Embellence Group AB (publ)

STO:EMBELL

Earnings Call Transcript 2022-Q4

[Operator]

This call is being recorded. Welcome to the Embellence Group Q4 Conference Call. [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, and welcome to the presentation of Embellence Q4 report of 2022. My name is Olle Svensk and together with me today presenting, I've got Karin Liden, who is our newly appointed CFO, started 1st of January.

Here I'm on next slide. And I will never miss an opportunity to tell you a little bit who we are. I mean, we are a company that acquire, own and develop strong brands in the interior decoration. We are now, I would say, an international group. We have 60% of our revenue is outside the Nordics. We are not e-commerce as that has been discussed in some forums, but we sell to retailers, design hubs and architects and designers around the world.

Moving on to the highlights of Q4. Yes, needless to say, we experienced a fast slowdown in the Nordics with almost 24%, unchanged and even actually an underlying growth in Europe and growth in rest of the world. But the growth in rest of the world is, of course, driven by the add-on acquisition of Artscape. Net sales came in on SEK 176.9 million, which is more or less on the same level as last year. So the slowdown in Nordics was compensated by the add-on acquisition of Artscape.

EBITA reached SEK 14.7 million or the adjusted EBITA of SEK 22 million. During the quarter, as we spoke about in the Q3 report, we have now implemented a major cost out program in the Nordics. And this is estimated to have an annual savings effect of around SEK 9 million in this year, 2023.

Generally we see a slowdown in consumer demand, while it remains pretty solid or even growing, I would say, in hospitality. And the growth that we can record in EU is actually coming from this segment. We have strong development in the U.K., in Italy and some other European markets.

The strong focus on inventory management that we talked about in Q3, that continues and we adjust our production rates to the demand that we see. And just as in Q3, we will continue to prioritize cash flow over short-term profitability gains going forward as well.

Last but not least, the Board of Directors for the company proposes a dividend of SEK 0.80 per share, which corresponds to 31% of the net profit for the year.

Over to you, Karin.

[Karin Liden, executive]

Thank you, Olle. As Olle said, net sales in the fourth quarter amounted to SEK 176.9 million, which is up 1.7% compared to last year. The organic growth was down minus 16.9%, primarily following the weaker customer demand in Nordics, but compensated by Artscape acquisition.

Adjusted EBITA for the period amounted to SEK 22 million or 8.3% of sales. Main reasons for the reduced margin related to the lower demand in Nordics and higher cost for input material as well as the utilization of the factories in Nordics.

Operating cash flow was SEK 16 million, relatively robust due to the earnings, but also thanks to improvement in the working capital.

Net sales for the full year was SEK 720 million, and that represents a growth of 11%. Adjusted EBITA ended at SEK 103 million or 14.3%. And similar to the quarter, the main reasons are the same with a lower demand and higher cost for input material and factory utilizations.

The operating cash flow for the year was SEK 108 million, and this is better than last year when it was SEK 62 million. And despite the limited growth in operating results, we have actively managed working capital to achieve this operating cash flow.

And over to the next slide. In this slide, you see the quarterly sales over the last 2 years. Quarter 4 is on par with the same quarter as last year and the rolling 12 development is increasing to SEK 720 million at the end of the year.

The adjusted EBITA margin has decreased during the second half of the year as a result of the increasing costs for input material, lower utilization of the factories and also return to a more normal activity level in sales and marketing, primarily in the Europe organization. Share of premium was 67%.

Looking at the net debt, it continues to decrease just as it has decreased quarter-by-quarter. And we also need to remember that part of the debt is denominated in U.S. dollar. So there are and there will continue to be fluctuations related to the currency revaluation also going forward. The EBITDA to net debt ratio was 2.1 at the end of the year.

If we look at the first segment of our 3 segments, Nordics, it represents 39% of the total sales in the period. There was a soft customer demand and the net sales declined to SEK 69 million in the quarter. The adjusted EBITA was SEK 8 million, and that corresponds to a margin of around 12%. The main reason for lower EBITA margin is the sales development combined with the higher cost and lower cost absorption in the Nordic factories. And we have prioritized, just as Olle said previously, cash flow over the short-term results and the slow down production in quarter 4 to meet the reduced demand.

On a full year basis, sales in Nordics was SEK 294 million. Adjusted EBITA margin was 12%. In the end of the year, we implemented a cost-saving program, which lowers the operating costs with SEK 9 million on a yearly basis for the company and we will start to see those savings from January 2023.

If you look at the second segment, Europe, we see -- we have 34% of total net sales. Europe has a different customer mix with a larger share of hospitality and professional buyers and also showed a more stable sales in quarter 4. And the total sales in Europe ended at SEK 61 million and that is on the same level as last year despite the negative influence we still have from stopping deliveries to Russia.

A positive sales mix contributed to a higher gross margin, while the return to a more normal level of marketing activities caused higher operating costs.

Sales for the full year was also in line with 2022 and ended at -- it was also in line with last year and ended at SEK 242 million. Looking at the profitability, we see an improvement both in terms of amount and in adjusted EBITA margin, which ended at 17%. This means that Europe is now the most profitable segment for the company this year.

If we continue with the final segment, rest of world, we now have a larger share of sales, 27% of the total sales comes from rest of world, primarily thanks to the Artscape acquisition. Total sales in the quarter ended at SEK 47 million, and Artscape acquisition contributed with SEK 28 million.

We saw a bit of a weaker organic sales development. But then we also need to remember that we had an exceptionally strong 2021 Q4, where we had a large stock order for the U.S. in the end of the year.

The adjusted EBITA is SEK 5.7 million and that is entirely driven by the increased sales. The reported sales for the year was SEK 184 million and the adjusted EBITA margin was 15%, both have increased significantly during the year.

When reviewing our development in relation to our financial targets, the net sales reached SEK 720 million for the year, a growth of 11% compared to prior year. We have an aim to obtain an EBITA margin above 15%. During 2022, we managed to reach 12.3% or adjusted 14.3% despite the difficult demand situation we are in the Nordics. From a leverage point of view, we should stay below 2.5% net debt to EBITDA. And we are well in line with that target end of December this year.

According to the dividend policy, Embellence should pay a dividend corresponding to between 30% to 50% of net profit for the period. In line with this, Embellence Group suggests to pay SEK 0.80 in dividend and that is the same level as last year and also in line with the policy. It stands for 31% of the net earnings.

And now over to you, Olle, for a summary.

[Olle Svensk, executive]

Thank you. Yes, so trying to sum up the year then. So a challenging consumer demand in Northern Europe, especially evident in the second half of the year, the latter part of the year. We continue to focus on cost control and the program that was implemented here in Q4. We expect to have SEK 9 million of savings that will start to kick in beginning of this year, as Karin said.

And summarizing last year, we reached revenue of SEK 720 million with what I would call a healthy adjusted EBITA margin of 14.3%. The list is, of course, long, what we achieved last year. But some of the key elements here, acquisition of Artscape in March last year, a further internationalization of the group where now Europe and rest of the world represents 60% of group revenue. And last but not least, we can see that we have an underlying organic growth in Europe and in rest of the world. If you take into consideration the situation with Russia that Karin mentioned before and our sales stopped there.

Further price increases will be implemented and have been implemented beginning of this year to mitigate the pressure that we are when it comes to direct material. And the focus on 2023 is, of course, to capture growth where we can find it and where we can see it. And we do see it in the hospitality segment and then in certain geographies as well.

But besides that, we will continue to focus on profitability to have a stable cash flow and continue to have a strong balance sheet in the world that we're living in right now.

So overall, I would say that premiums, is going better for us, Europe is better and hospitality is better. And where we see challenges, it's the Nordics. It's more of the mid-market and also in the consumer.

All right. Thank you very much. That was all with regards to the presentation. So now we are eager to hear your questions.

[Operator]

[Operator Instructions] The next question comes from Karri Rinta from Handelsbanken.

[Karri Rinta, analyst]

Yes. Firstly, about these cost savings. You say that they will start to kick in from the first quarter. So should we expect -- so firstly, is this on an annual basis, will you have SEK 9 million lower costs on a full year basis? And then should we expect a gradual ramp-up during the year? Or is this -- do you expect full impact already from the first quarter?

[Karin Liden, executive]

We have full impact. I mean, as we write in the report, it's we have reduced staff, primarily in Sweden. And these cost savings of SEK 9 million is for the full year saving. And they will start in January and will continue because we are not replacing or hiring people now. So these cost savings are permanent and that's an annual of SEK 9 million.

[Karri Rinta, analyst]

Then net financials, it seems that there were again some FX-related revaluations in net financials. Should we expect this to continue? Or should we, going forward, expect that the reported net financials will be similar to the ones that you report on your cash flow statement?

[Karin Liden, executive]

I mean the net financials, we have -- we report in Swedish krona. And we have part of the loan that was used to finance the Artscape acquisition is denominated in U.S. dollars. So as long as we have that loan in our balance sheet, we will have currency fluctuations in the net financial items.

[Karri Rinta, analyst]

Then about the Nordics. You mentioned that in Europe, you have more hospitality. But can you give us a rough split? So for the Nordics, so how much is hospitality versus consumer? And then maybe in the consumer, how much is new build versus renovation?

[Olle Svensk, executive]

Okay. In the Nordics, I would say that hospitality is a very limited part. What we do have in the Nordics is supplied to municipality and construction company, not for a new build, but for renovation, and that represents 1/3 of the revenue, more or less. But it's not hospitality, which when I talk about that like hotels and so on.

Then your second question was how much…

[Karri Rinta, analyst]

It was about renovation, but I think you already answered it.

[Olle Svensk, executive]

Yes. And then new build, I mean, I -- normally, when I get that question, we are very little exposed to new buildings and new dwellings. I mean, in a good month, it's at max 5%. And then I'm probably a bit too -- a bit generous. So we have very little exposure to production and new construction.

[Karri Rinta, analyst]

And then finally, the outlook comments, the focus on balance sheet and cash flow. So at what level of net debt-to-EBITDA would you be comfortable again to make an acquisition maybe in the same magnitude as in Artscape? Do we need to see a clearly lower net debt to EBITDA? Or are you still looking -- are you still willing to pull the trigger if you find something interesting?

[Olle Svensk, executive]

Yes, there were several good questions there, Karri. But I mean if I -- we are in continuous dialogue and we are looking and we are being approached. What is, I think, happening, yes, at least speak in our industry is that valuation expectations needs to go down a little bit. Some of the companies that we have been in contact with have had certain expectation that has been based on the 2021 result. So we will continue to acquire company. We are not trigger-happy. So we will do it when we see that there is a good fit and a reasonable valuation.

With regards to the headroom in our net debt, I mean, we think we should be mindful right now with how the situation is, not to increase our debt too much. But I don't want to -- I sound like a politician, I realize that, but it might happen, but I wouldn't expect it to happen tomorrow.

[Karri Rinta, analyst]

And then finally, these price increases that you mentioned in the report, are they broad-based? Or are they more for certain geographies for certain product segments?

[Olle Svensk, executive]

No, they are broad-based, they are.

[Karri Rinta, analyst]

And any sort of ballpark magnitude of these price increases? Are they single-digit, double-digit?

[Olle Svensk, executive]

I would look very close to a single-digit number in the middle.

[Operator]

The next question comes from [ Johan Hogberg ] from [ Aktiespararna. ]

[Unknown Analyst]

Just a few quick questions from me. First, can you give any indication on how destocking has affected the organic sales compared to, so to say, real consumer demand?

[Olle Svensk, executive]

It's a good question. I wouldn't -- we saw that started already in Q3, actually, and it does continue now. But I wouldn't dare to give any number there right now.

[Unknown Analyst]

If you look at the Nordic market, can you give a little bit more flavor on the development and regarding your performance compared to your competitors?

[Olle Svensk, executive]

I mean, first of all, I would say that this industry has a lack of external data. So have an absolute -- we don't have any market data to give an estimation of the Nordics. What I would expect that we are probably not developing neither better or worse than competition right now. The little we pick up on the market, we hear numbers that are greater decreases that we have and some that are less. But I would say that we are probably in the same situation as others. We are not gaining market share and not losing.

[Unknown Analyst]

On the cost side, can we expect more cost cuts going forward if the demand keeps deteriorating?

[Olle Svensk, executive]

Yes, yes.

[Unknown Analyst]

And what -- are that mostly in the Nordics, would you say?

[Olle Svensk, executive]

Yes. I would say it's mainly related to the Nordics. As we mentioned here in the report, we actually see a pretty good development in Europe, especially, but we also expect U.S. to continue to be good for us. So it's rather the Nordics.

[Unknown Analyst]

Can you say anything on how demand has developed in the beginning of 2023 compared to Q4 '22?

[Olle Svensk, executive]

No, not really. I mean we have January and we have -- we are now beating into February. I would say that January was very strong, while February has been a bit shyer. January was surprisingly strong. But it's -- as I've said before, it's a little bit like walking on thin ice now. You don't know how strong it is and how much it will hold. But that's the situation right now.

[Operator]

Yes. The next question comes from Benjamin Wahlstedt from ABG Sundal Collier.

[Benjamin Wahlstedt, analyst]

So one more question on the cost savings program. Could you elaborate on who gets cut, so to speak, any department that's hit more heavy than others?

[Olle Svensk, executive]

It's both coming from the production, both production facilities, both in Dalarna, where we weave the pappelina rugs, but also here in Boras where we do the -- produce the wallpaper. But in addition to this, also in Borastapeter as a brand that where they have done a reorganization and thereby being able to reduce headcount. And it comes -- it's in different areas, I would say, or in all areas.

[Benjamin Wahlstedt, analyst]

So we don't expect any material operational impact then perhaps except for maybe a slightly lower max capacity in production?

[Olle Svensk, executive]

Correct.

[Benjamin Wahlstedt, analyst]

And then I have a question on the continued cost inflation. If we could have any additional flavor on that? Where do you expect this cost inflation to stem from?

[Olle Svensk, executive]

Ben, if we look at the production that we have in Sweden, there is -- it seems like we are in some kind of a plateau here right now. So we don't see that increasing. But at the same time, a large part of the inflation in this country overall, but also the cost pressure we have is related to the currency as we purchase with Swedish krona mainly in euro, and that is continuing to be really tough for us.

But we -- I would say that we are on a plateau, some minor increases here and there. But overall, we are -- right now we are in -- kind of in a plateau.

[Benjamin Wahlstedt, analyst]

And then also your gross margins were very strong in this quarter. Is it possible to sort of split this up into what is just a bigger share of Europe sales and any additional flavors on why we might see this super strong gross margin would be helpful, please?

[Olle Svensk, executive]

It is a combination of the regional mix, exactly as you say there, Ben. I mean we have a higher share of Cole & Son and Wall&deco, which is healthy for our gross margins. And that is -- and Nordic has a relatively lower share. So that helps. So it sits in the product mix partly, but in the brand mix as well and geographical mix.

[Benjamin Wahlstedt, analyst]

And just to continue on that note, I noticed that the Nordics has a lower share of premium in the next quarter sequentially. Any comment on that?

[Olle Svensk, executive]

No, I don't. I mean the relative number is not changing that much. I can't recall, it changed from 32 maybe to 29. But generally there is lower consumer demand out there and it also kicks in here. And as I mentioned before, sales to the construction or the mid-level products that we sell to real estate companies and construction companies is relatively higher as well, yes. So that -- coming back to a question we received here from Karri, that sales is relatively okay still, but it's the consumer demand that is dropping.

[Benjamin Wahlstedt, analyst]

And then maybe one final question from me. Within the Europe segment, is there any sales here of sort of like a one-off nature? I'm thinking maybe larger products or a larger project sale than you normally see or anything like that?

[Olle Svensk, executive]

No, no.

[Operator]

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

[Olle Svensk, executive]

All right. So thank you very much to listening in. And as we said in the beginning here, we believe that we have continued healthy profitability despite the current headwind we have in the Nordic demand.

And thank you all for listening in and for all the good questions. Goodbye.