Mister Spex SE

XETRA:MRX

Earnings Call Transcript 2023-Q2

[Irina Zhurba, executive]

Good morning, everyone, and welcome to our Q2 2020 results call. The presentation, as usual, will last around 30 minutes, then we'll allow another 10 to 15 minutes for the Q&A. As usual, you can find the presentation online on the Investor Relations website on your reports and presentations. The speakers today with me are Dick Graber, Founder and Co-CEO; and Mirko, the Co-CEO of Spex. That said, let me hand over to Dirk to begin today's call. Thank you.

[Dirk Graber, executive]

Yes. Hello from my side as well. Thank you for participating. And yes, just let's quickly jump to the executive summary of today and our agenda. So Q2, we continued to outperform the market and showed a very solid trading result. Consumer sentiment slightly improved in Q2 versus the last 2 quarters, and we continued also to execute the Lean 4 Leverage program, and we will give you further insights in the next couple of minutes. We also made good further progress in fulfilling our brand promise, which is to deliver the perfect frame for every face and perfect lens for every eye, and Mirko's going to elaborate that on that what we -- how we progressed over the last months on this topic as well.

And then I will lead you through the financials in the second part of the presentation going into our good revenue development of plus 10% in Q2, a total of 8% in H1 and the return to EBITDA profitability for the first half year, which is an improvement of EUR 4.7 million versus the first half of last year. And this is also supported by a very strong improvement of our operational cash flow. So by having said that, I'm handing over to Mirko for the strategic update on Mister Spex.

[Mirko Caspar, executive]

Thanks, Dirk. Good morning, everyone. As Dirk said it before, we are -- we are seizing opportunities. We are increasing our market share while we are improving profitability. And on the other hand, we continue to develop our brand strength through delivering on our promise of the perfect match for every face with ease, style and expertise. So let me give you the overview. On the left-hand side, you do see the consumer sentiment development. And while we do see an improvement in sentiment quarter-over-quarter, the absolute level is, of course, still very low. Regardless. We are, and you see that on the right-hand side, we are outperforming the market and taking market share, and we continue to do so in the months where the market is growing, and we do so in the months like 3, 4, 5, 6, where the market has been slightly shrinking.

Now the market here is PG/SG in Germany as a reference measured by the GfK. So a significant driver of the market share gain has been our store performance. So let's look at that in detail. We have seen on the left-hand side, a significant improvement of the average sales per store. And that you see on the right-hand side, a step-up in profitability, and we are returning to solid EBITDA per store on average. Now the EBITDA on the right-hand side that you see the 4-wall EBITDA, it includes rent, but it does not -- but it excludes the central overhead costs, yes. But when you see starting from March, we have been consistently gone back to strong EBITDA on average per store. And if you remember, the drivers that we introduced in our Lean 4 Leverage program for the stores were mainly the price optimization, which holds true for all channels, so online and off-line.

Second bigger measure was that we started selective campaigns to create local demand in areas where we still see low traffic numbers, but still reducing discounts for being very targeted and selective in those campaigns. And on the bottom line, on the lower part of the P&L, really, a tighter grip on costs and a higher flexibility of the workforce. So that -- we did actually reduce the average staff per store and -- but the even bigger lever was the significant increase in flexibility so we could put the workforce where we actually need it.

Those improvements that I mentioned with regards to the stores, as you recall, they are under the joint umbrella of our Lean 4 Leverage program. And the first pillar is the concentration on the core. That is, a: we focus significantly on the DACH region of our business, and b: to focus on the existing stores, the like-for-like growth have been 6%. And I already touched on the improvements of the profitability of our stores and the store network.

The second pillar is basically to earn more money with every product sold. And you see, again, also in the second quarter a strong improvement in gross margin, and we'll double-click and zoom in on that in a second, but I already highlight one driver of that, and that's the introduction of the price for formerly free lens of 1.5 single vision.

And on the third pillar, the lean efforts to increase our operational leverage. The first thing is we're rolling out the lean philosophy and a large-scale training program. Over 20% of employees have been trained by now, and they're using process analysis, value chain analysis, team board, shop floor boards, et cetera, to continuously improve the efficiency of what they're doing. On the other hand, we closely looked again at our headquarter functions and actively made FTE adjustments to support our continued focus on profitability and cash. Let's double quit on the optimization for the margins. What you see is 189 bps improvement quarter -- year-over-year for the second quarter.

So still, and again, a significant improvement in margin and mind you, why we are growing and taking market share. And that -- and the first driver that I already mentioned in the middle of April, we introduced a price of EUR 19.95 to the 1.5 lens, which was formally free, which added significantly to the base point improvement of the margin.

The second is we continue to reduce discount rates. You see that in the middle of the slide. And also a significant driver in Q2 was the margin-accretive product mix. You see that we were growing significantly in sun at the expense of contact lens, which is the lowest margin category, and that we'll deliver it. Before I hand over to Dirk, I want to highlight a few initiatives that continue to build our brand strength. Why is that so important? We have again reduced the share of marketing spend while increasing the margin and taking market share, and that's quite tricky in that magic marketing triangle. And one thing that supports that is the power of our brand, which allows us to outperform in all 3 of those categories. And what we do to improve our brand positioning and work on our -- continuously on our brand strength.

So the first one is the perfect frame for every face with ease. We rolled out our bespoke frame technology and the collection for the perfect fit and comfort. It's based on our own face capturing technology and fit algorithm, we've rolled it out to 23 stores, and we continue to do so. Also, the same fit algorithm is in our app.

We launched it in the iOS store for new customers so they can measure their face, and we can recommend the fitting frame from our large assortment. And that increases the conversion rate of new customers and reduces the return rate for those new customers. If we look at the style, we added 6 new brands, so already outstanding assortment, the Mangrove Maui Jim and our icon from Hawaii with incredible lens technology. And then additionally, we launched 7 [perfect level] collabs. And just one highlight, Mrs Bella and Mister Spex sold out in 1.5 hours.

And what you also see, we continue to deliver on expertise, and that was one of the biggest focuses -- focus of our 15-year anniversary campaign, what we did, we featured our own employees and highlighted the 15 years of optical expertise that we were delivering.

So as you see, we continue to deliver every quarter in our brand promise, and that's why we are so confident about our strategy. Now over to Dirk with more numbers.

[Dirk Graber, executive]

Okay. Thank you, Mirko. So let's quickly little bit of highlights of the financial update. I mentioned a few of them. So we accelerated our growth rate into 2% to 10%, bringing H1 to a total of 8%. So we are fully on strike on our full year plan on the revenue side. In terms of profitability, we also went back to a profitable adjusted EBITDA in H1 was EUR 0.7 million, which is a significant improvement versus the first half of last year by EUR 4.7 million, also here, we are track. Second quarter, we see a very strong cash flow development of EUR 13 million. I will comment on that in more detail in a few minutes. And we ended the quarter with $124 million in cash and cash equivalents, which is a very solid basis for us.

So now let's look into the details a little bit more. This year, in Q2, but also in H1, revenue split is slightly different than last year. Why? Because we focused on the higher-margin categories. You see that the growth in Prescription glasses accelerated was last year to 8% in Q2 and for prescription glasses by 22% in Q2. For the first half, prescription is up 13% and Sun is up 18%. Please remind always that in our sunglass revenues also prescription sunglasses are included. So within the season, we typically see a marginal trade-off between prescription and Sunglass growth but balancing this out typically on a full year basis. Contact lenses, we told you already in earlier calls, we took the deliberate decision to really focus on margin-accretive on revenues. And so therefore, we optimized margin management for contact lenses, which led to slightly reduced revenues. So Q2, minus 6% and H1 minus 8%. There's also certain FX impacts, which we'll I explain to you on the next slide in especially for the Nordic countries included in that minus 6% or minus 8% contact lenses.

Overall, we continued to really show strong double-digit or mid-double-digit numbers for our boutique segment and also a healthy growth in our own rights. In total, we added 3 stores in the second quarter, currently running 74 in total. So now let's look into the segments, Germany and international. Part of our lean 4 leverage program is to focus on the core business and really tweak our total business for profitability and getting to a positive cash flow. And so the focus on Germany is part of that. And we have a strong brand awareness here. So therefore, our -- and also the investments in our retail store network and so on are quite advanced in that market. So therefore, we showed a very strong 14% growth in Q2. That is included or supported by the 6% like-for-like growth of the retail stores in the second quarter and first half, basically a double-digit like-for-like growth on a retail network. International, we see a slight contraction by minus 2%. Constant currencies that were I meant is plus 2%. So we see some headwinds on Nordic currency developments in the second quarter.

And overall, basically, we see or we continue with our very strict margin management also in the international markets focusing on bottom line. So now let's look at the financial performance based on where it's coming or where is the improvement of EBITDA coming from, right?

So in the second quarter, we continued to improve our gross margin by roughly 190 basis points. And so first half year, it's 290 basis points improvement. [BHR] costs are basically slightly increasing in percent of sales. Why? Because we significantly added retail personnel for our 14 new stores.

But on the other hand, Mirko explained it, we also been very cost sensitive on overhead [price]. Marketing expense in the second quarter contributed by roughly 30 basis points to the EBITDA improvement and significant contribution came in the second quarter from the other operating expenses. So EBITDA improved by 270 basis points and the adjusted EBITDA by 250 for the second quarter. In the first half, it's an equivalent improvement of 430 basis points. And on the marketing, just a comment here, we are on a good path to continue our, say, optimization levers. But we had also a very successful 15-year anniversary campaign that started in Q2, which focused on optician expertise and helped to drive our sales in the German market as well. So now we dive a little bit deeper, what you see is the gross margin improvement, which is the biggest lever on EBITDA improvement in the first half. It's really driven by price adjustments and the reduction in simplification of discounts.

We continue that path, and we see that basically, we are having a strong brand equity and that our consumers are basically accepting that, and we'll continue to grow and increase our absolute profit. Personnel expense, I just explained. We streamlined headquarter functions, but on the other hand, have an additional 14 stores. Operational expenses here next to I would say, the higher AOVs, which drives significant these operational improvements. We also see first positive impacts from productivity improvements through the lean management approach that we started to implement in the internal organization by the first impact we see in operations. Marketing, I mentioned continued reduction optimization, which really helps to drive the improvements in the effectiveness of marketing. And we also had lower one-off expenses and adjustments, so leading to this 430 basis points in improvement of adjusted EBITDA in the first half of 2022.

Now if we look at cash flow, which showed a very strong development in the first half of 2023. We started Q1 -- we ended Q1 with EUR 113 million in the bank. Now we added strong operation, EUR 18 million, we invested EUR 4 million, which partly is so expensive, the other one is capitalized IT investments, and negative [indiscernible] on the financing, which is mainly the lease payments that we had. So we're ending the quarter at the half year by EUR 124 million. So next to, obviously, the good trading results and the EBITDA improvement. The operating cash flow improved significantly through working capital management. There are some seasonal effects on this because of sunglasses. But overall, we are very satisfied with that development.

So let's look at the second half, what do we expect? And what you can expect from us. So I think Mirko mentioned it, consumer sentiment is not easy, right? And it's also, if you look at the latest GfK numbers, all the comments on the German economy, which is our core market, it's not so promising, right? So we see that, I would say, there are some headwinds on trading, I would say, of potential trading because of that consumer sentiment. But overall, we are committed to what we initiated our lean 4 leverage program. So on gross profit, we continue to reduce and simplify discounts that will also be true in the second half. We continue to grow in the highest margin category, which is prescription losses. So -- and also increase the share of prescription in our total revenue mix. I would say, what are the headwinds on gross profit? It is over the summer, we've seen significant promotional activities also from competitors. And while the second quarter showed really good weather patterns. And you've seen our sunglass growth for Q2. And I would say the weather at least for our core markets in Q3 showed mixed results or patterns impacting also revenue there. Personnel expenses, we continue to streamline our headquarter functions. Mirko mentioned that. So there will be some benefit from that in the second half. But we also continued to adds new stores. We are planning to open up to 3 new stores in the second half, ending the year with 809. And also, we see continued labor cost inflation and overall cost inflation in our core business.

On the operating side, I mentioned we started to implement the lean management philosophy. First impacts are shown in operations, but also customer service and we rolled that out to a headquarter function as well. And we continue to focus on our marketing effectiveness. But on the downside, headwinds would be in any kind of operational deleverage in case the market basically sentiment is further deteriorating.

All right. So let's look at the guidance that stays unchanged. So we are committed to our mid- to high single-digit revenue growth for 2023 on top line and a low single-digit percentage EBITDA margin or adjusted EBITDA margin for the full year, right? Q3, I just mentioned, so we see mid-teen patterns, especially impacting obviously sunglasses. We see the GfK consumer climate lowering in the last month or 2. And we also, I would say, see that the world is in flux. So there are a lot of things happening. And therefore, we, I would say, are stay cautious on the overall management but are fully committed to the guidance, as I said. So looking ahead, we will present our Q3 numbers on November 9 and also attend a number of conferences in the second half of the year, followed by the company's sponsored road show this afternoon.

So having said that, I would like to thank you for your listening and participation, and then we're going to open Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Graham Renwick from Berenberg. Your line is open. Please ask your question. .

[Graham Renwick, analyst]

Just firstly, on Q3, you mentioned a bit of softness due to the weather. Are you able to sort of give us a bit of color on what sort of growth you are seeing so far over the summer? Should we still be expecting sales to grow in Q3, but just a more moderate pace versus what we've seen in Q2? Second question, just on cash. You've obviously had a very strong cash performance in Q2. I know there's a few sort of technical factors within that. But where are you expecting cash to land at the end of the year? What are your expectations for cash burn this year? Third, just on the AUV, up 10%. How much did price increases contribute to that solely versus price mix? And on the price mix topic, where is the mix of progressive lenses now in the business and how will that be developing? And then just finally, just your store opening plans for the second half and what your current pipeline is for next year.

[Dirk Graber, executive]

So on -- I take the first 2 and then AUV, I will hand over to Mirko and also for the store expand. So on growth, so we expect single-digit growth also in Q3, I would say, maybe a little bit more moderate than in Q2. But so far, we are on track for that. On the cash balance, I mentioned, I think we are satisfied with the current progress, but there are also some, I would say, seasonal working capital impacts on that. So we remain with our cash flow guidance for the full year, which we gave to end the year with EUR 105 million to EUR 110 million. So that's the current expectation that we have. And then over to Mirko on the AUV development.

[Mirko Caspar, executive]

Yes. We see due to the fact that we have FX effects negatively affecting the AUV of contact lenses actually a lot of the AUV -- the average AUV development is price increases for prescription and that's a healthy, stable development that the can bank on for the second half of the year. The development of multifocal, I think, and the progressive lens share, what you see is that the share improved online roughly 10% and off-line roughly 10% on as an order share. So that shows you that our continued effort on optical expertise is driving those positive share development only through more stores that we open. But in both channels, we see an increase in the share of multifocal. That also contributes to the AUV, obviously. But again, you see the price increase for single vision and multifocal is -- you see -- well we drive that in both categories, so the same yes.

[Dirk Graber, executive]

So on the store expansion in the second half it will be likely quite backlog. So to the end of the year, we have signed a number of contracts. So we secured the locations already, which I mentioned. And for 2024, we currently expect a similar pace as this year, but we haven't finalized the plans for next year yet. So we are always screening the market for attractive opportunities, and we have a running pipeline there. And therefore, will continue to quite to a certain number and to also meet that target in 2024.

[Operator]

Our next question comes from the line of Cédric Rossi from Bryan Garnier.

[Cedric Rossi, analyst]

Yes. Good morning, everyone. Sorry, I have 2 questions. The first 1 is regarding the consumer sentiment. So a follow-up on Graham's question. Do you feel that even if we stay at low levels that the consumer patterns and the traffic is becoming more predictable, also helping you to probably increase your marketing effectiveness. That's my first question.

The second 1 is regarding the boutique format. So it continues to outperform the other price points. I recall that over the past quarters, you were not planning any additional store opening with regard this format, but looking at the performance and probably also maybe a discussion that you have with other brands. Do you feel that probably you could maybe reconsider this scenario and open new boutiques in the near future.

And my third question is regarding consolidation. So we have been seeing many M&As over the past quarters in the eyewear industry. So the market consolidation is probably also helped by a smaller chain and brand being under pressure. Is M&A still on the table with regard to Mister Spex]?

[Mirko Caspar, executive]

Yes, let me take the first 2 questions. On consumer sentiment, well, I think it is predictable in a sense that it is -- that it will stay relatively low in our core territory quite a while. However, just to shed a bit of light on it, we saw boutique sales grow roughly mid-double digits, so really strong boutique growth again that is relatively independent of the average consumer sentiment in the market. We see a strong demand for the fashionable and luxurious eyewear. And so that's relatively predictable also our targeted campaigns for the fashion oriented private label and value buyers also overproportionately is successful. So we see an over proportional growth in those 2 segments. The targeted fashionable private label and the boutique. And we do feel that to 2 targeted let's say, targeting efforts we expect a further improvement in marketing spend or at least keep the spend efficiencies that been in the first half of the year. On the boutique store format, actually, we are really satisfied with the success of the boutique store format even though it's only 1 store. What we have done is that we selectively increase the boutique assortment and also tweaked a bit of the boutique environment in the existing stores. So that is 1 aspect of the boutique forms that we wanted to do. And actually, the rollout of the customer frames in all of our stores as the next step is 1 sign that we back our boutique premium strategy in all stores. And now to the question that you really asked is, will there be new boutique format there is no concrete plan, but I definitely do not rule it out since it is actually quite successful. And over to Dirk, maybe on the consolidation in the industry. .

[Dirk Graber, executive]

Yes. So Cedric, I share your view. So we've also seen a lot of, I would say, movement in the market. I think our first priority is always to improve our core business and to basically also grow organically. Nevertheless, I mean, yes, they are every once in a while attractive opportunities in the market, which we -- is reasonable, and if value accretive to look at. And so therefore, we continue to do so. And in case there is an opportunity for us to strengthen our position in another European market existing or new. we would consider that also in the future. I think the further we progress with Lean 4 Leverage and especially get to where we aim for on the organic path the easier is especially for us and also think of adding potential, as I said, add-ons if they're accretive in value.

[Operator]

The next question comes from the line of Alexander Thiel from Jefferies. .

[Alexander Thiel, analyst]

Most of my questions have already been answered. Just a quick follow-up on the seasonality. Is it fair to assume that Q3 is still going to be stronger than Q4 in absolute revenue terms? And then looking at below your EBITDA line, the D&A increased significantly year-over-year. If you could touch on the impairments that you saw on that side. And from a margin progression perspective, is it also fair to assume that Q2 is now the peak of the year with the 3.4% because you're stating higher promotional activity. So how should we basically think about the competitive situation on the market when it comes to pricing for the rest of the year? .

[Dirk Graber, executive]

'Sure. So maybe I'll start with the margin improvement, Alex. So what we see is we started to improve our focus on pricing and gross margin in Q3 last year, right? So we do expect also because of product mix with prescription increasing in share again in the second half of the year to see margin improvements on a year-over-year basis. but maybe not basically as high in the first half, but we expect basically to improve. There's always an assortment mix effect, as we said. But overall, we do expect basically to see further gross margin improvements on a year-over-year basis in on the D&A. We have there some technical effect because if your equity value is higher than your market cap. There are some brilliant events in IFS, where you have to have impairment has -- and we've done that basically also again in the H1 report. So what we see is -- and we have to do this on a CGU level. So cash generating unit, which Mister Spex in an individual store. And if an individual store is slightly below our expectation, we need them basically to adjust. That means also if market cap would go up and strong performance picks up, that effect would reverse by as an impairment test done or the audience has done for roughly EUR 2.7 million fully on the retail network and where a number of low number of stores basically were impacted. And we have then basically to write off the and into the store and the right-of-use assets. And that's what we have done according to the [indiscernible].

[Mirko Caspar, executive]

And maybe just adding quickly, I'm more than 10%, Alexander, if you were referring to the absolute strength of Q3 versus Q4 or the margin or the growth. So just a bit in absolute levels, Q3 is stronger than Q4 because we have a significant share of sun still in terms of growth it's very hard to tell. It's just we have a normal growth path as we guided the market and -- so that's just -- but on an absolute level, Q3 is stronger than Q4 due to seasonality.

[Alexander Thiel, analyst]

Okay. That's very clear. And maybe a follow-up on the few month's call, there was again a pretty heavy discussion on the employee market situation for opticians. Could you give us some insights into how you're basically progressing with sourcing new opticians and store employees for your new stores that you're planning to roll out of the situation on the employee market basically. .

[Dirk Graber, executive]

So I think we continue with our existing strategy, right? So I think -- and that is the following: we need to be an attractive employer brand for opticians to join Mister Spex. And I think we -- with our approach to leadership to culture I think we demonstrate that definitely to especially younger dynamic opticians that we are basically strong. We -- so that's the first one in hiring also when we enter new cities, obviously, we need to hire people. but we also try to transfer often existing employees to new city stores because then we have, I would say, a mix of new and existing spec fees, as we call them. who know the process already and can run for more efficiently if you compare to just a new team. Second is we also invest in apprenticeship, right? So this year, we hired more -- or we had an intake of more than 40 new optician processes across our 5 training centers. is the latest train center that we opened. And now we run, as I said, 5 of them across Germany in different cities. And this is always a 3-year program where they finish as a certified optician.

Additionally, we also updated our program to basically have an education for master optician, which are required to run a real store. So at least we have one. And here, we have an attractive program for existing opticians, that wants to become a more traction to work either part time at Mister Spex and do the implication or to take a lead on this at a block basically and then take over also a leadership position within 1 of our retail stores.

So overall, I think we are we see that in the market. So it's not that we don't see it, but I think we have good programs and measurements in place to not struggle basically to continue to grow. And and to further basically develop and also educate and train our existing retail staff.

[Alexander Thiel, analyst]

Okay. That's very clear. Last one from my side would be on your international markets. Which country is currently basically right from a brand building perspective that you can go from a pure online side also to an off-line store side? Which countries are currently based on your estimate your next store openings, basically.

[Mirko Caspar, executive]

Yes. We do focus on that right now with the store expansion. As you know, we already have stores in Sweden on top. But for now, that's our focus within our strategy Lean 4 Leverage program focused on the core and that holds true for the omnichannel strategy for now.

[Operator]

The next question comes from the line of Albrick.

[Unknown Analyst]

What is your present market share in Germany?

[Dirk Graber, executive]

I mean if you only look at revenue, depending on which source you use, the German market is typically estimated to 4 to 6 -- sorry, to EUR 5 billion to EUR 6 billion in sales, across all categories, across all panels. So within that market, our market share is roughly purely on revenue, 3%, right? That's a ballpark number. Obviously, in the individual categories is very different. And also on units, right, it's a different game. So I think if we look at the numbers, we see that in sunglasses within optical retail, we're even market leader in contact lenses, I think the estimates are slightly low double digit in terms of revenue. And if you look at prescription glasses in terms of the units, we are at a high similar digital market share. But since we have a lot of single vision share or higher single billing share because of the average age of our customers being high 30s and therefore, the price basically being significantly lower for single different and for very focus, the revenue share is lower in prescription in terms of revenue.

[Operator]

We have no further questions at this time.

[Irina Zhurba, executive]

Okay. Thank you so much. I think then we're done for today. Thank you for participating in our call. As usual, if you have any questions, please reach out to me. I'll be very happy to answer. Operatively very happy to see during one of our roadshows in the coming months. Thank you so much, and have a great rest of the day. Thank you.