Embellence Group AB (publ)

STO:EMBELL

Earnings Call Transcript 2024-Q1

[Olle Svensk, executive]

Thank you. Welcome, everyone, to the Q1 2024 report of Embellence Group. My name is Olle Svensk, and together with me today is Karin Liden, CFO of the group. So essentially, Q1 highlight is that we had a very strong start of the year. Our net sales amounted to SEK 214 million, which is a growth of 8.5% versus previous year. And it's actually our strongest quarter ever, and especially U.S. is the driver behind this. EBITDA amounted to SEK 33.6 million, which is 24% more than last year, and this is also our strongest quarter ever reported. EBITDA margin reached 15.7%. And it was leverage in the business and economies of scale and also with a good product mix. All this while we continue to invest in product development and not the least in marketing and sales efforts in the quarter. Operating cash flow reached SEK 14.4 million, which is much better than last year, and mainly driven by an improved operating results. And I really want to share some highlights from the quarter. And it's been a very exciting start of the year with strong sales and marketing focus. As I mentioned, the Q1 this year was our strongest quarter ever, and we grew 8.5%. But first quarter is also an important fair period in this -- in the interior decoration industry. Among many sales, we have Maison & Objet in Paris, [indiscernible] in Paris in [indiscernible]. And at these fairs, our brands launched several new collections like Cole & Son's selection of humming birds, which is a celebration to one of Cole & Son's real design [items]. At Wall&decò launched d.ecodura at Maison & Objet in Paris, which is actually the world's first fossil-free vinyl wallpaper. And Pappelina presented the Elements collection with updated colors on some of the best sellers. And of course, I also want to share some pictures of the high activity level we have with our brands during the quarter. So Maison & Objet, Wall&decò used to showcase the 2024 indoor wallpaper collection, as you can see on the picture here. And more importantly, we launched d.ecodura, which, as we say, is a new paradigm in wallpaper.

It has all the characteristics kept like on the previous material, but we have like the same high rating, the durability, but it also boasts a reduction of carbon footprint with 50%. So it's really the perfect solution for hospitality where sustainability matters. Cole & Son launched the selection of Hummingbird's at [indiscernible] Paris. It's actually designed that originate from 1780s, and it's a collection with both textile and wallpaper.

But we also delivered a number of our own initiatives to continue to build our brand portfolio and to drive sales growth. We -- among many initiatives, the first -- we had the first [indiscernible] held at Cole & Sons flagship gallery in London, where design talks with industry leaders in the interior decoration. In Stockholm, Cole & Son hosted an event to celebrate almost 150 years of its craftmanship, all the way from hand block printing to hand-painted designs.

And for our largest brand, Boråstapeter, it has been, and it is a very successful launch of Orangeri, botanical beautiful collection with several contemporary wallpaper besides. And last but not least, I really have to mention that, again, we won several projects in hospitality in the U.S., in Germany, in Italy, but also in Algeria and Morocco.

And here, a few pictures that I really want to share with you. The first Salon Cole & Son had here during the quarter, and it's the first one of several. And now the ambition is to showcase that Cole & Son is the center of gravity when it comes to luxury interior decoration. There was a lively panel discussion among -- with leaders in the design world, discussing phase in the interior design, and it all happened in our Cole's flagship gallery in London, in Chelsea, London. In Stockholm, we had a celebration of almost 150 years of [commensal] craftsmanship. And as you can see, also well-attended event. It was held at Hotel [indiscernible] at in Stockholm. And so Boråstapeter ,here is a picture Orangeri collection and more importantly, the citrus garden design. And I'm personally not surprised if this is a future design icon, as it has been really well received in international -- everywhere, I would say, but not the least, [indiscernible], especially in the U.S. And Wall&deco won several projects during the quarter, and this is one that has been installed in Germany, where we actually were able to both win, produce and it got installed during the quarter. So also a very important growth channel for us is the hospitality in project business. But now, Karin ,now over to you to tell everyone a little bit on our financial performance.

[Karin Liden, executive]

Thank you, Olle. Looking at the financial. As earlier said, we are proud to report SEK 214 million in sales and almost SEK 34 million in EBITDA. The sales growth of 8.5% was primarily organic. It's 7.8% organic growth and 0.7% currency impact. The gross margin 58.3% was stable compared to 2023 full year, but a step-up compared to the same quarter 1 year ago. The EBITDA margin of 15.7% is a sign of the economy of scale potential, when sales grows. Operating cash flow was SEK 14.4 million, which is a clear improvement compared to prior year when it was SEK 2.2 million. The improvement in cash flow from operations is the main reason. The operating capital increased since accounts receivable grew in the quarter. If you look at the trends, the rolling 12 net sales increased from SEK 740 million to almost SEK 760 million for the rolling -- last rolling 12 period. The EBITDA margin increased to 15.7%. And finally, from finance, we look at the sales development by region. We saw a continuous cautious demand in the Nordic region, and we have a decline of 5.5%, or sales of SEK 78 million. The market is still cautious, and we had a slow start of the year, but also an effect of the early Easter in the Nordic region. Europe was more stable year-on-year with SEK 65 million of sales. We see especially good sales in the hospitality segment, and also some positive signs in Italy and U.K. The demand in Germany and France was a bit weaker. And as Olle already mentioned, we had a record in the rest of world reporting sales of almost SEK 72 million, a growth of 41%. The sales in U.S. was particularly good. Boråstapeter, Wall&deco and Artscape, all contributed. But of course, the launch of the new assortment in Artscape, contributed well. And back to Olle again, looking a bit ahead.

[Olle Svensk, executive]

Thank you, Karin. So I hope really comes across, we have a positive vibe and momentum across all our brands in the company. Yes, there are still some markets that are a little bit uncertain, but we will continue to drive strong product launches at PMLs as we did in the first quarter, but we -- it's also happening here in the second quarter. Contained input costs and really good work at [Borås Tapetfabrik] when it comes to production efficiency, helped the performance there as well.

There are some -- there is still an uncertain consumer market, especially in U.K. and Sweden, but we have many initiatives underway to perform better than the overall market. And I'm really excited to share with you our updated strategy at the upcoming Capital Markets Day on May 21 in Stockholm. To sum all this up then. So again, strongest quarter ever, and with U.S. as the best performing market. Net sales amounted to SEK 240 million, which is up 8.5%. And this is the third consecutive quarter with strong organic growth. EBITA margin reached 15.7%, economies of scale and improved product mix helped that. And we continued in the quarter to focus on product development and marketing efforts to drive sales. Strong operating cash flow improvement compared to last year and is exactly what we said also when we had these calls last year. And the focus ahead then. We are prioritizing organic growth. We are prioritizing an improved cash flow and good profitability. And we have a laser focus on executing successfully key product launches ahead. Now I invite you all to register for the Capital Markets Day on May 21 in Stockholm, where we will share more of our updated strategy. Thank you. Now over to see if there are any questions.

[Operator]

[Operator Instructions] the next question comes from [Felicity Janik] from ABG Sundal Collier.

[Unknown Analyst]

Yes. Hello. So this is Felicity at ABG Sundal Collier covering for Benjamin Wahlstedt today. So congratulations on a strong result. And I have a few questions here. So the first relates to the very strong rest of the World development. Part of this strong performance is attributed to Artscape's launch of a new range, and part is attributed to strong momentum for other portfolio brands. Could you share anything around the contribution from each part?

[Olle Svensk, executive]

No. We -- not indeed more than that. Yes, it's -- in the rest of the world, it is U.S. that is the majority of the growth, even though it's not all. And from a brand point of view, a large portion comes from Artscape, -- but Wall&deco and Boråstapeter also performed really, really well in the quarter.

[Unknown Analyst]

Okay. Understood. And so my next question is, in Q1, you have been around to several trade fairs. And this might be kind of a tricky question to answer, but could you share any indication on how your designs have been resumed?

[Olle Svensk, executive]

I mean the short answer is really well received designs, both Cole & Son launch that took place in the golf with the celebration of Hummingbird, but also Wall&deco, some designs really -- as far as our customers are concerned has the potential also to be kind of [indiscernible] iconic design and signature designs for the brand. But more importantly, for Wall&deco is the d.ecodura launch, with a new material that reduces carbon footprint with 50%, and that has been really, really well received across the markets, I would say.

[Unknown Analyst]

And so also previously, you have shared some data points on your e-commerce expansion. Could you maybe talk a little bit more about the launch in Germany and Austria?

[Olle Svensk, executive]

Yes, previously, this is for Boråstapeter. Until now, we have only had Boråstapeter in the Nordic countries. But now we launched it in Germany, in Switzerland, I think actually in Belgium and France as well here in April, and that will continue.

[Unknown Analyst]

Okay. And could you share any data points around your statement that the market trend is moving in the right direction?

[Olle Svensk, executive]

I would say there was a cautious optimism across the fares that we've been to, both in January and February, but also here in April, we participated in Paris, in Milano and Las Vegas as well. And there is some kind [indiscernible] feeling. And also, with all the comments and reception that we get from what we are launching, we are humble, but we are cautiously optimistic, because we have really interesting things going on in the company.

[Operator]

The next question comes from Karri Rinta from Handelsbanken.

[Karri Rinta, analyst]

Thank you, Karri from Handelsbanken. The surprisingly -- you are also interested in rest of the world, and in the U.S. So SEK 21 million increase in sales compared to last year. So it would be very helpful if you could split that between Artscape and Boråstapeter and Wall&deco. So is the majority of that increase Artscape, -- or how should we think about that?

[Olle Svensk, executive]

A large portion is Artscape, yes.

[Karri Rinta, analyst]

Okay. And then the Artscape is a very U.S.-based operation. So you have the manufacturing and you have most of your sales. And -- but the Wall&deco and Boråstapeter, so those are manufactured in Europe and then they are exported to the U.S. So how exactly do you work there? Do you have some distributors that hold stock? Or how is your sort of channel strategy, distribution strategy in the U.S. for the non-Artscape business?

[Olle Svensk, executive]

Exactly as you say, Wall&deco was reduced in Italy, and Boråstapeter in Sweden. And with Wall&deco, we have an agent structure. And then with Boråstapeter, we have a distributor that is kind of our prolonged [indiscernible] arm in the market and covers the entire country actually.

[Karri Rinta, analyst]

But is there any sort of change in terms of inventory management? So you record your sales when the distributor sells to retailers? Or when do you actually -- when do you report your revenues?

[Karin Liden, executive]

We report the revenues, of course, depending on [indiscernible] terms, but we have very little consignment stock. So we normally report our revenue when we sell to the distributor, when we ship the goods to the retailer, or when we ship the goods to the end customer, if it's an e-commerce transaction. And when it comes to hospitality or project sales, we record the revenue when it is shipped from our -- because then we don't have any inventory at the distributors, we record revenue when we ship to the project.

[Olle Svensk, executive]

And I think if I can elaborate a little bit further there, I mean for Wall&deco and Boråstapeter, they are normally -- typically they are very low inventory levels. And I mean for Wall&deco, there is none. For Boråstapeter, there might be a little bit, but we have very short lead time on all our items.

[Karri Rinta, analyst]

Okay. So in Artscape, there might be some -- since there is a new collection, there might be some pipeline filling the retailers building some inventory. But in Boråstapeter and Wall&deco, it's more good sales rather than some -- some [are building] inventories.

[Olle Svensk, executive]

I mean with Artscape, it's important to remember what we said in Q4 that we saw they were taking down stock and reducing inventory levels in front of the launch that happened in -- here in Q1. And exactly, as you say, with Wall&deco and Boråstapeter, it's not the same thing, I would say.

[Karri Rinta, analyst]

Okay. All right. That's very helpful. And then the -- one of your last comments, prioritizing organic growth -- does that have any implications on your -- I mean, okay, prioritizing organic growth means that you're prioritizing organic growth, but is a clear stepping away from acquisitions or...

[indiscernible].

[Olle Svensk, executive]

It's not a clear stepping away. I mean what we are saying and what we have been able to deliver now for 3 quarters is strong organic growth. And we have a fantastic portfolio already today, with strong brands that we see we can do more with. But you are invited, as you know, to come to our Capital Markets Day on May 21, and we can elaborate further on this.

[Operator]

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

[Karin Liden, executive]

And we have received a few written questions here in the chat function. And the first question is -- or several questions are around the rest of the world and the U.S. development. So I will ask about the Artscape launch in Europe, it should have been done now. Do you have any comments on that?

[Olle Svensk, executive]

Yes, the launch has been done. And as I commented before, it goes much slower than we expected. Artscape sales last year and especially in this quarter, has been strong in North America, U.S., Canada and also Mexico, but Europe is still very small numbers, I have to say. And then the another question here regarding this is, can we expect this strong performance for Artscape also in the coming quarters? For how long time can we expect this product launch effect in Artscape?

We had the delivery as we have anticipated during the first quarter actually in February. The first orders to -- we received in April to replenish the inventory, which was also according to plan. But of course, this was the stock reduction that happened in Q4 and then a stock build up in Q1, but replenishment is already happening since a month ago, a little bit more than a month ago.

[Karin Liden, executive]

And then finally, how much reduction in Rest of World sales, should we expect after Q1 boosted?

[Olle Svensk, executive]

How much reduction in sales results should be effect after?

[Karin Liden, executive]

Last year in -- I mean, Q1 was -- we don't give projections on our -- at all, but Q1 was a record quarter for us considering the Q4, Q1 effect. But as Olle said, replenishment is ongoing, and demand is good for Artscape.

No further questions so far. I hope everyone has gotten their questions answered, and I thank you so much for listening in today. Any final words, Olle?

[Olle Svensk, executive]

No. As Karin said, thank you so much for participating and looking forward to meet you soon again.