BHG Group AB

STO:BHG

Earnings Call Transcript 2020-Q1

[Operator]

Thank you for joining us on our conference call today to review BHG's First Quarter 2020 Results. This call is being recorded, and a replay of the conference will be available later today on our Investor Relations website. Together with me today are Adam Schatz, the President and CEO; and Jesper Flemme, acting Group CFO. Both will be available for Q&A later in today's call. With that, I will now turn the call over to Adam.

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

Thank you, operator. And good morning, everyone. We're happy to share with you that we're off to a good start to 2020 with a Q1 that in many ways, was not only a continuation to our strong fourth quarter of last year, but a quarter in which we recorded a further acceleration. Today's agenda is divided into 5 sections. We will start with the results highlights, followed by a business update. I will then hand it over to our CFO, Jesper Flemme, who will walk us through the financials in more details. After which, we will summarize the quarter and then wrap up with a Q&A session. Slide 5, please. As our performance shows, we continued developing the business during the quarter and recorded the highest net sales, EBIT, EBIT margin and cash generation for the first quarter to date. Net sales came in at SEK 1.63 billion, which corresponds to total growth in excess of 33% and organic growth of 22%. We recorded an adjusted EBIT of SEK 80 million, translating to an adjusted EBIT margin of 4.9% and finally, delivered the strongest Q1 cash flow from operating activities to date, amounting to SEK 148 million. It is thus clear that we further strengthened our position as the #1 online retailer in the European home improvement space in every regard, both from a market share point of view as well as from a financial point of view. In other words, we stand strong in a general economic environment with significant uncertainties, more on this in a few slides. Both our segments did well in the quarter on the back of the acceleration that we saw during last year. Home Furnishing, delivering solidly across the 3 months of the quarter and DIY having started well and then, in fact, accelerating further during the tail end of the quarter. We are also pleased with the performance of our recent acquisitions, all of which, to a significant extent are based on proprietary brands, more on this also in a few slides. Moving to Slide 6, please. With an online penetration in the Nordic countries, just shy of 10%, the online market for home improvement is set to continue growing for many years to come. Our strategy from inception has included being the consolidator in this growing but still fragmented market. This has resulted in a CAGR for the group in the past 5 years of 41%. One aspect that we were particularly pleased with in the delivery of the current quarter was the continued acceleration of the organic component of our growth. We are recording our fourth consecutive quarter-on-quarter increase in organic growth. The 22% number at group level for the quarter was comprised of an organic growth of almost 28% in the Home Furnishing segment and 18% in the DIY segment. We do not yet have access to overall market data for the first quarter, but judging by preliminary data, the picture that we see is one of the continued increase in online penetration. And in the quarter, especially so for Furniture and Home Furnishings, for which we believe the offline part of the market actually contracted. On the DIY side, there is evidence that the total market, which started turning around already in the fourth quarter of 2019, continued growing well. Under these market conditions and with the performance we recorded, it is clear that we took further steps in strengthening our already leading market share in both segments. Moving to Slide 7. Another important aspect of the delivery in the quarter was the fact that the share of net sales from our own brands continues to increase, both as a result of strong organic developments not least for our own flagship bathroom brand, Bathlife and also the acquisition strategy within the DIY segment, which has targeted opportunities with strong portfolios of own brands, such as Nordiska Fönster outlet, LS Bolagen and this quarter's acquisition, Hemfint. As a result of this, roughly 50% of Q1 sales was comprised of our own brands, driven by a rapid increase in DIY segment. Moving to Slide 8. Our strategy remains focused on 4 cornerstones: firstly, the continued expansion of our already leading product range, our portfolio has now grown to include over 800,000 unique products; secondly, scale and a high share of own brands in our sales mix, with a strong growth of the quarter, we continued building scale advantages. And as we just saw a significant share of the growth came from our own brands; thirdly, creating the most appealing shopping experience and dominating digital, as Jesper will share, we grew our digital footprint significantly in quarter -- in the quarter and saw some 57 million visits to our destinations; and finally, offering the market's best professional guidance, service and support, including our own installation network, for which we now offer services covering in excess of 100,000 products in the DIY range, as well as our own last-mile delivery on the Home Furnishing side, which continued expanding its coverage during the quarter. This is our ecosystem. Turning to Slide 10, and just a few short comments on this slide. We reported total sales in excess of SEK 6.2 billion for 2019 and are now at an LTM sales level of SEK 6.6 billion with an EBIT margin that continues to expand up 10 points on an LTM basis from the previous quarter. Moving to the right-hand side. In addition to being the largest listed consumer online retailer in the Nordics, we are also European leader in the online home improvement space. Our geographic composition is well-balanced with Sweden remaining our single most important market, but with even stronger growth in the geographies in which we have more recently established ourselves. Turning to Slide 11. As we realized the gravity of the coronavirus pandemic and its associated uncertainties, our first focus areas have evolved around protecting our people and supply chain and securing the demand picture as well as our financial position, very briefly on each of these parameters, starting with people. We have adapted the measures to the specific circumstances of our various office and warehouse environments with the primary objective of ensuring safety and the secondary objective of securing business continuity. With these measures, we have managed to stay fully operational throughout all our geographies and sites, providing a safe work environment for our colleagues and a continued high service level to our customers. Moving on to supply. We very quickly took steps to secure product availability. These steps have included staying in close contact with our suppliers as well as selectively increasing inventory and securing alternative sourcing wherever possible. Furthermore, the breadth of our portfolio, among other things, secures that there is almost always a substitute product that we can offer our customers in the case of shortages. Next, demand. We did not see any negative short-term impact on our business in the first quarter and have not done so in the start of the second either as consumers in our markets have continued investing in their homes particularly through the online channel, which we dominate. We also believe that online retail in general and our categories, in particular, are well placed in a world in which the nesting or cocooning trend leads to a higher interest in and budget for home improvement projects. The underlying shift from offline to online continues, and I believe will accelerate as more and more consumers experience the benefits of shopping online. And finally, cash is always key. And our already strong financial position from the end of 2019 was further solidified in the quarter on the back of an excellent cash flow and with continued strong support from our financial partners. With that, I hand it over to Jesper, our CFO, who will walk us through the financials in more detail.

[Jesper Flemme, Acting Chief Financial Officer]

Thank you, Adam. We are very pleased with our performance in the quarter and not least the fact that we saw a fourth consecutive quarter of accelerating organic growth. As Adam mentioned, net sales increased 33.5% to reach SEK 1.628 million and organic growth reached 22.1%. The strong growth from the fourth quarter of last year carried into the start of the new year and, in fact, accelerated at the end of the quarter, putting us in a good position as we enter the second quarter. The top line development, coupled with gross margin improvement and discipline on the SG&A line resulted in the highest first quarter EBIT and EBIT margin to date. EBIT grew by 44.7% in the quarter to reach SEK 80 million. Key factors contributing to the strong EBIT included: one, operating leverage as a result of strong growth and disciplined SG&A; two, the private label share of sales in the Do-It-Yourself segment; and three, strong operational focus in both segments on curation and purchasing to optimize unit economics. Both segments grew rapidly and so strengthened their respective market positions and both segments contributed significantly to the bottom line. Finally, just as in the past 2 quarters of last year, we did not treat any items as affecting comparability in the first quarter. Next slide, please. Turning to some of the sales drivers in the quarter. The number of visits to the group's destinations increased by 63% to SEK 57 million, primarily driven by a sharp increase in the Eastern European business within the Home Furnishing segment. Orders rose by 35%, and the group's mix trended well also from an AOV point of view. We saw levels in the range we're aiming for, especially for bulky items, given the advantage this provides on a direct selling cost line. The decrease in conversion rates is a direct mix result of the rapid growth of the Eastern European business, which has lower conversion rates than the rest of the group. The overall AOV level remained essentially unchanged through a combination of an increase in the Do-It-Yourself segment and a slight decrease in the Home Furnishing segment, resulting from a higher share of small parcels in its Nordic business as well as continued rapid expansion in Eastern Europe where AOVs are structurally somewhat lower than in the Nordics. Next slide, please. We again enjoyed the quarter which saw a leverage P&L. The significant top line growth at 33.5% translated into an even higher gross margin increase at 40% and a further boosted EBIT increase at 44.7%. The strong performance in both segments contributed to lifting the gross margin by 1.2 percentage points to reach 25.8%, our highest gross margin to date. The pure product margin, which is the measure most commonly used by our listed peers, amounted to 37.6%. As you can see on the right-hand side of the slide, the improved gross margin trajectory from 2018 and 2019 continues also into this year. The main drivers for the gross margin improvement included roughly equal contributions from the 2 segments, Do-It-Yourself, primarily driven by a higher share of sales from our own brands and Home Furnishing, primarily driven by continued scale improvements and inventory management, translating to lower fulfillment and posted costs in relation to sales. Before turning to the segments, a note on currency effects, we have had continued margin headwinds from a depreciating SEK and NOK. However, we have been able to essentially fully compensate these adverse effects by price increases. Let us now turn to our Do-It-Yourself segment. Next slide, please. Net sales in the Do-It-Yourself segment at just above SEK 940 million grew by 36.7% in the quarter, and organic growth accelerated to 17.9%. Overall market conditions were quite strong throughout the quarter and, in fact, improved further in the month of March. Under these market conditions, the Do-It-Yourself segment expanded rapidly, and the numerous sales related records were broken, including the strongest first quarter sales to date. The Do-It-Yourself segment continue to consolidate its position as the leading online player in the Nordics through rapid assortment expansion, extending the range of installation services and expanding its share of own brands. The P&L in the Do-It-Yourself segment was nicely leveraged with the top line growth of 37%, translating to an EBIT increase of more than 115%, reaching SEK 39.2 million, which corresponded to an EBIT margin of 4.2%. Next slide, please. Net sales in the Home Furnishing segment grew by 30% in the quarter, reaching SEK 694.6 million, of which organic growth amounted to 27.6%. All geographies grew in the period, but growth was the highest in Norway as well as our Eastern European business. Overall market conditions for Home Furnishing was less favorable than for Do-It-Yourself. Preliminary data indicates that the total market decreased during the first quarter. This was seemingly driven by an offline contraction and online penetration likely increased significantly. Two developments affected performance negatively. The tough measures initiated in Denmark, to counter the spread of the coronavirus and the rapid depreciation of the SEK and NOK. The latter development was counted by price increases, which limited the adverse margin impact. Just as within Do-It-Yourself, assortment expansion is an important growth driver, and the segments range now extends to over 300,000 SKUs. The rollout of the last-mile logistics operations in Sweden is progressing according to plan, and we are now live in Southern Sweden. As a result of these developments, adjusted EBIT increased by 8% and reached SEK 44.6 million in the quarter, corresponding to an EBIT margin of 6.4%. Let us turn to cash flow. Next slide, please. Cash flow from operating activities amounted to SEK 148.3 million, the strongest contribution for first quarter to date. This corresponds to a cash conversion in relation to adjusted EBITDA of more than 100%. Cash flow from operating activities was mainly driven by the group's EBITDA during the period as well as a favorable working capital trend as a result of an improvement in current receivables and accounts payable in the quarter. The right-hand graph showing the development in liquidity walks us through the starting period position of SEK [ 207.3 ] million, adding the strong cash flow from operations, deducting the impact in investing activities, a majority of which is M&A related. And finally, the financing activities, which consist of a mix of amortization of leasing liabilities while funding the ongoing M&A agenda through an acquisition facility, bringing us to the period end SEK 366.3 million of liquidity at hand. Next slide, please. The group's net debt amounted to SEK 499.6 million at the end of the quarter. Our strong operating performance meant that net debt in relation to LTM adjusted EBITDA ended at 1.3x, an outperformance of the medium-term financial target range. Our financial position, thus remains solid. The cash flow from operations reflects our strong business model, on top of which we have unutilized credit facilities at the end of the period of SEK 529 million. Handing it back over to you, Adam to summarize and conclude.

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

Thank you, Jesper. So summarizing on Slide 21. Our position is strong also in these turbulent times. We confirm that the 4 key parameters we discussed earlier of people, supply, demand and financial position are all in good stead. Our growth in the quarter was the strongest on recent record, including organic growth of 22%. Our gross and bottom line margins are at good levels and continue moving higher on the back of a sound mix development and the culture of cost efficiency. Our financial position is strong with ample cash on hand, available undrawn credit facilities and a net debt-to-EBITDA that is currently outperforming our midterm financial target. Our strategy is in place and execution is ongoing, revolving around our 4 strategy pillars, which make up the BHG ecosystem. And finally, with strong total and organic growth as well as expanding margins, we are on the path to reaching our midterm financial targets, including reaching SEK 10 billion in net sales. This concludes our presentation, and we will now open it up for questions. Over to you, operator.

[Operator]

[Operator Instructions] And our first question comes from the line of Niklas Ekman of Carnegie.

[Niklas Ekman]

And sorry, I came in a bit late here. It's a busy day of reporting today. So maybe you covered this, but I would be very interested to hear some more about the COVID-19 impact. As you mentioned here that you don't expect any negative impact, but I was curious about the potential positive impact. You mentioned in the results, the cocooning effect and how that could benefit, particularly the DIY side. So if you could elaborate a little bit about this, at least towards the -- what you saw towards the end of March and maybe the beginning of April, if you have seen any material change in demand for DIY products during this period?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

Absolutely. Thank you, Niklas. So just first, taking a little step back. As you know, we are benefiting from the structural shift from offline to online. So we are working in a growth market as it is already. And we had a very strong 2019, and we were very pleased with the pace that we came into 2020 with. And as we did mention in the report, we had an accelerating performance, especially on the DIY side through the second half of March. And we're also briefly mentioning in the report that the pace and the good trading in both segments has definitely continued into the second quarter. So far, I would say that the combination of the structural changes that are ongoing with the impact of COVID-19 has led to an acceleration, especially within DIY in terms of growth numbers. But I would say on the Home Furnishing side, an acceleration in online penetration as well. So definitely, we have seen those effects.

[Niklas Ekman]

Excellent. And you don't care to quantify that effect. If it's -- I mean, how material are we talking about 5, 10 percentage points or what kind of magnitude of acceleration?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

Well, I think it's fair to say, as we have seen also in the market at large, that it's been a market acceleration, especially on the DIY side through the second half of March and into April.

[Niklas Ekman]

And as you said, you've seen the overall market has slowed for Home Furnishing, but that's not something you have seen in your sales because of increased migration. Is that the right way to see this?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

Absolutely. So in the quarter -- in the first quarter, we had a performance within Home Furnishing that was nicely and evenly distributed over the 3 months. And interestingly, we saw some impact on our showroom activity initially, especially in Denmark, as you know, which of the countries that we operate and put in place the most stringent measures to limit the spread of the virus. So we saw some impact. And then that actually eased up very nicely also on the showroom side.

[Niklas Ekman]

Okay. Excellent. And my second question was maybe how this impacts your acquisition ambition, travel restrictions, et cetera, it makes it more difficult to visit potential companies to acquire. Is this a more difficult environment to make acquisition, more difficult to get the funding for acquisitions? Or do you think that your short-term acquisition strategy is intact?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

It's definitely intact. And the fact that we stand so strong in these testing times improves, I believe, our position as the continued player that is consolidating this market. So if anything, I would say that our position has strengthened. And yes, as you say, there are some practical challenges with not being able to travel, but let's see how long -- for how long those are in place. But I would say, structurally, we are in a -- as strong a position as we have ever been, if not stronger, given that the world outside of BHG is struggling a bit now.

[Niklas Ekman]

Yes. Excellent. And can you elaborate a bit here on what kind of acquisitions you are looking for? Is it still strengthening mainly private label in DIY? Or what kind of areas do you see for future acquisitions?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

Well, the acquisitions that we did in 2019 and also Hemfint in the current quarter, are definitely the sorts of additions that we will continue to be scouting for. So companies that very clearly complement our presence and not least from a product portfolio point of view, including then with a strong interest in companies that have brands of their own, so similar to the acquisitions that we've pursued. Then of course, there are also acquisitions of a bigger nature that could be contemplated. But when it comes to the ongoing M&A agenda, I would say, our recent history is a good guide to how we plan to move forward.

[Niklas Ekman]

Excellent. And I'm curious also what's happening with prices for acquisitions right now? Is it on the one hand, the strong demand here, I guess, for a DIY and Home Furnishing is driving prices higher? Or is it on the contrary that some of your competitors are struggling with financing and therefore, prices are going lower?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

I think it's a bit early to say anything conclusively with it really only being 6, 7 weeks into the crisis. But I think that the latter factor will be the more decisive one. So I think, again, coupling our financial strength with the SEK 366 million in cash that we have now and significant undrawn credit facilities, I think we are in a stronger position relative to the market. And I think overall valuations of the sorts of acquisitions that we would be looking for should definitely not be going up in this market.

[Operator]

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

[Michael Benedict, Analyst]

I got a few, but I'll ask one at a time. As you mentioned last time we spoke that you had plans for 20% DIY private label share this year. And clearly, you're already there. Do you have a new target in mind for this year?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

The direction is to continue moving that number higher. We haven't reset our sites and we haven't quantified a new target. But the key thing for us on the DIY side is to continue having, by far, the broadest product portfolio in the market, consisting then of -- this mix of the majority still, I think, in the medium to long-term will be the strong external brand. But with a growing share from this level, 20% and up of good strong brands around that have baked out positions in interesting niches. So we haven't quantified it again, but we don't believe this is the end of the line for increasing the share that comes from proprietary brands.

[Michael Benedict, Analyst]

Great. And then happy to see the leverage in Home Furnishing direct selling costs. What's driving that, particularly given that the average for order values has fallen quite substantially in the quarter?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

So the line is a little bad, but I think the question is to do with Home Furnishing and average order values and margin development. Is that right, Michael?

[Michael Benedict, Analyst]

Yes, that's right. So just the leverage over sales and costs given the average order value has fallen substantially. And then yes, perhaps there's a follow-on to that, what's caused the relative margin business in that landscape given where you had strong gross margin in the quarter?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

Yes. So when it comes to the average order values, we are very pleased with the way they came in. And we do acknowledge, of course, that the headline value in Home Furnishing is down on the first quarter of last year. But there is a mix component there that is very important to keep in mind, and we've had strong growth in the portfolio that consists of less bulky items that are -- products that are shipped to service points, postal packages. And just as long as we have AOVs for the bulky items that hold up well, we continue to have that nice leverage on the direct selling cost line. So the immediate decline is primarily to do with the product mix, but also there's a geographic mix component affecting it where we have somewhat lower structural AOVs in the very rapidly growing Eastern European business, where overall economics are slightly different than in the Nordics. So we don't see sort of like-for-like AOVs going down. It's a mix effect partially from the Nordics, as I explained, and then with a strong growth in Europe -- Eastern Europe. And when it comes to the bottom line margins in Home Furnishing, we did mention in the report and Jesper also now in the presentation reiterated the fact that we had a pretty rapidly depreciating SEK and NOK during the second half of March. And the long-term development of currencies for Home Furnishing is not something we lose sleep over. But when we have rapid shifts, we also have to counter those rapidly with price changes. So we did that. And with the price changes, we managed to mitigate the impact. But nevertheless, with that sort of rapid change in currencies that did eat in to our margins a little bit.

[Michael Benedict, Analyst]

Okay. Great. And then I guess, are you also seeing your competitors increase slightly as a result of the declines in currencies?

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

So on the Home Furnishing side, as you know, price transparency is much lower than for the external brand portfolio on the DIY side. So it's our -- we have to base our answer on this on our market insights and it's less quantifiable. But I think one way of answering is that in spite of the very quick measures we put in place, especially in the Norwegian market with the NOK falling the quickest and steepest versus the euro and U.S. dollar. We actually expected to see some impact on growth as a result of the price increases, but we did not. So I think that implies that either there's a huge underpenetration online in Norway, I think that's part of the answer. But I think the other side of it is that our supply chain is similar to the other players' supply chain. So currencies, at least over a period of time, affect us all similarly, and then it's a question of how rapidly we act to counter them.

[Operator]

[Operator Instructions] And there are no further questions. Please go ahead, speakers.

[Adam Schatz, President, CEO & Head of Home Furnishing Segment]

Well, in that case, thank you all for dialing in. And we will speak again. Thank you.

[Operator]

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.