BHG Group AB

STO:BHG

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, everyone, and thank you for joining us on our conference call today to present the Bygghemma Group Q1 2019 Results. This call is being recorded, and a replay of the conference will be available later today on our Investor Relations website. Today's presenters are Acting President and CEO, Martin Edblad; and CFO, Adam Schatz. Both will be available for Q&A later in today's call.With that said, I now turn the call over to Martin. Please begin.

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Thank you, operator, and good morning, everyone. We are happy to present a strong first quarter for Bygghemma Group where we grew by 19% and posted our highest first quarter margin ever, once again proving the strength of our business model and our leading online position.The agenda is divided into 4 sections and ends with a Q&A session. We'll start with the results highlights, followed by a business update. I will then hand over to Adam Schatz, who will walk you through the financials in more detail. Finally, after summarizing the quarter, we will focus on your questions.Before starting, I would like to highlight that we, from the 1st of January, have implemented the new accounting standard, IFRS 16, which has increased our balance sheet total by around SEK 360 million and will have a positive impact on EBITA and EBITDA of around SEK 7 million and SEK 90 million, respectively, on full year basis. In this presentation, however, we'll focus on figures excluding the impact from IFRS 16 in order to provide relevant comparisons against last year. Having said that, let's start with the results highlights on Page 6.So we reported our strongest first quarter sales ever. We did this despite the calendar effect in sales around minus SEK 20 million in the period. This means that we have further strengthened our position as the #1 Nordic online retailer within home improvement in the period.Net sales grew by 19% to SEK 1.220 billion in the quarter. Sales growth in the period was mainly driven by the strong growth of 26.7% within the Home Furnishing division, which accounted for an impressive uplift compared to Q4 with an increase in total growth of 8.7 percentage points and in organic growth of 5.8 percentage points. The DIY division continued to perform strongly with a total growth of 13.4% and organic growth of 8.5%, which was reduced by the negative calendar effects in the period. This means that we also outgrew the market within both divisions in the period.Looking at profitability. We delivered a record high Q1 adjusted EBITA of SEK 53.4 million in the quarter driven by our highest gross margin ever. Operating cash flow came in at SEK 16.3 million, translating to a cash conversion of 26.1%, which is a seasonal low due to inventory buildup preparing for the high season in the second quarter.If we then turn to Page 8, I want to start this section by repeating a few key facts about our business. Bygghemma operates in the Nordic home improvement market. This is a market that has a turnover of approximately SEK 230 billion annually, making it the third largest retail category after groceries and jewelry. The online share of the home improvement market is expected to double in size over the next 5 years, thereby approaching SEK 40 billion annually. And in this market, Bygghemma Group is the clear Nordic online leader with a close to 30% market share.So on an LTM basis, we have reported net sales of SEK 5.2 billion, which also makes Bygghemma Group the largest listed business-to-consumer online retailer in the Nordics. In addition, through our significant growth, scale and dominating online position, we're profitable and generate strong cash flows, making us somewhat of a rarity in e-commerce.Moving to Page 9. I want to highlight the following. Our growth in Q1 means that we have further strengthened our #1 European online position within home improvement. We have done so by further adding to our close to 30% Nordic online market share. We have continued to build on our positive momentum from Q4, so further expanded our gross margins to the highest level ever, which explains that we also delivered our highest first quarter EBITA to date both nominally and margin-wise. This is the result of a radical uplift in the Home Furnishing segment, which post its highest EBITA and EBITA margin ever for any quarter. We further reiterate our medium-term financial targets.And finally, moving to Page 10. We have made 2 important acquisitions: first, vvskupp.no, which makes Bygghemma the clear #1 DIY pure play in Norway; and second, Nordiska Fönster, which makes Bygghemma category leader in the value-for-money doors and windows segment.With that, I hand over to our CFO, Adam Schatz, who will walk you through the financials in more detail. Adam?

[Adam Schatz, Chief Financial Officer]

Thank you, Martin. Turning to Slide 12. And as you've already seen, Bygghemma Group is off to a strong start in 2019. Net sales increased by 19% to SEK 1.2 billion with significant organic contributions from both the DIY and Home Furnishing segments as well as from well-performing recent acquisitions. Combined organic growth across the segments amounted to 8% in spite of being negatively impacted by the calendar effects as mentioned earlier and which arose from very strong order volumes over the weekend that ended the quarter.These orders, amounting to SEK 50 million, were converted into net sales only in the first days of the second quarter of 2019. A similar but less strong effect occurred in December of '18 amounting to SEK 30 million, which was accounted for in the first day -- the first quarter 2019. The net effect over the last 2 quarters consequently amounted to approximately minus SEK 20 million in the period, primarily impacting the DIY segment. Growth of the DIY segment in the quarter was also impacted by fairly steep comps in 2018.The right-hand side of the slide shows 4 key performance metrics which further explain the solid top line performance. The number of visits to the group's web stores increased by close to 40% to almost 35 million. We also succeeded in driving the business towards the quite significant mix shifts with the number of orders rising by 3% while the average order value increased by [ about ] 17%, the impact of which we will turn to on the next slide. Before going there though, I also want to mention that the shift on focus to higher ticket items led to slightly lower conversion level in the period.So now turning to Slide 13. And as I've already mentioned, the higher average order value has a significantly positive impact on gross margin, and I wanted to leverage further on the importance of this as it is one of the important explanation piece behind our strong Q1 numbers. The graph on the left-hand side illustrates the kick to gross margin of higher order values, starting at SEK 3,000 and increasing by SEK 250 at a time. The calculation assumes fixed transportation cost and that the other cost of goods vary within [ net sales ]. And as you can see, SEK 500 or 17% increase in average order value in this example translates to an increase in gross margin of 30%, almost twice the increase, which then corresponds to a 2 percentage point increase in gross margin.Turning to the next slide. The realized effect of the increase in average order value resulted in a record-high gross margin in the quarter of 24.6%, which is an increase on the previous year's quarter of 3.8 percentage points. The solid top line combined with the strong gross margin led to an EBITA delivery of SEK 53.4 million, which is our best quarter 1 EBITA to date and an increase over last year of 74%.Let's now turn to the segments, starting with DIY. Next slide, please. The DIY segment accounted for 56% of the group's net sales and had another solid quarter with net sales increasing 13% to SEK 689 million. The segment grew organically by 8.5% in spite of the fairly steep comps of last year and the negative impact of the quarter end occurring on a weekend during which orders were particularly strong.The segment's Danish and Norwegian operations performed the best. The focus on category leadership and our growing specialized knowledge base and portfolio of brands from recent strategic acquisitions are important cornerstones for us. This, coupled with operational improvements in terms of service, assortment and pricing and a steadily growing online penetration, allowed us to further strengthen our market position in all our geographies. The EBITA margin of 2.5% was adversely impacted by the calendar effect already mentioned.Next slide, please. The Home Furnishing segment accounted for 44% of the group's net sales and had a record performance in a number of regards. Sales increased by 27% to SEK 534 million. Organic growth came in at 7.2% compared with 1.4% in the fourth quarter of 2018, and recent acquisitions performed well. All in all, we extended our lead across all our categories and geographic markets.Traffic for Furniturebox also continued improving. We reiterate that we should be reaching the levels experienced before the web platform change sometime during the second to third quarter of 2019. The record-strong EBITA and EBITA margin at 7.6% is a testament to the division's successful assortment, mix and curation work which, among other things, drove growth as well as higher average order value in the period. We will be commenting on the last-mile project which we rolled out during the second half of 2018, and this is developing to expectations and continues to drive an improvement in customer satisfaction.Let's turn to cash flow now. Operating cash flow in the period amounted to SEK 16 million, corresponding to a cash conversion of 26%. Bygghemma's business model continues to be cash flow rich with a significant negative working capital requirement as well as low CapEx needs. Hence, our full year target for cash flow conversion remains at 100%, and the lower conversion rate in the quarter is primarily explained by the seasonal buildup of inventory ahead of the high season of the second quarter particularly of outdoor furniture. The decision to build a somewhat larger and broader stock of product has now put us in a good position to meet the demand of the high season.The right-hand graph showing the development in liquidity walks us through the starting period [ evolution ] of SEK 227 million; adding cash flow from operations; adjusting the impact of investing activities, result of which is M&A related; and finally, the financing of these M&A activities through our bank facilities, which brings us to the period-end SEK 265 million of liquidity at hand.Next slide, please. As you can see here, the group's net debt amounted to SEK 544 million at the end of the quarter, which corresponds to a net debt in relation to LTM adjusted EBITDA of 2.1x. This is well within the range of our midterm financial target.Our financial position remains solid. Cash flow over the year's 12 month will reflect our strong business model, on top of which we have unutilized credit facilities of SEK 286 million and a strong relationship with our bank, meaning we can continue executing on our M&A strategy and consolidate the markets we operate in further.Handing it back over to you, Martin.

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Thank you, Adam. So to summarize on Page 19. Our positive momentum from Q4 continued and strengthened in the quarter, thereby further improving our position as the #1 European and Nordic online retailer in home improvement. We delivered a record-high gross margin level and our highest first quarter EBITA and EBITA margin to date. The development in the Home Furnishing division was especially strong with a total growth of 26.7%, an increase in organic growth of 5.8 percentage points compared with Q4 and a record-high EBITA margin of 7.6%. The development was driven by the assortment, mix and curation works during the last 6 months, which have paid off, and amongst other improved unit economics through higher tickets.In addition, our last-mile rollout is delivering as expected. We've improved customer satisfaction levels. Further, we have completed 2 exciting add-ons, which is an important part of our strategy to maintain and strengthen our online leadership. And finally, we reiterate our medium-term financial targets.So that concludes the presentation. So time for your questions. Please go ahead.

[Operator]

[Operator Instructions] And the first question comes from the line of Gustav Sandström from SEB.

[Gustav Sandström, Research Analyst]

Congrats on a solid report. I have a question on the gross margin development, which was very strong in the quarter. Is there an element of seasonality here and calendar effect from [ hedging from ] Easter? Or should we -- is it [ prudent to wait ] this margin development also for Q2, Q3, in fact, all else equal?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Thank you, Gustav. So let me put it like this. There hasn't been any exceptional things affecting gross margins in the period and then especially Home Furnishing, so nothing extraordinary. And the seasonality is not something that has a huge impact in Q1. Then obviously, we move into high season, and there's a lot of campaigns and so on and so forth. But nothing exceptional affecting the gross margins in the quarter.

[Gustav Sandström, Research Analyst]

That's very clear. And then I'm curious about your comments regarding improved customer satisfaction. Is there any -- do you have any firm numbers or data or reviews that you point to that, that sort of underlines this trend?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Yes, we do. In the regions where we rolled out our last-mile deliveries, all the customers rate the drivers and the deliveries, and we've had quite significant improvements in those ratings during the period from the launch of the rollout. So the customers can rate the drivers from 1 to 4. It's a scale from 1 to 4, and we're in the high range of 3, so to speak. So we're clearly above 3.5, and we started out somewhat lower. So we've seen quite a good increase in those level. And as I said, we rate all deliveries. And so we have, I'd say, very good and strong information on that development.

[Gustav Sandström, Research Analyst]

Okay. And final from me regarding organic growth in DIY, it was low of a base than we had in our model. Could you elaborate a bit on the development there, sort of where you see that category going into Q2? Is -- was Q1 particularly challenging for some reason? Or is this sort of more normalized level we see now, around 8% to 10%?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

I mean, it's hard to tell obviously. But as we stated in the report, the first kind of -- the first quarter was quite strong for DIY last year, and then obviously we have the calendar effect. So adjusting for that, I mean, it should be, I mean, double-digit organic growth for DIY. And we also say that we had a very strong end of March. So I'd say we're in good shape as we move into the high season. Then obviously, we -- I mean, there's huge volumes in Q2. So remains to be seen where we end up, but I'd say we're in good shape.

[Operator]

Our next question comes from the line of Michael Benedict from Berenberg.

[Michael Benedict, Analyst]

Just a couple for me. Do you see further upside to your average order values from here? I guess in relation to that, could you also give us a sense of how you expect gross margins to progress throughout FY '19? And the second one is am I right in saying all your lease costs were previously within your other external cost line, which explains why it's decreased year-on-year given the, let's say, comparatives post IFRS 16?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Thank you. On the latter, that's the case. And on your first question regarding average order value and gross margins, we've -- I mean, we've seen quite a radical uplift, as we've said in the presentation, with regards to Home Furnishing and average order value. Our aim is obviously to increase this further. I think the gross margin level we've reached now is high. And as I said to Gustav, there hasn't been any exceptional things in Q1 affecting gross margin. I mean, however -- I mean, moving into Q2, our focus and priorities is pushing growth. Having said that, I think the gross margin level that we've reached now is a satisfactory one. So yes, hopefully that's somewhat of an answer to your question.

[Operator]

Our next question comes from the line of Nicklas Fhärm from SEB.

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

Just to follow up on Gustav's question on the gross margin. I was just wondering if you could -- I assume most of the increase is due to the change in average order value. But still, are there -- could you outline the gross margin bridge? Are there, for example, any currency or FX effects in gross margins affecting this quarter year-on-year?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

We obviously had a quite a dramatic negative impact last year, as I'm sure you're aware of. This year, if anything, we benefit from a strong SEK. So there hasn't been any kind of positive impact from the currency. But what impacts us are kind of fluctuations because it's the competitive pricing that affects us somewhat since they hedge and we don't. So they had a huge benefit last year. But to answer your question, we haven't had any positive impact, so to speak, from currency this year, but rather -- not any negative items.

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

And also, if you look at the reported organic growth of about 8%, how does that actually break down into volume, price and mix? Because there are some evidence elsewhere in the sector of price increases and lack of -- weak Swedish krona from most of your peers.

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Yes, I think -- the breakdown is it's -- if anything, it's kind of volume related. But then you have, I mean, certain seasons, certain quarters -- I mean, you have some -- you obviously have had comps which you compare to and so on and so forth that affects organic growth. And as I said, we had a fairly strong Q1 for DIY last year, and as I said, to the group as well. I mean as we move into Q2, I think we're in good shape. As we stated in the report, we had a good end of the quarter and so on and so forth. So yes.

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

But to put it in another way, have you raised prices in Q1 this year?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

No.

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

No?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Yes and no. But we had not done so within the DIY division, but rather we do have a positive impact with average order value, but that's rather a mix impact. Within Home Furnishing, as we stated, we've worked quite -- we've done quite substantial work with all aspects of assortment, mix and also pricing.

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

Perfect. Final question, I mean, you continue to do these nice but smaller bolt-on acquisitions of course as part of your strategy. And I was just wondering generally how you would describe the M&A environment for you. I'm sure you have a pretty lengthy shortlist of M&A that you would like to do. But would you describe the market as benign for you? And could you give us some idea, for example, with this company turning over about SEK 100 million, what you actually are paying for that in terms of multiples, please?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Yes, sure. I'd say that the market in our part has improved. So I mean it's absolutely benign. We -- I mean, what we see at least, the P/E activity for the targets that we're looking at kind of medium-sized and small-sized niche category leaders that the market has improved for us. So the environment is better, so to speak.

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

Meaning price expectations have come down, is that what you're saying, from the sellers?

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

Yes, in a sense. The competition is somewhat -- has been reduced somewhat, and that obviously translates to pricing in some sense. That's what we see at least. And there's a lot of interesting targets still out there. We're obviously looking for, I mean, niche players, category leaders that can fuel growth within certain categories within both DIY and the Home Furnishing segments. And we obviously have a target of paying like 6 to 8x EBITDA, and I think we'll -- I mean, as it looks right now, we should be able to maintain that target. Then if it's strategically important target, we're prepared to go somewhat higher. I mean obviously the acquisition in Norway was very important because that provided us with that dominating online position in Norway, which is so important for us in all regards, but not least when it comes to having kind of market power to, in some sense, pricing and so on and so forth, traffic -- driving traffic and so on.

[Operator]

[Operator Instructions] As there seem to be no further questions, I'll be handing the word back to the speakers for any closing comments.

[Martin Edblad, Head of Home Furnishings, Acting President & CEO]

No, not really. Thank you, and thank you for the questions. So I suppose that concludes the call for today.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.