BHG Group AB

STO:BHG

Earnings Call Transcript 2021-Q3

[Operator]

Thank you for joining us on our conference call today to review BHG's Third Quarter 2021 Results. [Operator Instructions] 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, Group CFO. Both will be available for Q&A later in today's call.With that said, I'll 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 2 please. We continued to grow in the quarter on the back of our special BHG recipe, combining organic initiatives with M&A and unlocking the synergies made possible. Through this recipe, our position was reinforced, and we continue to make progress towards becoming the undisputed European online leader within home improvement.Slide 3, please. I'll start this morning's presentation by reviewing the results highlights and then move on to the business update. Jesper will then cover the financial update before I conclude and we launch into the Q&A session.And Slide 4, and on to Slide 5, please, for the results highlights. Despite challenging comps, we delivered another quarter of growth with net sales of SEK 3.1 billion, up 33.6%, corresponding to pro forma organic growth of 10.2% and organic growth of 5.5%. Adjusted EBIT amounted to SEK 164 million, corresponding to an adjusted EBIT margin of 5.4%, and cash flow from operating activities at minus SEK 232 million was significantly affected by the disruptions to the global supply chains, which, among other things, has led us to accept higher inventory levels for now. The past quarter is the first in which we operate in a fully post-COVID environment...[Technical Difficulty]

[Operator]

Adam, you're now live, please continue.

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

Okay. I apologize for the interruption there.I was on Slide 5, and I'll take that from the top then. Despite challenging comps, we delivered another quarter of growth with net sales of SEK 3.1 billion, up 33.6% corresponding to pro forma organic growth of 10.2% and organic growth of 5.5%. Adjusted EBIT amounted to SEK 164 million, corresponding to an adjusted EBIT margin of 5.4% and cash flow from operating activities at minus NOK 232 million was significantly affected by the disruptions to the global supply chains, which, among other things, have led us to accept higher inventory levels for now.The past quarter is the first in which we operate in a fully post-COVID environment affecting supply but also demand. Nevertheless, we strengthened our leading position. I'm pleased with the fact that our units outgrew the market significantly, and I'm also pleased with the continued strong performance of our recently acquired businesses. Two key acquisitions, one for each segment were also carried out during the period: HYMA, our second largest acquisition to date; and AH-Trading, our first ever acquisition in Germany.Slide 6, please. As you well know, our growth journey is fueled by a mix of organic initiatives and M&A, an approach we are convinced conveys unique advantages for us. When it comes to the organic component, we did quite okay in the quarter given the tough comps and the decline in the overall market. Organic growth amounted to 5.5%, driven by the DIY segment and pro forma organic growth to a whisker over 10%, with both segments at similar levels.Slide 7, please. In the quarter, we saw our underlying markets contract and with bottlenecks and price increases in the supply chain persisting, our units gained market share. In addition, we added new units under our umbrella, leading to total growth in excess of 30%. As I've already mentioned, the new additions to the group have performed well. Further, our still nascent position on the European continent was significantly strengthened.As you can see on the chart to the right, net sales on the continent accounted for 13% of the total and within the Home Furnishing segment to a full 30%, a significant increase on as recently a couple of years ago.We continue to be bullish about the further organic and M&A-related opportunities in our traditional Nordic home market as well as on the European continent. And finally, we reaffirm that the underlying online expansion trajectory, in our view, remains unchanged. The pandemic simply accelerated the path. And from this higher base, we expect the online home improvement markets to expand by 15% per annum over a cycle for many years yet to come.As the natural industrial consolidator of our space, we have [indiscernible] available to continue docking excellent new businesses to the BHG model ship.Slide 8. For a reminder on our total addressable market opportunity. Today, we are the #1 of the Nordics. And as we just discussed, we also have a rapidly growing presence on the European continent. Jointly, these markets represent a very significant growth opportunity.Our pro forma net sales is approaching SEK 14 billion. This should be viewed against the backdrop of the Nordic online market for home improvement worth some SEK 35 billion, which in turn forms part of the total addressable market in the Nordics worth some SEK 300 billion, which finally, of course, is dwarfed by the 15 to 20x larger European opportunity.With online penetration standing at around 14%, but increasing steadily, the bulk of the growth and the total addressable market will continue to accrue to the online segment for many years to come. It's against this market backdrop that we updated our midterm financial targets earlier this year, including us setting out to again double the size of our business and become a SEK 20 billion sales company.Slide 9, please. Moving to the business update. So Slide 10, please. Our strategy remains focused on our 4 cornerstones, which I trust that those of you who have followed us for a while know by heart by now. Firstly, a continued expansion of our leading product range; secondly, scale and a high share of own brands in our sales mix; thirdly, creating the most appealing shopping experience and leading in the digital realm; and finally, offering the market's most professional guidance, service and support.The product offering forms the base of our ecosystem and the customers at its center. And an integral part of our execution approach includes leveraging our M&A capabilities to accelerate both growth and strategy execution.Slide 11. Again, our recipe combines organic initiatives and M&A with the synergy possibilities created between the 2. The organic approach is based on our 4 strategic pillars, which we just reviewed. In addition to benefiting from the secular trend of driving online penetration, we continue adding product, geography categories and geographies. We also continue improving our approach to M&A. We have the proven track record. We have the organization capability and we have the deal flow.Our markets are still fragmented. This is true for the Nordics, but also applies perhaps to an even greater extent to the European continent. And we continue refining our post-merger integration playbook to ensure we capture synergies in a structured and repeatable fashion. We fine-tuned how we go about integrating the bolt-ons on to our platforms and the model for how the group ensures clear governance processes, centers of excellence and how to optimize tech, data and automation across our units.Moving to Slide 12, please, for a quick status update on the post-merger integration side in reverse chronological order. Our most recent acquisition, that of AH-Trading is already in deep discussions with its new partners within our Home Furnishing segment. One great milestone was reached as recently as last week when a truck from our Helsingborg warehouse was dispatched to the AH-Trading warehouse in North Rhine-Westphalia.The other completed acquisition in the third quarter, HYMA, is already experimenting with assortment exchange between various relevant BHG units. Further cost synergy, primarily revolving around products and delivery partners, are in execution.IP Agency, our Finnish private label acquisition, is now operating as part of the BHG Finland team and much of new product development centers around ranges that fit particularly well into the various BHG sales channels.Hafa Bathroom Group is forming our new base for a significant chunk of our proprietary brands within DIY, with a focus on the bathroom category and adjacencies. This includes leveraging the Hafa management team and warehousing infrastructure.And finally, Nordic Nest and Svenssons are essentially already operating as one under the Nordic Nest management. The Nordic Nest warehouse is expanding to meet the good growth of the business, but also in order to allow moving the former Svenssons' warehouse into the Nordic Nest one. We've also decided to automate a very large part of the Nordic Nest warehouse. This project is kicking off now, will run through next year and is set to drive significant efficiency gains.Turning to Slide 13 and a look at organic initiatives, which are sorted under the key themes, assortment, delivery and data/automation. We continue to expand our assortments, and we continue to grow our installation businesses in support of our mission, we make living easy.A number of our units are now operating in our proprietary system for automated product data exchange, and we are clustering our units to reduce complexity, including, as I just mentioned, consolidating a number of our own brands into the newly acquired Hafa Bathroom Group.We are making significant investments into delivery within the DIY segment. These include bolstering our drop shipping capabilities to meet ever-rising customer expectations. Within the Home Furnishing segment, these are focused on consolidating warehousing infrastructure and expanding our showroom and last mile delivery footprint. And on the data and automation side, we have embarked on upgrading our customer platform as well as automating parts of our warehousing infrastructure.Turning to Slide 14 for an update on key customer metrics. Net sales growth was, of course, an outcome of our expanding customer footprint. Although traffic generation conditions were more challenging in the quarter than in the preceding 18 months, our customer base continues to grow and our customer metrics improved. As you can see to the left on this slide, an increase -- the increase in active customers, defined as customers who have made at least 1 purchase in the past 12 months, amounted to 32% and surpassed the $4 million mark. We succeeded in driving both the number of orders per customer and the share of net sales from repeat customers up, and we maintained an attractive marketing ROI.Our investments into gaining further insights from customer-related data across the group continue. The work to launch an upgraded customer data platform for select large units in the first half of 2022 is progressing well. These efforts will help drive customer lifetime value up and so unlock further profitable growth, more generally, driving BHG towards a higher level of customer simplicity remains a key focus area for group management.Slide 15, please. This is BHG today at glance. On the left-hand side, our CAGR since 2014 exceeds 40%. In this period, EBIT has grown by more than 100% per annum. Our EBIT margin on an LTM basis stands at 7.1% and is generated by over 100 customer-facing web properties.And now moving over to the right-hand side, these web shops having visited over 380 million times in the past 12 months, generating some 4.5 million orders from customers in 24 countries. And finally, our leading product portfolio has now reached 1.5 million SKUs.Slide 16, please. Handing it over to Jesper, who will walk us through the financial update, Slide 17, please.

[Jesper Flemme, Group Chief Financial Officer]

Thank you, Adam. With the third quarter behind us, we can conclude that BHG remains strong in a post-COVID environment, thanks to our position in our home market and the potential we have started to realize in Continental Europe.As Adam mentioned, net sales increased 33.6% to reach SEK 3.060 million. Pro forma organic growth reached 10.2% and organic growth reached 5.5%. Organic growth was impacted by high comps and a sluggish Home Furnishing segment, particularly at the beginning of the quarter. Adjusted EBIT amounted to SEK 164 million, corresponding to an EBIT margin of 5.4%.Let us now turn to Slide 18 and a closer look at the EBIT margin compared to last year. Comparing our EBIT margin in the quarter 2 last year, we can conclude that the Q3 2020 EBIT margin of 8.5% is a tough comparison as it was favorably affected by COVID-related market sectors. Our product margin amounted to 38.3% in the quarter, almost 1 percentage point higher than last year. The negative impact from increases in supplier prices and freight rates was mitigated by significant price increases and mix improvements.Fulfillment costs increased in the quarter compared to last year, driven by supply disruptions, longer lead times and our decision to accept higher inventory levels for now to ensure product availability.Marketing costs increased in the quarter as we, like the rest of the market, were faced with increases in cost per click and tougher competition for customers. The increase in organizational cost should be seen in the light of under-resourcing in previous periods and continued long-term investment to drive customer centricity.Finally, the increase in depreciation and amortization was primarily driven by continued tech investments. All in all, our EBIT margin amounted to 5.4% in the third quarter.Let us now turn to our Do-It-Yourself segment, Slide 19, please. The Do-it-Yourself segment reported a solid quarter, given challenging comps and us now operating in a post-COVID environment. Net sales grew by 27.2% to reach SEK 1.862 million, of which organic growth amounted to 10.1%.As in the second quarter, the segment Swedish operations performed particularly well, including the HYMA platform and the specialist unit focusing on our own brand. The gross margin in the Do-It-Yourself segment was once again favorably impacted by high share of sales from our own brands and improved by 0.2 percentage points to reach 23.3%. Adjusted EBIT amounted to SEK 129 million, corresponding to an EBIT margin of 7.0%.Slide 20, please. The Home Furnishing segment continues to build crystal mass by combining organic initiatives and acquisitions, including our entry into the large German market. At the same time, high comps in weaker total market and complications in the global logistics chain resulted in a weak organic growth. Net sales in the Home Furnishing segment grew by 44.6% in the quarter, reaching SEK 1.206 million, of which organic growth amounted to minus 2.4% and pro forma organic growth amounted to 11.1%.The gross margin for the quarter was 29.3%. Adjusted EBIT amounted to SEK 49 million, corresponding to an EBIT margin of 4.0%. The lower margin compared with the year earlier period is mainly attributable to 3 factors: complications in the supply and logistics chain, cost increases for online marketing due to weaker demand and the fact that the consumer price adjustments have yet to fully offset cost increases.Let me turn to cash flow, Slide 21, please. Cash flow from operating activities amounted to minus SEK 232 million and was mainly impacted by the buildup of inventories to ensure high product availability despite the disruptions in the global supply chain.The right-hand graph showing the development in liquidity walks us through the starting period position of SEK 299 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 are primarily related to the share issues completed in Q1 and the refinancing completed in Q2, but also include amortization of leasing liabilities, bringing us to the period end SEK 677 million of liquidity at hand.Slide 22, please. The group's net debt amounted to SEK 1.854 million at the end of the quarter, and net debt in relation to LTM adjusted EBITDA ended at 1.8x within the medium-term financial target range. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 800 million.We continue to see excellent M&A opportunities both in our Nordic home market and in Continental Europe and our strong financial position means that we can act decisively as the right opportunities materialize.Handing it back over to you, Adam, to summarize and conclude.

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

Thank you, Jesper. Slide 23, please, and moving to Slide 24, for the key topic of sustainability. Our sustainability report for 2020 was our first-ever consistent with the global reporting initiative standard. We're now taking further steps to professionalize our ESG work. We're building our own in-house ESG capabilities, including having hired Maria Morin as part of the executive management team. We are tying together our ESG execution with our internal control processes. We recently discussed and approved our new code of conduct with the Board as well as updates to our supplier code of conduct, which is slated for rollout before year-end. And we've taken the first steps to establishing a taxonomy framework into our metrics for the upcoming 2021 sustainability report.Moving to Slide 25 for conclusions, please. Summarizing the quarter. On the back of combining organic initiatives with M&A, our growth journey continued and Q3 LTM sales amounted to SEK 11.5 billion. While facing tough comps and operating in a post-COVID environment with total market contraction, we continue to strengthen our Nordic position and we took decisive steps on the European continent.Supply disruptions and demand complications through a spanner in our and competitors' works, the environment in the next quarter is likely to continue to be complicated, but we see that our mitigating actions are having desired effects. A host of organic initiatives are in motion, including expanding installation services, last-mile delivery services and the showroom network, investing in our tech and automation capability and clustering our units around key platforms.We concluded 2 important acquisitions in the third quarter and more is definitely to come. We updated our financial targets at the start of the year, and we're progressing well towards reaching these with Q3 pro forma LTM sales now at SEK 13.7 billion. And finally, we continue progressing our work to create the undisputed European online home improvement platform.Moving to Slide 26. This concludes our presentation, and we'll now open up the call for questions. Over to you, operator.

[Operator]

[Operator Instructions] The first question comes from the line of Gustav Hagéus from SEB.

[Gustav Hagéus, Research Analyst]

My first question relates to these catalog-based competitors that you bring up again I remember back in 2018, you talked about them as well. You grew quite okay in the quarter, at least on a group perspective, but then margins, I guess, was a little bit lower at least than we had anticipated. So does it really make sense to go head-to-head with these fiscal retailers in terms of matching price in these type of situations? Or can you rely a little bit more about on loyalty to your site and perhaps try to break margins a little bit since the products -- I understand with DIY, you typically price compare a Lowe's [indiscernible] lawn mower or something, but these are private label or no label products, if I recall correctly, mainly. So are they really compared head to head on a quarterly basis?

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

Thank you, Gustav. So you're quite right that we execute on pricing decisions somewhat differently between the external brands where price transparency is basically one-to-one and the private label or own brand part of the range. When it comes to the well-known external brands, we execute with pricing robots, and we actually have the ability to adjust pricing up to 4x per day depending on competitors' moves. So that's -- it's a clear pricing approach and algorithm on the external brand side.On the private label side or the owned brands, we have to distinguish between the value for money private label part in the furniture side and the part of the range that is sort of truly proprietary brands. And when it comes to the value for money part on the furniture side, we do have the ambition to have those entry-type products that are priced very competitively. That is the main trust of our scope in that part of the business. So we absolutely are affected by competitors' moves, although price transparency isn't really one-to-one the way it is on the external brands. But nevertheless, there is a market out there, and we're competing with these players, especially, I would say, in the value-for-money furniture business.

[Gustav Hagéus, Research Analyst]

But do you -- did you have like a strategy going into Q3 that let's try to go for 10% pro forma growth and let the margin suffer? Or did you sort of end up here? You know what I'm saying, like maybe it would have been better for shares, for instance, if you grew 5% and with the margin was slightly higher today, maybe, I don't know. But have you -- are you sort of taking informed decisions that this is the plan now in terms of prioritizing growth over margins on a quarterly basis? Or is that hard to do? Or...

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

It's always -- no, it's always a balancing act, and we definitely are making very conscious decisions. I can say on the home furnishing side, in particular, when it comes to the value for money part of the business, that we did adjust margin structures quite significantly during the quarter. So on that part of the business, we have adjusted pricing and gross margin structures quite significantly again during the quarter. So we came out at a higher level than we came in.

[Gustav Hagéus, Research Analyst]

And what does that save for sort of margin -- sequential margin as analysts needing to put in something for the margin in Q4. Given what you just said, do you think that we have trough now in Q3? Or is -- do you think these margin levels will be sort of flattish sequentially? Or what's your feeling right now?

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

Well, as you know, Gustav, we don't publish forecasts. And we do mention in the report that overall, the fourth quarter has begun in a similar vein as the third quarter. That's the total view. It does vary as we look under the hood there between the various platforms within BHG. So I would say that specifically commenting on the value for money furniture part, we do expect stronger margins in Q4 than we did in Q3. But beyond that, I'd be not to comment any further. That's how far we commented in the report.

[Gustav Hagéus, Research Analyst]

And in terms of the inventory buildup, this is like 170% or something. How much of that is M&A related and how much is like-for-like, what do you say?

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

So I see if Jesper can provide any further flavor to that particular twist on the question. But I can say that, as you know, the delays in terms of freights from Asia have led to basically 3 effects. Longer lead times, all else equal means higher inventory levels. And secondly, the lack of predictability on those lead times means that we've accepted slightly higher inventory levels to maintain good product availability. We actually suffered a bit from a lack of product availability earlier in the year, and that's been perfectly restored now. And the third element is that some of the seasonal items came in late in the season, and those are quite difficult to activate out of the season. So those are the 3 main elements. When it comes to M&A impact, I'll turn over the questions to Jesper.

[Jesper Flemme, Group Chief Financial Officer]

Yes. And if we start with the balance sheet perspective, so the acquisitions of AH-Trading and HYMA have contributed with some SEK 400 million of inventory to the balance sheet. And if we then shift focus to the cash flow statement, you can see the effects from changes in working capital in the report. And if I just say that at least half of that effect is related to inventory buildup.

[Gustav Hagéus, Research Analyst]

Okay. And coming back on the inventory. So I guess it's going to be a tough sale to sell sort of outdoor furniture now in Q4. Do you feel that you are -- with these delays of seasonal furniture, do you still -- taking that out of this and M&A component out of this inventory buildup, do you still feel that you are in a better situation than say, Q3 to meet demand in terms of supply or should we...

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

Yes. Definitely.

[Gustav Hagéus, Research Analyst]

Yes. Okay. And it's not for us to assume that maybe growth should continue then as well on the trend as in Q3. So we'll see positive organic growth in Q4. Is that the internal ambition?

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

It's definitely the ambition. And again, I'll just say that we don't provide forecast. But yes, we're a growth company, and we always intend to drive growth -- total growth, pro forma growth, those are, I think, perhaps the 2 most important metrics, but absolutely, organic growth, excluding the acquisition of the 12 -- last 12 months is, of course, also a key driver, and we definitely intend to keep growth up.

[Gustav Hagéus, Research Analyst]

But is there any one part of view that -- is there any one item that makes it harder for you to grow in Q4 versus Q3, the comp was a little bit tougher at least year-over-year, but do you feel that you have a similar starting point for you a little bit...

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

From an internal point of view, we don't see any obstacles. And I guess, the unknown is where the market will go from here from a demand perspective. And we don't have that crystal ball, but we're ready and fully equipped to grasp the opportunities that will be there. But that's the unknown, we don't know.

[Operator]

[Operator Instructions] There are currently no further questions registered. I hand the conference back to you, speakers.

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

Thank you, operator, and thank you, everyone, for dialing in this morning. We look forward to speaking to you again before too long. Have a great day. Bye.