RVRC Holding AB
STO:RVRC
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Good morning, everyone, and welcome to this conference call where we will address the development of the second quarter of our fiscal year 2022 and '23. My name is Paul Fischbein, and I am the CEO of RevolutionRace, and today, I am also joined by the company's CFO, Jesper Alm.
And, for those of you who are not familiar with RevolutionRace, I will start with giving you a brief introduction. RevolutionRace is a happy outdoor brand offering a wide range of outdoor products for people with an active lifestyle. We operate with a digital D2C model, meaning that we skip the middleman, and we sell our colorful products directly to our customers.
By doing so, we can offer quality products with, what we call unmatched value. And we are live with 18 unique and localized web shops, and we reach customers in more than 35 countries. And what really makes us stand out is our engaged customer community. We know how to communicate with our customers, resulting in more than 400,000 unique product reviews, and that is something we are really proud of, and around 1 million followers and fans on our social platforms.
Now, let's take a look on the highlights during our second quarter. And to start off, we are very pleased to see that RevolutionRace continues to deliver profitable growth during the second quarter of the fiscal year. We noticed continued good demand for our multifunctional products during the second quarter, which generated a record sales of SEK 509 million, corresponding to a growth of 30% compared to last year.
During the second quarter, RevolutionRace showed growth in all regions, despite a challenging macro environment. We note that our largest region, the DACH region, continues to develop well with a sales growth of 44% during the quarter. And the Rest of the World region also shows a high growth of 37%. It is also satisfying to see that sales in the Nordic region have recovered, showing a sales increase of 3% in the quarter.
Adjusted EBIT in the quarter amounted to SEK 117 million, corresponding to an adjusted EBIT margin of 23%. The lower margin in the quarter compared to last year is explained by a slightly lower gross margin, increased cost for marketing, some higher fixed cost compared to Q2 last year and also a negative currency impact of SEK 8 million compared to the corresponding quarter last year.
The increased cost from marketing are partly a result of investments in brand building campaigns such as TV commercials and the YouTube series in Sweden. But what is important to point out is that the increase in fixed costs is mainly related to a staff increase and is a comparison to the same period last year. But quarter-on-quarter, the number of headcount is roughly the same. The adjustments during the quarter amounts to SEK 12 million related to a new long-term incentive program, as decided by the AGM in November.
I also want to highlight the strong cash flow we saw in the quarter. Cash flow, excluding a dividend payout and a tax payment almost amounted to SEK 190 million. The strong cash flow performance is mainly related to the strong EBIT, but also a reduced inventory by SEK 79 million, which was a result of a good sales development.
Thus, as a result of our continued growth, good margins and improved working capital position, we delivered a strong cash flow from operations. And at the end of the calendar year, RevolutionRace has a net cash position of SEK 32 million. And our strong financial position strengthen our competitiveness and makes us well positioned for continued growth in both existing and newer markets.
Now moving on to some other operational highlights. And during the quarter, we also started several exciting collaborations. One of them is a long-term collaboration with the German football legend, Philipp Lahm. And given that Germany is our largest market, we see the collaboration as a starting point for further collaborations in the DACH region and very much look forward to follow this partnership.
In addition to our ambassadors, we also have a strong and loyal and active customer community, supporting us in improving the brand awareness by sharing and posting user-generated content, and some examples are shown here.
RevolutionRace is dedicated to continuing to develop and refine our customer offering. We have many exciting projects in the pipeline, and I look forward to sharing these with you during the year.
During the quarter, we continued to develop our product assortment, partly through new product categories, but also through refining and adding products to existing product categories. In October, for example, we carried out a successful launch of our first fleece collection for dogs, which actually sold out in no time, and we also introduced a so-called duffel bag as a complement in our product category, bags.
Now let's also take a quick look at our markets and the market development in Q2. In our biggest market, the most important region, the DACH region, net sales increased by 44% to SEK 277 million, and that accounts for 55% of total second quarter sales. Germany continues to lead the way in the region, growing by 43%. The Rest of the World region also reported strong sales of 37% to SEK 103 million. And as I mentioned before, Nordics are showing a positive growth again, of 3%, after a period of weaker sales.
And with that introduction, I would like to hand over to the company's CFO, Jesper Alm, who will now present and walk through the financial performance. Jesper, please go ahead.
Well, thank you, Paul, and good morning, everyone. I'll talk you through our financial performance during the second quarter of the year, and starting with our net sales development.
As already mentioned by Paul, this is our strongest quarter in our history in terms of net sales, which amounted to SEK 509 million, and this is the first time for us over SEK 0.5 billion for an individual quarter, corresponding to a 30% growth in net sales and 24% growth in local currency, fueled by continued strong growth in the DACH region and the Rest of the World.
Looking into gross profit. We note a good development with a growth of 28%, which is almost in line with the net sales growth. The gross profit in the quarter was SEK 360 million, corresponding to a gross margin of 70.7%, which is a decrease by 0.9 percentage points compared to the same period last year.
The gross margin was positively affected by a favorable market mix, but offset by increased price reductions, and to some extent by increasing cost of goods sold following the strengthening of the U.S. dollar.
Moving on to operational expenses. We see an increase in personnel expenses compared to Q2 last year, in order to future-proof the organization for future growth, while also related to the one-off cost for the new long-term incentive program, amounting to SEK 12 million. Staff levels were basically flat compared to the previous quarter.
Other external expenses increased compared to Q2 last year related to higher marketing expenses as a result of investments in testing of new brand building campaigns such as TV ads and YouTube productions, but also somewhat higher fixed costs in absolute terms.
And over to adjusted EBIT, which, for the quarter, is in line with Q2 last year and amounted to SEK 117 million, corresponding to an adjusted EBIT margin of 23%. The lower margin compared to last year is mainly explained by the somewhat lower gross margin, increased cost from marketing and a negative currency effect. We had other operating expenses of SEK 5 million compared to other operating income of SEK 2 million in the comparison period, for a net difference of SEK 7 million.
When it comes to the balance sheet, we see minor movements overall, but I'll highlight some topics on the following slides. Net working capital as a percentage of sales decreased in the quarter as a result of the sales growth and improved inventory levels, which leads us to the next slide showing the inventory development.
As discussed over the past quarters, we have seen a planned inventory buildup from previously unhealthy low levels, but also to meet the expected higher demand during our peak season in Q2. As expected, we see that the inventory level is now coming down after reaching a peak at the end of the first quarter. During the quarter, our inventory was reduced by SEK 79 million to a total of SEK 445 million as a result of good sales development.
Cash flow from operations amounted to SEK 146 million, and the improved inventory position in combination with a solid EBIT performance contributed to the strong cash flow from operations.
When summing up the second quarter 2022, RevolutionRace has a net cash position of just over SEK 30 million, despite a dividend payout of SEK 87 million in the quarter and a tax payment of SEK 62 million. So in conclusion, RevolutionRace has a solid financial position, being profitable with strong cash flows and with net cash and a credit facility of SEK 600 million.
So I think that sums up my part, and I'll hand over back to you, Paul.
Thank you, Jesper. So to summarize, we had a good sales growth in the second quarter at 30%. We saw profits in line with last year and also a strong cash flow development. We do have a positive view of the future. But at the same time, we are, of course, humble by the increased uncertainty in the world around us.
We are committed to continue delivering long-term profitable growth. And in the beginning of the third quarter, we note that sales continues to grow, however, at a lower level than we saw in Q2. And in the current market climate, with increased pressure on many operators, we believe that RevolutionRace with our D2C -- digital D2C model, is well positioned to continue to increase our market shares further.
And that concludes our comments on the result. And before we finish, I would also like to take the opportunity to thank the whole team at RevolutionRace, our customers, shareholders and partners, and I very much look forward to continue to build on RevolutionRace's success together with all of you.
And with that, we are now happy to answer questions. So operator, do we have any questions?
[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABG.
I was wondering if we could have a bit more flavor on the pace within the quarter piece. So last quarter, you commented on October in line with target. You also say that the exit rate is below the quarter's pace overall. Should we interpret this as very strong November sales in particular, please?
I mean, I didn't get the full question. But yes, as we mentioned in the previous quarterly report, we saw a very strong sales momentum in September moving into this quarter in October, where it also continued, and it continued in November, and also actually into December. And we saw a continued growth during whole December.
However, during the last weeks of December, if there is something to mention here, we saw a slightly lower sales growth in December, and that we can see has continued into beginning of this quarter as well in January. So we still grow. We feel that we have a strong customer proposition and a strong position in the market and -- but growth has slowed down a little bit compared to the last quarter in January.
Is this -- to follow on the last question, is this the same across regions, please, this slowdown in growth?
Yes. We cannot -- we saw in the last quarter, more or less the same patterns in all regions, and also in both platforms we operate on, both our own website, but we also sell through some marketplaces. And we also see sort of the same patterns now when growth is slowing down. Also bear in mind that growth was extremely high in the last quarter of 30%. So we continue to grow, and we feel that, that is still a strong performance given the conditions we believe that the market is actually in.
I agree. Could you perhaps comment as well on the AOV growth in the quarter? Is this mainly an effect of a better market mix or there's something else sliding in?
Yes. It's definitely a result of Germany or the DACH region growing. We do see that we have a higher average order value in that region. So that is one of the main reasons behind that. But we also -- so that is one reason.
One could also add that the product category of jackets is also growing, and that category also has a higher average order value, or prices of jackets are higher than, for example, pants, which is still our biggest product category. So I would say that it is related to those 2 movements. DACH is continuing to grow and some other product categories are growing faster than our core segment.
And then one final question. I know that the employees in period end are down sequentially. Could you comment briefly on where you are right now in terms of staffing, considering what you see in outlook?
Yes. So as I mentioned, we have more -- roughly the same number of head counts in this quarter compared to last quarter, that is Q1 in this fiscal year. We believe that we have a good platform now in place with all the resources that we need in order to continue to grow our company. So we feel pretty satisfied with the situation we are in right now.
The next question comes from Niklas Ekman from Carnegie.
Yes. Firstly, is there any way you can quantify the current trading that you've seen, and I guess, the development both in the end of December and start of January?
So what we have said and disclosed is that we continue to grow, but the only thing we have chosen to quantify at this point, since it has been only a couple of weeks into this quarter, is that the growth rate is lower than we saw in the last quarter, which in whole corresponded to 30%. So that is what we have communicated for now.
Second question. Besides the Nordics and Germany, which other markets are you now seeing the greatest growth in? And can you elaborate specifically on markets like the U.K. and Switzerland and the U.S., for instance?
Yes. So we see some -- I can do that. And we see some markets within all regions. Actually, we see some signs of those taking off. In the Nordic region, I would like to highlight Denmark, which actually shows good signals in the DACH region outside of Germany. I can mention both Austria and Switzerland. And in the Rest of the World region, if I need to highlight some markets, I would say the Netherlands and maybe also Poland, to some extent. Just to mention some of them that are sort of showing some strong signals.
And you mentioned this Philipp Lahm contract. You said that this was a long-term contract. How long are we talking about? Are we talking about quarters or even years? And can you say anything about the amount that a contract of that magnitude could have?
We chose to not disclose any details of the contracts that we signed with our partners, and that is, yes, because we have confidentiality clauses and there are some sort of competitiveness into that sort of information. So we would like to -- not to disclose that kind of information at this point.
But can you say if this contract will kind of -- or the cost of this, will that be mitigated by lower cost for others? Or do you expect your total marketing [ expenses ] to be up going forward?
So I think we have a very -- we have a big marketing investment sort of continuously rolling in within our company. I wouldn't expect this -- the cost for this specific collaboration to stand out in relation to the total marketing budget. So -- but from time to time, we test new things in the last quarter. We mentioned that we tested some new activities in the Swedish market. We launched the YouTube series. We also actually did some marketing activities in traditional TV media. So we will continue to test new formats.
But -- and from time to time, that may have some sort of smaller impact on the numbers, but I don't expect it to stand out. I don't expect this specific collaboration to stand out in -- to a large scale.
And on that topic, you mentioned higher marketing expenses here in Q2. Was that more of a temporary nature? Or is it a step-up in order to help accelerate growth?
Yes. So if we take those 2 marketing activities or the 2 investments that we did in Sweden, that were -- we can -- you can look at them as a test of new marketing activities. So you could view them as a one-off. But having said that, we are right now evaluating the effect or the impact of those activities. And if we believe that we get a good return on those investments, we will, of course, continue to evaluate if we should do even more.
Just a final question. We talked about inventory levels here and inventory coming down. What would you say is an ideal inventory level? Are you getting closer to that? Or what direction do you see going forward?
I think it's pretty difficult to say any specific numbers on that. We did a heavy investment prior to this quarter. That was, of course, planned as we knew that we entered into our peak season. We have said earlier that one should expect our inventory level to flatten out. That was something that we said after the last quarterly report. And I think we have now proven that we are going into that direction.
But I can't really say a number. And the reason for that is that we now operate with 2 and even 3 warehouses. So those investments are requiring some extra inventory levels actually, in order to operate them in an efficient way.
Please state your name and company.
This is Emanuel Jansson from Danske Bank. I think most of my questions are already being answered, but just coming back to the gross margin, which declined a bit during the quarter. Can you give us some view on how the purchase prices look today? Is it cheaper now than compared to a year ago on the current trading?
If the purchase prices are cheaper?
Yes.
Yes. So you have to look at it from different angles. We have a couple of components affecting the purchase price. One is that we have now -- we are now operating with higher volumes, and putting higher volumes on our purchase orders also give up some -- gives us some extra cost advantages. We can also choose to sort of mix how big the orders. We have many factories, many partners that we work with. And if we place big orders on specific partners, we can get better purchase prices. Another important component to also bear in mind is, of course, the currency impact. Most of the purchases are being made in U.S. dollar. So that also impacts that purchase price.
And maybe a third component into the whole purchase pricing model is the freight costs, which we actually do see are coming down, both in terms of real cost, but also in terms of lead times. So it's hard to say exactly if the purchase prices are coming down, and the gross margin is, of course, also impacted by other components such as sales price and what we sell and what kind of margins we have on the specific products that we do sell. So it's hard to say an exact number on what kind of impact it has had on purchase prices.
And on that subject going forward here, should we expect continued campaigning or discounting in the market overall and also for RevolutionRace in this case?
So we do note that we have some players in the market that are very active. We -- I mean, the core of our business model is that we offer our multifunctional products at a high quality, but always at a competitive price level. So that is sort of the core of our whole customer proposition. So we feel that we have a very strong market customer proposition in place already.
And so it's hard to say if we have to be more active with campaigns. We do work with campaigns from time to time with some sort of frequency. But if that will -- if that frequency will increase or decrease, it's hard to say. What is very -- what is sort of an important thing to bear in mind is that we work with the digital D2C model, meaning that we can act very, very fast. We can more or less decide from one day to another that we want to increase our campaigning or whatever we want to do. So that comes down to daily sales tactics and how we see the development in the market.
And last question from my end. Can you give us any view on how the reception of the -- of these new marketing activities have been? How the result of these have been in Q2, the TV commercial and the YouTube series?
It's a bit difficult to say. We are right now evaluating it. We -- those 2 activities that you mentioned are more like brand-related activities. So we did not expect it to have an immediate impact on our sales numbers. And also bear in mind that those activities only took place in Sweden. So we are right now evaluating, especially the TV campaign and -- to understand what kind of impact it had on our brand awareness and our brand strength in Sweden. So yes, I think that's the answer we can give at this point.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
So thank you, operator. But before we actually wrap up, let's see if there are any questions online, and then I will read the question and then -- or maybe also -- and then also try to answer it.
And let's start with a question from [ Partusel ]. And the question is, last year, you developed a few more product lines, for example, shoes and dog clothes. Are you thinking of further expanding the customer offer in 2023?
So yes, my answer to that is that, we continuously develop our product portfolio. As was mentioned in the question, we were very active last year. In last calendar year, we launched shoes. We launched bags. We launched a teens collection, and we also launched a dogs collection.
And on top of that, and maybe most importantly, we continue to develop new products, both in terms of new functionalities within our existing product categories, but also in terms of different kinds of colors, for example. So we will continue to do that. I very much look forward to all the new launches that we see in the pipe for the spring and summer collection, but also very important for the autumn/winter season after the summer. So we are very excited about the product portfolio that we see in the pipe and look forward to introduce them into the market.
And then we have a second question that maybe -- Jesper can [ address ].
Yes. And this is relating to the increase in personnel costs between Q2 and Q1. The main reason for the increase is due to vacation pay accruals, which is quite normal between the summer autumn quarter and the first in the early winter in our case, Q2 versus Q1. So in Q1, you have a reduction in vacation pay accruals and then you return to normality in our Q2 and the rest of the year. So there is a seasonal effect in vacation pay accruals. That's the principal explanation.
Another explanation is, in the headcount, you see that we have a lower headcount ending Q2 than compared to ending Q1, but the average headcount during the quarter is higher. So that's also part of the explanation. Main one, vacation pay accruals, and then average number -- average headcount and other personnel costs.
And now we received another question from our online listeners, and that question is also from [ Partusel ]. Could you comment a bit on cost going forward? Are there certain areas where you need to hire more employees in?
So the answer to that is, I addressed earlier in this call that the number of headcounts or the number of staff is roughly the same compared to the last quarter. We feel that we are more or less well positioned now to facilitate further growth. So we don't expect any big hires of employees going forward in the coming quarters or in the coming period.
So with that, we don't see that we have more questions coming from online. So all in all, we are seeing exciting days and look forward to the coming months. Thank you all for participating today in this call and for your interest in us. We look forward to speaking to you again over the coming weeks and months. May I also, before I end, remind you that our Q3 report will be announced on the 9th of May. So with that, thank you, and goodbye.