BHG Group AB

STO:BHG

Earnings Call Transcript 2020-Q2

[Operator]

Thank you for joining us on our conference call today to review BHG's Second 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, President and CEO; and Jesper Flemme, acting Group CFO. Both will be available for Q&A later in today's call. With that said, 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. Moving to Slide 3, please. We are happy to share the highlights of the second quarter with you, a quarter in which our business saw a significant acceleration on what was already a strong first quarter of the year. With both our segments, DIY and Home Furnishing performing well, the second quarter, in fact, developed into our strongest to date. Today's agenda follows that of our recent earnings calls and is divided into 5 sections. We'll start with the results highlights, followed by a business update. I'll then hand it over to Jesper, who will walk us through the financials in more detail, after which I will summarize the quarter. We'll then end the call with a Q&A session. Slide 5, please. The second quarter is our seasonally strongest one. This time around, our normal peak season combined with changed consumer behaviors in the wake of the corona pandemic, including consumers spending more time at home, realizing that they will travel less for some time to come and discovering the benefits of shopping online. That is what I would call the usual benefits such as an unrivaled assortment at the best prices delivered to your doorstep, but now also the added benefits of not having to unnecessarily risk contracting the virus. All of this, in turn, resulted in a higher share of wallet going to products for the home than usual. As the online leader in home improvement, BHG was well placed to benefit from these developments. Net sales came in at SEK 2.7 billion, which corresponded to total growth of 58% and organic growth of 42%. We recorded an adjusted EBIT of SEK 233 million, translating to an adjusted EBIT margin of 8.6% and delivered by far the strongest quarterly cash flow from operating activities to date, amounting to SEK 605 million. BHG's financial position is now stronger than ever and allows us to execute our organic growth initiatives robustly while combining these with a continued active acquisition strategy. Commenting briefly on segment performance, more on this later. While the Home Furnishing segment had a strong quarter, it was, to a large extent, a continuation of what the segment delivered also in the 3 previous ones. Rather, it was the DIY segment, which experienced an exceptionally strong demand, clearly boosted by the changed consumer behaviors that I already mentioned, with growth figures for many of its constituent businesses of well over 100%. Although we expect to return to more normal growth levels, the demand we experienced was quite constant over the 3 months of the quarter, and the third quarter also started well. Slide 6, please. From inception, our strategy has included being the consolidator in the growing online market for home improvement. The group sales growth of more than 40% per annum in the past 5 years is a result of combining organic growth initiatives with consistently adding new businesses under the BHG umbrella through acquisitions. When it comes to organic growth, we are now reporting our fifth consecutive quarter-on-quarter increase, following up last quarter's 22% with this quarter's 42%. And the 42% number at group level was comprised of an organic growth of 32% in the Home Furnishing segment and 48% in the DIY segment. As always, there's a lag between our reporting and when we can gain more comprehensive insights into overall market developments. However, judging by preliminary data, the picture that we see, just like in the first quarter of the year, is one of a continued increase in online penetration, especially for furniture and home furnishings, for which we believe the offline market was soft. On the DIY side, there's plenty of evidence that the total market, which started turning around already in the fourth quarter of 2019, grew strongly. Still, with total growth of 58% and organic growth of 42%, we are convinced that we further strengthened our leading market position. Slide 7, please. Our strategy remains focused on 4 cornerstones. Firstly, a continued expansion of our leading product range. Our portfolio is now approaching 1 million unique products. Secondly, scale and a high share of own brands in our sales mix. With a strong growth in the quarter, we continued building scale advantages and the significant share of the growth in the DIY segment came from our own brands, both those which we have developed organically and those which have been added through recent acquisitions. Thirdly, we are creating the most appealing shopping experience and dominating digitally. We grew our digital footprint significantly in the quarter, seeing more than 90 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 under 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 9, please. Briefly on this slide, we reported total sales in excess of SEK 6.2 billion in 2019 and are now at an LTM sales level of SEK 7.6 billion, with an EBIT margin that continues to expand. Moving to the right-hand side. We're the European leader in the online home improvement space and our geographic composition is well balanced, with Sweden remaining our single most important market, but with even stronger organic growth in the geographies in which we have more recently established ourselves. Slide 10, please. In the first quarter earnings call, we concluded that our business was well placed to navigate the uncertainties of the pandemic. Our performance in the second quarter now backs this conclusion up. We, of course, continue monitoring and managing developments closely. With regards to people, we're continuously adapting the measures to the specific circumstances of our various office, warehouse and showroom environments with a primary objective of ensuring safety and the secondary objective of securing business continuity. The measures are effective and continue allowing us to stay fully operational. With regards to operations, we worked hard in the quarter to handle various aspects linked to the exceptional demand. This has included managing inventory optimally, working closely with our logistics partners and adding customer service capacity along the way. However, sales within some categories such as the Garden one, was somewhat held back by select product availability issues. Further, some of our logistics partners initially struggled to meet the higher volumes, and this also led to a heavy load on our customer service teams, particularly at the start of the quarter. We have now made good progress on working through the backlog that arose. Moving on to cash. We had a record cash flow in the quarter, resulting from the combination of the exceptional growth and our asset-light business model. This provides us with ample strategic flexibility moving forward. When it comes to demand, clearly, the DIY segment has been positively affected, and demand within the Home Furnishing segment has at least not been adversely affected. With the progress achieved in the second quarter, we believe that we have established a new base from which we will continue growing. And finally, linked to demand, online migration. The underlying shift from offline to online accelerated in the quarter, especially within the home furnishing market, and this shift is set to continue. All in all, 4 months into the pandemic starting to affect Europe significantly, it's clear that overall, our business has benefited from a higher share of consumers' wallets. Uncertainties around how the pandemic will evolve remain, but we feel confident that we're well positioned in the face of this uncertainty. I'll now hand it over to Jesper, who will walk us through the financials in more detail.

[Jesper Flemme, Acting Chief Financial Officer]

Thank you, Adam. The exceptional demand that we saw at the very end of the first quarter continued throughout the second quarter. As Adam mentioned, net sales increased 57.7% to reach SEK 2,695 million and organic growth reached 41.8%. On the back of the extraordinary growth, we reported the highest EBIT and EBIT margin to date. EBIT grew by 127.6% in the quarter to reach SEK 232.7 million, corresponding to an EBIT margin of 8.6%. The high adjusted EBIT margin was the result of, one, a disciplined execution of pricing and product mix strategies, including the continuously growing private label share of sales in the digital sales segment; and two, operational leverage as a result of the exceptional growth; finally, just as in the past 3 quarters, we did not treat any items as affecting comparability in the second 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 110% to 92 million, generating 893,000 orders during the quarter. The strong trend in the number of visits to the group destinations, which reached an annual rate of more than 350 million, was also the reason for the slightly lower conversion rate. The group's sales mix changed during the period. Among other things, because of the sharp growth in product categories with slightly lower AOV as well as growth in Denmark within the Do-It-Yourself segment and Eastern Europe within the Home Furnishing segment, both of which are markets with structurally lower AOVs than the group's other units. However, as the gross margin trend clearly demonstrates, this did not have any negative effect on earnings, since a large share of products with lower AOV could be sent as postal packages to a service point, which meant that a strong gross margin could be maintained. Next slide, please. Exceptional top line growth at 57.7% resulted in strong operating leverage, translating to a gross margin increase of 69.9% and an EBIT increase exceeding 100%. The gross margin, which is impacted by the peak season and thus a higher number of sales campaigns than in the first quarter of the year as well as the different product mix, improved on the prior year during the quarter by 1.8 percentage points to reach 25.1%. The pure product margin, which is the measure most commonly used by our listed peers, amounted to 35.7%. Just as in the first quarter, the gross margin improvement was driven by a continued focus on cost and process efficiencies in purchasing and logistics as well as a growing share of sales from our own brands. Before turning to the segments and note on currency effects, the depreciating NOK primarily impacted the Home Furnishing segment adversely, but the net effect on the EBIT level was largely offset by rapid pricing adjustments in the period. Let us now turn to our Do-It-Yourself segment. Next slide, please. The Do-It-Yourself segment performed exceptionally well in the quarter. Net sales grew by 73.8% to reach SEK 1,819 million and organic growth accelerated to 48.3%. Growth in the segment had already picked up towards the end of 2019 and throughout the first quarter. It subsequently accelerated sharply in the second half of March and has since continued through the second quarter and into the third. The P&L in the Do-It-Yourself segment was nicely levered with a top line growth of 74%, translating to an EBIT increase of more than 200%, reaching SEK 162.6 million, corresponding to an EBIT margin of 8.9%. The Do-It-Yourself segment continued 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 our own brands. Next slide, please. The Home Furnishing segment is now in its seventh consecutive quarter with good growth and strong margin structure. Net sales in the Home Furnishing segment grew by 32.3% in the quarter reaching SEK 886 million, of which organic growth amounted to 31.5%. Adjusted EBIT increased by 55.9% and reached SEK 85.1 million in the quarter, corresponding to an EBIT margin of 9.6%. All geographic markets, except Norway, with its currency headwinds, grew by more than 25% in the period. And growth was especially brisk in the segment's Eastern European and Danish operations. Changed customer behaviors in the wake of the pandemic has seemingly less of an impact on the Home Furnishing segment than the Do-It-Yourself segment. However, we also estimate that the total market did not develop as favorable for the Home Furnishing segment as it did for the Do-It-Yourself segment. The rollout of the last-mile logistics operations in Sweden is progressing according to plan. The infrastructure, which was launched in Southern Sweden at the end of the first quarter has now been established. And the continued rollout is planned, probably most likely with the metropolitan areas of Helsinki and Oslo next in line. Let us turn to cash flow. Next slide, please. The exceptional demand in the period strengthened the usual seasonal profile for working capital, with inventory buildups during the first quarter prior to the peak season, with high sales and thus, high cash conversion during the second quarter. Cash flow from operating activities amounted to SEK 605.1 million, the strongest contribution for a single quarter to date. This corresponds to a cash conversion in relation to adjusted EBITDA of more than 220%. The right-hand graph showing the development in liquidity walks us through the starting period position of SEK 270.3 million, adding the cash flow from operations, deducting the impact of 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 898.1 million of liquidity at hand. Next slide, please. Our strong operating performance translated to a net cash position of SEK 26.7 million at the end of the quarter. Accordingly, an outperformance of the medium-term capital structure target range. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 524 million. Our financial position is stronger than ever, which means that we can continue to execute both organic and inorganic growth initiatives. 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 20, our position was strong going into the quarter and further strengthened during it. We have our people, supply, demand and financial position all under control. Our growth accelerated significantly, reaching the highest level on recent record. Gross and bottom line margins are at good levels and continue moving higher on the back of strong operational control and a sound mix development. The financial position is strong with ample cash on hand and significant undrawn credit facilities. Our strategy is firmly in place, execution is ongoing and it revolves around our 4 strategic 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, which were set in conjunction with our IPO in March 2018 and include reaching SEK 10 billion in net sales. This concludes our presentation, and we'll now open up the call for questions. Over to you, operator.

[Operator]

[Operator Instructions] Our first question is from your Gustav Sandström from SEB.

[Gustav Sandström, Research Analyst]

This is Gustav Sandström with SEB. I have a few questions, if I may. Firstly, I didn't see that you wrote out the pro forma organic growth or the organic growth in the acquired businesses, if you'd like. So could you give us that, that would be very helpful.

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

Sure. So the pro forma organic growth ended up at 44.2% at the group level. So it was higher than the organic growth, as you see, Gustav, and also very clearly shows what we also mentioned in the report, which is that the newly acquired businesses have developed very strongly.

[Gustav Sandström, Research Analyst]

Sure. And is this fair to assume in a typical Q2, that June is slightly smaller than April and May, given outside furniture, I guess, is mainly sold in April and May, for instance?

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

Historically, the seasonal pattern, as you know, Q2 is the seasonally strongest quarter and May typically is the single strongest month. So that's the typical pattern.

[Gustav Sandström, Research Analyst]

And I'm curious about net financials, SEK 32 million. It was a big number last year in Q2, too, and then there was a fair amount of that related to earnouts. Could you help us break out the composites in the net financials, FX, leases, earnouts, interest rates, whatnot?

[Jesper Flemme, Acting Chief Financial Officer]

Sorry, can you repeat the question maybe?

[Gustav Sandström, Research Analyst]

What is the breakup of the net financials? What is included in that number for Q2?

[Jesper Flemme, Acting Chief Financial Officer]

The single largest number is of revaluation of earnouts, that estimates -- our guess is SEK 22 million or so in the quarter. And also if you look at our interest costs, it's approximately SEK 8 million in the quarter.

[Gustav Sandström, Research Analyst]

Great. I'm thinking about your level of coolness here, how you think about capital allocation and M&A? Obviously, you have a much stronger financial position now than what is stated in your financial targets. And I'm thinking, given that there might be a discrepancy on valuation now in terms of very strong growth, hard to reach a deal. And as you write in the report also to actually meet people to shake hands. How do you think -- what's your level of coolness? Are you happy to let this cash position go much further? Or should we be looking at some type of shareholder returns medium-term if you don't accelerate your M&A agenda? And is there also -- is there an option here to perhaps acquire back some of the minorities and prepay earnouts to get a higher share of cash flow going forward?

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

Well, I think as you are implying, Gustav, a very strong position now provides us with ample flexibility really to do what we feel under current circumstances is the best course of action. And we continue being quite convinced that we will be able to put this cash to excellent use funding organic but also acquisition strategies. So that is definitely the picture that we see today. And linking back to your question on the net interest as well with the revaluation of the earnouts, as you know, we have an acquisition strategy, which includes deferring upside to make sure that we have a maximum level of incentives in place for a period of 3 years or so following an acquisition. And the way that we see these liabilities going forward, we have a relatively low amount, which is due this year. And then we have higher amounts the subsequent year and the year following that. So that's also something that we are taking into account when we project our cash flows going forward. But also, most certainly, we are very, very actively engaged in continuing to find excellent acquisition opportunities. But we're also cool, as you call it, in the sense that we won't be going into acquisitions that -- where we apply less of a disciplined approach than we have to date. And as we write in the report, both the fact that physical meetings are more difficult to arrange these days but also especially on the DIY side with the strength in the overall market that we report but also that our competitors have reported, that has affected valuation expectations, especially again on the DIY side.

[Gustav Sandström, Research Analyst]

Right. And the last one for me. I might have some follow-ups. But I'm curious, have you received any governmental support such as for furloughing or reduced working hours in Q2?

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

So the only ones that we've received are the reduced social expenses. And in aggregate, they don't amount to a very substantial figure.

[Gustav Sandström, Research Analyst]

Less than SEK 2 million?

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

No, slightly more than SEK 2 million, actually.

[Operator]

Next, we have Fredrik Ivarsson from ABG.

[Fredrik Ivarsson, Lead Analyst]

A couple of questions from me as well. Firstly, maybe if you could say anything about the first 3 weeks of Q3. Are you holding up the strong pace of growth we saw in the end of June?

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

So we -- as we write in the report, we had a nice and even level of demand through the quarter. And the way we've chosen to phrase how we're coming into the third quarter is that we continue to see strong performance rather than applying a fixed number to that and quantitatively relating it to Q2. Suffice it to say that we're very pleased still with the demand levels. But as we also write in the report, we continue being of the firm belief that growth will revert back to more normal levels. And when exactly that happens is anyone's guess, but it will most likely or even most certainly happen.

[Fredrik Ivarsson, Lead Analyst]

Okay. Sure. And then on the positive change in working capital, mainly payables, I guess, how should we think about that going into Q3, Q4? Was there any calendar impact, for instance?

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

The main impact is through the exceptional demand, which led to the accelerated growth and linked them to our business model, that is what it results in. So there's nothing in addition to the exceptional demand that explains the development in the working capital. So it's simply an effect of exceptional demand mix with our asset-light business model.

[Fredrik Ivarsson, Lead Analyst]

Perfect. And then one last one. On the share of own brand sales, how much higher is the current rate versus a year ago?

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

We haven't quantified that specifically in the second quarter. The second quarter was exceptional in so many ways. But of course, headline-wise, it was clear that the DIY segment outpaced the Home Furnishing segment for both total and organic growth. And that's significant as it relates to your question because of the fact that the DIY segment has a lower share of private label than does the Home Furnishing segment. So the segment mix effect, all else equal, would push the share of private label down. But the share of private label within DIY in itself increased.

[Operator]

Next, we have Niklas Ekman from Carnegie.

[Niklas Ekman]

First question is on the COVID-19 impact. You seem very certain that this is a step change in the market and that growth will come back to more normal levels but from a higher sales level. And I'm just curious how convinced you are of this? What kind of evidence are you seeing that these effects we're seeing right now are not going to reverse going forward? Are you seeing anything in terms of cohort behavior or anything like that, any evidence that this is an acceleration that is likely to continue?

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

Well, I think that how I interpret your question, Niklas, and correct me if I'm wrong, is that do we believe that a new base has been established? Because we certainly don't believe that growth levels will remain at the 40-plus percent. But if that is the correct interpretation, do we have a new base, so to speak? Then -- we believe that we do. We believe that there has been an acceleration in terms of the shift from offline to online. As we write in the report, it's probably been more pronounced within home furnishing. But we do believe that it's happened also in DIY. And that's a change, which we don't have the market data to be able to quantify it yet, but we don't believe that it will revert back. So we don't believe that the increase in online penetration is a onetime effect that we'll see clawed back through the offline channel in the time to come. It's simply been what would have happened over a period of time -- a longer period of time, has happened in a shorter space of time. So that's, I think, the main underlying reason why we believe that a new base has been established. But also, we believe that it's reasonable to see some other spending categories being subdued for a long period of time, for instance, foreign holiday travel, is difficult for us to see it coming back to pre-pandemic levels very quickly. It will be a staged come back, we believe. So I also think that it's reasonable that our categories will continue benefiting from a higher share of wallet also after the immediate effects of the ongoing pandemic subside.

[Niklas Ekman]

Excellent. And that was exactly what I meant with my question. The second question is on the EBIT margin. I think you said here in the statement and you talked about OpEx not really catching up with the strong sales growth. I'm curious how you see the current 8.6% adjusted EBIT margin in Q2? Do you think that this is a level that could be sustained going forward? Or has it been exceptionally strong in this particular Q2?

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

It's been exceptionally strong, certainly. The way that our group operates today, the 8.6% level is exceptional. So if we look at sort of a normalized performance for BHG under the current circumstances and into the short and medium term, we don't believe that we'll be able to notch up this type of EBIT margin. Longer term is another question. And as you know, part of our midterm financial targets is that we are striving to reach 7%. And we very clearly see the path to that 7% EBIT margin number. And that target was communicated, as all the midterm financial targets, in conjunction with the March '18 IPO. And back then, we applied something like a 5-year horizon to reaching that target. So that's still our belief that we'll be able to get there and perhaps we'll get there quicker than the 5 years from March '18. And we're approaching a point in time when it will be suitable for us to raise our sights and to stake out new targets for the next 5 years, both for net sales and adjusted EBIT. And when we do that, it's quite likely that we'll have a target which is higher than the 7% for that next leg of our journey. But that really is for the next leg of the journey.

[Niklas Ekman]

That's very interesting. Look forward to hearing more on that. Thirdly, you mentioned some supply issues in the Garden segment, I think you believe. Is that the only segment that has been impacted? Have you otherwise had the availability of products that you expected during the quarter? And basically, have your sales been materially impacted by supply issues during the quarter? Or is this more of a minor issue in selected product categories?

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

It's been a minor issue overall. And as we also commented after the first quarter, we are in a good position with our broad product range to substitute products that are temporarily out of stock or unavailable from the suppliers with alternative options. So that has helped mitigate the impact. But having said that, again, within specific categories, garden is the one that was the most affected one. It had somewhat of an impact. It also shows a little bit in the average order value, where some of the items that have high price points were the ones and where we had this still relatively limited but supply shortage. But overall, it's not a material impact on us.

[Niklas Ekman]

Okay. And finally from my end, in association with the Q1 results, you talked a bit about the Continental European expansion. And I'm curious if you could elaborate a bit on your view here, same as we talked about acquisitions before being perhaps a little bit delayed right now because of pricing and because of the difficulties in due diligence. Is it the same with European expansion? Do you think that expanding to new markets at the moment is difficult and maybe put on hold? Or what's your view here?

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

No. Actually, we don't think that the pandemic in itself is a major hindrance in this regard. And when it comes to the valuation levels, it's been within the DIY segment that, that's been felt much more tangibly than on the Home Furnishing side. So nothing materially has changed with regards to our outlook for European expansion, including the option of using the M&A toolkit as one avenue of getting there.

[Niklas Ekman]

And can you remind us what that agenda is? How soon in time? Is this something you could execute on already in 2020?

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

We have, as you know, Niklas, we have the Furniture1 platform, which based out of the Baltic states, Lithuania, has operations in 10 or so Eastern European countries. And we haven't entered any new geographies during the quarter, but we most definitely have plans of entering new geographies through that setup. So the 2 main avenues that we see for expanding on Mainland Europe -- in mainland Europe is, one, through Furniture1 and the continued proven geographic expansion model that we have there; or -- and/or, I should say, two, complementing that approach with acquisitions.

[Operator]

The next question, we have Arthur Benedict.

[Michael Benedict, Analyst]

Michael here from Berenberg. Hopefully you can hear me okay. Firstly, on M&A, would you be willing to stretch the 6 to 8x target you've historically aimed for, should valuation specifically in DIY, not return to more normalized levels?

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

So I guess, we're always willing to stretch that in a specific instance where the logic was overwhelming or the synergies were overwhelming, et cetera. So that's more of a framework that we operate under than a fixed rule. And so we haven't changed either framework or the fact that we give ourselves the license to be flexible around that framework. But I guess I'll go back to what I said a little while ago on the discipline when we do engage in M&A, we continue demanding of ourselves that we keep that discipline. But that discipline could absolutely go hand-in-hand with paying more in a specific case than the 6 to 8x.

[Michael Benedict, Analyst]

That makes sense. Secondly, we've seen very strong growth in the DIY gross margin before selling costs, I think around 440 basis points this quarter. I think that might be more than can be explained by the shift to private label. Are there any other key drivers that have driven that...

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

I'm sorry, the question relates to the gross margin and the DIY segment?

[Michael Benedict, Analyst]

Yes, exactly. I think preselling costs has increased by over 4 percentage points, which I think is more than can be explained by just a shift to private label. Are there any other key drivers within that?

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

No. The main developments within DIY are, as you say, the mix shift as a result of increasing the share of private label. And just to remind everyone on the call on the basic difference in, let's say, a standard, if you will, P&L for the private label business compared to the external range. We do enjoy significantly better gross margins or product margins, if we start with that. We have somewhat similar costs in handling down to gross margin, too, although the product -- the private label assortment typically is [ stock-kept. ] So that can add some costs down to the reported gross margin level. And then we typically have higher online marketing expenses for the private label assortment because those products aren't as well-known as the well-known external brands are. And the net benefit is still substantially down on the EBIT line of -- north of 5 percentage points, I'd say, on average.

[Michael Benedict, Analyst]

Great. And just one last one from me. The direct selling cost line, we've seen strong deleverage in DIY this quarter and leverage in Home Furnishing. Is there any reason for that difference in performance -- what's the underlying drivers of those statements?

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

So what you're saying is that the direct selling cost line was improved more in DIY than in Home Furnishing.

[Michael Benedict, Analyst]

Yes. I think it got worse in DIY and improved in Home Furnishing, sorry. Something got cut off.

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

Yes. I'm not sure that I'm following there. And unless, Jesper, you can look it up. We can look into this, Michael, and get back to you.

[Operator]

The next question, we have Markus Heiberg from Kepler Cheuvreux.

[Markus Borge Heiberg, Equity Research Analyst]

So the first I have is with this rising share of private labels, is, of course, a very long-term structural question is, how do you ensure that brands find it attractive to list their product with BHG? Of course, you have to differentiate from other third-party distributors of branded goods. So how do you ensure that you're kind of not cannibalizing your value proposition towards brands?

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

Sure. We have to look at that segment-by-segment. Because within Home Furnishing, as I'm sure you know, the vast majority of what we sell is our private label assortment. So I guess your question primarily relates to the Do-It-Yourself segment. And I think exactly because of the reasons you mentioned, it was more difficult for us to drive the share of private label within the DIY segment in the past because we were smaller than we are today. And today, we have 4, let's say, country platforms in DIY. In addition to the country platforms, we have a number of niche destinations. Now the niche destinations, some of those are overwhelmingly comprised of [ own ] brand or private label products. So they don't really have any of the challenges that you're referring to because that's what they sell. And when it comes to the platforms, they overwhelmingly still sell external brands. But given the size and market power that we have achieved in those platforms, there is space to also introduce a higher share of our own brands. And we are not really hearing much grumbling from many of the external brands, who definitely want to continue to being visible on our platforms because we have such great traffic to those platforms. So it's much less of a problem for us than it would have been some years ago when we were smaller.

[Markus Borge Heiberg, Equity Research Analyst]

It makes sense. But do you -- are you afraid of competition in that perspective that if you grow too fast then it could become a problem in the future? Or what's your reasoning or strategy with that regard?

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

We're always paranoid, and we're always looking to the risks we see and think about things that we don't see but might happen, et cetera. But I don't think that this is one that is of a particular worry to us from a competition point of view. And we're not seeing -- we don't believe -- we don't want to wholesale and move towards private label on our DIY platforms. We see that having the broadest assortment, which then necessitates having all those well-known external brands is a huge competitive advantage for us. And as you know, one of our strategic pillars is to continue expanding that assortment. And although we keep adding our own brands to that, just by way of the law of numbers, we will be adding many more external brands [ than ] we will be adding our own brands also going forward. And having that broad assortment gives us so many advantages that are key to our business model today, at least, including the traffic generation advantages that they give us. So we continue cherishing our external suppliers and certainly see within the DIY platforms that it is those external brands that will continue being the vast majority of the business we transact.

[Markus Borge Heiberg, Equity Research Analyst]

I understand. So my last question here is on the average order values, which I think is a very interesting topic because you have managed that very well now in the last quarters. And I understand that a lot of new customers now actually drive the average order values down because new customers naturally want to order less the first time. But that, of course, could increase going forward. And do you have any analysis that you can give us on sort of the underlying AOV on recurring customers in the quarter?

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

So firstly, if we just say a few words about the progression of the customer base. We've looked hard at what those developments have broken down into. And in fact, we've seen this exceptional demand from existing and new customers alike. So it's really not only new customers that are driving the exceptional demand. It's really -- in terms of customer mix, similar to what we've seen in previous periods, just at a higher level throughout the customer cohort. And then when it comes to the AOV development, it's certainly been a mix that has driven some of the big shifts. For instance, in Home Furnishing, it's been a category mix where the decoration items have grown much quicker than the furniture items, at much lower price points, which isn't really a concern because those are -- the logistics are just fundamentally different for those. And you can also see that in the way the gross margins are holding up. But there's also been a geographic mix shift in Home Furnishing and in DIY. But in Home Furnishing, not least, where we have seen this great growth in Eastern Europe, where average order values are somewhat lower structurally than in the Nordics. But also, of course, that goes hand-in-hand with an overall P&L that is able to handle those average order values with excellent margins still. So what we're really focused on is ensuring like-for-like that we don't see a structural slip in the average order values for the bulky items that are shipped on pallets. And we haven't seen that. And if we had seen that, that would have been noticeable in gross margin that didn't look as good as ours this quarter.

[Operator]

Next, we have Gustav Sandström from SEB.

[Gustav Sandström, Research Analyst]

Gustav from SEB. Just to [ mitigate this ], if I may. Firstly, could you please let us know what the marketing spend in relation to sales force is in the quarter?

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

Sure. So it was north of 5%. And the marketing spend in relation to net sales has increased in tandem with the increase in the share of sales that comes from the private label range for the reasons that I mentioned earlier. So it's a total progression in the P&L, which goes hand-in-hand with the share of net sales from private label.

[Gustav Sandström, Research Analyst]

Would you say that it's closer to 5% or 6%, you say north of 5%?

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

I'd say it's in between those points.

[Gustav Sandström, Research Analyst]

Okay. Great. And depreciations quarter-on-quarter were down quite significantly, [ SEK 14 million ]. Is there -- what's the dynamic behind the depreciation levels?

[Jesper Flemme, Acting Chief Financial Officer]

It's really related to the IFRS 16, and you know, it's some kind of a judgment sport where you combine new contracts and terminated ones and also try to estimate for how long you are going to stay in the current ones. So totally related to IFRS 16 and leasing.

[Gustav Sandström, Research Analyst]

And what do you think is a good estimate for going forward? Is this SEK 42 million intangible depreciation is a good estimate going forward? Or -- per quarter?

[Jesper Flemme, Acting Chief Financial Officer]

I think it's a fair one.

[Operator]

As we have no further questions right now, I will hand the session back to you, Adam, for closing remarks.

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

Thank you, operator. Thank you, everyone, for your interest today, and we look forward to speaking to you soon again. Wishing you a good day. Bye.