BHG Group AB

STO:BHG

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to BHG Q4 Report 2023. [Operator Instructions]

Now I will hand the conference over to CEO, Gustaf Ohrn; and CFO, Jesper Flemme. Please go ahead.

[Gustaf Ohrn, executive]

My name is Gustaf Ohrn and I am the CEO of BHG. I'm here together with Jesper Flemme, our CFO, to present the BHG fourth quarter report. We will also be available after the presentation to do our best to answer your questions.

Slide 2, please. The financial highlights of the report. It was another challenging quarter from a market perspective and sales was down approximately 10% pro forma. However, given the data points we have, we are confident that we have continued to take market share. Earnings came in at SEK 55 million, still not where we want to be, but with a decreasing top line, we have improved our profitability versus last year's Q4 results.

The improvements in earnings, a result of our focus on gross margin improvements and cost reductions. And we can happily conclude that our hard work is starting to pay off, and this was the first quarterly improvement year-over-year on earnings since mid-2021. Continued very strong cash flow with plus SEK 350 million, significantly stronger than last year. We reiterate the message from Q3 that we for 2024, will prioritize profit over cash flow.

Slide 3, please. Summarizing the year from a financial perspective. The team has reason to be proud of what we have achieved on inventory reduction, cash flow, balance sheet and cost reductions. We set out for 2023 with a communicated ambition to reduce our inventory with SEK 600 million. Summarizing the year, we have reduced our inventory with more than SEK 900 million.

We have, as a consequence of primarily the inventory reduction had a cash flow improvement of more than SEK 1.5 billion during the year. In the beginning of the year, we set and communicated a target to reduce our SG&A with between SEK 100 million and SEK 150 million net, and we have delivered on that target with a cost reduction of SEK 125 million net during 2023. On balance sheet, we have, as a consequence of our strong cash flow and in combination with the structural work we have done during the year, reduced our interest-bearing liabilities with SEK 1.6 billion during the year. In summary, we are from a financial standpoint entering 2024 with a significantly stronger financial position than last year.

Slide 4, please. A few words about the market in the last quarter and market outlook. This slide is based on the Swedish market, but we see a similar development with smaller variances, in most of the markets where we are active. The market was challenging also in the last quarter, and it has been for the last two years with a detracting market and negative sales development following the pandemic. The drivers, we all know too well, inflation, interest rate levels, low transaction volume on the housing market and still some rebalancing effect on category level following the pandemic. The strongest effect on demand, we unchanged seeing capital intense categories as doors, windows and floors and other categories associated with renovation. As we all know, the number of renovations is closely connected to the number of transactions in the housing market.

Trying to look forward, I think most of us believe that we now most likely have passed peak rent and that the interest levels will come down during the coming year. Our view is, however, that the effect on disposable income for most of the consumers will be fairly limited for the majority of the year, and we are planning for a challenging market for most of 2024. Also on the positive side, we believe that we will see increased activity in the housing market from pent-up demand and improvements in consumer confidence as a result of interest rate levels coming down, and the above-mentioned Corona rebalancing effects starting to level off. The fundamental drivers of our business, the migration from physical retail to the online channel will continue, and the penetration in our categories is still low, both from a category perspective, but maybe more importantly, also from a geographic perspective.

Slide 5, please. Leaving the financials and saying a few words about where we are in our main strategic ambition on business unit level. As you know, we are a highly decentralized group of online businesses within do-it-yourself and home improvement. The business is based on what we call entrepreneurial accountability, and we have a very limited group function defining core strategies, working financials and supporting our businesses through a few center of excellences and utilizing best practice and benchmarking from within the group to support the entrepreneurs.

The business is divided into three business units based on category, target group and business model. The reasoning behind the business unit is that it is primarily on this level that we can realize synergies. Starting with Home Improvement. Our Do-It-Yourself business primarily in the Nordics and primarily based on a drop ship business model. The main strategic ambition of Home Improvement in the short to medium term is focused on continued consolidation to achieve economies of scale and realize synergies in creating what we call the Nordic Do-It-Yourself powerhouse.

Value Home, our Home Interior business in the Value segment. primarily European business based on a private label based business model. As a consequence of the supply chain disruptions and the long lead times towards the end of the pandemic, this is where we had the biggest challenges related to inventory buildup and profitability following the pandemic. It was in this business unit we did a major restructuring program in Q3 including two divestments of loss-making businesses. However, we still have our work cut out for us to improve our operational execution and restore profitability in some of the entities in this business unit. However, and with that said, this is where we saw the biggest profitability improvements in the fourth quarter.

And finally, Premium Living, our home interior business in the Premium segment and based primarily on a wholesale base business model. This is a very international business with the majority of the sales from [ outside of the Nordics ]. Strong European business with a significant contribution also from Asia. Here, the prime focus is to continue the international expansion and strengthening the Nordic Nest Group.

Two weeks ago, we also announced a smaller acquisition to Nordic Nest with the asset acquisition of Kitchentime. Kitchentime is a segment specialist within dining and cooking and just as we acquired Svenssons as a segment specialist in furniture in 2021 and integrated into Nordic Nest Group, we will now integrate Kitchentime into Nordic Nest Group. In conjunction with the acquisition of Kitchentime, we also announced that we, during spring '24, will consolidate our lighting business of Lampgallerian into the same group, basically reinforcing the Nordic Nest platform, now consisting of Nordic Nest with a supporting category specialists of Svenssons in furniture, Kitchentime time in cooking and dining and Lampgallerian in the lighting category.

Slide 6, please. In our tactical plan for the coming year, we have identified the following key focus areas. After 18 months of focus on cash flow and balance sheet, we will reinforce our focus on profitability and I will expand how we are to do this in a minute.

Continued consolidations. We have done a significant number of consolidations in the last 18 months, and we will continue this focus and work going from a large number of smaller businesses to fewer and larger platforms.

Efficiency, already a focus for last year with our focus on cost reductions, but planning for a challenging market also in '24, we will need to continue this focus to improve efficiency and reduce cost.

Growth initiatives. Also with profitability as a main focus and also in a challenging market, we must, as retailers continue to take steps to grow our business. This we do to growth initiatives as internationalization, expanding into marketplaces and category expansions.

And finally, customer centricity. Focusing on presenting relevant offer for the consumer, delivering a strong user experience and a positive experience in deliveries, both from a speed and a quality perspective, is key for customer retention. Buying the same customer over and over again is just too expensive. We need to ensure a positive experience through the complete customer journey to secure repeat customers.

Slide 7, please. Coming back to profitability, our key focus for the coming year. This is where we'll put our focus to deliver profitability also in a challenging market. Gross margin improvements will be crucial, and it's a huge focus for us working on optimizing both supply chain and pricing.

Direct selling costs as fulfillment, postage and online marketing is significant cost drivers within our business models. We need to continue leveraging our reduced inventory to reduce warehousing costs and leverage our size to reduce last-mile cost as well as optimizing our traffic acquisition to reduce online marketing spend.

SG&A efficiency. As mentioned, we did a good job last year in reducing costs. We also created some AI-powered efficiency, primarily in product and content creation. With a challenging market, we need to continue to build efficiencies, both through consolidations and all other available tools, including AI, where we see a number of opportunities.

Slide 8, please. As mentioned, we have taken huge steps in the last 18 months to simplify our structure, creating economies of scale and realizing synergies in the process. We had, in these 18 months, reduced our number of operational entities from 25 to 15 business units. This has been done through two closings, two divestments, but primarily through a larger number of consolidations. Too many to go through today. We aim to continue this consolidation journey, aiming at a target state of approximately 7 to 8 platforms.

And with that, I will leave it to Jesper.

[Jesper Flemme, executive]

Thank you, Gustaf. Slide 9, please. Net sales decreased 14.5%, reaching SEK 2.8 billion and organic growth was minus 10.6%. The net sales trend in the fourth quarter was impacted by a continued challenging market. At the same time, our initiatives to achieve geographic expansion outside our home markets progressed well. Segment-wise, the Premium Living segment had a strong quarter with total growth of 7.8%, driven by very strong growth in the markets outside the Nordic region of 24%.

Turning now to Page 10 and profitability. Adjusted EBIT amounted to SEK 54.8 million, corresponding to an EBIT margin of 1.9%, 1 percentage point higher than the corresponding period last year. From a segment perspective, Premium Living performed best with an EBIT of SEK 45.3 million, corresponding to an EBIT margin of 5.8%. However, the biggest improvement was seen in the Value Homes segment, improving EBIT with SEK 60 million compared to last year.

Moving on to Slide 11 and the EBIT bridge. The EBIT margin improvement compared to last year was mainly driven by a significant improvement in product margin. In turn, thanks to; firstly, an active effort to normalize the margin structure and secondly, somewhat more balanced inventory levels in the market. Another positive driver in the quarter was inventory handling costs as we start to see the effect both from cost initiatives and investments in automation. On the contrary, last-mile and other direct selling cost was negative, mainly driven by inflation-related cost increases from last-mile delivery. All in all, our EBIT margin amounts to 1.9% in the quarter.

Slide 12 and cash flow, please. Our successful inventory reduction continued also in the last quarter of the year and generated a strong cash flow. Cash flow from operating activities amounted to SEK 349 million. For the full year, cash flow from operating activities amounts to a fantastic SEK 1.6 billion.

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 are primarily related to amortizations of our revolving credit facility and leasing liabilities, but also include [ interest payments ], bringing us to the period end SEK 370 million of liquidity at PAT.

Slide 13, please. The group's net debt amounted to SEK 1.1 billion at the end of the year and net debt in relation to LTM adjusted EBITDA ended at 4.01x. On top of our liquidity attempt, we had unutilized credit facilities at the end of the year of SEK 1.8 billion. Acquisition-related liabilities have been reduced with close to SEK 900 million since the beginning of the year and amounts to SEK 374 million at the end of the year. Cash flow-wise, roughly [ SEK 50 million ] will be paid out in 2024 and another SEK 250 million in '25.

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

[Gustaf Ohrn, executive]

Thank you very much, Jesper. I will do my best to summarize this. Slide 14, please. Market has been challenging since mid-'21. And if we now see positive signs, we plan for a challenging market for the majority of 2024. We are very pleased with the result of the work we have done the last year in strengthening our financial positioning, reducing inventory, super strong cash flow, reducing cost and strengthening our balance sheet. We have delivered on our plan to simplify our business and realize synergies, taking it from 25 entities to 15 operating units, and with continued consolidation, aiming for a target structure of approximately seven to eight platforms.

With the work we did last year, we are entering this year with a significantly stronger financial position than where we were last year. And the last quarter of the year, we improved our profitability year-on-year for the first time since 2021. We have done and are doing the work to be in good shape and well positioned when the market bounces back, and our focus for 2024 is continued focus on profitability.

Thank you very much for listening and happy to do our very best to answer all your questions. Please, fire away.

[Operator]

[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABGSC.

[Benjamin Wahlstedt, analyst]

So first of all, Gustaf, you talked about a better consumer outlook compared to Q3. And I was wondering if we could get some more flavor on that. Obviously, you mentioned interest rates. Do you see anything in consumer behavior to add at this point or anything else, please?

[Gustaf Ohrn, executive]

Benjamin, this is Gustaf. No, I can't really say that I do. It is based on, I think, the same outlook as we all read. Interest rates potentially coming down a bit faster than we thought a few months ago, and the effect that we believe that, that can have also on consumer confidence when it comes to transactions on the housing market. But as we stated, we think that '24 is going to be tough. Even if disposable income comes up a little bit, we think that the limited -- the effects on most of our consumers is going to be fairly limited.

[Benjamin Wahlstedt, analyst]

Perfect. And then I also have a question on your inventory outlook or your market inventory outlook. You mentioned a normalized situation for several categories. And I was wondering if you could elaborate on this point. I was wondering, first, if you could specify any or given an indication on [ category ] that are looking better? And if you could also help us how to think about your exposure to outdoor furniture following the divestment of AH-Trading, please?

[Gustaf Ohrn, executive]

I'll do my best, I would say that inventory on the market in most categories are normalizing. And where we were super heavy going into last year for spring and summer categories, that's where it has normalized the most and will make the biggest difference. What we've also said is that in some categories, there's still some inventory -- some overstock of inventory, and we have specifically mentioned one of those being outdoor garden furniture, but there is some overstock in that category. I would say that our exposure to that category is less with the divestment of AH-Trading, but I would still say that it is significant. We have a number of businesses with a fairly large business in that segment.

[Benjamin Wahlstedt, analyst]

Perfect. And then perhaps final question that's inventory related. At the end of 2022, you made a inventory write-down. And now having seen the whole 2023 result then, what -- could you give us an indication on the net effect of this write-down on profitability after the products have been sold, so to speak?

[Jesper Flemme, executive]

No, if I start, Benjamin. I will just repeat that I think our assessment at the end of last year was the right one. If we look at gross margin full year, it's almost flat. So I think the combination of write-down and price reductions needed to get the goods moving have been the right ones. Do you want to add anything, Gustaf?

[Gustaf Ohrn, executive]

No. I think in terms of gross margin, which I must admit is, I think, is one of the most difficult to forecast also for us. We have a number of positive effects. One is the fact that it is -- we have less inventory, which means that we can be less aggressive in pricing. Another positive effect, of course, is that there's less inventory in the market, which will put less price pressure in the market. And the third one, of course, which is what Jesper touched upon is that a lot of the products that we saw last year was bought during the supply chain disruptions, very high freight costs, very high landed cost, and that is what we try to balance out with the inventory write-down. And as Jesper said, we believe we did a fairly good job in doing so.

[Operator]

The next question comes from Daniel Schmidt from Danske Bank.

[Daniel Schmidt, analyst]

I hope you can hear me. A couple of questions from me. And maybe starting with the sort of housing and housing transactions which, of course, has been a big drag for you for the past couple of quarters. Do you have any sort of idea of what the average spend on your categories is when people buy new home?

[Gustaf Ohrn, executive]

No, we don't have that number. We can see that the number of transactions is closely related to renovations and renovations is closely related to a large part of our business. But I don't have any number I can give you on that specific question.

[Daniel Schmidt, analyst]

Right. Of course, it's probably quite meaningful. And then maybe on price, and of course, I do hear you when it comes to inventories being down in the market, which is creating less need for promotional activity. But at the same time, it seems like some of your -- I guess IKEA have done it all the time, basically trying to push any sort of cost benefits to the consumer in terms of lower prices and they were out two weeks ago saying that they are lowering prices again now on 2,000 articles they did so in September with [ 500 ], so that's 25% of their assortment. Is that impacting your daily operations what they have done recently at the start of this year? Or are you seeing any others doing the same thing, i.e., should we see sort of lower ordinary prices in '24 versus '23, you think?

[Gustaf Ohrn, executive]

I think we should say that there is a significant price pressure and that will be a significant price pressure also for this year to come. I mean that is what our category is, I think retail in general is about. So that will just continue. I don't see and I don't believe that IKEA will have any particular specific effect on our pricing. IKEA is almost like a category in itself in most of our sectors, to be quite honest. But that said, less inventory will put less price pressure. But competition is all still very tough and price pressure will remain high.

[Daniel Schmidt, analyst]

Yes. And then maybe a final question on your M&A strategy, which you have been conducting in the past year, which has crashed, you have to say. Wouldn't it be more prudent to sort of be a bit cautious on M&A and stay away from it a bit longer given you're sort of still fairly high indebtedness? I'm referring to the Kitchentime acquisition that you announced two weeks ago.

[Gustaf Ohrn, executive]

No, I think you're absolutely right. And we have been very cautious. As you know, we haven't done any acquisitions for the last 18 months. It's still part of our business model. We're still evaluating opportunities when they turn up. But it is not -- has not been our prime focus. It will not be our prime focus for the month -- for the sort of year to come, but there will be opportunities. And when they are, we will look at them.

And I actually think Kitchentime was a very good example of the type of acquisitions that we might be considering doing. It was an asset acquisition, where we -- it was a small acquisition. It was an asset acquisition, and it's was as a bolt-on to one of our existing platforms where we acquired a brand name and a very, very limited inventory. Basically, there are no liabilities and no cost that we brought on in that acquisition. I think those type of acquisitions when the opportunities arise, we will consider.

[Daniel Schmidt, analyst]

All right. So it's a fairly light asset, but it looks like it has been loss-making, at least if you look at the Swedish records.

[Gustaf Ohrn, executive]

It's has been loss-making, yes, but it's important to keep in mind that none of the costs associated this, we acquire. We only acquired a brand name and an inventory nonorganizational cost, nonfulfillment costs. Everything of this is brought into Nordic Nest.

[Daniel Schmidt, analyst]

Okay. But this is more to be seen as if you're doing anything, it's going to be very light assets, but the sort of the core focus is to continue to drive profitability organically and cash flow. Is that what you're saying when you look into 2024?

[Gustaf Ohrn, executive]

Yes, that's correct.

[Operator]

The next question comes from Niklas Ekman from Carnegie.

[Niklas Ekman, analyst]

Can I just ask you to elaborate a little bit more on your comments about the 2024 outlook. When you talk about a very challenging environment, I mean that's on the one hand and that's a given. On the other hand, you're facing very, very easy comparisons here, particularly in Q1, and there should be some -- quite a lot of pent-up demand for Home Improvement. I'm just wondering should we read this that you worry that recovery will take time? Or do you still see a tangible risk that sales will continue to decline going into 2024?

[Gustaf Ohrn, executive]

It's such a difficult question, but I'll do my best to elaborate on it. As we said in the report, we believe that the majority is going to -- the market is going to be challenging for the majority of the year. And that is basically based on a number of things.

One is, of course, disposable income. And even as you say, even if inflation is coming down, interest level is coming down, the effect of most of our consumers is going to be fairly limited for this year, and that's why we believe it's going to be challenging. While what we see are some of the positives, apart from quarter interest levels coming down, et cetera, is that we believe that a number of house transactions on the housing market will go up. As you say, there we see pent-up demand because there's been almost two years of significantly less transactions. And that has an effect on innovations, and that has an effect on our business, but we should also be mindful that there's quite a time delay before that happens.

And of course, one of the last points to also comment on is the pandemic rebalancing, which we mentioned in the report. A lot of categories that was significantly down during the pandemic. I'm talking about travel, hotels, et cetera, et cetera. It's doing surprisingly well right now, considering disposable income. And we believe that, that still affects from the pandemic rebalancing. We believe that, that will level off over time, but it's very, very hard to forecast how long that is going to take. So summarizing all these impressions, we believe, as we write that the majority of '24 is going to be challenging in our business. I think that's unfortunately the best answer we can give you.

[Niklas Ekman, analyst]

Yes. Fair enough. And I assume you're not at this point willing to say anything about the beginning of 2024, if you see any change in trend versus Q4.

[Gustaf Ohrn, executive]

No, we don't comment on current trading.

[Niklas Ekman, analyst]

Fair enough. Can I also ask you about your comment about prioritizing profit over cash flow in 2024? Can you say a little bit more about what you mean here? I mean, you've now reduced your inventory significantly. Is this something you see reversing now? Are you going to be rebuilding inventory? Or do you rather mean that you're kind of done with the cash flow improvements and now your prioritizing profit? Can you just elaborate on the mix here and particularly what you see on cash flow? Is there any room for further improvement in cash flow? Or is that journey essentially behind?

[Gustaf Ohrn, executive]

I can start, and I'll let Jesper follow up. In short, I mean it was a dramatic inventory reduction that we did last year. SEK 900 million is more than we were aiming for, to be quite honest, and we're very pleased that we could achieve that. We still believe there is room for further inventory reduction, but on completely different levels. We must be now much, much more surgical in trying to reduce inventory. And we have to be very, very careful to protect availability. So we have the best sellers in stock.

But there is room for some more improvement, but it's going to be on a completely different level. I think that's what we're seeing in terms of inventory and prioritizing profit over cash flow basically means that in some instances, last year, we did an active choice to be very, very aggressive to get down on our inventory. And of course, that costed on gross margin. And in that type of -- that would be less frequent we believe, during this year to come because there's less need to free up cash and inventory reduction.

Jesper, you want to fill in on that?

[Jesper Flemme, executive]

No, maybe numbers wise. I mean, we still think that we will be able to reduce the inventory with maybe SEK 100 million to SEK 200 million, but that will take time, maybe 12 to 18 months. So that's the numbers.

[Niklas Ekman, analyst]

Very clear. And some nitty-gritty details here as well. Net financials, SEK 65 million in Q4, of that, SEK 55 million was financial expenses, was that exceptional? Or is that a reasonable assumption for the coming quarters here in '24?

[Jesper Flemme, executive]

I think that's high. As you saw in the report, we amortized on the revolving credit facilities also the base will be lower next year. I still think that between SEK 150 million and SEK 200 million is a reasonable number for net financials.

[Niklas Ekman, analyst]

Very clear. And also the impact from divestments, it seems to have been quite limited here in Q4, if you look at the sales impact based on the divestments you've done. I assume that's related to the seasonality, and you'll have a similar small impact on Q1, but bigger in Q2 and Q3. Is that the right assumption, the right way to think about it?

[Jesper Flemme, executive]

Yes. It's the right assumption for '24. And if we look at the adjustment in Q4 '23, the SEK 40 million on net sales is only related to the physical stores in Value Home.

[Niklas Ekman, analyst]

Okay. Very clear. Thank you. All my other questions have been answered. So thank you so much.

[Operator]

The next question comes from [ Johan from Fred ].

[Unknown Analyst]

My line got disconnected, so I do apologize if any of my question has already been answered. But could you elaborate a bit numbers wise into the profitability savings that you expect from -- in 2024? Are there any sort of levers to pull internally to improve the [indiscernible] specially going forward?

[Jesper Flemme, executive]

So I can start with the numbers. We reported that we reached a cost saving of SEK 125 million. If we look at the full year effect, we estimate that, that will be some SEK 30 million higher. So that's one effect going into '24. The other effect comes from impairing leasing assets with -- my best guess is that we will have a reduction of DNA in '24 of maybe SEK 75 million.

So that's the numbers, and Gustaf can answer on actions.

[Gustaf Ohrn, executive]

Basically, there's two main levers to pull. One is gross margin, of course. And there, we're actively working supply chain and trying to get in prices and landed costs down, which is a huge focus for us. And the other end of gross margin, of course, is pricing, but we're also putting a lot of effort into improving our pricing.

The second lever is what we call direct selling cost, which is a significant part of our cost structure, given our business models. And there, we're trying to leverage our reduced inventory to reduce our fulfillment cost that will continue during the year and also continue to leverage our size when it comes to last-mile cost. And of course, on top of that, we have SG&A, where we're doing everything we can to be more efficient. It was our super focus last year, will be also for this year. I can also mention that we did our first sort of adventures into AI, especially into automating content generation with both product content and other content. And we now see another -- number of other opportunities trying to build efficiencies through AI, which we will explore during the year.

[Unknown Analyst]

And on that topic, you touched upon that you're seeing the pricing pressure in the market sort of easing. Could you elaborate on what you think is the driver behind the decrease? Is it due to a stronger demand? Or is it just inventory going out, less inventory in the market? Or what do you see?

[Gustaf Ohrn, executive]

I think, first, maybe I should correct that. It's not that price pressure is easing off too much, to be quite honest. Price pressure is significant also for all of the fourth quarter. And with a demanding market, we see it going to be challenging also in that respect for the coming year. I think the main driver that we see that we believe will ease competition is the fact that there's less inventory on a general level in the market.

[Unknown Analyst]

Got it. And I want to touch upon Premium Living that continues to develop fairly strongly, especially in relation to your other segments. What's sort of driving the relative outperformance here? Is it the customer segment, the product portfolio or just better quality on the underlying asset? If you could help us better understand the dynamics, that would be great.

[Gustaf Ohrn, executive]

First, I should say that it's a great business. It's a good business model, and it's very well executed by the team at Nordic Nest. And the main driver is continued internationalization. Not for premium living, but for Nordic Nest, the majority of the sales today comes from outside of the Nordics, and that's where we see the biggest growth. I think they're doing a tremendous job in doing what they do, which is basically taking Scandinavian design and exporting it internationally, strong in Europe and also a not significant business in Asia.

But the driver is primarily internationalization, then of course, they're pulling all the other levers as we all do. And I should also mention that they do a really, really good job on customer centricity and taking care of the customer.

[Unknown Analyst]

Okay. Got it. A final question from me on Value Home. You mentioned that you still have your work cut out for you in terms profitability improvements. Long term, what's your market target for the segment?

[Gustaf Ohrn, executive]

I think we should just be clear that we see the profitability potential of Value Home as the highest of the three segments, but it's also a segment that come with the highest risk that we saw towards -- that we saw toward the end of the pandemic. It's a business model with longer lead times and therefore, bigger risk. But it's also a business model with the highest gross margins. That's why in good times, it's very, very profitable, and we would see profitability levels, potential profitability is above our long-term financial targets of 7%, but also the toughest one when the market is decreasing.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions.

[Unknown Executive]

We have one written question coming in, and that is what's the current standing with regards to the loan covenants?

[Jesper Flemme, executive]

So we have an amendment with our two banks up to and including Q1 '24, where the covenants are minimum liquidity and profitability. From Q2 '24 and onwards, we will then start testing leverage and interest coverage ratio again. And maybe I also should say that also from a covenant perspective, profitability is the key to improve.

[Unknown Executive]

Thank you. That was all .

[Gustaf Ohrn, executive]

Thank you very much. Thank you very much for listening. I hope that we were able to make some clarity on most of your questions. And if you have any further questions, please don't hesitate to reach out to us. Thank you very much. Goodbye.