BHG Group AB

STO:BHG

Earnings Call Transcript 2023-Q2

[Gustaf Ohrn, executive]

Hi. My name is Gustaf Ohrm. I'm the CEO of BHG, and I'm here together with our CFO, Jesper Flemme, I'll give you a few highlights of the report, some future outlook and our focus on the current actions. Jesper will further clarify the financial details, and we will both be available for the Q&A doing our very best to try to answer all your questions. Slide 3, please. I thought I would start this with a very short introduction of BHG, what we are and what we do. The group with Bygghemma as its starting point was founded in 2012. Since then, we have grown organically and through some 25 (sic) [ 35 ] acquisitions to the group we are today, approx SEK 13 million (sic) [ SEK 13 billion ] in turnover in some approx 20 businesses.

We are and we aim to remain a highly decentralized group based on entrepreneurial accountability, offering a high degree of freedom for the entrepreneur, also keeping the entrepreneur highly accountable for the results. The head office is very limited to keep central costs low and has in the last 6 months, become even smaller. On group level, we are basically a small group function, a finance function and complemented by a few very limited center of excellences.

The business instance last fall, divided into three business units. Home Improvement, Do-It-Yourself based business making up some 50% of sales and based primarily on a drop ship model with a Nordic focus with Bygghemma as its lead brand.

Value Home, a home interior business in the value segment, built primarily on the private label based business model, making up approximately 34% of sales and with Trademax as one of its lead brands. And Premium living, the latest addition to the group, making up approximately 70% of sales, a highly international business in the premium segment based primarily on the wholesale model, complemented with private label.

Slide 4, please. A few words about the highlights of the second quarter. Sales was down approximately 10% to 11% in the quarter compared to Q2 last year. An improvement from the historically weak first quarter, and we are confident with that have continued to take market share in a challenging market. Earnings improved significantly in the second quarter to an EBIT of SEK 98 million, driven by improving gross margin and cost control.

We are also very pleased with the very strong cash flow in the quarter, a cash flow of plus SEK 767 million, driven by a significant reduction of inventory being down with more than SEK 400 million in the quarter and plus SEK 500 million year-to-date. All in all, summarizing an improved cash flow effect of more than SEK 900 million versus the second quarter last year.

Slide 5, please. A few words about the market development and the future outlook as we view it. Q2 was significantly stronger than Q1, partly driven by more favorable weather conditions. Spring came late, which you all know, reflect -- really affected the first quarter with a weak March, Demand in some of the spring categories was strong during the second quarter. But for some of the more capital-intensive categories as doors, windows, et cetera, the market is still weak, partly driven by low activity in the housing market and as a consequence, less renovations, this putting a dent in the demand in these categories.

Looking forward, we expect the remaining part of 2023 and also into 2024 to remain weak in demand, driven primarily by lower disposable income as a consequence of rent increases and inflation. Even if rent levels most likely will continue to increase and even more fixed rent levels will convert to variable rent or fixed rents at considerably higher rent levels. We also need to take into account that we are most likely close to what we call peak rent. And with that, a significant part of the uncertainty of the future rent levels is decreasing. This reduction in uncertainty will most likely have a positive effect on consumer confidence. The price pressure in the market as a result of high inventory levels is still present and has been so for the second quarter, but we believe that it will decrease as inventory levels normalize towards the second half of the third quarter.

Slide 6, please. Our key focus area are unchanged to improve profitability, strengthen cash flow and to strengthen our financial position. To improve profitability, our focus is to drive sales and margin and also to implement the earlier communicated cost-saving program of SEK 150 million to SEK 200 million. This program is on track and the main focus is on organizational and warehousing costs. We are also as part of our focus on profitability, investing in tech platforms in some of our main businesses, both to reduce cost and to enable future consolidations to realize synergies.

Cash flow was strong in the second quarter with SEK 767 million. To strengthen the cash flow, the most important action is to reduce inventory levels. We are very pleased with the progress in the second quarter, and we are with a reduction of plus SEK 500 million year-to-date, currently ahead of our early communicated ambition to lower inventory with SEK 600 million during 2023.

We track this reduction weekly by entity and have well-defined goals on entity level to follow our progress against. Last but not least, our focus to strengthen our financial position. During the quarter, we have, in addition to the inventory reduction, sold 20.1% of our holding in Furniture1. This subject to a BGM decision in late July. Thereby eliminating a put option and as a consequence, reducing both a potential cash flow effect and our acquisition-related liabilities with some SEK 470 million. During the quarter, we have also renegotiated our financing agreement and its covenants, allowing us more financial flexibility looking forward.

Slide 7, please. As mentioned, we are very pleased with our inventory reduction in the second quarter. Reducing inventory is crucial, both to free up cash and also because high inventory levels is a cost driver, both from the extra warehouse space it requires and also from decreased efficiency in fulfillment. The focus has been to reduce our inventory of spring and summer products. And we have, as mentioned, reduced inventory by SEK 410 million in the second quarter and with SEK 510 million year-to-date. And is with that currently ahead of our plan to reduce the inventory with SEK 600 million during the year. We have now reduced our inventory level in the last 4 quarters in a row, and inventory is now down more than SEK 400 million since the peak inventory level one year ago when we closed Q2 last year.

With this said, also after reducing inventory with SEK 600 million this year, we see room for further improvement and further inventory reductions in 2024. Slide 8, please. Few words about our strategic priorities on group level to take us back to the pre-pandemic levels of profit and cash flow generation that is our current short-term priority. Customer centricity. We have parts of the group who are super strong on this, and we have others where there's room for improvement.

We are now measuring NPS in most entities, and we're working hard to improve and we are utilizing both analytics and AI capabilities to improve this, both from customer satisfaction and efficiency. As an example, we are already now using ChatGPT to improve both quality and efficiency in our product-related content. Competitiveness need to be a super focused in this challenging market, and we are focusing on everything from supply chain efficiencies, warehouse consolidations to online marketing to stay competitive.

Sustainability is one of our defined key strategic focuses, and we're trying to break it down into a few tangible focus areas when we can make a difference. On a business opportunity, there is a -- within ESG, there is an increased focus on selling energy-efficient appliances and another focus is to improve ourselves on sustainable packaging. Assortment expansion is an area that built this group to what it is, and we remain committed to offer a wide and relevant assortment and now also looking forward to do this to an increasing extent enabled by analytics and AI. And last but not least, simplification and consolidation.

After 35 acquisitions, and 10 years of focus on growth in a strong market, we need to simplify our structure and reduce complexity. As part of this, we are working hard to consolidate our business into fewer entities and thereby realize synergies.

The ambition is to remain decentralized but gravitate from many smaller entities to fewer larger platforms. I spoke at great length about this and what we have done and are doing in the Q1 report, and will today settle with mentioning the fact that we in the last 6 to 9 months, have done a significant number of consolidation and also closed down a few new businesses, and we have the ambition to continue on this journey.

Slide 9, please. On business unit level, where we believe most of the synergies are to be realized, we have the following key strategic and operational priorities. On Home Improvement. Consolidation of our entities into fewer and larger platforms to increase competitiveness and simplify our structure and realize synergies. In order to do so, we need to invest in our tech platform to enable this consolidation. And one example of this is Bygghemma, Sweden, where we're currently investing. Reduced inventory is some of the non-drop ship-based businesses and reduced cost levels to reflect current tough market demand situation, and focus on growing sales through assortment expansion through driving intercompany sales and in some entities, expanding internationally.

On Value Home, our focus is, as this is a primarily private label-based business model, this is where we have the biggest over stock, and we need to continue to reduce inventory levels, and we have also initiated the process to reduce retail footprint in some of the entities where we have physical stores. Upgrade tech platform and in Value Home, more to improve customer experience and to reduce cost levels from all the non-efficient platforms. Currently, we are investing in HFM or the Trademax platform. And also here to consolidate into fewer and larger platforms to improve competitiveness.

On Premium Living. The main entity in this group is Nordic Nest, a highly international business based on selling Scandinavian design in the international markets with a main focus on Europe and a few selected markets in Asia. It is clear that internationalization is working, and our focus is to continue executing on this strategy. Last year, we also initiated the work to improve efficiency in handling and fulfillment with an investment in AutoStore for automated picking. Here, we continue this work and with follow-on investments to improve efficiency. Thank you. And with this, I will leave the word to Jesper.

[Jesper Flemme, executive]

Thank you, Gustaf, and Slide 10, please. The second quarter of the year saw a clear improvement from a historically weak first quarter despite underlying demand being weak. Net sales decreased 10.9%, reaching SEK 3.5 billion. Category-wise, the Garden and Outdoor Furniture categories performed better than the group as a whole. Meanwhile, capital-intensive categories performed worse.

From a geographical perspective, mainly in the Nordic region was weaker than in other geographies, primarily driven by Sweden. Adjusted EBIT amounted to SEK 98 million, corresponding to an EBIT margin of 2.8%. Turning now to Page 11 and the EBIT bridge.

The product margin improved by 0.8 percentage points compared to Q2 last year, mainly due to strong performance of our assortment of own brands, which generally has a higher product margin. Inventory handling costs was lower as we continue to see results from our cost-saving initiatives. Last Mile and other direct selling cost was negative, mainly driven by inflation-related cost increases for Last Mile delivery. Marketing costs increased slightly because of mix effects. Increase in organizational cost from same period last year is mainly due to investments in tech platforms. Personnel-related costs are starting to come down, although cost savings have not yet had full effect. Finally, the increase in depreciation and amortization in relation to sales was primarily driven by weak sales and costs related to lease agreements.

All in all, our EBIT margin amounted to 2.8% in the quarter. Moving on to cash flow, Slide 12, please. Successful inventory reduction generated very strong cash flow in the quarter. Cash flow from operating activities amounted to SEK 767 million, our assessment is that we will be able to further reduce our inventory this year, but not as fast as during the second quarter.

The right-hand graph showing the development in liquidity walks us through the starting period position of SEK 478 million, adding the cash flow from operations and the impact of investing activities, a majority of which is M&A related, 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 1.1 billion of liquidity at hand. Slide 13, please. The group's net debt amounted to SEK 969 million at the end of the quarter and net debt in relation to LTM adjusted EBITDA ended at 4.1x. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 1.3 billion. Acquisition-related liabilities amounted to SEK 1.2 billion at the end of the quarter. Excluding the liability related to Furniture1, the liabilities would have amounted to SEK 711 million. Cash flow-wise, we assessed that roughly SEK 350 million will be paid out during the rest of the year and another SEK 50 million in 2024. During the quarter, we also amended our existing financing agreement in order to provide additional flexibility from a covenant perspective.

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

[Gustaf Ohrn, executive]

Thank you, Jesper. Could you please take me to Slide 14, and I will do my best to summarize this. From a historically weak first quarter, we rebounded with the second quarter that is much stronger on both profitability and cash flow. We expect the market to remain challenging for the remainder of 2023 and also into 2024. We are unchanged prioritizing cash flow and profitability and the strengthening of our financial position. Also in challenging times, we need to continue to drive growth with initiatives as internationalization, intercompany sales, marketplace, et cetera. Our cost reduction program of SEK 150 million to SEK 200 million is on plan.

Simplifying our structure, including consolidations to realize synergies and also closing of non-performing businesses and reducing retail footprint is high on our agenda. In order to enable this consolidation and also to improve customer satisfaction and reduce costs, we are investing in tech in some of our main platforms. We are very pleased with our inventory reduction in Q2 and we are currently ahead of our plan to reduce inventory by SEK 600 million during the year. Selling 20.1% of our holding in F1 reduces our acquisition rating of liabilities and the potential cash flow effect with some SEK 470 million.

Our renegotiated covenants gives us increased financial flexibility looking forward. The main trends that has built BHG to what it is, the migration to the online channel and the interest in Home and Home Environment remains unchanged and we see no reason why we should not be able to take BHG back to pre-pandemic levels on profitability and cash flow generation. And this is our short-term main focus.

Thank you very much for listening. And now me and Jesper will be able to answer all your questions to our best of our abilities. Thank you.

[Operator]

[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABG Sundal Collier.

[Benjamin Wahlstedt, analyst]

And congratulations on staying on track on the strategy running currently. A couple of questions from me. Ahead of the original inventory release plan, you say -- I see you're still running a rather steep discounts on several sites. Should we expect a larger than SEK 600 million release for the full year?

[Gustaf Ohrn, executive]

No. Our ambition is unchanged, the SEK 600 million. And I think as Jesper pointed out, we see a very, very high pace of inventory reduction in Q2 -- we don't see that looking forward. Of course, we have ambitions to reduce it more, but we still remain with the SEK 600 million as our main ambition for the year. And I think we should also acknowledge the fact that even if it was somewhat easier to reduce inventory in Q2, which was spring and summer sort of focused, it's got tougher going forward.

And we also need to be very, very careful and keep a very, very good and important eye on availability and NPS on product. So continue to reduce inventory. There's definitely room for further reduction, but the SEK 600 million that we have set as a goal for this year still stands.

[Benjamin Wahlstedt, analyst]

Terrific. And then you also mentioned seeing a stronger demand in Q2. And I think any additional flavor here would be helpful. First of all, you know that the trend in -- believe I'm citing here. You know that the trend in net sales during the second quarter is better compared with the first. Just to clarify, is this a comment on intra-quarter positive momentum?

And second, is stronger demand in Q2 versus Q1 too also for, I guess, non-weather-related products. So intra-quarter momentum and is it true for non-weather-related products, please?

[Gustaf Ohrn, executive]

I think you should start in the fundamentals. And what we see in the fundamentals is that disposable income is not up, that is down, if anything, and we also see it coming down further in the quarters to come. We see a small improvement actually in consumer confidence, and we see reasons to believe that, that potentially can continue. We also see, as we saw already in Q1, a significant effect on what we call the capital-intensive categories where demand definitely is down. And then I'm talking about the Doors and the Windows, et cetera, et cetera. The weather-related categories, as you say, that is where we saw the main increase in demand in the second quarter.

[Benjamin Wahlstedt, analyst]

All right. And then a bit of a housekeeping question. Do we keep expecting payments of SEK 400 million this year, i.e. expecting SEK 250 million to be paid out here in Q3, please?

[Jesper Flemme, executive]

So, SEK 350 million during the second half of this year stands.

[Operator]

The next question comes from Daniel Schmidt from Danske Bank.

[Daniel Schmidt, analyst]

Yes. Good Morning, Gustaf and Jesper, Hope you can hear me. A couple of questions. If I got you right, the Jesper, have you been sort of shifting around in terms of earn-out payments timing for the year? Because I think you said before it was supposed to be above SEK 200 million in Q2, but sort of postponed into H2 than basically, but it's the same number?

[Jesper Flemme, executive]

Yes.

[Daniel Schmidt, analyst]

So you did SEK 100 million basically in Q2, right?

[Jesper Flemme, executive]

SEK 150 million. Maybe also, I should clarify that to some extent when we have a very strong cash flow that can also affect the actual payment when buying additional shares from minority owners. So slight increase in that.

[Daniel Schmidt, analyst]

So the total earn-out commitment for '23 is actually SEK 500 million, and it was SEK 450 million before, right?

[Jesper Flemme, executive]

Yes.

[Daniel Schmidt, analyst]

Yes. Okay. So you have another SEK 350 million to go. And just the timing of that, is that mostly in Q3 or is it equally divided?

[Jesper Flemme, executive]

Mostly in Q3.

[Daniel Schmidt, analyst]

Good. And then just coming back to sort of cash flow generation. I hear what you're saying in terms on reduction of inventory maybe another sort of the SEK 90 million, SEK 100 million for the second half of this year, but you do sound hopeful that you can do more in '24. What is a reasonable sort of what's your target basically? Where do you want to sort of come back to you?

[Jesper Flemme, executive]

I think that given the size of the business that we see today, I think it would be fair to aim against some SEK 1.5 billion or so. I think that's a reasonable amount.

[Daniel Schmidt, analyst]

And is it sort of the target to get there basically in 18 months' time? Or is that going to take longer?

[Jesper Flemme, executive]

At least 18 months, if I answer that way.

[Daniel Schmidt, analyst]

Yes. All right. Good. And then just sort of the deal that you struck with the minority owner of Furniture1, that is still for approval, of course, on the extra general meeting. But assuming that, if that happens that sort of earn-out disappears.

When would that sort of earn-out have been in time if you wouldn't have done this basically?

[Jesper Flemme, executive]

Based on how we estimated that would have happened in '25, but I should say the option was valid utilized at any point.

[Gustaf Ohrn, executive]

It was not within our control exactly when it was to be utilized.

[Daniel Schmidt, analyst]

So that could have come on top of what you had in terms of commitments for this year already?

[Jesper Flemme, executive]

Yes.

[Daniel Schmidt, analyst]

Yes. And given that you still consolidate there some Furniture1, given that you do have some sort of buyback agreement also for these 20%. What is that -- what price does that entail that buyback agreement and when?

[Jesper Flemme, executive]

So we will not disclose the term -- actual terms, but just underlining that we now, if the EGM approves the transaction, fully controlled if and when such a deal would take place.

[Daniel Schmidt, analyst]

So -- okay. So you can -- so you can execute that buyback when you feel needed basically? Is that what you're saying?

[Jesper Flemme, executive]

Yes.

[Gustaf Ohrn, executive]

Yes. That is within our control.

[Daniel Schmidt, analyst]

But the price, I assume, is already set?

[Jesper Flemme, executive]

The price, we have agreed on a mechanism to calculate the price, Yes.

[Daniel Schmidt, analyst]

But at core, that's all we are going to be able to know. Is that what you're saying there's not going to be any extra information in connection with the EGM or ?

[Jesper Flemme, executive]

No.

[Daniel Schmidt, analyst]

Okay. All right. Just a housekeeping question as well. change of top line in reported numbers is basically the same as organic. I was just thinking FX has moved quite a bit in many of the countries that you do sell in. Am I missing something here? Or is this the right number?

[Jesper Flemme, executive]

Sorry, did not fully understand your question.

[Daniel Schmidt, analyst]

No, but I'm just saying that if you look at reported top line decline is 11%, and it's basically the same for organic decline. But sort of the Euro has probably moved 12% or something like that in this time.

[Jesper Flemme, executive]

So our definition of organic does not include the effect from FX.

[Daniel Schmidt, analyst]

Okay. So the true organic is probably the minus 15% or something like that.

[Jesper Flemme, executive]

Given that we have been able to adjust -- I mean, you have so many effects. You have also the -- our ability to adjust prices. So I will not comment on the exact number.

[Daniel Schmidt, analyst]

And just coming back also to Q2 in terms of the inventory write-down that you did in -- I think it was Q4 last year relating to out or furniture, greenhouses, Jacuzzis, big ticket items that have been sort of, of course, lacking a lot of demand.

Do you feel that right -- that sort of match the outcome for this particular season? Or was there a sort of slight net gain or net loss compared to what you thought?

[Jesper Flemme, executive]

I think we did a really good job, I have to say. I mean, trying to assess net sales value months in advance. I think we did a good job. And I also should say that without that impairment to write down the -- those products would have been very hard to sell given that the landing cost was simply too high. So no material effect.

[Daniel Schmidt, analyst]

And then maybe just sort of how we should model operational performance into the second half of this year. It's sort of a very difficult market, of course, -- and that, of course, shows in the numbers, although you did do a lot better in Q2 versus Q1, coming from a big loss to a decent sort of gain. How should we look at Q3 and Q4 from a P&L perspective? You're saying that the market is still tough, especially for big ticket. You've seen some slight improvement in consumer confidence. It sounds like you did have a sequential improvement in the quarter, but maybe that is partly also weather related. Where are we basically looking into Q3 and Q4?

[Gustaf Ohrn, executive]

And first, I should say that we don't give any forward-looking statements. So it's very hard for me to give any exact answers on that. I don't think I can say much more than what we've talked about before. We see some positives. We see some negatives we believe that the market will remain challenging.

[Daniel Schmidt, analyst]

But you will have more savings coming through because you are saying that they are more to be -- most of them to be realized in the second half, right?

[Gustaf Ohrn, executive]

We have more savings, yes, we see comparable. We see comparables coming down. So there's quite a few positives in the mix as well.

[Daniel Schmidt, analyst]

And how much of that sort of targeted savings that you announced for this year have been realized already in H1?

[Jesper Flemme, executive]

Maybe some 20% to 30% have been realized. But as you said, the majority is to be seen in the second half of the year.

[Gustaf Ohrn, executive]

And we should also significant cost increases in some of our cost lines as well, of course, staffing costs, but also rent levels.

[Daniel Schmidt, analyst]

Yes. Sure. And especially since first of April, when it comes to salaries, I assume in Sweden at least, but then the rent levels you already had by the first of January -- correct me if I'm wrong. So some difference versus Q1, of course, but maybe more sort of more of the same from Q2 and onwards into the second half because you're also seeing, I assume, freight costs coming down.

So okay, thank you. I think that's all for me, guys.

[Gustaf Ohrn, executive]

Thank you.

[Operator]

The next question comes from Gustav Hageus from SEB.

[Gustav Sandström, analyst]

I have a few questions of my own, so with the apparent change of ownership now on the main owner of BHG there's still the financial target that you've had for some time, which imply 5% to 10% growth per year stemming from M&A and also the financial target of having a net debt to EBITDA of 1.5 to 2.5x as far as I understand, you have not changed those?

But is that still a good guidance for the market as you see it? Or are those subject to change, how to think about this.

[Gustaf Ohrn, executive]

They still remain valid, and we have not changed them as you know. We still think they are valid in the long-term perspective, but they need to be regarded in the long-term perspective. We're currently in tough market situation. Our main focus now, as I commented earlier on, is to what we call the short and short-term ambition, and that is to take us back to the pre-pandemic levels of profitability and cash flow generation.

But long term, we still believe that the financial goals we have over a cycle is valid. Yes.

[Gustav Sandström, analyst]

But the organic growth is one thing. I'm more asking about the M&A growth now that you're starting to divest and consolidate your holdings. As far as I remember from the IPO, part of the -- the strategy was to buy the storefronts to sort of cloud search field for potential buyers that you would sort of own the Google windows.

And now that you're sort of -- it seems like you're reverting from that strategy to consolidate a bit stronger sites, is the M&A target still valid in your opinion?

[Jesper Flemme, executive]

The M&A target is still valid. We still believe in M&A. We still want to continue to do M&A. As we said in the report, M&A is currently is not within our main focus, but we still evaluate M&A opportunities as they come in. And looking forward, we still believe it's going to be a key component in building this to what we want to be.

We will do acquisitions as add-on acquisitions. I think a good example is the way we acquired Svenssons and sort of put it into Nordic Nest group at once. So I think it will be more of those type of acquisitions, basically, the platforms acquiring businesses to add to their existing businesses. But we will also looking forward invest in and look into potential further platform acquisitions. So it's definitely a key component -- but it's not within our main focus right now.

[Gustav Sandström, analyst]

I'm just thinking that perhaps the analysis in retrospect of the value creation from doing these acquisitions was not as good as they were. So that's what I was asking if perhaps you would start to reconsider that strategy? But maybe I'll top it for another discussion. But then related then, you have SEK 6.5 billion in goodwill still, if I recall correctly, that -- and part of that is stemming from these acquisitions that you now discontinue or consolidate.

But can you talk a little bit about that goodwill position and if you feel that, that is, over time, going to need some revisions?

[Jesper Flemme, executive]

Not where we stand right now. I mean, goodwill is tested on segment level. So consolidation does not really affect the testing. And we do not see any need for impairment now.No.

[Gustav Sandström, analyst]

I guess part of the goodwill related to these brands that are now discontinued or. How can it not affect?

[Jesper Flemme, executive]

I think we should also clarify that quite a lot of the consolidations means that we still remain with several brand names and sites. I think a good example is Bygghemma Finland where we basically had 4 different businesses that we consolidated into one. We terminated one, yes. But the other 3, we have consolidated into 1 entity but we still run 3 different sites, but under 1 organization and 1 IT platform.

So consolidation does not necessarily mean reduce the number of sites or brands.

[Gustaf Ohrn, executive]

But you are, of course, perfectly right, if we work to discontinue any brand, that band would need to be impaired .

[Jesper Flemme, executive]

The main synergies does not come from reducing site. The main synergies comes from consolidating on entity level to reduce cost levels in running platforms, organizations, et cetera.

[Operator]

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

We have also received a question in the Chat. And the first question comes from [ Marnus Worman ], and it consists of two parts. So the first one is you mentioned that a wide selection and availability remains at the heart of your business. Where is the balance between this ambition and your target to reduce inventory? It seems possible that your inventory reduction will exceed the SEK 600 million target at the end of 2023. But will you see a limit in inventory reduction from where the sales potential is affected too much?

[Unknown Executive]

I think it's a very good question, actually. And we really work hard to balance this. We need to measure both inventory reduction, and we also need to measure availability. And I would say that in all our businesses today, we measure availability. And the main focus, of course, is to not decrease availability on the most important and the highest turnover products. So there's still room to decrease inventory, but it will be done more on the tail and not to the same extent on the high-running products because their availability definitely is a key driver.

So measure that, be careful with that and balance that, yes. But with that said, still room for significant inventory reduction, but we need to be careful and consider it when we do it.

[Operator]

And the second question from Marnus is, can you elaborate how your interest costs will be affected following the renegotiation with banks?

[Gustaf Ohrn, executive]

I mean we have communicated, of course, additional flexibility comes with a cost. And trying to quantify, I would say interest expenses would be 1.5x the number that we reported in 2022.

[Operator]

And that was all of the questions from the chat. So thank you.

[Gustaf Ohrn, executive]

I'll just say thank you very much. Thank you very much for listening. Highly appreciate it. If you have any other further questions that you want to take with us, please don't hesitate to contact us. We will do our very best answer. Well, thank you very much for listening and bye