BHG Group AB

STO:BHG

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, everyone, and thank you for joining us on our conference call today to present Bygghemma Group Q2 Report 2019. 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 Martin Edblad, Acting President and CEO; and Adam Schatz, CFO. Both will be available on Q&A later in today's call. With that said, I now turn over the call to Martin.

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

Thank you, operator, and good morning, everyone. We are happy to present a record quarter for Bygghemma Group where we increased our total growth to 21% and posted our highest ever sales, EBIT, EBIT margin and cash flow levels. We've once again proven the strength in our business model and our leading market position. The agenda for this presentation 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 our CFO, Adam Schatz, who will walk you through the financials in more detail. Finally, after summarizing the quarter, we'll focus on your questions. But before starting, I'd like to highlight a couple of things. Firstly, I would once again like to highlight that we, from the 1st of January, have implemented a new accounting standard, IFRS 16, which has increased our balance sheet total by around SEK 360 million and have a positive impact on EBIT and EBITDA of around SEK 7 million and SEK 90 million, respectively, on a full year basis. In this presentation, like in the presentation for the first quarter, we'll however focus on figures excluding the impact from IFRS 16 in order to provide relevant comparisons against last year. Secondly, as of this report, Bygghemma Group introduces the measure of adjusted EBIT to further clarify the group's underlying profit generation and profitability. Adjusted EBIT replaces the term that was previously used, adjusted EBITDA. Adjusted EBIT corresponds to the operating profit adjusted for acquisition-related intangible assets and items affecting comparability. In other words, adjusted EBIT includes all depreciation and amortization arising from the ongoing business. The difference between adjusted EBIT and EBIT is that the amortization, which arises as a result of the accounting treatment of purchase price allocations in conjunction with acquisition, is added back to adjusted EBIT. By using the measure adjusted EBIT, we aim to simplify the analysis of the group's profit generation and profitability. The adjusted EBIT measure provides a correct picture of the group's operating results since it excludes the accounting-related amortization which arises from purchase price allocations in conjunction with the acquisition. Further, the measure simplifies peer comp analysis and companies -- and with companies that do not make acquisition and makes the analysis of acquisition opportunities clearer and more transparent, since the anticipated operating EBIT contribution of acquisition opportunities then corresponds to their actual EBIT contribution post consolidation. It is also important to note that the effect from acquisitions are already reflected in the group's capital structure and net debt. So having said that, let's start with the results highlights on Page 5. So we reported our best quarter ever by quite a wide margin. We posted our strongest quarterly sales to date, breaking the SEK 1.7 billion mark; our highest adjusted EBIT ever for the first time exceeding triple digits in one quarter; as well as our highest ever operating cash flow exceeding SEK 220 million. Consequently, we also further materially improved our position as the #1 online retailer in the European home improvement space. Sales in the period was mainly driven by the strong growth within the Home Furnishing division, which accounted for another quarter of improved ratios across the board, further underpinning the continuously strengthened momentum since the third quarter of last year. The DIY division also continued to perform strongly and improved its growth rate to 16%. This obviously means that we have heavily outgrown the market within both divisions in the quarter. Looking at profitability, we delivered an all-time high adjusted EBIT of over SEK 100 million, driven by a new record EBIT margin level in the Home Furnishing segment of 8%. The DIY division in turn also posted its highest EBIT level ever, with an EBIT margin in line with last year. Operating cash flow came in at SEK 224 million, which is the highest level ever, translating to a cash conversion of 201%, proving the capital efficiency in our negative working capital business model. The performance within both divisions were driven by the fast structural shifts in market from off-line to online sales as well as by group market share gains and successful M&A. The EBIT margin increase were driven by, amongst others, improved unit economics from our systematic work to push high-ticket items, thereby increasing average order value across the board. If we then turn to Page 7, I'd like to start this section by repeating a few key facts about our business. So 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 in the Nordics after groceries and clothing. The online share of the home improvement market is expected to double in size over the next 5 years, thereby increasing from today's SEK 20 billion to approximately 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 5.5 billion and an EBIT margin of 4.7%, which makes Bygghemma Group the largest listed consumer-focused online retailer in the Nordic. And in addition to our fast growth, scale and dominating online position, we also have a market-leading profitability and cash conversion. Looking back on the past 3 quarters, we can conclude that the group's performance has met our expectations and that the momentum has grown ever stronger. The group's core strategy and operating focus remain in place and can be summed up as follows: a continuous drive for category leadership and expansion, mainly organic, but also augmented by acquisitions; a cost and infrastructure position that allows us to match lowest market pricing while maintaining strong operating margins and cash generation; and offering a great customer experience through best-in-class online and technical capabilities. Going to Page 8, shortly on our most recent acquisition, we acquired Lampgallerian in the second quarter, which is a leading pureplay online retailer in Sweden for indoor and outdoor lighting. This acquisition is meant to work as a catalyst for category leadership and growth within the Home Furnishing division in total. So with that said, I hand over to our CFO, Adam Schatz, who will walk you through the financials in more detail.

[Adam Schatz, Chief Financial Officer]

Thank you, Martin. Turning to Slide 10. Our second quarter continued the strong development from the first quarter of the year as well as the last quarter of 2018. Net sales increased 20.5% to SEK 1.7 billion. Organic growth picked up further and amounted to 8.6%. And pro forma organic growth, which includes the performance of recent acquisitions as this typically accelerates once they join the group, amounted to 11.2%. The key metrics on the right-hand side of the slide further explain the top line developments. The number of visits to the group's web stores increased by 46% to 44 million in the quarter. Orders rose by 8%. And just as in the first quarter, we succeeded in further increasing the average order value, which stood 15% higher, more than compensating the associated moderate decrease in conversion rate. The ongoing work with curation, coupled with UI, UX and smart technology, again succeeded in driving a mix improvement towards higher ticket items. The effect on unit economics through lower transportation costs as a percentage of order value is a strong margin contributor. And so it is worthwhile reiterating the mechanism which we explained in the Q1 presentation. Next slide, please, illustrating the importance of average order value. The graph on the left-hand side shows the kick to gross margin from high order values, starting at SEK 3,000 and increasing by SEK 250 at a time. In this example, we have assumed fixed transportation costs and that the other cost of goods vary with net sales. As you can see, a SEK 500 or 17% increase in average order value translates to an increase almost twice as high in gross margin of 30%, corresponding to a 2 percentage point increase. Turning to the next slide. So the realized effect of the increase in average order value contributed to the strongest gross margin we have experienced in the second quarter of the year of 23.3%. In addition to the increase in average order value, improved pricing and product procurement, low return rates and a good increase in ancillary revenue streams further contributed to the strong margin. Seasonality explains why the gross margin was somewhat weaker in the second quarter than in the first. As in the second quarter -- the second quarter is characterized by a higher proportion of DIY and outdoor furniture sales as well as sales campaigns. The group made some targeted investments and primarily into the IT and infrastructure as well as marketing areas. And SG&A came in at 16.7% of net sales in the quarter. There are some items included in SG&A such as online marketing and costs associated with handling peak demand in customer service, which correlates to sales development. Overall, however, the group has now laid the foundation and has the right base structures in place to benefit from scale effects, which will allow net sales to grow at a faster pace than SG&A in the coming periods. The record top line, combined with a strong gross margin and tight control of the targeted IT and infrastructure and investments, translated into the highest adjusted EBIT to date of SEK 100 million. So let's now turn to the segments, starting with DIY. The next slide, please. With record-high net sales of SEK 1.046 billion, the DIY segment accounted for 61% of the group's net sales in the second quarter. The second quarter is seasonally the strongest quarter for the total DIY market, i.e., online and offline combined. We continue to follow the developments of the total market for DIY products closely and note that some of our off-line competitors are pointing to a slowdown in the overall market. Be that as it may, the online segment is less sensitive since total market fluctuations are offset by a strong continued shift away from off-line to online destinations. Our performance in the quarter thus makes it clear that we have continued to expand our market share. The DIY segment grew net sales by 16% in total, and organic growth amounted to 9% in spite of the fairly steep comps of last year owing to the exceptional weather conditions in the summer of 2018. We also saw growth picking up markedly during the latter part of the period, including a good finish to the weekend ending the quarter. We believe that this strong momentum positions the segment well ahead of the third quarter of the year. The segment reported its highest ever adjusted EBIT in the quarter of SEK 51.8 million corresponding to an adjusted EBIT margin of 5%. Next slide, please. The Home Furnishing segment developed very strongly in the period and grew net sales by 28% to SEK 670 million, which corresponds to 39% of the group's net sales. The sales composition was well balanced, with outdoor furniture, as always, an important component in Q2. But with indoor furniture, furniture and furnishings are also performing well. Organic growth increased for the third consecutive quarter and amounted to 7.8%. Furniturebox continues its step-by-step recovery following the platform change. And all our other major destinations, including the recently acquired ones, are showing a strong performance. 10 months after the launch of our own last-mile project, the infrastructure is now well established in the Greater Stockholm and Gothenburg area, and the Öresund region is next in line. As communicated previously, implementation costs charged to the first quarter amounted to SEK 5.8 million, and we did not charge any costs to the project in the second quarter. We reiterate that the total costs associated with the last-mile project will not exceed SEK 15 million in 2019. Just like the DIY segment, Home Furnishing reported its highest ever adjusted EBIT in the quarter, growing 87% to SEK 53.8 million. But the segment also reported its highest adjusted EBIT margin to date of 8.0%. The favorable margin trajectories in both segments corroborate the feasibility of the group's medium-term profitability target, which is set at an adjusted EBIT margin of 7%. Let's now turn to cash flow. Next slide, please. Operating cash flow in the period amounted to a record SEK 224 million corresponding to a cash conversion rate in excess of 200%. Bygghemma business continues to be cash flow rich with a negative working capital requirement as well as relatively low CapEx needs. Our full year target for cash flow conversion remains at 100%. The higher conversion rate in the quarter is attributable to the strong top line development as well as seasonality. A portion of the inventory buildup of the first quarter and in part for outdoor furniture has now been turned over. The right-hand graph showing the development in liquidity walks us through the starting period position of SEK 227 million, adding the strong cash flow from operations, deducting the impact of investing activities, and majority of which is M&A-related; and finally the financing activities, which were impacted by our decision to amortize the revolving credit facility, bringing us to the period-end SEK 282 million of liquidity. Next slide, please. The group's net debt amounted to SEK 358 million at the end of the quarter. Our strong operational performance as well as a measure of seasonality with regards to the inventory position, as explained earlier, meant that our net debt in relation to LTM-adjusted EBITDA ended at 1.2x, outperforming the group's medium-term financial targets. Our financial position remains solid. Cash flow over the year's 12 months will reflect our strong business model, on top of which we have unutilized credit facilities of SEK 456 million and a strong relationship with our banks. Handing it back over to you, Martin, to summarize and conclude.

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

Thank you, Adam. So to summarize on Slide 18. The second quarter further underpins our position as the European online champion within the home improvement space, driven by our superior Nordic online market position with a close to 30% market share. We posted our best quarter ever both in terms of sales and EBIT, but also in terms of the EBIT margin and cash flow. This was achieved on the back of numerous operational improvements throughout the group's value chain, ranging from purchasing online capabilities, which, amongst others, resulted in higher average order values and related improvements in unit economics. Our record cash flow also meant that we reported our lowest net debt ratio ever, giving us ample room for continued M&A. So all in all, this leaves us in an excellent position as we enter the third quarter of 2019. So that concludes the presentation, and then time for your questions. So please go ahead.

[Operator]

[Operator Instructions] The first question we received is from Michael Benedict from Berenberg.

[Michael Benedict, Analyst]

I've got a few, but I can go one at a time if easier. You mentioned a strong last weekend in DIY. Do you expect to see a sort of positive calendar effect flowing into Q3 in that segment?

[Adam Schatz, Chief Financial Officer]

Yes, we do. So the second quarter is our strongest quarter seasonally. And with that quarter ending on a Sunday, and that by necessity means that there will be an overhang going into Q3, so it won't be all too materially impacting. But certainly, it will benefit quarter 3 to some extent.

[Michael Benedict, Analyst]

Great. Second one is growth in Sweden remained relatively subdued in Q2. Could you give some color on the headwind you're seeing the -- perhaps from the housing market? I know there's some commentary in the statement. And how you expect Swedish growth to develop going forward.

[Adam Schatz, Chief Financial Officer]

Yes. I mean we do see a headwind looking at the total market, which we comment on. However, looking at the online market that we see it or growth in online, we say that we see a continued structural shift from offline to online, so we have not seen historically because we think it has been in total market for some time. We have not seen that we've been materially impacted. And basically, we see in statement is that we don't foresee that moving forward either.

[Michael Benedict, Analyst]

Okay. So is there anything else that's holding back growth in Sweden?

[Adam Schatz, Chief Financial Officer]

No. We're -- I think we've seen a quite nice growth in Sweden. And especially taking the fairly tough comps into consideration since the high temperatures and the weather last year will benefit in Q2 in April and May, and then this will be the opposite effect in Q3.

[Michael Benedict, Analyst]

Okay. Great. And just one last one, if I may. Do you still expect to see that Furniturebox traffic get back to normalized levels in Q3? I think it was mentioned in the statement, unless I missed it.

[Adam Schatz, Chief Financial Officer]

Yes. We still expect Furniturebox to bounce back, to get back on par sometime during Q3 and moving forward.

[Operator]

[Operator Instructions] As there are no further questions now, we got a follow-up question from Michael Benedict.

[Michael Benedict, Analyst]

Oh, sorry. If no one else is going to ask, so I thought I might take the time to. So in term -- you mentioned lower return rates during the call. Is that an ongoing trend, do you expect? Or do you think it's just a short-term thing?

[Adam Schatz, Chief Financial Officer]

So we've had low -- relatively low return rates looking at competitors. So that's basically part of the model we operate. But we have also seen a relatively significant improvement in those return rates in the past 2 quarters. So we're very pleased with that development. And there are many tangible benefits arising from it, including financial, of course, but also environmental aspects.

[Michael Benedict, Analyst]

Yes, makes sense. And is that as a result of certain initiatives that you've implemented? Or is it a market-wide sort of improvement in return rate?

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

Well, I mean we certainly hope that it arises from initiatives we've taken, but it's also part of the segments that we operate within. I mean there are structurally lower return rates within both DIY and Home Furnishing compared to, for example, fashion or other areas.

[Michael Benedict, Analyst]

Yes.

[Adam Schatz, Chief Financial Officer]

So I'd say, also, to the extent that our improvements in UI/UX curation product descriptions, et cetera, all of those factors also contribute to the low return rate.

[Michael Benedict, Analyst]

Yes. Also, I don't know how many questions I'm allowed to ask moderator. But if no one else is going to ask. So that conversion rates were down in the period. Anything driving that?

[Adam Schatz, Chief Financial Officer]

So this is directly associated with our conscious push towards higher average order value. So it links intimately to curational aspects. And it's not like we're driving for lower conversion rates. But we -- certainly, we'll take that as a result, as long as that is more than fully compensated by the increase in average order value, which it is.

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

And as part of our systematic work to push higher tickets.

[Michael Benedict, Analyst]

Yes, makes sense. And just one last one this time. Adjusted EBIT, the prior year comparative was the same as adjusted EBITDA, are they the same measure?

[Adam Schatz, Chief Financial Officer]

Yes, they are. They are the same measure. And we decided for this second quarter to both change the terminology because we've experienced over and over again that applying the term adjusted EBITDA created confusion in the markets where it was typically interpret it as EBIT excluding any amortization. Here as -- of course, you know, Michael, that it only excludes the acquisition-related amortization. So we decided to change the terminology, but we also made sure that this change in terminology was fully explained both in this call, but also in the quarterly report. There is a reference to the change in a few places as well as a longer explanation in the reconciliations section.

[Operator]

[Operator Instructions] As there are no further questions, I hand back to the speakers.

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

So thank you. That concludes the presentation. Thank you for participating, and goodbye.

[Operator]

Ladies and gentlemen, this now concludes our conference call. Thank you for attending. You may now disconnect your lines.