -- and this is important then that the gross revenue increases somewhat because -- so on the performance marketing side, we're happy with the development of how we handle that.

We dislike of course, the inflation, but we can -- it's difficult for us to do something about that. So that's the first component. So I would say that, that component of the marketing cost, which is the largest one is in check, and we're handing that well and increasingly well.

The second part is then, of course, other types of marketing and performance marketing. And in this quarter, we saw increases in insurance marketing and in social media, areas where we do want to reinforce, I -- we at least attempted to be clear that we didn't expect the marketing share of sales to go down because we wanted to invest in these areas, which we've done.

So your implicit question is what should we expect going forward? Well, again, performance marketing in Czech. So no underlying increase in performance marketing spend to sales. But on the other hand, some of that, some increase year-on-year based on making small investment and/or select investments in influence marketing and social media.

[Nicklas Fhärm, analyst]

Right. So in short, some reinvestments, right?

[John Afzelius-Jenevall, executive]

Exactly.

[Nicklas Fhärm, analyst]

Yes. Okay. Also finally, on the fulfillment and distribution side, I think you were right somewhere in the report that you've managed to take out about SEK 5 million in costs relating to your savings program from automating the DC. Is that correct?

[John Afzelius-Jenevall, executive]

Well, we decreased our cost line by SEK 5 million year-on-year. That is correct.

[Nicklas Fhärm, analyst]

Okay. Okay. So that's what it says. It's a lot of reports there. But I guess my question is, since I was actually looking for a slightly lower number than the SEK 49 million odd fulfillment and distribution costs. Are you -- do you think you're on par with your internal expectations in terms of delivering the savings that you're targeting?

[John Afzelius-Jenevall, executive]

Yes. There are 2 components to that line. The largest one is the distribution cost. And on the distribution cost, it was -- it increased slightly -- but of course, when we deliver lower volumes, you'd like to see distribution costs go down somewhat. The reason it didn't is because we saw fuel surcharges and that we saw a different mix in that we sent more packages than letters, if we're technical. But that was -- I mean, so a small inflation on that side. But we -- that means we saw a rather healthy decrease of cost on the fulfillment side. even though it's only Q1 because please remember that when automating what we are doing is that -- I mean we're reducing staffing quite dramatically.

Fixed cost goes up a bit but then the variable cost mainly through staffing goes down. So we are on -- we are an increasingly confident that we will reach our business case for the warehouse projects during the year. And we should see more effect of that in the larger volume quarters like Q2 and Q4 to be explicit.

[Operator]

We have no other questions, back to you for the conclusion.

[Kristina Lukes, executive]

All right. So again, thank you for listening in. And even though you didn't ask all your questions now, both John and I are here for any reflections or thoughts that you should have or that you can have after this call. So thank you so much.

[John Afzelius-Jenevall, executive]

Thank you.

[Operator]

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.