Embellence Group AB (publ)

STO:EMBELL

Earnings Call Analysis

Embellence Group Q4: Growth Amid Challenges

Embellence Group reports a confident close to a challenging year with Q4 revenues climbing to SEK 190 million, marking a 5.7% organic growth. The quarter saw a robust 12.2% EBITA margin, backed by cost reductions counteracting an adverse product mix. Operating cash flow impressively doubled to SEK 33.6 million from last year's comparable quarter. Upbeat about the future, the company anticipates market uncertainties yet remains poised with a strong product lineup to support continued organic growth. Noteworthy, a new board chairman, Magnus Welander, has been appointed, and a strategic reveal is slated for May 21 at their Capital Markets Day in Stockholm.

Executive Summary of Q4 Results Amid Market Challenges

Despite a soft and unpredictable market environment, the company closed the final quarter of the year with commendable performance. Achieving revenue of SEK 190 million, the company witnessed an organic growth of 5.7%, indicating resilience and the ability to navigate through tough conditions. The premium wallpaper brands in their portfolio especially contributed to this growth during the quarter.

Financial Health Illustrated by Strong Margins and Cash Flow

The company's financial discipline shone through with an EBITA of SEK 23.2 million, translating to a margin of 12.2% which reflects effective cost management strategies. Moreover, the substantial operating cash flow of SEK 33.6 million, a significant improvement from SEK 16 million in the previous comparable quarter, highlighted their operational efficiency and robust cash management.

Regional Sales Performance and Strategic Brand Developments

A 15.7% growth in the Nordics, largely driven by Sweden, showcased the company's dominance in its largest market. Challenges in the product mix slightly impacted margins but were counterbalanced by effective cost-savings measures, particularly in Europe. While the U.K. market experienced some softness, Germany and Italy displayed strong sales development. The U.S. market faced a weak quarter primarily due to a client's destocking, which is expected to rebound with a new collection launch in the following period.

Future Outlook and Commitment to Brand and Product Innovation

With a focus on driving organic growth through a robust product offering, the company is optimistic about their competitive edge despite ongoing market uncertainties. Upcoming key product launches are anticipated to bolster their market position. Additionally, a capital markets day scheduled for May 21 will provide further insight into the company's strategic direction.

Sustainable Innovations and New Collections Catalyzing Growth

Highlighting their innovative streak, the company introduced a novel sustainable wallpaper offering, Decodura, which promises to combine sustainability and durability without compromising on aesthetics. This positions the company as a pioneer in the market, reducing the carbon footprint by 50% for their products. Upcoming collections like Wall&decò and Boråstapeter's children-themed wallpapers were mentioned to exemplify the brand's commitment to design excellence.

Business Resilience in an Uncertain Retail Climate

Despite a challenging retail environment, particularly in the Nordic markets, the company maintained business resilience through strong sales, cost-saving measures, and innovative product launches. There is anticipation of recovery in the U.S. market, with positive sentiment towards the economic outlook and new assortment deliveries planned for the first quarter. However, the company remains cautious and focused on strengthening existing brand value to drive growth.

Earnings Call Transcript 2023-Q4

[Operator]

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]

Thanks. Welcome, everyone, to the Q4 presentation of Embellence Group. Presenting today is together with me, Karin Liden, our CFO; and myself, Olle Svensk.

So let's move directly into the Q4 results then. So while the market remained challenging and somewhat soft, I'm really proud to say that we finished the year strong in a strong way. We reached a revenue of SEK 190 million, which means organic growth of 5.7%. And all 3 premium brands in wallpaper category grew in the fourth quarter.

On EBITA level, we reached SEK 23.2 million or a margin of 12.2%. And thanks to a lower cost base, we managed to mitigate some of the adverse product mix that we saw in the quarter. We had no adjustment during the quarter. And so in total, 12.2% on EBITA margin, as I mentioned.

Strong operating cash flow, SEK 33.6 million compared to SEK 16 million last comparable quarter. And last, but not least, a new Chairman of the Board was appointed on December 8, Magnus Welander.

Over to you, Karin.

[Karin Liden, executive]

Thank you, Olle. Looking at the net sales in the fourth quarter, as Olle said, it was SEK 190 million, and this is a growth of 7.3% compared to the same period last year and 5.7% of this was organic. The EBITA margin in the quarter was 12.2%. Operating cash flow SEK [indiscernible] million was strong and the improvement of working capital contributed with almost SEK 23 million. It was primarily accounts receivable and inventory that improved in the quarter.

Looking at the full year, we achieved the sales of SEK 741 million, which is a growth of 2.8%. The organic sales declined with 2%. Acquisition of Artscape added 2.2% and currencies added 2.6%. The EBITA ended at SEK 92 million with a margin of 12.4% and the adjusted EBITA ended at SEK 95 million or 12.8% margin.

Net profit was SEK 39 million and operating cash flow around SEK 61 million. Continuing with the sales and EBITA development over time, we can see that the start of 2023 was weak, especially the second quarter. During the second half of the year, we returned to organic growth and improved profitability again.

And now over to you, Olle.

[Olle Svensk, executive]

Thank you. Thank you very much. So looking at the sales development then by region. Nordics being our largest region with 42% of our total sales. We had strong sales with 15.7% growth, majority of it coming from Sweden. And of course, a positive impact was the launch of the professional assortment for Boråstapeter that took place during October and November.

EBITA margin lower due to product mix as this part of the assortment is not in the premium segment. In Europe, sales growth good quarter, plus 7.1%, really good sales development in Germany and Italy and some other markets as well. while U.K. in the quarter was soft and retail market is soft in the U.K.

So increased sales and the implemented savings that we have done earlier gives us a really strong EBITA margin as well for this region. Rest of the world, we had a weak quarter. We only reached SEK 45 million, and it had a strong impact by destocking of one of the larger clients to Artscape, ahead of the refreshment or fresh update that will take place during the first quarter this year.

Last, but not least, the operating result was weak due to -- we came in low on sales. So it's very much concentrated with this. Looking at the full year sales development by region. So I'm happy to today that Nordic, we gradually during the second half of the year, we are returning back to growth, especially the second quarter last year was weak. But now we are -- we have a good momentum overall and have seen that for several months. Europe, I would say, summarizing Europe for us last year, stable sales, good profitability.

We have been around rolling 12 here, as you see around SEK 250 million and a little bit ahead of that, strong finish of the year, as I just mentioned. Rest of the world where U.S. is a big part of the total market was -- in total, it was flat over the year, so quite stable in terms of revenue.

Looking ahead then, I mean, the market we expect to continue to be uncertain and a bit unpredictable, but we have our strongest product offer ever in our full portfolio of brands. And we are certain, and I'm certain that consumers will still want to live in beautiful environment and homes regardless if it's their existing home or moving to a new home. So we [indiscernible] the brands and the designs to offer that opportunity.

We will continue to prioritize the development of our existing brands in the portfolio to drive organic growth, and we will do this through strong product offering and professional execution of key product launches here in -- during the year.

I also want to mention here that we will hold the Capital Markets Day in Stockholm on May 21, where we will present our strategic view going forward.

But talking about best product offer ever, I really want to showcase you a few things here. And behind our revenue and behind all numbers, we have an impressive collections and in impressive brands that 2 of them I would like to share with you.

Starting off with Wall&decò, this is one of the designs that we presented and launched during here in middle of January. This is [indiscernible] inspired by And as you can see, transforms a room in a very, very impactful way.

Another design that was very well received or is very well received right now is this one inspired by Scotland, actually, [indiscernible]. And the third one here is -- which gives you hope of spring, I would say, but a very beautiful design by Lorenzo de [indiscernible] which, as you can see, is also has [indiscernible] this room here.

But one of the really important things that we launched at [indiscernible] was Decodura [indiscernible] that's a new parading for wallpaper. And it's without any compromise between sustainability, durability for beauty.

With beauty, this is the wallpaper, which we print upon for Wall&decò and we have it in 2 different surfaces, as you can see here in texture. With durability, this surface is as durable as traditional fossil fuel-based vinyl. So in terms of scratchability and cleanability, all those benefits.

But novelty, which is actually the first in the market ever is that we have changed the petrol-based part of that is used in vinyl to a bio-sourced one. So it's a sustainable solution that can withstand scratches in public areas and of course, also in private homes. And we have reduced the carbon footprint 50% here. So is the new carding for wallpaper.

Then I want to take it to another important launch that is taking place now here in January, and that is for Boråstapeter. With Boråstapeter, we have our second edition with [indiscernible] which is a very beautiful design that is especially for children's room, as you can see, which brings happiness, but also can make you have a wall here that makes you talk and see different animals and beautiful drawings.

We have several designs here, like the Little Explorer. We have this one as well here with Savanna. And last, but not least, this is one that I actually personally wallpapered and hang in one of my grandchildren's room here recently, and it totally transforms the room and there are so many things to look at on this one. So it's absolutely beautiful.

So summary of the quarter then as I mentioned, a strong finish of the year despite a really challenging environment. We managed to grow 7.3%, of which organic growth was 5.7. Our lower cost base mitigates some of the negative product mix that I mentioned here before. So our EBITA reached SEK 23.2 million compared to SEK 14.7 million fourth quarter in the 2022.

The strong operating cash flow and with SEK 33.6 million, and our focus ahead, as I mentioned here for several quarters, we prioritized moronic growth to further develop our fantastic portfolio of brands. And we prioritize to have good cash flow and profitability. And all hands on deck out to have successful execution of our different collections that are launched right now and products that are launched as well.

The last part here, which I want to repeat, we will invite to Capital Markets Day in Stockholm on the 21st of May, and more details about that will come later on.

And with this, we are finished with the presentation, and we are open to -- if there are any questions.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions or closing comments. The next question comes from Karri Rinta from Handelsbanken.

[Karri Rinta, analyst]

Sorry, I missed the first part of the presentation, and maybe you commented on the Board's proposal to not pay a dividend. And if you did, could you please repeat those comments? And if you didn't, do you have any color that you could give, any background on this decision?

[Olle Svensk, executive]

I mean the main reason for the Board to propose this is that we want to continue to have control our destiny on our future and have a good and healthy balance sheet.

[Karri Rinta, analyst]

You have a healthy balance sheet, and you had a strong cash flow in the fourth quarter. So does this mean that you're seeing some weakening in the -- in your business outlook for the coming year?

[Olle Svensk, executive]

No, I wouldn't say so. It's a matter of that we want to have operational control, continue to have that. We are -- we are aware that we have a healthy balance sheet, but it can get even more healthier. So we are ready for -- it's something that will happen here in the future. But we don't -- and I don't foresee any weakening or risks in the market. I think we have -- the market will probably not get worse and probably not in the near time, not -- it will not get better, but I think we have the worst behind us as well as well, at least.

[Karri Rinta, analyst]

All right. And the just a detail on the cash flow. I think you mentioned that you had a strong working capital in the fourth quarter. And does that in any way indicate that maybe the last month of the quarter was a bit weak, so that you had time to collect your receivables and you didn't incur that many new payables? Was there any element of that in the cash flow in the fourth quarter?

[Karin Liden, executive]

Karin here. I would say, looking at -- we ended the Q3 very strong with a high level of sales. And these high accounts receivables that we ended Q3 with were, of course, collected during the last quarter. So that's my comment to that. So I don't see any unusual activity [indiscernible] months.

[Karri Rinta, analyst]

No, that makes sense. And then the business-to-business channel or the hospitality and corporate that you have commented in recent quarters has been strong. Was there any change in trends in that specific sales channel?

[Olle Svensk, executive]

No. No. No changes.

[Karri Rinta, analyst]

Good. And then finally, a bit of an oddball question, but have you started to experiment with new AI tools when it comes to wallpaper design?

[Olle Svensk, executive]

Yes. We are using it in many areas or in some areas, let's be modest there. And one of them is design where we are exploring some things, yes.

[Karri Rinta, analyst]

But none of these new wallpapers that you presented now are AI generated?

[Olle Svensk, executive]

No. No, no. Definitely not.

[Karri Rinta, analyst]

Okay. All right. And then maybe, as I said, I missed the first part of the presentation, but the Europe, I think you mentioned that U.K. was weak, but then that must mean that Europe sales outside the U.K. were pretty solid.

[Olle Svensk, executive]

Yes. So 2 other very important markets for us in Europe, it's Italy and Germany, and both of them performed strong.

[Karin Liden, executive]

And in addition to that, we have several smaller markets, which also performed in the quarter.

[Karri Rinta, analyst]

And looking at Italy specifically, if you would say that where are we roughly what we compare to, I don't know if we should compare the pre-pandemic levels or to what levels we can compare. But in absolute terms, sales in Italy are we at index below 100 compared to pre-pandemic levels or significantly above?

[Olle Svensk, executive]

I wouldn't call it significantly above. What has happened in Italy and in many other countries -- or yes, many other countries, I would say that there is this shift or yes, partly shift between the retail channel and the hospitality channel. So while the retail channel remains softer with lower footfall, we are able to compensate that with more business into hotels, basically.

[Karri Rinta, analyst]

Okay. And then finally, this professional collection in Boråstapeter. Is it typically when you launch these new collections, is there any type of sort of channel pipeline filling that the sales channel does? Or is it indicative of sort of the sell-out levels? So how should we think about the coming quarters for this collection, is it a one-off event?

[Olle Svensk, executive]

Sorry, sorry, Karri, please.

[Karri Rinta, analyst]

No. Is it sort of a -- was this impact isolated in the fourth quarter or should we expect a continued positive impact from this new collection?

[Olle Svensk, executive]

When we have the launches like this with the professional assortment, there is destocking in trade that happens over 5, 6 months, I would say. And then there is the stocking up happening in this quarter here. But you -- I would not -- you should not expect that these levels should remain. So it's a longer destocking that then is filled up during 1.5 months.

[Karri Rinta, analyst]

Okay. And then maybe just finally, if we just look at the retail climate and then compare Compass Sweden, Europe and Rest of the World. So I guess Sweden is probably through the worst when it comes to consumers, which have been pretty weak for quite some time now. But is there any -- how confident are you that even the U.S. market will perform better in 2024 than it did in 2023?

[Olle Svensk, executive]

It was -- I would -- I mean, first of all, if we look at Europe, yes, and we have said before, Nordic market and Swedish market the consumer confidence is lower there probably than other markets as we have the combination of interest rates and so on. But also we also have inflation that has been fueled by the currency, as you know, and exchange rates. So it's been tougher there.

With regards to you said U.S. market that it should come back. I mean, in general, it seems like the macros for U.S. is somewhat more positive than many parts of Europe. So we are cautiously optimistic about that, but it remains to be experienced here going forward. As we mentioned here, we had a destocking with Artscape, and we will have that new assortment being delivered during first quarter that will take us back with the new designs and new assortment that we are -- that is actually happening right now as we speak this new launch.

[Karri Rinta, analyst]

And besides that, do you have any exciting plans for the North American market besides Artscape for 2024?

[Olle Svensk, executive]

We have lots of exciting things. And we'll be happy to share that in Q2 -- Q1, Q2, the Capital Markets Day. So please stay tuned.

[Operator]

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

[Karin Liden, executive]

Karin here, and I will read out the questions we have received on the -- in the written part of the presentation. And first of all, we have received a couple of questions on the dividend. I think we have answered those as best we can.

And then we get a question in the previous report, you noted an expected positive input from lower input prices starting in Q4 it seems if this did not materialize. Could you give us some flavor on this, please?

And my answer to that is that we do see input prices, and we have a lower cost base. We do see lower input prices as of Q4 and that is part of our lower cost base that we talk about. It did materialize, but we had an adverse product mix in the quarter, which overtook this impact with the launch of the professional assortment and the low sales in the U.S.

Next question. Any additional flavor on the Artscape slowdown and relaunch, would be helpful?

I think, Olle explain that. Do you have anything else to say on that?

[Olle Svensk, executive]

No. I can only repeat what I said before. We -- it was the customer we're taking down inventory and then started to order beginning of this year. So we will get back on track there.

[Karin Liden, executive]

And then the final question. How does the pipeline for potential acquisitions look? Has the price level of companies in the private market come down?

[Olle Svensk, executive]

I mean the pipeline is, as we discussed, and we have discussed before here, and there are companies out there, but I will repeat what we talked about before. Our main focus is to develop our already beautiful bouquet of flowers of brands to deliver organic growth. So that's our main focus, and we will do that by launching amazing collections and fantastic products. So that's our focus now here going forward.

[Karin Liden, executive]

And I believe that is all questions. So thank you for us at Embellence Group. Any final words, Olle?

[Olle Svensk, executive]

No. Thank you very much for tuning in and listening, and we look forward to talk to you later again. Thank you.