BHG Group AB

STO:BHG

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for joining us on our conference call today to review BHG's Fourth 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, 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. Please begin.

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

Thank you, operator, and good morning, everyone. Moving to Slide 3, please. The final quarter of 2020 continued much in the same strong vein as the previous 2 quarters, adding the acquisition of Nordic Nest in December to the picture, taps an exceptional and transformative year for us. With the acquisition of Nordic Nest, BHG has essentially reached the midterm financial targets we communicated in conjunction with our IPO in March of 2018, including becoming a SEK 10 billion business. As a consequence, and to reflect our continued journey, we're updating our financial targets this morning, more on which later. Fourth quarter performance demonstrates that demand has remained strong, characterized by solid growth in our Home Furnishing business, but powered especially by outstanding growth in our DIY business. Today, we'll start by reviewing the results highlights, then move on to the business and financial updates before summing up and launching into the Q&A session. I'll kick it off, and I'll then hand it over to Jesper to cover the financials before I summarize and we move on to the Q&A. Slide 5, please. Please note that none of these numbers, nor the ones on the subsequent slides include Nordic Nest, since we consolidated the P&L of Nordic Nest only from the 1st of January this year. Growth accelerated somewhat compared to the third quarter. Total growth amounted to 43% and organic growth to 36%. Net sales reached SEK 2.4 billion. Adjusted EBIT came in at SEK 194 million, corresponding to an adjusted EBIT margin of 8.2%, more than SEK 200 million in cash flow from operating activities was generated in the quarter. And so cash flow for the full year almost touched SEK 1 billion. The underlying performance drivers in the quarter were similar to those of the previous two. Consumer interest in online shopping in general and in-home improvement specifically has remained on a high level, and BHG has been well placed to capture the resulting demand. Both segments, again, performed well with the Home Furnishing segment now delivering robustly for a 9th consecutive quarter, while the DIY segment continues to be the most clearly favored by the strong trading conditions since the second quarter of 2020. Our 2 largest platforms within DIY, bygghemma.se and BHG Finland, accelerated further compared to third quarter, growing by some 40%, while some of our niche private label-based units again grew at truly exceptional rates. We reiterate that we expect a reversion to more normal trading conditions. But once again, we note that trading has remained strong thus far into the new period. Slide 6, please. We continue approaching growth through a mix of organic initiatives and M&A. When it comes to the organic component, we're now reporting our fifth quarter in a row with growth above the 15% level, our communicated target over a business cycle. With a 35.5% organic growth of the fourth quarter, the full year 2020 came in at an organic growth rate of 33.7% which was comprised by the Home Furnishing segment growing 30% and the DIY segment growing by 37%. Slide 7, please. Our strategy remains focused on our 4 cornerstones: firstly, the continued expansion of our leading product range, which now stands around the 1 million SKU mark; secondly, scale and a high share of own brands in our sales mix, with full year growth of 44%, not least fueled by our private label range and as evidenced by the gross margin trajectory, we continue building scale advantages; thirdly, creating the most appealing shopping experience and leading in the digital realm. We grew our digital footprint significantly in the quarter, resulting in visits to our destinations, exceeding 300 million for the full year; and fourthly, offering the market's best professional guidance, service and support, including in the quarter, further extending the reach of our installation network within DIY as well as our owned last-mile delivery capabilities on the Home Furnishing side. This is our ecosystem with a product offering at its base and the customer always at the center. And finally, an integral part of our execution approach includes leveraging our M&A capabilities to accelerate both growth and strategy execution. Moving on to the business update and so turning to Slide 9, please. As we enter our ninth year since inception, some key metrics describing who we are today at a 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 7.8% and is generated by our over 80 customer-facing web properties. And now moving over to the right-hand side. These web shops have been visited over 300 million times in the past year, creating some 3 million orders from customers in 19 countries across Europe. And finally, our product portfolio is leading in terms of its breadth and depth. Slide 10, please. We announced the Nordic Nest acquisition on the 13th of December. Nordic Nest is a leading online player with a focus on the affordable luxury segment for tabletop, lighting, interior design and other smaller home furnishings items. The business, which in round numbers, turns over SEK 1 billion today, has customers in many European as well as international markets. The largest geographies are the Nordics, Germany, the U.K. and South Korea. We're convinced that the combination of BHG and Nordic Nest is a winning one. From the customer, product and geographical perspective, we now cover the full spectrum from value for money to affordable luxury and from large furnitures, such as beds and couches to table decor and design. The geographic footprint of the group is also significantly expanded. And last but not least, the cultures of BHG and Nordic Nest are a perfect match, with a strong focus on profitable growth, cost control and customer centricity. Slide 11, please. As I've already mentioned, adding the SEK 1 billion sales from Nordic Nest, we are now within touching distance of the SEK 10 billion in net sales that has been our target since early 2018. The time has come to raise our sights and stake out the path forward. We're thus announcing updated medium-term financial targets. These reflect our strong vantage point in markets that we are convinced will continue to grow. We're setting out to double the business again from SEK 10 billion to SEK 20 billion. We reiterate that this trajectory will follow from combining organic growth at least in line with the market with acquisitions to deliver a combined growth in the 20% to 25% range per annum. The new profitability target is to achieve an adjusted EBIT margin of at least 7%. The past year demonstrates that 7% does not represent the ceiling for what the business can deliver. However, we are in a growth phase, and we will continue to focus on growth. We will not compromise on this by prioritizing profitability at a higher level than the established target. The capital structure and dividend policy targets remain as before. Moving on to Slide 12, please. Our business model combines a multi-brand approach with acquisitions, both of which help maximize our digital footprint and result in a customer base that is both broad and attractive. As we stated a couple of quarters back, we're step-by-step increasing the granularity with which we communicate customer developments. Our ongoing acquisition agenda, however, means that our consolidated internal data today covers the main platforms rather than the complete BHG universe. With this said, as you can see on the bottom left-hand side, we've seen a steady increase in the number of active customers during the year, reaching well over 2 million. This represents a growth in active customers of more than 50% year-on-year. A few words on this customer base. The largest cohort consists of customers who are active in the labor market and [ edifying ] when it comes to improving home environments, for the families. We have roughly 50-50 split when it comes to gender, with men being more prevalent within DIY and women within Home Furnishing. On the bottom right-hand side, we show how the delta between our fully loaded gross margin and marketing investments keeps expanding. The significant increase in gross margin is the result of both pricing diligence operational efficiencies and the growing share of net sales from our own brands. A slight increase in marketing to sales, which at 5.7%, is still at market-leading levels, is connected to the increase in net sales from our own brands. The net result of these developments includes very attractive customer acquisition metrics, with a strong return profile already on a new customer's first purchase. We're committed to constantly enhancing the customer experience. The commitment which was put to the test during the exceptional demand peak in the second quarter. We've cut lead times and we've clawed our way back since then. We will continue investing in systems and in processes to ensure that we meet or surpass our customers' expectations. I'll now hand it over to Jesper, who will walk us through the financials in more detail.

[Jesper Flemme, Group Chief Financial Officer]

Thank you, Adam. As we now put the fourth quarter behind us, we can see that a high level of growth has been maintained. The patterns from the second and third quarters of the year were largely repeated in the fourth, even on high-growth in the Home Furnishing segment and accelerated growth in the Do-It-Yourself segment. As Adam mentioned, net sales increased 43.2% to reach SEK 2.355 million and organic growth reached 35.5%. On the back of continued favorable market conditions, we reported the strongest EBIT and EBIT margin for a fourth quarter-to-date, reaching SEK 194 million, which corresponds to an EBIT margin of 8.2%. The high adjusted EBIT margin was the result of: one, a favorable price and product mix, including a continuously growing private label share of sales in the Do-It-Yourself segment; two, operational leverage in fulfillment, logistics and SG&A due to high growth; and three, positive currency effects, which I will get back to. Moving on to Slide 15. Turning to some of the sales drivers in the quarter. Similar to the performance in the second and third quarter, the continued strong trading conditions led to a strong growth in the number of visits to the group's destinations, which increased by 53% to 78 million during the quarter and generated 865,000 orders. Although the trend in the number of visits to the group's destinations was strong, the conversion rate increased somewhat compared with the year earlier period. As in the 2 preceding quarters, a changed product mix resulted in a lower AOV than in the year earlier period. However, after record high gross margins the period demonstrates, the decrease in AOV did not have any negative effect on earnings since an advantageous AOV structure could be maintained in relation to the delivery options relevant to a given category. In other words, the AOV for bulky products, which are certain pallets, remained high and the high growth for small parcels could be managed by delivering to service point. Slide 16, please. As a result of continued strong market conditions and the group's position, profitability for the quarter was very high. Strong top line growth at 43.2%, resulted in strong operating leverage, translating to a gross margin increase of 54.8% and an EBIT increase exceeding 100%. The gross margin improved by 2.0 percentage points to reach 27.2%, exceeding the previous record that was set in the preceding quarter. The product margin amounted to 38.4%. Just as in the third quarter, the gross margin improvement was driven by a growing share of sales from our own brand; continued focus on maintaining the price points for bulky product; additional cost and process efficiencies in purchasing and logistics; and finally, positive currency effects from the stronger SEK, resulting in a favorable impact on the gross and EBIT margin by 0.9 percentage points. Let us now turn to our Do-It-Yourself segment. Slide 17, please. The Do-It-Yourself segment closed the year with strong growth and exceptionally high profitability. Net sales grew by 49.4% to reach SEK 1.439 million, of which organic growth amounts to 39.4%. The segment platforms in Sweden and Finland continued their strong trend from the previous quarters. At the same time, the Danish operations as well as a number of the more specialized operations in Sweden, particularly those with a high private label share of sales grew very strongly. Profitability in the Do-It-Yourself segment was favorably impacted by a higher share of sales from our own brands, and gross and EBIT margin reached record high levels. The gross margin improved by 2.0 percentage points to reach 25.1%, adjusted EBIT amounted to SEK 143 million corresponding to an EBIT margin of 9.9%. During the quarter, we continued to develop our customer offering, including the continuous expansion of the product range, expanding the base of products which consolidated deliveries offered and a further rollout of installation services. The installation platform has now been introduced in the Finnish market. Slide 18, please. The Home Furnishing segment is now in its ninth consecutive quarter of strong growth and solid margin. Net sales in the Home Furnishing segment grew by 34.7% in the quarter, reaching SEK 923 million, of which organic growth amounted to 30.1%. Net sales were strong and even across all geographical markets, led by the category specialist Lampgallerian, which reported growth rate of nearly 100%. However, net sales were somewhat negatively impacted by bottlenecks in certain areas of the product supply chain, not least as a result of the shortage for room for our postal furniture throughout Europe. The stricter Danish restrictions also had a certain negative impact during the final week of the year. The gross margin improved by 2.4 percentage points to reach 30.3%, adjusted EBIT reached SEK 63.6 million in the quarter corresponding to an EBIT margin of 6.9%. The somewhat lower EBIT margin for the quarter is attributable to: transaction costs relating to the acquisition of Nordic Nest; the relatively high cost of online marketing in Eastern Europe, which, in turn, were linked to product bottlenecks and associated delays between order intake and the invoicing; as well as changes to the Danish warehousing infrastructure. Let us now turn to cash flow, Slide 19, please. Cash flow from operating activities for the full year amounted to SEK 994 million, corresponding to a cash conversion in relation to adjusted EBITDA of 105.9%. The main drivers behind the strong cash flow was the group's EBITDA as well as a favorable working capital trend. The right-hand graph showing the development in liquidity works up through the start and period position of SEK 270.3 million, adding the cash flow from operations, deducting impact of investing activities, a majority of which is M&A-related and some -- the most related to Nordic Nest; and finally, the financing activities which again primarily related to Nordic Nest in the form of a new term loan of SEK 1 billion, but also include amortization of leasing liabilities, bringing us to the period end of SEK 299 million of liquidity at hand. Slide 20, please. The group's net debt amounted to SEK 1.8 billion at the end of the quarter, despite the acquisition of Nordic Nest. Our strong year-to-date operating performance meant that net debt in relation to LTM adjusted EBITDA ended at 2.2x, within our medium-term financial target range. Our financial position is strong. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 300 million, 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 22. Q4 caps a transformative year for us with stellar growth, profitability and cash flow generation. We're reporting a fifth quarter in a row with a rough target growth. Nordic Nest joined us and now constitutes a new vertical within our Home Furnishing segment. Our gross and bottom line margins are at industry-leading levels on the back of sound mix development and strong operational control. Strategy execution of emotion revolving around our 4 pillars which make up the BHG ecosystem. And finally, on the back of having coming in touching distance of our previously communicated financial targets, we're today staking out the path forward, including targeting to reach SEK 20 billion in the medium term. Thank you. This concludes our presentation, and we'll now open up the call for questions.

[Operator]

[Operator Instructions] We have a question from the line of Gustav Hagéus from SEB.

[Gustav Hagéus, Research Analyst]

A few questions, if I may. Firstly, Adam, you mentioned that trading has continued into January. If you can confirm that we should interpret that as the organic growth being roughly at the same pace in January compared to Q4? And if you could elaborate a little bit on the trends intra-month, it has accelerated or declined towards the end? And lastly, if you could remind us sort of the phasing, typically in Q1, if January is small or a representative 1/3 of that quarter?

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

Thank you, Gustav. So as we comment on in the report, and actually, it's the third report in a row where we basically say the same thing, which is, we expect a reversion to more trend-like growth which over a business cycle should be something like 15% per annum organically. We can still confirm that the above trend growth that we've seen in the past 3 quarters has continued into January. So without being too specific, the answer is, yes. It's more or less in line with what we've seen through the fourth quarter, thus far into the month. And the first quarter, as you know, seasonally is not our strongest quarter from a top line point of view. And January, I think, is roughly similar to February, taking into account the additional days of the month, of course. And then March is slightly stronger than the 2 preceding months in the quarter.

[Gustav Hagéus, Research Analyst]

Great. That's very clear. And could you remind us sort of when you saw exceptional growth starting last year on the back of COVID-19? Was that sort of end of March or early April? Or could you remind us?

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

Absolutely. It was in the final days of the first quarter. So when -- I think that people realized that this thing that was coming to us from far away was not an isolated epidemic. It was actually going to be a global pandemic. I think the initial couple of days -- when we sort of understood that this was dawning on everyone, the market was bit taken aback. And then after that initial 3, 4-day period of slightly more held-back trading, we saw this significant increase in demand, and that was more or less the last week of March. And then as you know, it continued basically throughout the second quarter. The third quarter was also excellent, although at a slightly lower level than the second quarter. And now the third quarter is sort of somewhere in between the 2.

[Gustav Hagéus, Research Analyst]

Right. Okay. If I turn to M&A, I understand you keep roughly -- I mean, your new target simply means that you're keeping your old growth targets being 10% M&A and 50% organic. And you already have about 10% M&A growth this year, I guess, from the Nordic Nest acquisition. Could you elaborate a little bit on your hunch on whether or not we will see additional acquisitions in the next few quarters? And if you could also elaborate a little bit on what you see your financial capacity is to add M&A, without going for new equity, near term?

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

I was alluding to it, it's difficult to sort of forecast precisely the pace of M&A in a shorter period of time like a quarter or even a couple of quarters. But over the course of the year, I hope don't have to eat this up, but I can say with full certainty that there would be more M&A. And there will -- and with all certainty be more M&A of the types that we call category catalyst acquisitions. Whether we will see opportunities in the order -- size order that we just did with Nordic Nest, that -- well, we definitely see opportunities, but further, it sort of always draws with a line, and we will grab opportunities to go for those types of acquisitions that depends on a number of things. But category catalyst acquisitions full certainty, yes, there will be such acquisitions this year. And then, coming back to seasonality because I think it's important in this regard as well, the second quarter is seasonally our strongest cash flow quarter always. And so we do expect that seasonality to hold up well this year as well.

[Gustav Hagéus, Research Analyst]

And in terms of firepower, where do you see your firepower? If you look at your internal budgets for, how you will perform this year compared to your -- where you're comfortable in terms of leverage, what's your firepower for M&A this year, you think Adam, roughly?

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

I will actually not quantify that, other than to say that, we feel that we have sufficient firepower. And all that we did, revise our financial targets, our net debt-to-EBITDA remains. But the way that's phrased, we said that we can temporarily also move outside of that range, if we see that we can quickly come back into it, following an acquisition. Our relationships with the financing community, including our House Bank, is excellent. So we don't feel that we're significantly constrained to follow through on our plans.

[Gustav Hagéus, Research Analyst]

Okay. A few more questions, if I may. But firstly, you mentioned the installation that you're rolling that out now also in Finland, and you're breaking it out a little bit from your current organization to give it a little bit more room internally. Could you give us a little bit of flavor of where you're at currently in terms of share of sales coming from installation in January or end of last year, if it's more than accretive already today and current growth rate as you envision it?

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

Yes. So the easy question to answer is the one on margin accretion, and the answer is, yes. It's absolutely margin accretive to us. When it comes to share of revenues, it's actually very small, if we look at that as an isolated P&L. But we do see that it's strategically important to us. As you know, our mission is, we make living easy. And this is a crucial building block for moving ever closer to that mission. And I think arguably, also, we have some product sales that might not otherwise have happened, if we also didn't offer this additional service, which goes so much hand-in-hand with some of the product range within DIY.

[Operator]

[Operator Instructions] We have a follow-up question from the line of Gustav Hagéus from SEB.

[Gustav Hagéus, Research Analyst]

Okay. Yes, a few more then, nitty-gritty ones. Could you give us some guidance on CapEx and lease payments for this year? And secondly, with regards to the earn-out payments in Q4, could you confirm whether or not that mainly relates to Furniture1? And if you could elaborate a little bit on, if you have any further commitments financially to the previous entrepreneur there and your ability to possibly remain -- keep in within the organization also going forward?

[Jesper Flemme, Group Chief Financial Officer]

So if we start with the Furniture1 question, so we did spend SEK 180 million in the fourth quarter relating to acquire another 20.1% from the noncontrolling interest in Furniture1. So that's what you see in the cash flow. And when it comes to the IFRS 16 or the leasing payment, that would be in line for next year. So it's roughly, as you see in our cash flow statement, it's SEK 40 million in amortization and another SEK 10 million, SEK 12 million in interest. And I think the last question was maybe, when it comes to additional payments to Furniture1, is that correct?

[Gustav Hagéus, Research Analyst]

Yes. I mentioned that your ability to remain that entrepreneur or your -- if you see that these kind of still be around? And also, if you have a CapEx guidance for us for next year to have?

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

Yes. So if I may just comment further on Furniture1, yes, he's a great entrepreneur. He's much appreciated. He's happy being part of our universe, and we very much expect him to continue driving the business to new highs.

[Jesper Flemme, Group Chief Financial Officer]

And coming back maybe to the CapEx, we have said before that we're aiming for some 1% of net sales, with the high-growth that we have had this year, we are not there. So I will say slightly below 1% for next year.

[Operator]

We have one more question from the line of Carl-Oscar Bredengen from Berenberg.

[Carl-Oscar Green Bredengen]

I just have a question relating to the wider market. So obviously, you guys have shown stellar growth across the wider market. But can you talk a little bit more about the wider market characteristics? How has the brick-and-mortar been losing market share to online players? To which extent have you taken market share? And what have we seen in terms of overall growth in the wider industry now that people are sitting at home realizing that their homes need to do some sort of refurbishment. If you can just elaborate a little bit about the general market conditions and your growth trajectory and penetration rates?

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

Absolutely. Thank you, Carl-Oscar. That's a good question. And I guess, many of us also read and listened into bit more news, fourth quarter results. We feel that the way that their CEO put the conditions now on the DIY side, which, of course is, their exclusive market, is quite in line with how we view the DIY side of our business and in terms of total market. So I think the way he put it was that, the market for DIY in 2021 will definitely be bigger than in 2019, but it won't be as big as in 2020. And that's now referring to the total market. And in our case, we, of course, are an online player, and we fully expect, and I guess, all market analysts are with us on that one, that online penetration will continue increasing. And we believe that there will be sort of a major growth in the online section of the DIY market in 2021. So that's sort of our market outlook. And for 2020, the market for DIY still, the total market was unusually strong, just as big nutshell so mentioned. And so we agree with that characterization, although there's sort of isn't objective data out there yet. The market for a B2C was much stronger than B2B. And we believe that the Swedish market was probably the strongest of the 4 Nordic markets in terms of total market, again, growing by on the B2C side, perhaps, just shy of 20%. And as you know, we had organic growth in the quarter within DIY of 39% or so. So that's on the DIY side. If I move on to Home Furnishing, I think the market developments have been very different in the Nordics compared to some of the Mainland European markets where, especially there was sort of a forced online conversion that was much more marked than in the Nordic markets, where the often alternatives became truly off-line, meaning, shutdown. And by and large, that hasn't been the case in the Nordics with a few exceptions during specific times like in Denmark right now. But that has meant that we haven't forced online penetration increase, but it's sort of been the normal online penetration increase in the Nordics. And if we look at the trajectory of our Home Furnishing business, it's sort of almost boringly predictable trajectory since the third quarter of 2019. We've had organic growth around 30% quarter-over-quarter. So it hasn't been noticeably affected by changed consumer behavior in the wake of the pandemic. Does that answer your question, Carl-Oscar?

[Carl-Oscar Green Bredengen]

Yes. That was very clear. I just -- I think for one follow-up, I guess, following the IPO in terms of the wider market research that we've seen and online penetration has been some 10%. So is it fair to assume that online penetration has continued to accelerate in line with your recent growth trajectory that online, it continued to take market share? Or would you say that the overall Do-It-Yourself and home improvement market has grown as well? Or should we consider this a relatively flattish market with online continue to take penetration? I think I'm just trying to understand to which extent have the wider market grown, or are you guys just continuing to win?

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

It's -- so the answer for DIY in 2020 is both those things have happened. So the market has definitely grown at significantly above the trend growth. We believe that trend growth for both of our segments is perhaps, slightly, slightly north of GDP growth over business cycle. And what we saw in the DIY market in 2020 was many multiples of GDP growth occurring in the total market for DIY. And then, of course, online has grown faster than the off-line market, because online penetration has also taken a leap forward. So our growth within DIY is 40% level or so, across the 4 Nordic countries, is the combination of a very strong total market and continued online penetration increase.

[Operator]

We have one more question from the line of Fredrik Ivarsson from ABG.

[Fredrik Ivarsson, Research Analyst]

My question was actually asked already. So I'm very happy with the answers you've given.

[Operator]

As there are no further questions, I will hand it back to the speakers for closing remarks.

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

Thank you, everyone. We look forward to speaking to you again in conjunction with reporting our first quarter 2021 results. Thank you. Wishing you all a good day.