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

Hello, and welcome to the B&S Group S.A. Analyst Call Q1 2020 Trading Update. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Bert Meulman, CEO, to begin today's conference. Thank you.

Good morning, all. This is Bert Meulman, the CEO of the B&S Group. With me here on the call, Gert van Laar, our current CFO; and Peter Kruithof, our upcoming CFO. We will take you through the highlights of the quarter 1 trading update and the COVID-19-related developments that we published this morning. Of course, after that, I would like to open the call for question-answering sessions. As already communicated in our COVID-19 update on April 2, our key priority is to keep our employees safe and healthy during these times. We have taken all actions necessary to enable our employees to work from home as much as possible. Of course, in our logistics operations, we have taken all required and precautionary measures to protect our employees, while they assure the continuity of logistics operations to keep serving our customers. At the same time, we are proactively managing the economic consequences of the COVID-19 for our diversified business portfolio. In the first 2 months of the quarter, our sales volumes in the Asian markets were impacted by COVID-19 and the measures taken by authorities to limit the spread of this virus. In the latter part of March, the sales volumes in our cruise and travel retail markets rapidly declined and came even to a complete standstill at the end of March. On the other hand, our online Health & Beauty distribution to platforms and end customers showed very good performance and good performance. Our full distribution to remote areas in our international medical supply continued during Q1. Also, in the latter part of the quarter, we began to notice the first sign in our Asian markets towards vigilant recovery. All in all, this resulted in an overall turnover decline of 1.3% at reported rates, where organic turnover declined by 5.3% also at reported rates. Let me zoom a little bit more on market circumstances on a segmental level and the action we have taken. Within our health and -- HTG Health & Beauty business, our online distribution to platforms and end customers showed resilience in quarter 1, performed even better than anticipated in the first part of quarter 2. Starting mid-March, temporary lockdowns on a vast number of countries and the closing of physical shops impacted our Health & Beauty distribution to physical retail outlets. This was mainly related to value and discount retail in certain European countries. In the first week of quarter 2, convenience retail shops in several countries started to open again. From that point onwards, our distribution to physical retail begin to show a slow, but noticeable upward trends. Our HTG distribution to Asia and particularly, China was impacted by COVID-19 in the first month of 2020, albeit traditional always a slow quarter after the seasonal peak in quarter 4. When lockdowns in this area were gradually lifted, we began to notice the first signs of Asian recovery of sales volumes in this market. This trend sustained in the first part of quarter 2, although it has also to be said that current margins are lower compared to the quarter 2 2019 levels. Our HTG liquor wholesale in Europe was impacted by the social restrictions on end customers and on the closing of public venues across Europe that started in March. In the last weeks of March and the first weeks of the quarter 2, this impact enhanced as more and more countries in Europe declared a temporary lockdown or prolonged the initial period of their lockdown and particularly related to social gatherings. Within the B&S segment, the majority of our maritime business in the international FMCG distribution remained resilient in quarter 1 and was hardly affected. Our other business lines in this segment, including full supply to remote areas and international medical supply rely on the continuity of the services we provide and remain very stable. On the other hand, our full distribution to European cruises and our international FMCG distribution to duty-free markets such as airports came to complete standstill towards the end of March. These market circumstances continued in the first part of quarter 2. For the cruise market, we do not expect a recovery for the short to medium term. We have taken measures to align the inflow levels of our inventory with the outflow of our shares. For example, all purchases for our European cruise distribution had been canceled. We have also relocated our employees in the cruise business as much as possible for those business lines within the segment that require continuity of our services. Our workforce is cut back as much as possible by not extending fixed-term contracts. That brings me to our retail segment, with the travel retail sector being severely impacted by COVID-19-related measures, the sales of our international and regional airport activities and cruises shops came to a standstill towards the end of March. In quarter 1, we set up a dedicated committee within the Retail segment to develop and execute an action plan with primary focus on bringing the back the cost levels and bring them in line with expected sales volumes with current set of expectations of passenger numbers to reach recovery levels of only, say, 50% in 2021, we are preparing for a reset in this segment to this new reality. It's important to note here that our shops are located in 14 different airports globally and that the applicable rules and regulations vary widely in the different jurisdictions where we operate these shops. We are carefully working towards further cost reductions in this complex environment. With our half year results, we expect to provide you with a comprehensive update on our cost reducing measures that have been executed and implemented. That concludes the segmental review and brings us to our financial position. Gert and Peter, please go ahead.

Thanks, Bert. Good morning, all. This is Peter here. Firstly, I want to reaffirm that our balance sheet is solid and that we have sufficient credit facilities to cover our liquidity needs. Close to 75% of our assets relate to accounts receivable and inventory or close to 2/3 when you include IFRS 16 right-of-use assets. Our working capital comprises a healthy, mainly credit insured and diversified portfolio and an inventory of predominantly fast-moving branded products. When looking at our net debt position, over 80% is related to this healthy working capital and as such, adjustable to sales volumes. As we have indicated, our focus lies on aligning the inflow levels of our inventory with the outflow of sales. And in this way, we are decreasing our net debt position. We are maintaining an active dialogue with our suppliers and customers to work towards agreements and solutions where required. The other 20% of our net debt, this does not comprise working capital. This is related to recent acquisitions such FragranceNet and Lagaay. And as Bert already indicated, these business activities are performing very well in this COVID-19 pandemic. Our solvency, as such, remains very strong and solid. If you look at our operating expenses, they mainly comprise staff costs. And as said, we've taken all measures to decrease these cost levels by scaling down temporary staff and not renewing fixed-term contracts in line with the sales volumes. Combining this with the use of support from government regulations in the countries we are present, we are, to a large extent, counterbalancing the effect of lower sales in the effective part of our business. This way, we are mitigating the effect on our EBITDA levels where possible. It is, however, important to keep in mind the mechanism of our business model. Where our operational leverage fuels EBITDA growth in time of increased sales volumes, this effect, of course, reverses in times of declining sales volumes. Our CapEx requirements in the foreseeable future were already limited and the number -- the limited number of current investment programs are being reevaluated to adopt to the current situation in our end markets. In conclusion, our measures related to working capital and cost control are concentrated on aligning net debt and EBITDA going forward in order to allow us to keep operating within our covenants and providing headroom once volumes pick up again and sourcing opportunities arise. Bert, it's now up to you for the outlook.

Thanks, Peter. Okay. For the remainder of quarter 2 2020, we expect market circumstances similar to what we have seen at the end of March and in the first part of quarter 2. We anticipate sales volumes to decline between 25% and 35% in quarter 2 on a like-for-like basis due to the COVID-19 impact. For the second half of 2020, we do foresee a partial recovery of overall group sales volumes starting in quarter 3, with positive trends towards end in quarter 4. More specifically, we expect this to originate from growth of online channels and recovery of our Asian and our European market, except for our cruise and travel retail markets. Given the seasonality of those 2 markets that would normally a peak in Q2 and Q3, we do not expect their sales volumes to recover in 2020. We are continuing our 2020-2022 strategic initiatives with an enhanced focus on optimizing internal processes and digitizing our operations. This will position us for future business opportunities, and we foresee -- and in growth, we foresee in specific niche markets and particularly in the online channels. All in all, we consider 2020 a bridge year towards getting back to pre-COVID-19 sales growth levels for the group in 2021. And that will end our highlights for quarter 1 2020 trading update. I would like now to open the call for questions and hand over to the operator.

[Operator Instructions] And our first question for today comes from the line of Robert Jan Vos from ABN AMRO.

Can you remind us what percentage of B&S segment is the 2 areas where you reported negative impact being European cruises and FMCG distribution to duty-free markets? So combined, what percentage of B&S segment sales this represents? That's my first question. Second one, guys, on the outlook, maybe a bit more color on what social distancing and lockdown scenarios your outlook for particularly the second half is based. For example, do you expect that most restrictions will have been lifted in the fourth quarter? That's my second question. And the final one, when is the next covenant test is? Is that at half year? And can you confirm that, that's based on what you see now and expect -- you expect to stay within the covenant also by then, so by the time of the next test?

Okay. Allow me, Robert Jan Vos, to start with your second question and the third. And then I ask Peter to -- or Gert to discuss the negative impact. Social distance, of course, has a huge impact when you talk [indiscernible]. [indiscernible] is -- for us, it's -- in the liquor business -- in liquor wholesale business in Europe, it's relatively big. So of course, that has an impact. But on the other hand, we, as a company, we did also in Liquor, we did invest in platforms to also to benefit the online sales. We work very hard on that. We believe -- we are big believers in that online business has a huge future. And what we are convinced that, that will -- this is also a catalizator to head start to bring that to a different level. So it's one way or other. We will -- of course, we are sure -- we can be sure that sales in liquor in Europe will not be the same like in other places this year. But yes, we can benefit also from that. When you see that we now live in a time that shops -- still a lot of shops are closed. They are now in the verge or they are now reopening. It's normal to expect that for the coming months, we see a recovery. And shops are opening, and if shops are opening, we will also have sales. Bars are opening. The restaurants are opening. Terraces and places in beaches are opening. So of course, we will have a ton of sales. And that's, of course, that makes also logical to assume that we will have recovery soon. When we talk about covenant testing, yes, that the next test is -- please correct me if I'm wrong, but it will be next -- it will be half year. And yes, we expect that our inventories come down. We don't hope, so for example, for the cruise ships, we don't need to hold receivables for the cruise ships. So it should also be reasonable to expect that our balance sheet will also be lighter. So are we modeled...

Correct. The next test we need is...

Half year.

At half year ended, where net debt to EBITDA, the covenant still is at 3.5%, of course, pre-IFRS 16, so excluding the lease liabilities. And of course, as Bert also indicated and we've indicated earlier in the call, we are now decreasing the working capital which, of course, comes naturally when a part of the sales is down. But of course, we also keep our inventory and our accounts receivable healthy. And as such, also, net debt is decreasing.

Let's also note that we see that our clients really not will take a longer time to pay us. So it's not that we need for that also a healthier balance sheet, so we are quite efficient on managing our working capital. So yes, our -- the forecast we made internally did not foresee that we would not make -- that we would pass that test. Peter, the negative impact, which you mentioned.

I think, Robert Jan, correct. You were asking about the negative impact on the B&S segment, stemming from the both cruise and the duty free. When looking at those markets, of course, we have not disclosed that before, but I would say it's good market. Both markets roughly represent around EUR 50 million of turnover. The cruise margin, of course, as Bert already indicated, yes, that season is gone. So basically, we don't expect any sales going forward during this year from the cruise. We do we expect duty-free markets to slowly pick up starting in Q3.

Peter, did you say 5 0 or 1 5?

5 0.

And that's on an annual basis?

Correct.

Our next question comes from the line of Tijs Hollestelle from ING.

The first question is about the gross margin development. And then in the bigger business segments, Health & Beauty and liquor. I can imagine that you're faced with a lot of different pricing dynamics, but how is it currently impacting your gross margin development so far during 2020? That's the first question.

Peter, let me invite you to answer the question or Gert?

No problem. If we start with the Health & Beauty, then we see the margins, yes, remained constant. What we don't see a pressing effect on those markets. What we do see is in the liquor market, and then especially the Asian liquor market that we do see a pressure on the gross margin. In other words, in that market, yes, we are selling at lower prices. Within the European markets, especially during the first quarter, the margins remained stable.

And do you have any view on how long that will last? Because I can imagine that somewhere in the future, it resets itself again.

Yes, that's really difficult to say, Tijs. And we -- we don't have any -- yes, we always -- we are optimistic that's also because we have -- we turn our inventories and then you get -- you always have new buying moments, and they are not -- it's not that we have contracts also for a very long period when we do buying. So it's -- if it's not a business, it's not a business, then we offer...

For the expense side, the OpEx, but can you give us a kind of indication of how much millions of euro you are getting from different government compensation schedules?

We are not disclosing that, Tijs.

But I can imagine that in some businesses, it's significant that because you can show the government that you basically have 0 revenue in some of your...

Yes. The payroll of Capi, of course, is entitled for compensation also, but in various countries. So Germany has different rules than the Netherlands, for example. So -- and so we are now -- also, we are now making all the claims. So we filled out basically all the claims as we now send them in. So we want to wait that a little bit.

Tijs, what you see in general is that when looking at the Dutch regulations, which, of course, comprise the majority of our staff, that within the Dutch regulations, you have to look at a group perspective. So in other words, you cannot say the retail is down 100%, so I get 100% of those costs. What they will say is, "Okay, look at your entire group. And if your entire group is down, well, let's say, 25%, then you get the 90% of the 25%. And you don't get a full discount between brackets for the retail-only. And in the markets where you're up, you don't have to include it. So you have to include your entire business and looking at that perspective, yes, you'll get the compensation."

Okay. And one final question. If I understood correctly from the question with Robert Jan, your net debt position at the end of June will be lower compared to the reported one at the end of last year. Is that correct?

Net debt level, but we are...

Yes?

Sorry, the net debt level will be, Peter?

The net debt level will be lower than end of year. You are correct.

Yes.

Okay. That's helpful. And are you also willing to share, let's say, the rolling 12-month EBITDA number adjusted for IFRS 16 at the end of the fourth -- first quarter?

Peter?

At the end of the first quarter, you indicate? Or...

Yes, the 12-month rolling and then also adjusted for IFRS 16 there because you do it on the debt, but you also have to do it on the EBITDA.

We are willing to present that figure at the half year report.

Okay. That's the second outlook.

Now -- in line with previous years.

Our next question comes from the line of Anvesh Agrawal from Morgan Stanley.

I got 2 questions. First is, maybe if as Asia sort of, in particular, China has started to reopen and you obviously would have seen some sequential recovery there, I was wondering if you can comment on the shape of that recovery. I mean, is it like a substantial improvement sequentially and Y-o-Y, the business still flattish down? And the reason I ask is maybe we can make our own assumptions around the European recovery and use China as a reference point to sort of forecast Q3 and Q4 for Europe. And the second question is just to clarify on the working capital point. Clearly, you would have a lot of inventory turnover and the stock levels are lower. So are you actually expecting a positive inflow within the cash flow from working capital, at least for 1H? Or it sort of remains flat to slightly down?

Peter?

Let's start with the China reopening/recovery. What we've seen over there is a gradual recovery. In other words, it's not like flicking a light button where all of a sudden demand is up to 2019 levels. We see a gradual start. And yes, that's also the gradual start we foresee and expect in Europe. However, also bear in mind that the markets we serve in Europe are quite different. And looking at the value retail, for example, or the discount retail, there, you will see that once the stores reopen, you will -- at least that's what we expect demand to increase more rapidly than with the liquor in the Chinese markets. When looking at the working capital, we expect, indeed, working capital to be lower than year-end. At half year, in other words, yes, we expect that to decrease in line with the decrease we expect on a half year basis of our turnover. In other words, we expect that to, of course, gradually decrease. However, please also bear in mind that if and when the markets start picking up again, of course, we will use that opportunity to also increase our inventory levels again in order to be able to generate EBITDA to the maximum level in the second half.

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

I'll have 2. The first one is on the e-commerce part of the business, especially at HTG. I was wondering whether you saw stronger performance than expected. Obviously, that was one of the beneficiary of the crisis. And the second one is on kind of the portfolio of businesses you have. Do you now question a bit whether you need to be in the cruise or multi-segment and the shape of B&S as well as of the retail division? Do you consider maybe selling some of those businesses now?

E-commerce is a trend which is not stoppable. And we have seen that also the years before. And now with the corona, we see that the trends become -- that, that trend become more and more significant. And we have seen strong growth and also with our business in America, we saw, yes, very strong growth. And yes, we expect that's a trend which we will really work on to make sure that's for us also sustainable. And yes, that's for us -- that's very important. Sorry, your second question was again?

On disposing some of the noncore businesses...

Yes. Okay, I have it. It's -- of course, this is for us, it's a new situation. This is a reality we have to deal with. We will now focus on balance cost and revenue. We have -- we will do what we need to do to make that work. I expect, of course, also it will take time, but the retail will come back. And yes, we don't want to miss out on our airport retail. If you talk cruise ship distribution, it is a nice -- it has always been a good part of the B&S food distribution business. What you see is we are quite flexible. So -- and we did not expect in January that this business would not come. And we prepared everything like we always did, so we had the tenders. So everything was prepared and then this situation occurred. But we were so flexible, we were able to cancel all the purchases. We know we also -- we did, yes, dismantled, more or less, the department. So that now you can be sure that there are no -- not a lot of people working in the cruise department right now on not selling cruise ships. So these people are working in other departments where they are needed. And if their business, of course, is also in all business, it's -- so these companies who will do cruises, they have now to fight to survive, but they also raised capital. And they have always been attractive for vacation. So they will really do everything to come back. And if they come back, we will be there to support them with our food distribution. And I'm also quite sure that when they do, we will be even a better partner for them than ever before because then we became more important because, yes, that business also has changed and they will rely more on us. So yes, we hope that next year, they will be back.

Our next question comes from the line of Paul [ Hoffman ] from [ BID ].

The first question's actually also about e-commerce, of course, growing fastly, sales to the online platforms and your own fragrance business. Can you be a bit more specific? What were kind of sales share these businesses have now if you compare it, let's say, to the 2019 group sales of EUR 2 billion? And also, yes, it is, of course, growing fastly, but yes, what kind of percentages can we talk about? And then, not to the exact number perhaps, but just to give a feeling about what kind of a percentage we are talking about? And then a final question about the airports you're in discussions. You reiterate about the concession fees, et cetera, to negotiate these. That's actually also something you said at the start of April at your early April update. Have you now realized the progress in these talks? Is that ongoing? Or have you already come to some agreements? Or what's kind of the status of these talks?

Okay. Now let's start with the airports and that business first. You can imagine if you don't have any business or hardly any business in this airport, it becomes, first, very important to scale back costs as much as possible. We see that airports are realistic. They -- so we have a very good talk with them. And yes, that, of course, to everybody is also -- the airports, there, everybody is a little bit waiting to see when they are reopening, and we -- what is happening with the passenger numbers because that's, of course, very important also for their future and our future there totally. What I noticed, they're realistic. So we expect that we have reasonable solutions there. And yes, we have to accept that. When you talk about e-commerce, Peter, can you elaborate a little bit on that? Or...

I don't think we've ever disclosed these percentages before. I think if you look at when we acquired FragranceNet and the percentage that represents and includes our own other online business to platforms, I would say that roughly 20% of the -- of our sales is related to these platforms.

And you talked about the sales of, let's say, 2019, so group sales of EUR 2 billion? Or of course, sales have been...

Right.

Yes. Okay. Okay, not fair. And yes, if you look a bit at the ball.coms and the online players, yes, we see growth rates of, let's say, 30% plus or even higher. Yes, can you give some rough guidance where your online sales? How they are progressing? Is that -- I assume also double digits, but is that really double, double digits? Or can you be a bit more -- can you provide some color there?

We also before, we never have -- we had always -- they do high -- they do double-digit growth, but Fragrance is a different bracket, so -- than the general bracket like ball.com. So they have as a little bit slower growth rate. But of course, the good thing of fragrance is that it's another very heavy product and also people don't return it so it has put -- yes, the environment around these kind of products in e-commerce are, for us, is very good. Yes. You know that with FragranceNet, this kind of business, we also said that the biggest part of the profit you make in the end of the year, in the last 2 months, but we now -- with the numbers we see currently are really also significant, so we are very optimistic about that.

We have a follow-up question coming from the line of Robert Jan Vos from ABN AMRO.

I have 2 small questions on retail. That you already mentioned something on it. But just -- it's clear that you're hit hard in retail, obviously. But just to get a sense there, in the midst of all the measures like the lockdowns and the travel restrictions, is it fair to assume that sales, for example, if you look at April, that sales really dropped by close to 100%? Or is that too harsh? That is the first question on retail. And second, you mentioned that you, here and there, have been able to suspend or waive lease -- or having waived lease obligations in retail. For how long have you been able to do that? I assume there's an end to these, let's say, measures and that your tenants do not allow it for indefinitely. So for how long have you been able to agree suspensions or waivers of your lease obligations?

Robert Jan, every -- the people in this -- the airports in this retail industry have been quite flexible. So you can imagine they are -- of course, everybody is flexible until the business is starting up. And -- but I would say, almost with no exception, everybody has been fairly cooperative and very flexible. A bigger part of the rent is concession fee. Concession fee means if you have very high -- if there are a lot of passengers, you have a very high revenue number, also you pay a very high rent. And of course, it's dropping if there are less passengers. And so it is, more or less, for a larger part, it's revenue depending rent so that we have now no revenue, so that means also that we have way lower rent for this moment, but also in a later stage, we have also because of that, a way lower rent for our airport. When we talk about the current business, yes, that line is -- dramatically, it's like what you, of course, you see also in the retail streets. You see also the shops are closed also. A lot of our businesses, our shops are closed. And there's a hardly any traffic. So you could really say that it's near 0.

Our next question is another follow-up coming from the line of Tijs Hollestelle from ING.

And final question on the acquisition of Lagaay. That company's active in the medical supplies. So looking with hindsight, it's a well-timed acquisition. Can you remind us of the annual turnover it will add to the revenue? And also the current growth rates you're seeing in that business?

Peter, we're not really disclosing doing, do we?

No, especially not the growth rate. What you've seen when we acquired the company and that has also been indicated in our financial report, is that sales volumes were around EUR 40 million last year. So it was a nice add on, not a very large add on but a nice add on. And we did have a good profit margin, so it's a good business.

Yes, it is growing, I assume.

And it's quite -- it's growing quite fast. Also, if we would not have to have this COVID, it's also growing because we're able to -- they are able to use our service offering. So their products are also growing with our products, so because of their barrels growing quite well.

Thank you. We currently have no further questions in the queue, so I'll hand the call back to our speakers to conclude today's conference.

Okay. Guys, thanks very much. Thanks, operator. Thank you very much, everybody, for joining us this morning. If you have any additional questions, you know how to reach us via Anke Bongers. And for now, everybody stay also healthy. Keep safe. Operator, thanks.

Thank you, and thank you for joining today's call. You may now disconnect. Hosts, please stay on the line and await further instructions.