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

Hello, and welcome to B&S Group Half Year Results 2020. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'll now hand you over to your host, Tako de Haan, CEO; and Peter Kruithof, CFO, to begin today's conference. Thank you.

Good morning, everyone. My name is Peter Kruithof, CFO of B&S Group. With me here today is our CEO, Tako de Haan, who joined B&S Group in this capacity on August 11.

Good morning, everyone. This is Tako. I would like to take this opportunity to briefly introduce myself. For the last 11 years, I've worked mainly in the capacity as Chief Operations Officer for renowned retail brands like Nike, Triumph and TOMS Shoes. As CEO of B&S Group, my first focus area is to accelerate the value chain optimization driven by digitization and efficiency. In the past months, we have enhanced our focus on optimization of our -- optimizing internal processes and digitizing our operations, all driven by our initial Digital First approach. I will elaborate on this later in the call. Together with the executive team, I look forward to further sharpening our strategic focus areas and business priorities that we initiated in 2019. So let me now take you through the highlights of our half year 2020 results. After that, there's, of course, opportunity to ask questions that you may have after the full deck has been presented. Before Peter discusses the financials with you, let me put some color on the COVID-19-related developments and the actions we have taken to mitigate the impact on our results. While the impact of COVID-19 intensified on a global scale in the second quarter, our diversified business portfolio continued to show relative resilience during this pandemic. After a sales decline of 1.3% over Q1, the second quarter saw sales decline by 12.1%, therewith outperforming our expectations at the time of our Q1 trading update of May 18. This performance was the result of several developments. Firstly, the swift recovery of our value retail business after reopening of the shops starting in April. Secondly, the continuance of our sales recovery in the Asian markets that started late in Q1. I have to add here that this was at low margins due to the oversupply in the market. And last, but not least, our enhanced focus on our online sales channels. Over the past months, we have implemented strict cost control measures to reduce our operating expenses, which mainly comprise of staff cost. We brought temporary staff levels in line with sales volumes as much as possible and utilized government support in the countries we are present. Our colleagues in heavily affected markets such as cruise were redeployed, where possible, to parts of the business that required additional support during this pandemic. For our Retail segment, we set up a committee to draw up and execute a dedicated action plan. We will elaborate on this plan in a minute. Our net debt is mainly based on working capital, and we took various measures to reduce working capital by matching group inventory with sales levels as much as possible. For example, we canceled our purchase orders in the cruise market. This way, we match our positions with market developments as fast as possible, which was supported by the turnaround time of our inventories. All in all, this resulted in a very strong cash flow for the first half of the year. At the same time, we accelerated our digital transformation, which we refer to as our Digital First approach. This is focused on enhancing operational efficiencies and sharpening our business to leverage the opportunities we foresee in specific niche markets and online channels. Now let me hand over to Peter for the financials.

Thanks, Tako. Let me take you through our financial highlights of first half 2020. Driven by COVID-19 developments, overall turnover declined by 7%, where organic turnover declined by 10.5%. Turnover from acquisitions originated mainly from Lagaay Medical Group, which saw increased sales volumes driven by COVID-19 developments. EBITDA came in at EUR 35.3 million, a decline of 33%. I will elaborate on this in a minute. As mentioned, we managed to generate a strong cash flow amidst the COVID-19 pandemic and kept strong focus on working capital. As such, both inventory in days and debtors in days decreased. Let me put some color on performance at segmental level. Our liquor distribution to Asia, and in particular, China was impacted by COVID-19 in the first month of 2020. When lockdowns in this area were gradually lifted, we started to notice the first signs of cautious recovery of sales volumes. This market recovery continued in Q2, albeit at low margins compared to Q2 2019 levels. This was due to the demand supply imbalance in the market. Liquor wholesale in Europe was impacted by the social restrictions on end customers and the closing of public venues across Europe that started in March. In the last weeks of March and throughout Q2, this impact enhanced. This was the result of more and more countries in Europe declared the temporary lockdown or prolonged the initial period of the lockdown, in particular, related to public gatherings. Our online Health & Beauty distribution business to platforms and end customers showed resilience in Q1 and performed even better than anticipated in Q2. On the other hand, our distribution to physical retail was impacted by the temporary lockdowns in many countries and the closing of physical shops mid-March. This related mainly to the value and discount retail in certain European countries. In the first weeks of Q2, our distribution to physical retail began to show a slow but visible upward trend. This was the result of convenience retail shops in several countries that started opening again. This trend continued throughout the quarter with sales recovery towards the end of Q2. The B&S segment, our food supply business to remote and military caterers, relied on the continuity of our -- the services we provide and remained stable in the first half. The majority of our maritime business and international FMCG distribution also remained resilient in Q1 and Q2, with the acquired medical supply business even seeing increased sales from the COVID-19 developments. On the other hand, the subsegments, Cruise and international FMCG distribution to duty-free markets came to a standstill towards the end of Q1. The market circumstances for these 2 subsegments continued in Q2, and recovery is not expected for the remainder of 2020. The Retail segment was severely impacted by global travel restrictions, and our travel retail activities came to an almost complete standstill at the end of Q1. Early Q2, we set up a dedicated committee within the Retail segment to develop and execute an action plan. The main focus lies on limiting the effect of COVID-19 on operating profit. Operating profit in this segment is driven by sales volumes, concession fees and staff costs. We aligned our cost base within the segments with business volumes to the extent possible. This was done by scaling down temporary staff wherever possible, utilizing support from government regulations in the countries we are present. Moreover, we kept in close contact with all airports where we operate to come to agreements for suspension or waiving of lease obligations and concession fees. Despite these measures, however, the rapid and abrupt sales decline of 90% in Q2 resulted in negative EBITDA for half year 2020. However, with the aforementioned cost measures in place, we do expect to see a gradual improvement of EBITDA levels when sales volumes start picking up, a trend we already noticed in recent weeks, although very prudent. We do not expect recovery of the Retail segment to pre-COVID-19 levels on the short to medium term. The committee is preparing the rollout of further initiatives to find the organizational structure and cost levels with anticipated sales volumes. In addition, we are investing in further digitizing our operations in this segment as part of our Digital First approach. This is aimed at permanent increase of cost efficiency moving forward. That brings me to the financial review. As mentioned, the half year 2020 turnover decline of 7% or 10.5% organically was driven by COVID-19 developments. Gross profit came in at close to EUR 150 million compared to EUR 126.3 million for the first half in 2019. As a percentage of turnover, this was a decline from 14.1% to 13.7%. This was mainly driven by the low margins in our liquor category in Asia in our Q2 sales and partly the effect of the sales decline in the retail segment, which comes at higher margins. Despite our cost control measures that were concentrated on reducing variable operating expenses, our EBITDA margin over the first half declined to 4.2%. This has to do with our fixed cost base, combined with the sales decline in the first half. As a result, our EBITDA levels outpaced the decline in turnover and decreased by 33%, arriving at EUR 35.3 million compared to the EUR 52.7 million for half year 2019. Net profit amounted to EUR 12.8 million, of which EUR 7.2 million came from minorities. This was the result of the growth of our online Health & Beauty, quick recovery of value retail and the performance of our medical supply business. This bridge shows the elements that together lead to the turnover decline. Driven by COVID-19, organic turnover declined over EUR 103 million, with the EUR 32 million acquisitive growth stems mainly from Lagaay Medical Group. Development of the USD exchange rate had a positive effect of almost EUR 9 million. That brings me to our financial position, presented in line with last year on a pre-IFRS 16 basis. Solvency stood at 37.2%. This was the result of continued profitability, the cancellation of final dividend for 2019 and a decreased balance sheet total. Our measures related to working capital and cost control, as discussed earlier, were concentrated on aligning net debt and EBITDA to allow the group to keep operating within its covenant. For the first half of 2020, our net debt-to-EBITDA stood at 2.8, well within our covenant of 3.5. As mentioned in our press release, we want to avoid becoming limited by our balance sheet when sales volumes pick up again and sourcing opportunities arise. That is why we proactively engaged with our relationship banks to agree on a covenant holiday for 3 test periods: half year 2020, full year 2020 and half year 2021. This way, we have created additional headroom for inventory buildup towards a seasonally stronger second half and particularly Q4. To give some more color on net debt, let me elaborate on the bridge showing the movement from year-end 2019 to half year 2020. As mentioned before, our focus on working capital reduction resulted in a strong operational cash flow of more than EUR 70 million. Our limited investment activities were driven by our Digital First approach and contained software developments to accelerate the rollout of our ERP system in subsegments. Final dividend for 2019 was canceled, leaving only dividend payments to minorities of some EUR 3.6 million. All in all, net debt decreased by over 27% to roughly EUR 240 million. That brings us to working capital development. Inventory decreased from EUR 432 million in -- at half year 2020 to EUR 355 million in half year 2020 -- sorry, the previous one was 2019, or from 98 days to 78 days. Trade receivables decreased from EUR 193 million to EUR 182 million or from 38 to 35 days as a result of strong credit management. And trade payables roughly remained stable at around 20 days. For the outlook, I would like to hand back to Tako.

Thank you, Peter. Based on the current market outlook and not taking into account the second wave of COVID-19, we foresee a partial recovery of overall group sales volumes in Q3 with further positive trends towards end in Q4. And as Peter mentioned, this is traditionally our strongest quarter. This will primarily be driven by continued strong momentum in online channels and further recovery of the Asian and European markets, with the clear exception of cruise and travel retail. We anticipate our EBITDA margins in the second half of the year to increase compared to the first half of the year, partly given the seasonality of our business and partly because of expected gradual margin recovery in the liquor business in Asia. Yet, we do not expect to see recovery to last year's EBITDA margin levels by the end of this year. Besides our enhanced focus on optimizing internal processes and digitizing our operations, driven by our Digital First approach, we will continue to sharpen the strategic focus and business priorities as initiated in 2019. That basically ends the presentation, and I would like to open the call for your questions and hand over to the operator.

[Operator Instructions] And the first question comes from the line of Patrick Roquas from Kepler Cheuvreux.

Two questions from my side. The first is on working capital. So normally, what we've seen in past years is a buildup of working capital at the half year event, which then tends to be an indication of a strong Q4. Now you have reduced working capital to a big extent in the first half. What can we read from this for your expectations for, let's say, the second half and especially Q4? So that's the first question. And then second is on -- yes, you've indicated that government support helped part of your business in the first half. Could you quantify that? And is that also something that we can expect for the second half?

Okay. Thank you, Patrick, for your questions. I think if we look at the buildup of working capital, we remain within the line. We've also indicated in our press release. In other words, we still expect recovery of our sales in the second half, albeit not to 2019 levels yet. There is sufficient availability within the market for us to be able to cover that growth. So yes, we still expect to be able to increase in line with what we've indicated in the press release, in line with -- or relating to the government support, that's also indicated in our half year report. The total amount equals EUR 3.4 million for the first half. We don't expect to use the government support in the second half. Given the way the regulations are unfortunately, or I should say, fortunately, the line is not open for us since we don't meet the criteria any longer. And I think that answers your question?

Yes. That's clear. Just a quick follow-up, Peter, on working capital. So what you're saying is that there is sufficient availability in the market should, say, demand and market developments be a bit better than expected for you then to be flexible and to [indiscernible] declines if demand would catch up quickly?

That is correct. And besides that, please also don't forget that, take, for example, the cruise. Normally, of course, we also have inventory for the cruise market, as an example. Well, if that market is not there, then, of course, we also don't have that inventory. So we don't carry that on our balance sheet. Also, we've been working and we've been working quite hard, I would say, on the turnaround level of our inventory, that's also what you see with the number of days. And yes, we do expect that trend to continue throughout the second half. So that would imply that, in general, inventory levels are a little bit lower than they were in the past.

The next question comes from the line of Robert Jan Vos from ABN AMRO.

A couple of questions from my side. First, maybe a follow-up on the government support of EUR 3.4 million, you mentioned, in the first half. Were there other, let's say, support benefits that are included in the first half results, for example, some lease holidays or discounts? So that's my first question. Secondly, you mentioned that the margins in liquor in Asia are lower because of an imbalance between supply and demand. When do you expect margins to be back at more normal levels? That's my second question. And maybe my final one, on the covenant holiday. For the half year '20, end of this year and half year next year, what should we read from this, that it is, for example, quite likely that you will end up at a leverage ratio of more than 3.5x because you want to benefit from opportunities? Or is this not necessarily the case because you also had this holiday for half year '20 and you remained within the covenant by quite a wide margin? Yes, so those were my questions.

Okay. If I look at the other support benefits you've indicated, well, apart from the benefits within the airport retail, where, as indicated in the press release, we came to agreement with several airports on the minimum annual guaranteed concession fees. This basically implicates that in a normal situation, you have a certain minimum fee that you have to pay. So yes, whether or not you're selling products in your stores, you are paying that concession fee. Well, with the agreements we now have in place, there is no minimum guaranteed fee anymore. In other words, if we sell, we pay. If we don't sell, we don't pay. But yes, I would not consider that really support. It's basically an effect of the -- almost completely lacking sales. Margins within the liquor, that's a little bit difficult to forecast. What we see right now is that within the entire supply chain, there's quite a lot of product availability that goes for both the end consumers, that goes for the middleman, so the distribution partners in country that also goes for the A brand suppliers that kept producing or that oversupply needs to get out of the system. We expect that margins will slightly increase towards year-end. So we expect that effect to gradually get out of the system. But we don't expect to be at margin levels at the end of the year, already in line with last year. For the covenant holiday and what you should read from that? Basically, what you see is that as long as you keep operating below 2019 levels on EBITDA-wise, your last 12 months EBITDA that keeps getting lower and lower. And that might imply that the 3.5 as per half year 2020 gives you a certain amount of headroom based on the 3.5. Then if your last 12 months EBITDA keeps getting lower then your headroom also vanishes. Well, that's, of course, a situation that we wanted to avoid, that's why we got the covenant holiday, in other words, releasing us from that barrier. We expect and we hope to be able to continue to operate within the covenants we previously had, in other words, to remain under the 3.5. However, if we see opportunities in the market right now and in the not desirable case that EBITDA declines a little bit, we still have sufficient headroom right now. Basically what we did, we agreed with all our relationship banks on a minimum EBITDA to be reached. So instead of testing on net debt-to-EBITDA, they simply test, okay, did you meet the minimum level, which is very, very low, then we're good to go, and we can use all the headroom. So at this moment, we were not -- with our back against the wall. So yes, we had all room to negotiate with our banks and to open a partnership discussion. So at this stage, they allowed us to act from a position of strength, instead of, with your back against the wall and get the banks tell you what to do.

Right. Yes, that's clear. I have one follow-up on the concession fees. You apparently pay less because the minimum amount is not there anymore. Would you have to compensate airports for that at a later stage? Or is that a final discount you get for this year?

That's a final discount. What you will see is that, in the end, of course, they will get back to the minimum annual guaranteed fees again. However, that's going forward and not looking backwards.

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

Yes, my first question is about the financing cost. Does this already include, let's say, the fee you have to pay for negotiating the covenant all day? Or is that in the second half? And if so, how much is it about? That's the first question.

Guys, sorry to interrupt you. But can you please repeat the question. The first part was not clear.

Yes. Of course, in your financing cost, does that include any fee for the negotiations on the bank covenant holiday?

Okay. You want me to answer straight away or do you want to first read all your questions?

No, I'd like to do it one by one, please.

Okay. Let's do it one by one. The fees are already included, and they were quite limited, but -- yes, of course, we are quite prudent, as you know, and we already took all the fees into consideration in these figures.

Okay. That's clear. And then the second question is about the B&S division. If I would, let's say, exclude the negative impact from the cruise vessel business, but if I also exclude, let's say, the positive impact of the consolidation of the Lagaay, what is the underlying performance of the business? And the reason I'm asking is, of course, you're referring to the trouble you had with the new warehouse last year. So is it back at full efficiency? Is it performing in line with your expectations?

Basically, what you see is that we are serving different markets within the B&S segment. As you can imagine, the maritime comprising both supplies to ship chandlers, but also supplies to the cruise industry, that market got hit quite severe, especially in the cruise business, of course. And we have the remote catering part, and that's related to the industrial catering and the government and defense contracts that business was quite resilient. Then we have the medical supply. And as you can imagine, especially in these times that business line outperformed. And the last part is the international FMCG distribution, and that's -- that part of the business also outperformed our expectations. If you then look at the warehousing, well, as you can imagine with the cruise being down, efficiency-wise, yes, we're doing -- well, I'd say, at least okay. On the other hand, what you do see is that you are missing a certain volume within your warehouse, of course, and yes, that is slightly hitting your operation.

Yes. Okay. But there are no specific or company-specific operational problems? I mean it's more end market, which is impacting the lower efficiency?

Yes. Correct.

Operational margin for the GTC warehouse is up to par. But of course, we have lower inventory levels, which, well, leaves us with percentage of more cost.

Okay. Yes. And then also, the final question is on the airport retail business. All things equal, so assuming that there are hardly any passengers in the second half of this year, are you then able to get it to breakeven? Or have you more opportunities to lower the fixed cost even more in the second half?

Well, if you would really compare it with the first half and the same amount of travelers we are having right now, then it would be quite difficult to get to a breakeven point. We are, of course, still looking at our cost levels, and we are still decreasing the staffing numbers because, of course, that doesn't work like flicking a switch and you've lost 50% of your staff levels. We are still extremely careful with that. We are also careful with opening smaller shops. If you look at Schiphol, for example, there we have several stores. Of course, the big stores, they can receive quite some passengers. There it's not really profitable, but at least you can run at a breakeven point. However, within the smaller shops, yes, it's really difficult to generate your margin at the moment. So there, both staffing-wise, but also shop opening-wise, we are really, really careful.

We currently have no further questions in the queue. [Operator Instructions] And we do have a few other questions in the queue. And the next one comes from the line of Paul Hofman from The Idea.

Paul from The Idea. I have 2 questions. The first one on FragranceNet. I guess it has been quite a good period for the online business. If I look now at a number of sites you operate at least as far as I can see it, it's for the U.S., China, Mexico and The Netherlands. How are your plans there to further expand that, that always has been, of course, an ambition to really out wall it aggressively? I guess the sales level of overall FragranceNet has been progressing favorably, but, yes, the number of websites is still rather limited. Is there any explanation? Or how do you see that developing going forward? That's the first question. And yes, perhaps a second question for later then.

Okay. And we also take it one by one then. On expanding, of course, we are still fully focused on expanding our FragranceNet sales. And indeed, you are right that, of course, the business is outperforming the expectations we had at the start of this year. However, as you can also hopefully understand, given these COVID-19 periods, also within the operations of that company, we are now fully focused at the markets we are currently serving. Because as you can imagine, if your sales increase quite a lot and within your warehouse, you have to operate within the COVID-19 1.5 meter society, then that absorbs quite some of your attention, of course. On the other hand, we are now fully working on our update for the second half of the year and years to come. And as you can imagine, the online business will be a significant part of that. It has already been a pillar at the strategic review at the end of 2019, also indicated in earlier presentations. And that focus is still fully there. So we are expanding. We are expanding. We are operational in China, as you indicated. We are -- we just opened and are working on a platform in Australia and such we are moving on and moving on.

Okay. And then second and actually also final question. You talk about -- in general, you talk about opportunities going forward in specific niche markets and online. Well, online, I can fully imagine. But specific niche markets, do we then look -- or do you mean sales channels? Or do you also look at product segments? And the reason I ask is that if you look at the portfolio, of course, the largest weight is still in Health & Beauty and liquors. Food and beverage is still limited to 12%, also, of course, due to the exceptional market environment in the first half. But yes, do you ambition a more diversified portfolio in terms of product segmentation?

Well, what we are looking for is further strengthening the partnerships we have with all the major A brands and that goes especially for the food and beverage part of the business. So yes, that, of course, going forward is where we do see the growth. As you can imagine, several suppliers are also looking at their distribution models, and they are really looking forward to partnering up with the distribution partner, especially within these COVID-19 periods, where they also find it more complex, and they are looking for partners to open up markets for them. And that's why we see the added value for B&S Group as well, and that would imply a further diversification of our product portfolio, however, within the product lines we currently have.

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

I have a question for Tako. Tako, I know you only just started at B&S, but it'd be great if you could share your first impression and your thoughts regarding digitization and optimization as well as the implications that you see on the commercial side as well as on cost levels? And then finally, what do you regard as the strength and weaknesses of the company?

Sure. So let me get first your first question about digitization. I think coming from a background of operations, this is, of course, where our focus is for the next months, basically, maybe even a year to further optimize our cost base. There's opportunity. There's also what I find a lot of steps have been taken. So this is building further on the Digital First steps that B&S has initiated about half a year ago, a year ago. So there's opportunity, but a lot has been done. And on the commercial side, further rolling out and focusing on our e-commerce channels will be absolutely one of our main objectives. And we think the opportunity may lay in that area more than in traditional business for the future. So strengths and weaknesses. Does that answer your question?

Yes, partly. But I can imagine, coming from the outside and starting at B&S, you have your view about really what the qualities are so you can push a bit harder and also which parts to improve rather than aside from what you've indicated on optimizing or optimization?

Of course, I started officially on the 11th of August. So that's mere 2.5 weeks ago. And I'm still making an inventory for myself on -- yes, where the strength and weaknesses of the company are. I think we have a very strong distribution network that's really strong, and we can build further commercial activities based on that network. We're also looking for more partnerships so we can roll out our commercial models over a bigger part of the world. And -- yes, the weaknesses, I think it's hard to really point out the weaknesses as we speak. We're in the midst of a COVID crisis. And that, well, may somehow blur the clear image that I'm getting. So, Patrick?

Yes. Okay. Clear.

The last question in the queue comes from the line of Robert Jan Vos from ABN AMRO.

Two small questions and one other question, if I may? Let's start with the 2 smaller ones. The EUR 6 million you're spending CapEx in the first half, is that a good proxy for the second half as well? And I couldn't find any mentioning on the tax rate, which appears to be quite low at 13.5% in the first half. Is there any explanation here? And what's your view for the second half? And then the final one, retail sales, it was down 90%. However, your wording is slightly positive when you say that you see volume trends improving, albeit prudent. Is it possible to quantify this a bit more for July and August? For example, are you back at 50% or can you say anything there?

Okay. I think I'll start with the CapEx. Yes, I think that roughly the line we also expect for the second half of 2020. We are focused on investing in digitization of the company, as also indicated by Tako. If we look at the tax rate then this low, given the results we made in high tax jurisdictions and, yes, at this stage, we don't expect this rate to continue to the -- in the second half. So in other words, yes, we now have certain low-tax regions that are a little bit higher in results, as such, depressing the tax rate we have. If we look at the retail, then retail is still very, very down. We see a small gradual improvement. That's why I said very prudent in the voice over. We are now running at roughly, let's say, 80% down of last year. So in other words, we're running at 20%. I think if you would ask me to forecast 2021, that's really, really, really difficult, of course. But I don't see ourselves exceeding a 50% level in the next year.

As there are no further questions in the queue, so I'll hand the call back to our speakers for any concluding remarks.

Well, if there's no more questions, I'm looking forward to meeting you -- with all of you in the coming weeks, and together with Peter, of course, discuss our company, our results and our strategy with you in more detail. For the upcoming roadshow, we are bound to digital meetings and phone calls, but I hope that we can meet each other face-to-face soon. Thank you for joining us today. Should you have any additional questions, you know how to reach us via Anke Bongers, our Manager, Investor Relations.

Thank you for joining today's call. You may now disconnect. Hosts, please stay on the line and wait for the instruction.