B&S Group S.A. (BSGR) Earnings Call Transcript & Summary

Hello, and welcome to the B&S Group Full Year 2019 Results Call. My name is Mahan, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Bert Meulman, CEO, to begin today's conference. Thank you.

Hello, good morning. This is Bert Meulman here, the CEO of the B&S Group. Gert Van Laar is also in this call; and Peter Kruithof, our Finance Director as well; and also Anke. Good morning. I will, together with Gert, take you through the results of the year-end review. Of course, like always, we have the opportunity to answer any questions you might have. First, allow me to shortly share my personal view over the year. 2019 was a mixed year for our group. We managed to realize the double-digit turnover growth, of which nearly 5% was organically. Also, our cash flow in 2019 was quite strong and back in line with years prior to 2018. Throughout the year, according to our strategy and further to our strategy, we invested in digital and operational infrastructure. And we aim -- of course, focusing, leveraging our position in key growth markets and continued execution of our M&A strategy in selected niche markets. On the other hand, we sustained some unfavorable developments in some of our key markets in Asia and together with the earlier and previous communicated logistical constraints we had sustained in the B&S segment, which together had a significant effect on our results. However, these developments that impacted our group results, we consider them as isolated events. And I and also, we, as a company, we are confident that our position in the unique market and channels that we serve, together with our strategic initiatives for 2020 to '22, will position us for further profitable growth moving forward. Let me go to the next slide. Like before, we walk you through our full year 2019 financial highlights, I'd like to put some more color on the development that had an impact on our financial results for the year. Firstly, and we communicated that before, trade war between the U.S. and China and the political turmoil in Hong Kong. We noticed that this development had an effect on the demand. And we noticed that these effects on the market circumstances became evident from quarter 3 onwards. But what we also noticed that for the quarter's progress, so for the last quarter, we -- it became more heavier. And unfortunately, yes, quarter 4 is the quarter we realized historically the highest turnover in gross profit. So that was, first, an effect. As a result, gross profit for the year in both our Liquor category in Asia as well as our fast-moving consumer goods were impacted. And secondly, we -- I'd like to, of course, to notice the development in Health & Beauty. We identified new business opportunities with our business-to-business distribution to value retailers, e-commerce platforms, initiated new partnerships in fast-growing markets. And these investments were primarily focused on growth of our Health & Beauty e-commerce markets and equipped our organization for further growth from which we will also benefit the coming years. To conclude, net cash from operations increased to nearly EUR 115 million. This is a result of our continuous focus on working capital and also our decision, which we told you after the 9 months, our decision to sustain sales volume in Asian market as much as possible despite early described market circumstances. Now that brings me, that's in the following slide, to our financial highlights. Full year characterized by a top line growth, steady growth of 13.3%. As mentioned, 5% was organic. Business segments HTG, B&S and Retail all contributed where HTG fueled turnover growth was an increase of 17.7%. Turnover growth from acquisition originated from inclusion of 9 months FragranceNet, 5 months Lagaay, 7 months of the 2 regional airport shops. EBITDA on like-for-like came in at EUR 104.6 million at reported rates. EBITDA amounted to EUR 114.6 million. Growth was held back by the developments in Asian markets as well as increase in staff cost. I will elaborate on this in a minute during the business segment performance review. As mentioned, our cash flow increased substantially, inventory and debtors in days decreased substantially. Let me go to the next slide, business segment performance. Let me elaborate -- allow me to elaborate a little bit on segmental level. HTG growth was mainly attributable to increased focus in demand from value retail and from Health & Beauty markets in Europe and U.S.A. And that resulted in a substantial contribution to group results from Topbrands and FragranceNet.com. Also, our Liquor category in Europe also realized growth in line with expectation. The margins in our Liquor category in Asia were impacted by the U.S.A.-China trade war turmoil, as you know. And yes, it is what it is. In the B&S segment, the first half of 2019 was characterized by higher-than-expected staff cost we endured from logistical constraints. And we did communicate that to you also last year, these constraints were soft end of June, and the B&S segment had a focus on volume contracts. And you saw also that, that noted -- that resulted in noticeable performance improvement in the third quarter. Thus, in B&S, you see always a seasonal pattern. And so you see also more revenue coming towards the end. We anticipated also the performance improvement to continue in quarter 4 as this was also reflected in staff costs. However, we also were hindered there by what happened in Asia, so our FMCG market was affected, and this caused some higher costs. And as a result, EBITDA in the B&S segment also declined for the full year 2019. The Retail segment performed as expected. And that's following new shop openings of the multi-category stores we did at the regional airports and the addition of the acquired Rotterdam and Weeze airports. For our financial review, I would like to hand over to Gert.

Bert, thank you. Good morning, everybody. Taking you to Slide 9 (sic) [ Slide 16 ]. As Bert said, we managed to grow our turnover by 13.3% at reported rate. Gross profit margins slightly decreased to 13.7%, primarily the result of the unfavorable developments in our Asian Liquor and fast-moving consumer markets. EBITDA grew 5.1% at reported rates, including the positive IFRS 16 effect. The EBITDA margin declined to 5.8%, the result of the increase in staff costs related to the full year consolidation of FragranceNet and the increased staff costs as Bert elaborated on in the B&S segment combined with the lower gross profit, as just mentioned. On Slide 10 (sic) [ Slide 17 ], let me give you the bridge showing the positive developments in our turnover compared to the full year 2018. All business segments, as mentioned, contributed positively to turnover growth, represented by EUR 56.9 million organic growth. Organic growth, mainly driven by our Health & Beauty category in Europe and the U.S.A., and the volume contracts in the B&S segment. The inclusion of FragranceNet, Lagaay Medical Group and airport retail shops based in Rotterdam and Weeze contributed a little over EUR 148 million to the total turnover. The financial position on Slide 11 (sic) [ Slide 21 ]. We have table with a like-for-like comparison and as such, pre-IFRS 16. Net debt decreased from EUR 312.7 million to EUR 296 million at the end of 2019. Supplier finance arrangements have been terminated and have been replaced by the bank finance to facilitate cost savings. Taking the effect of this repayment into consideration, net debt improved by EUR 37.9 million. The EBITDA ratio stood at 2.8 post-IFRS, while, based -- pre-IFRS; and post-IFRS, it stood at 3.2. Looking at the net debt at the -- for the full year 2019. The bridge is showing the movement. As Bert mentioned before, we took the decision to sustain volume, sales volume, despite the described market circumstances in Asia, combined with our continuous focus on working capital. Increase -- that resulted in an increase in net cash from operations for the EUR 3.5 million reported in 2018 to EUR 114.7 million reported this year. The group invested over EUR 34 million in the acquisition of Lagaay and the 2 airport shops as well as in-house -- in warehouse infrastructure and digitization in HTG and B&S. Financing activities related to dividend distribution and to, I earlier mentioned, supplier finance redetermination, which we replaced with bank finance. Bringing me to Slide 13 (sic) [ Slide 23 ], working capital. We realized the growth in turnover. At the same time, we managed to decrease inventory, including the first-time consolidation of Lagaay to EUR 375.6 million compared to EUR 378 million at the year-end 2018. This is the result of our focus on working capital reduction. Number of inventory days significantly improved from 92 to 80 days in 2019. Trade receivables also decreased from EUR 205.7 million at the end of 2018 to EUR 201.3 million at the year-end 2019. Number of debtor days improved from 43 to 37. Net working capital decreased from EUR 472.2 million to EUR 492.8 million last year as a result of this focus on working capital reduction. And as such, working capital in days improved from 113 to 95 days in 2019. That was a flashback on 2019. So Bert, the outlook for 2020 on Slide 15 (sic) [ Slide 25 ].

When you look at our group and how we are now positioned, how we worked last year on balance sheet and on revenue growth, we are now at the point where we are -- we can say that we are confident about overall growth opportunities in Europe and U.S.A., especially with our Health & Beauty segment. That's also, when you talk about our Liquor distribution business and -- I mean, that's for short- and medium-term performance levels, and we can increase also our growth from geographical expansion. We saw, hence, these effects of protest in Hong Kong and the trade war between U.S.A. and China. But what we learned is that these are somehow one-offs, so this is all -- was all temporary. And the trade war is perceived by the majority of the people that it's now -- it's ending by -- and the tensions are a little bit more mild. Of course, now you see things like -- new challenges occurring like what you now see with the coronavirus. Of course, that will have an impact on Asia. I'm sure you have read our outlook. However, we remain positive about market for medium, long term. We will follow closely developments in Asia. We think it's a temporary thing. And we will follow up, and then we will determine a potential impact. But please keep in mind that this is -- the first quarter is not our big season. This is the season where it's not happening a lot. When you talk Asia, the virus and the first -- all started more or less at the same moment that Chinese New Year started. So that's a period nothing was happening anyway. So we, of course, see the late ordering from these markets. But it's -- our feeling is that it is temporary and the effects are limited. Commercial focus should be long-term value creation in key growth markets. We should benefit from global developments, market trends like digitization, retail redesign, supply chain simplification. We will solidify our financial position by operational effectiveness and cost reduction. You can be sure, like in the B&S segment, our distribution is now a smooth distribution. We did not receive a lot of complaints or we did not receive complaints from clients, we -- you see also growth in that segment again. So we are also there. Yes, we are positive about the chances we will have in 2020. Also, we did a strategic survey and we -- so we checked our businesses. We discussed with management the possibilities. And when you see that -- the plans we see, we see also enough room also to organic grow our business. And having said, this would end -- this is ending our presentation. I'd like to open the call for your questions and hand over to the operator.

[Operator Instructions] Our first question comes from the line of Robert Vos from ABN AMRO.

I have a few questions. First, on working capital. If you look at the net cash from operations, it's really that working capital saved the day for you with huge swings in inventory, trade receivables and trade payables. So optically, it seems that you are paying your suppliers later while demanding quicker payments from your customers. My question -- and maybe I see this completely wrong and then you can reassure me. Or can you maybe explain whether this situation is sustainable? That's my first question. The second one, dividend. You propose a dividend of EUR 0.22. Indeed, that is 40% of the payout. But it is not a progressive dividend, which is also what you used in your dividend policy. My question is, at a slightly higher payout, you could have maintained also that, the progressive dividend, and it would cost you a couple of million more in cash-out. So why have you decided to cut your dividend to EUR 0.22? That's my second question. And the third one is a bit technical, a small question. I noticed that amortization almost doubled. You mentioned FragranceNet.com as the main reason. But when you look at the increase in the intangible assets, the jump in the annual amortization seems quite high. Can you help me understand this better?

Okay. Thanks very much. Let's start first with the dividend. And please understand, we -- what we did, as a company, we grew the last 2 years. And when we came to the market, we had a revenue of EUR 1.5 billion. We closed last year roughly around EUR 2 billion. Of course, you need to finance your business as well. So it's easy to pay out dividends and to increase the level of dividends. But in the past, we are growing. At this moment, we would prefer to stick to 40% and -- I mean, when you see that we did also take over activities, I think that's also reasonable for the company that we have reinvested our money in that kind of things. Then secondly, and we were -- I would address to Peter.

Thank you, Bert. I think there are 2 questions left. One is the amortization that doubled. Well, as far as that is concerned, please note that in 2018, we only had 3 months of FragranceNet included. So this year, we have 12 months, of course. Apart from that, we also acquired Lagaay during 2019. Of course, that also comes with additional amortization. And following the digitization trend, of course, that leads to software investments we did both in the past and, of course, we are still doing. And also these come with amortization. And looking at the sustainability of working capital, we look at the accounts payable that you indicated. Please note that during 2019, we acquired Lagaay. Lagaay also comes with a different financing model. They are more financed with suppliers than the B&S Group traditionally was. And also know that, of course, despite the slightly negative developments in Asia, we managed to keep our volumes high and as such, grow the company by 13.3%. And of course, the growth also comes with additional suppliers. I hope that answers your questions.

Pretty much. So there's no specific action taken to improve the working capital and to -- well, what I said, to pay your suppliers later. It's merely a result of the acquisitions and the growth of the business in itself. Is that what you basically said?

That's what I'm saying. Apart from a healthy focus on working capital, there is no window dressing involved.

The next question comes from the line of Patrick Roquas from Kepler.

I've got 2 questions. The first one is on the supply chain. What's the amount that you expect that can be recovered now that your warehouse in Dordrecht is running smoothly? And how much of that amount can be recovered in 2020? And the second question is on FragranceNet.com. You expect the business to grow high double-digit again in 2020. What about the launch in Europe? Can we assume further gross margin gains this year as well?

Let's start with FragranceNet. FragranceNet is -- was a great success last year. It was -- and we have owned it now since September '18. So we had one quarter and what was the most -- best quarter we had in '18. And then, of course, we had now the full year '19. FragranceNet is, of course, working on rollout programs for Europe and also for other parts of the world. We did focus for FragranceNet a little bit on the U.S., and we saw that it was also -- they were busy. Because you need to manage your growth, we opened a second warehouse in the U.S. in Nevada to have a better conversion rate to the U.S. and especially the, say, California, this part of the U.S. And now it's also time to roll out. But we did not calculate the effects of such a rollout as we want to be also conservative. When you talk about B&S and the cost of our supply chain here, what we learned is, of course, when you have a warehouse, when you have staff, when you automate and digitalize your processes, you can -- if you do more business, so incremental business, you can execute that without a lot of extra cost. And of course, this will -- this is the best path for the B&S Group here in Dordrecht to enable higher EBITDA margins. Now what we see is that we see that also now, despite corona and all these things, the business we do in Dordrecht, it's growing well. We were a little bit unlucky last year, yes. But the good thing is that things move reasonably smooth, has moved well. We have the processes. So we -- yes, if this volume is pursuing, yes, our EBITDA will -- also margin, percentage-wise, will grow. You want to add something, Gert?

No. I think it's the blend between variable cost and fixed cost. As Bert indicated, yes, we are at the fixed cost level we want. That's not going to increase with volume increasing. And as indicated in the press release, working on operational efficiencies, we will no doubt realize growth in EBITDA during 2020 and especially years beyond.

Okay. That's a clear answer. On FragranceNet, Bert, aside from, let's say, the qualitative statements you made, any quantification, any -- what we can -- I mean, is it expected to maintain on the same growth trail as you've seen over the last 12 months?

Yes. The forecast we made for such a business are in that deadline.

[Operator Instructions] And the next question comes from the line of Lucas Ferhani from Deutsche Bank.