Embellence Group AB (publ)

STO:EMBELL

Earnings Call Transcript 2023-Q1

[Operator]

This call is being recorded. Welcome to the Embellence Group Q1 2023 Conference Call. For the first part of the conference call, the participants will be in listen-only-mode. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Olle Svensk and CFO, Karin Liden. Please go ahead.

[Olle Svensk, executive]

Thank you. Welcome to Embellence Group's Q1 2023 presentation. My name is Olle Svensk and today, presenting with me is Karin Liden, who is CFO for the group. And Embellence Group, yes, as you know, we acquire, own and develop strong brands in wallpaper, textiles, rugs and other interior decoration categories. And we have a certain focus on premium and even luxury brands in these categories. Moving on to the highlights for Q1 then. So we still see, as we did in Q4, somewhat cautious consumer demand, especially in the Nordics. It was a bit better -- it was better than Q4, but still I would say that consumer market is a little bit fragile. Moving on to Europe and Continental Europe. We had a pretty stable development with an increased share of projects. So hospitality projects kind of compensated a bit lower demand from consumer. In the quarter, again, no shipment to Russia. Altogether, that was minus SEK 1.7 million. But overall, Europe, fairly stable, I would say.Moving on to rest of the world where U.S. is the dominant country in that region for us. Overall, we grew 60%, but more importantly, the underlying organic growth was actually 10%. And it's mainly coming from U.S. but also the steps that we have talked about end of last year to increase our focus on Middle East is starting to show -- we start to see that in our books as well. So net sales amounted to SEK 197.5 million, which is 7% better than last year and organic minus. So still we have not been able to achieve our organic growth. But compared to Q4, where we reported minus SEK 16 million, it is still in the right direction, I would argue. EBITDA and adjusted EBITDA at same level, 27.1 million. We have no -- anything there in adjustment. So SEK 27.1 million. The cost-saving program that we implemented end of last year, especially in the Nordic region, it has started to kick in as of January and generates the result as we spoke about before. We continue to see strong growth in our own e-commerce channel that we have with Borastapeter, Pappelina, Cole & Sun and also with Artscape. Inflationary pressure on input material, it remains on a high level versus last year. I mean, especially compared to Q1 last year. We do see that, hopefully, it's not being pushed up any further. So we are on this plateau, as I've discussed or spoke about before. Over to you, Karin.

[Karin Liden, executive]

Thank you Olle. Looking a bit closer to the numbers. We have net sales reported to EUR 197.5 million, which is, as Olle said, an increase of 7% compared to last year. However, the growth was supported by the fact that the acquisition of Artscape happened early March 2022. Organic growth, negative 3.1%, and we were supported by the currencies by 1.7%. And the EBITDA was SEK 27.1 million, which represents a margin of 13.7%. And we don't have any normalization items this quarter. The margin decrease compared to prior year is mainly due to higher costs for input materials and the utilization of production units, but also increased market activities in a few companies. The operating cash flow was low in the quarter, SEK 2.2 million. And the main reason for this is that sales picked up quite late in the quarter in March. And so we ended the quarter with a higher accounts receivable than we started the quarter following the very low sales in Q4 last year. If we move on to see the quarterly performance, you can see that the net sales is increasing compared to the second half of last year and also the EBITA level is increasing compared to the last quarters last year. The net debt-to-EBITDA was EBITDA was 2.2% end of quarter 1. The net debt ended at SEK 237 million compared to SEK 257 million 1 year ago and the rolling 12 EBITDA is a bit lower following the recent performance. It's SEK 109.7 million versus SEK 115.8 million 1 year ago compared to previous quarter, the net debt-to-EBITDA was 2.1%. If we move into the regions, we have our largest markets, the Nordics, and they had a sales of SEK 82.4 million, and the consumer demand in Region North continued to be cautious and the constant growth is 6.8% in the Nordics. The adjusted EBITDA was SEK 11 million or 13% of sales, and we have the same picture in all our regions concerning the somewhat lower EBITDA margin, which is mainly due to the lower sales, increased costs in input materials compared to quarter 1 last year. So some savings are seen in region Nordics, thanks to the cost saving programs, which is satisfactory to see. The Nordic represents 42% of sales and has a share of premium, which is 30%. Continuing with our next region, Europe, we have a stable sales trends with increased share of projects. The reported net sales was SEK 50.5 million -- no, sorry, SEK 4.6 million, and that is flat compared to last year. We have a bit of a mixed picture in the various European market. We have the strongest growth in U.K., Switzerland and Austria, where -- and we see some negative development in, for example, France. We should also remember, as Olle said earlier, that in January and February last year, we had some sales to Russia of around SEK 1.7 million, which happens there or -- which we don't have this year. The adjusted EBITDA was SEK 10.1 million or 16% of sales, and the margin is suffering from the same factor as in Nordics. Sales mix, higher costs for input material and increased market activities. Europe represents 33% of our sales and has an 83% share of premium in their sales. Continuing with the rest of the world, that is our market that shows the best growth, and the underlying growth of this quarter was 10%. Total net sales amounted to SEK 50.5 million, and it's mainly due to the acquisition of Artscape, the organic growth in Rest of World is mainly coming from the U.S. and in the Middle East. And same picture for the EBITDA for the region as the other segments. Rest of World represents 25% of the sales for the group and has a 92% share of premium. So summarizing a bit and looking at our financial targets. We maintain our target of growing net sales to SEK 1.2 billion. We want to keep an EBITDA margin about 50% over a business cycle, the leverage should be below 2.5x of EBITDA, and we aim to have a dividend between 30% and 50% of net profit every year. This year, we will pay a dividend of SEK 0.8 per share, which corresponds to just above 30% of total net profit for 2022.

[Olle Svensk, executive]

Summarizing then. So demand gradually recovering, but consumer demand remains challenging or fragile, especially in the Northern Europe. Solid growth, though, we see from, as I mentioned before, our own e-commerce channel in hospitality and then also in rest of the world. We have and we will continue to have a focus on keeping the costs on the right level. And the program that we implemented out of last year is kicking in, as I mentioned before. Pressure on input material remains on a high level versus last year, and especially for our production that we have in the Nordics in Poland and in Boras, obviously, the Swedish krona week is not helping either. So focus on 2023, yes, it is on keeping profitability on a healthy level on our cash flow and to build and have a resilient balance sheet. And then of course, and clearly focus on the growth zones that I mentioned here before and capture the potential growth you can see there. To summarize, and I've talked about this before. For us, this is not the sprint. This is a marathon. And we're building a high-quality company that is fueled by passion, professionalism and the love of building strong brands. So thank you so much for listening. And now over to see if there are any questions.

[Operator]

[Operator Instructions] The next question comes from Philip Ekengren from ABG Sundal Collier. Please go ahead.

[Philip Ekengren, analyst]

Hi Olle and Karin. Thanks for this presentation. Thanks for taking my question. So I have a few questions, but would you like to start by expanding on the strength in the U.K., Switzerland and Austria. Is that mainly connected to hospitality? Or is it driven by consumers?

[Olle Svensk, executive]

In Switzerland, Austria, it is driven by hospitality. In U.K., I would say it's actually both areas that is developing more or less on the same level.

[Philip Ekengren, analyst]

Perfect. And if we look at Rest of world and more specifically, the U.S. and Artscape, you show very, very strong organic growth there. Would you like to give some color on that? Any deviations from normal seasonality or anything else you could explain that growth?

[Olle Svensk, executive]

I mean, as you know, we reported 60% up as January, February last year. Artscape was not part of it. But then when we look at the underlying organic growth, this is coming from our wallpaper business. So it's Cole & Son and Borastapeter and actually a bit of Pappelina rugs as well.

[Philip Ekengren, analyst]

Okay. Cool. And if we move on down the P&L, you say that input costs have started to level off. Do you have any outlook on the coming year? Anything you can say about that?

[Olle Svensk, executive]

I mean it's -- our guess, which is almost as good as anyone else. I don't see -- we don't see the input material having this steep increases as it had last year. What we haven't seen that, but what we could expect is maybe a small decline, but it's a little bit too early to mention that.

[Karin Liden, executive]

If I also make a comment from the moment that we see the input materials plateauing or even declining. It takes a couple of months before we use the input materials in our production, and we actually sell the finished product. So from a -- so it is very important to see them leveling out, but it might be some time before we see it in the P&L, just a small reminder.

[Philip Ekengren, analyst]

So we expect to see a lag over a quarter or so, a few months. Is that correct?

[Karin Liden, executive]

That could be a good assumption.

[Philip Ekengren, analyst]

Yes. Perfect. Thank you. And then finally from me, the price increases that you talked about and that are planned for the coming months, can you give any specific dates or kind of some indication of how large these will be and across which brands and anything on that?

[Olle Svensk, executive]

All the price increases have been implemented already during January until 1st of April was the last one. And it's been between 3% to 5%, and it will gradually have effect across the brands. So they have all been implemented.

[Philip Ekengren, analyst]

Perfect. Thank you very much. And that was all for me. Thanks.

[Olle Svensk, executive]

Thank you.

[Operator]

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

[Karin Liden, executive]

Sorry, I was a bit too quick there. We have received a written question, which I turn to Olle. Could you give an update on Artscape performance after the acquisition? Earnout was fully written down and the EBITDA seemingly down since 2021.

[Olle Svensk, executive]

Yes. The Artscape performance until summer was more or less in line with our expectations. But since then, the sellout and therefore, our sell-in has been on a lower level. So it's not performing as it did in 2021 or beginning of 2022. And needless to say, we are working in many ways how to improve that, but it's a correct observation that sales is not performing as we expected, basically.

[Karin Liden, executive]

And I believe that was the one and only question. So...

[Olle Svensk, executive]

Okay. So thank you very much for listening and hope to hear from you soon again.