BHG Group AB

STO:BHG

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to BHG Q1 report. [Operator Instructions]Now I will hand the conference over to the speakers, CEO; Gustaf Ohrn, and CFO; Jesper Flemme. Please go ahead.

[Gustaf Ohrn, executive]

Thank you. Please take me to Slide 2. My name is Gustaf Ohrn. I'm the CEO of BHG. I'm here together with Jesper Flemme, our CFO, to do a short presentation of the Q1 report, and then we'll do our very best to answer your questions.

Please take me to Slide 3. Today's agenda in short, we will first take you through the financial highlights of the quarter, and then we will say a few words about the market and our actions to mitigate a challenging quarter. Then Jesper will give you a financial update, and I will in the end, do my very best to try to summarize all of this, and then we will be available for the Q&A.

Please take me to Slide 4. Starting with the financial highlights. As we guided already on the 21st of March, Q1 was a very tough quarter. Sales came in at SEK 2.6 billion, a decline of about 16% in a very soft market that was weaker than we expected in our outlook given after Q4. As you have heard from others, cold weather in March, typically our largest month in the first quarter also affected sales negatively.

In summary, and based on the data points we have, we estimate that we did better than the overall market in the first quarter. Profitability was weak in the quarter but improved during the quarter and came in at minus SEK 69 million and somewhat better than the guided range of minus SEK 70 million to minus SEK 105 million that we communicated on the 21st of market. Jesper will talk more about this, but the main reason is weak demand, and this in combination with high inventories leading to price pressure in the market, also putting pressure on the gross margin.

Highlighting the positives in the quarter, our cash flow improved and we reduced our inventory further. With that said, the ambition is to reduce it further. And in the coming quarters, and I will come back to that in a minute.

Please, Page 5. Here you can see our organic growth development in the last few years and also covering the crazy growth during the pandemic. As you all know, we are now in a contracting market after massive changes to the market conditions in 2022, affecting both supply and demand, but with very different timing. As I mentioned, demand in the first quarter was very soft. The concern for increased cost of living that has affected consumer confidence since last summer, now also became a reality with disposable income shrinking at a high pace, driven by rents and electricity. Demand was especially weak in the capital-intensive big-ticket categories as windows, doors, floors, et cetera. It's a challenging time, and we expect the market to remain challenging throughout 2023. However, we believe that the price pressure will decrease as inventory normalizes after Q2, Q3 and it should also be noted that our comparative numbers are gradually getting lower throughout the year.

Page 6, please.. Given the challenging market and the outlook for 2023, we have taken several actions to respond to the situation, and we are convinced that our efforts are gaining traction, and we are starting to see results, but also that more will be needed. We communicated our revised strategy back in Q3 last year and the structural changes that we are making. We are focusing on simplifying BHG and to realize synergies. We have a portfolio of many companies. And from the 1st of January this year, we have implemented the new structure with 3 new business units to better realize synergies. And I'll come back to the structural changes we are implementing for each business unit in a minute.

Our cost saving plan with a target of SEK 150 million to SEK 200 million is on track, but as communicated has not yet had full effect. This is primarily related to organizational and warehousing costs, and we can already see some positive effects. As an example, it is positive to see that our inventory handling cost is down relative to sales in the quarter. However, given the current demand situation, it is clear that our announced cost-cutting program would not be sufficient, and we are in the process of identifying additional cost-saving measures, both at group level and in our companies.

Reducing our inventory to improve cash flow is one of our top priorities, and I'm pleased to say that we reduced inventory by a further SEK 90 million in the first quarter and that we in the last 3 quarters have reduced our inventory by more than SEK 400 million in total. Our ambition is to free up a total of SEK 600 million in the full year of 2023, meaning an additional plus SEK 500 million in the 3 quarters to come. Our liquidity position improved in the quarter and remains strong.

Spring is finally here and with it, the important outdoor season. We feel that we are well prepared with capacity offerings and the Q2 and Q3 is where we should see more effect from both inventory reductions and cost savings. We are working super hard with multiple operational actions to drive sales in this very challenging market, and this includes things as revised price communication, optimizing price matching and strategic pricing, working in our UX to drive conversion, optimizing our online marketing, driving intercompany sales between our entities and where we can do it cost efficiently continue our expansion through both internationalization and external marketplaces.

Slide 7, please. Let me give you a brief update on some of the structural changes we are currently working on to make BHG better and stronger for the long term. The aim with these changes is to reduce complexity, realize synergies and secure scalability. First, home improvement, which is basically our do-it-yourself business. This is our biggest segment and mainly based on the drop ship model with Bygghemma Sweden as its lead brand. Here, we have initiated the work to consolidate our Nordic home improvement business, apart from securing synergies, the main initiative here is investing in tech to enable both current and future consolidations and scalability.

We have, in most of these entities now also implemented sales force, a customer data platform enabling marketing automation and already now covering some -- approximately 70% of sales in this business unit. Warehouse consolidation is ongoing to reduce footprint, for example, FEMA, holding stock and inventory for Big Hammer Swede Sweden. In Value Home, our second largest segment, we are also upgrading the tech platform in HFM to better enable the customer experience on site, but also to reduce the running development cost and going forward, enable consolidation and scalability in the Value Home segment. We're also in the process of reducing retail footprint in this business unit.

And finally, in Premium Living. The investments that we did last year in warehouse automation when we implemented out-of-store has lower than handling cost per order. The next space in the automation will be operationally ahead of the big sales period in the first quarter. The international expansion for Nordic Nest continues. Now with almost 40% of the sales in this segment coming from outside the Nordics and despite the tough market environment showing very strong traction in some of the international markets. It should also be mentioned that on a general level, we are not ruling out selling businesses or eliminating categories or businesses that are either unprofitable or where we see limited potential or being too far from our core business.

Please, Slide 8. I thought I would also give you some examples of some of the actions we have taken and some of the things we are currently working on to consolidate and simplify our business. Starting with Home Improvement. We have consolidated Polarpumpen into Bygghemma. It's basically a full-blown integration of both tech organization. We have also consolidated our Finnish platform, which were basically 4 businesses into 1 and also as part of this closing down one of the operations in Edututor. And we already during this fall consolidated f Nordiska Fönster into Hafa, thereby creating what we call the Hafa Group, and we're now in the process of integrating LSBolagen into this Hafa group.

We're also in the process of consolidating Vitvaruexperten and Vitvaruexperten into one entity, doing one organization, but running the 2 sites. And we have, as mentioned in Q4, closed down Stonefactory, which was a nonprofitable entity, and we managed to integrate the majority of the business into Bygghemma. In Value Home, on the more structural changes, we have consolidated the 7 entities that made up MyHome into one entity that is now our furniture business in Denmark in retail and online. We've also closed down Wegot, which was one of HSN's -- HFM's operational entities.

And finally, in Premium Living, as we mentioned before, we have consolidated Svenssons and Nordic Nest into what we call Nordic Nest Group. And thereby created a vehicle future consolidations in the premium segment. And this just being some examples of what we have done and are currently doing and it is also fully clear that we have more work to do in this area.

And with that, I'll hand it over to Jesper to go through the numbers. Jesper, please?

[Jesper Flemme, executive]

Thank you, Gustaf, and go to Slide 10, please. As Gustaf said, the market conditions continue to be very difficult in the first quarter, and the market was softer than we expected in our outlook in Q4. Net sales decreased 15.9% reaching SEK 2.6 billion. Organic growth was minus 16.8% and pro forma organic growth minus 15.5%. I will go through each of our new segments in a minute, but all 3 segments saw net sales decline in Q1.

Adjusted EBIT amounted to minus SEK 69 million. This was somewhat better than the range we had guided for and corresponding to an EBIT margin of minus 2.6%. The EBIT margin was negatively impacted by price pressure in the market due to very weak demand and high inventory levels.

Turning now to Page 11 and the development in the segment. The weak demand affected all our segments in the quarter, but in different ways. In Home Improvement, demand was especially weak in Sweden, the largest market, the trend where capital-intensive categories such as doors, windows of floors, had a weakest development continued in the quarter as consumers experience higher cost of living and quickly shrinking disposable incomes. Net sales in Home Improvement declined by 22% in Q1. Profitability negatively impacted by weaker gross margin and decline in sales as fixed costs have not yet been adapted to the current demand situation.

In Value Home, our private label business, the Swedish market was especially challenging, and the cold March had a negative effect on the sale of outdoor furniture, mainly in Sweden and Germany. Net sales in value Home declined by 14% in Q1, weak demand and intense competition, pressured gross margin for the quarter. There was some effect from the work to reduce fulfillment costs in the quarter. Finally, in Premium Living. Net sales declined by 7% in Q1, but the markets outside the Nordics developed strongly and grew by 11% ended the quarter. Intense campaign activity put pressure on the product margin, to some extent, offset by lower fulfillment cost for warehouse automation in the fourth quarter last year.

Slide 12, please. The product margin in the quarter was 1.9 percentage points lower than in Q1 last year and was negatively impacted by price pressure in the market as a result of weak demand and high inventories in the market. Inventory handling cost was lower as we see results from our cost-saving initiatives. Last mile and other direct selling cost was negative, mainly driven by elevated fuel prices for last-mile delivery. Marketing cost was again positive in the quarter. We had lower marketing costs and cost per click reduced further, a trend that started in the second quarter last year. The increase in organizational costs from same period last year is a result of weak sales and currencies, adjusted for effects from acquisitions and currency, salary-related costs are down.

As Gustaf mentioned, we are executing on cost reduction initiatives to adjust our fixed cost base to the lower demand, and these cost savings have yet not had a full effect. Finally, the increase in depreciation and amortization in relation to sales was primarily driven by weak sales and costs related to lease agreement. All in all, our EBIT margin amounted to a very disappointing minus 2.6% in the quarter. We have turned to something more positive, our cash flow.

Slide 13, please. Cash flow was positive in the quarter. Our cash flow from operating activities improved significantly compared to last year and amounted to SEK 211 million, positively impacted by changes in working capital as a result of inventory reduction and accounts payables during the period. Reducing inventory continues to be key to improving our cash flow. We're happy to say that our inventory was reduced by a further SEK 90 million in the first quarter, bringing the total of the 3 last quarters to over SEK 400 million.

The work to reduce inventory continues. And in 2023, the ambition is to reduce the inventory by SEK 600 million for the full year. The right-hand graph showing the development in liquidity walks through the starting period position of SEK 478 million, adding the cash flow from operations and the impact of investing activities, which are mainly IT investments; and finally, deducting the financing activities, which includes proceeds from the share issue in December, amortization of leasing liabilities and interest payments, bringing us to the period end, SEK 590 million of liquidity at hand.

Slide 14, please. The group's net debt amounted to SEK 1.4 billion at the end of the quarter, and net debt in relation to LTM adjusted EBITDA ended at 4.82x due to the weak profitability in the quarter. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 1.3 billion. At the end of Q1, the group has fulfilled all financial covenants. BHD is engaged in a dialogue with its bank partners to ensure the group's access to continued financing through credit facilities. The Board's assessment is that there are good prospects for reaching a solution, albeit at a higher cost. As I mentioned, our ambition is to reduce the inventory by SEK 600 million for the full year 2023 and announced cost savings should have effect on the P&L over the remaining quarters of 2020.

With that, I will hand it back over to you, Gustaf to summarize and conclude.

[Gustaf Ohrn, executive]

Thank you very much, Jesper. I'll do my very best to summarize this. It is a very challenging market, and we expect it to remain challenging throughout the year. Price pressure may ease as inventories in the market decrease after Q2, Q3 and also our comps will be easier. We are prioritizing cash flow and profitability, and we also put our focus on operational short-term actions to drive sales in this challenging market. We have revised our strategy to simplify structure and to better facilitate synergies. We are taking major steps in all business units by making structural changes, and we will continue to simplify the group.

We are reducing our costs as planned, and we are in the process of identifying additional measures and our inventory reduction is on plan with the ambition to reduce inventory with SEK 600 million in the year of 2023. The inventory reductions we have done have improved the liquidity position and will further improve as we continue to reduce inventory. The structural trends that have built BHG to what it is, remains intact. I'm talking about primarily the migration from physical to the digital channel and the continued interest in our home and home environment. We are confident that we have a good prospect for returning BHG to the profitability and the cash flow we delivered in the years before the pandemic as a first step. Thank you very much and looking forward to your questions.

Operator, we are ready for the Q&A, please. Thank you.

[Operator]

[Operator Instructions]

[Benjamin Wahlstedt, analyst]

This is Benjamin Wahlstedt from ABG. I was wondering if you could talk a bit about March specifically, please. The reported adjusted EBIT is obviously in the better end of the guidance. And just about every other company who can credibly blame bad weather do so. So what happened in March? How come you were able to realize that strong margin in adverse maybe perhaps weather conditions?

[Gustaf Ohrn, executive]

In March, as has been stated by other reporters, yes, the weather was difficult. We should also say that when we made our guidance, it was sort of just after the mid part of the month, and there's still a lot of uncertainties. So that's probably the best answer I can give you that March came out slightly better than anticipated, but I would also admit that the weather conditions was challenging.

[Benjamin Wahlstedt, analyst]

Could you point to any sort of cost line that might have been better than expected in March?

[Jesper Flemme, executive]

No. I mean the truth is that March is such a big part of the Q1 results. So before you have closed March, you really don't know.

[Benjamin Wahlstedt, analyst]

Yes. Yes. Perfect. Okay. And then you also very forward leaning on inventory cash release, I believe. How much of the SEK 600 million you expect to be able to sell, is it related to summer season products, please?

[Jesper Flemme, executive]

I don't have an exact number, but the majority will be related to sales in Q2 and Q3 and the seasonal product.

[Gustaf Ohrn, executive]

A significant part is summer product, I would say.

[Benjamin Wahlstedt, analyst]

Yes. Perfect. And on the previously announced cost savings initiatives, you expect to save SEK 150 million to SEK 200 million on an annual basis, how much do you think is realized already? And how much do you think you'll be able to realize in total, if we could get just an update on how that's going, please?

[Jesper Flemme, executive]

I think we are in accordance with plan. And as we've said before, it's roughly a split of 40% in the first 6 months and 60% in the second half of the year. With that said, 12 months ago, we were still building organization, and that is one of the reasons the efforts is not to be seen in the P&L in Q1. But I think we are on track, and the results will come in Q2 and Q3, Q4.

[Benjamin Wahlstedt, analyst]

All right. Perfect. I think those were my questions right now. So I'm happy to leave to someone else.

[John Backman, executive]

Thank you. This is John, IR at BHG. I've received 2 questions in writing from Magnus at Kepler Cheuvreux. So the first one is because our Cost Per Click has been down, do you see further opportunities to reduce marketing spend ahead provided that the positive effect annualizes from the second quarter. That is the first question.

[Gustaf Ohrn, executive]

Yes. I would say that there's opportunities to do that. We are spending a lot of efforts in trying to become more efficient in our online marketing with, to some extent, moving from bidding on cost of sales to bidding -- on profit bidding. We see some positive effects from that. So yes, I do see potential for lowering that further as well. It's something we're continuously working with and spending a lot of effort on.

[John Backman, executive]

Thanks. And the second question is, do you expect to close a new agreement with lenders ahead of the expiring of temporary relief on covenants.

[Jesper Flemme, executive]

We will not speculate about timing. But just to repeat, -- we are compliant with all covenants in the financing agreement, but given that we have reported a loss in Q1, it's very easy to see a scenario where we will breach, but it's not the only scenario. And that is also why we are engaged in a dialogue with our bank partners. And as we have stated, we are confident that we will find a solution.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Unknown Executive]

Thank you very much for listening. And if you have any questions, please refer to us. Thank you. Bye.