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

Hello and welcome to the B&S Group 9M 2020 Trading Update Call. My name is Rinkel, 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, Tako de Haan, to begin today's conference. Thank you.

Good morning, all. This is Tako de Haan, CEO of B&S Group. With me here is Peter Kruithof, our CFO. Peter and I will take you through the highlights of the 9-month trading update that we published this morning. After that, I would like to open up for Q&A. So in Q3, COVID-19 continued to influence the channel dynamics in our markets, but we did see an improvement trend in turnover compared to the first half of the year. Turnover declined by 2.1% in Q3 compared to an approximate 12% decrease in Q2. This trend was mainly driven by our Health & Beauty segment. To be more precise, by our online channels and value retail in Europe. Our Liquor business in Asia showed continued prudent recovery, and Liquor Europe saw positive developments, especially in the online channels. Although these signs were encouraging, they could not fully counterbalance the sustained negative impact on our cruise, airport and duty-free business. Also, our remote business started to show COVID-19 impact, also due to geopolitical developments. All in all, for the first 9 months of 2020, it resulted in an overall turnover decline of 5.3%, where organic turnover declined by 8.1%. So let me zoom in a bit on the market circumstances on a segment level. Liquor distribution in Asia, and particularly in China, showed early signs of recovery in Q2, which continued to gain momentum in Q3. Know that this is still at low gross profit margins compared to Q3 in 2019. When compared to Q2 this year and also Q3 of last year, liquor wholesale in Europe increased its turnover in Q3. This was the result of both new and intensified business relations, mainly in the e-commerce arena. These developments led to a 26.1% turnover growth in Q3 and an overall 2.3% growth for the first 9 months. Within Health & Beauty, our online distribution business to resellers and consumers continued to show strong performance in Q3. This was driven by increased demand and more favorable sourcing conditions related to COVID-19. The reopening of brick-and-mortar value retail throughout Europe brought sales in these channels back in line with 2019 levels. On the other hand, our perfume distribution to retail outlets in Europe declined as consumers shifted to online channels. Also, the distribution to retailers in Asia declined due to oversupply in the market. All this resulted in a 10.5% turnover growth in Q3 and 0.4% decline for the first 9 months. In the B&S segment, the downscaling of global industrial sites due to COVID became evident in Q3. Next to that, the withdrawal of the U.S. troops from Afghanistan in Q3 resulted in a declining demand in military catering. Our cruise and FMCG business to duty-free markets almost came to a complete stop, also due to COVID, of course. Moreover, the earlier upward trend in our medical supply business stagnated compared to Q2. This is due to the absence of seasonal peak in travel and related businesses. All in all, it resulted in a 23% decline for the quarter and a 3.4% decline in the first 9 months. Now that Lagaay, the acquired medical business, was included in the numbers from August 1, 2019, only. Last but not least, our retail segment remains severely impacted by the COVID-19 pandemic. While most of our airport shops reopened in the course of Q3, performance has been lagging due to very limited number of passengers. This led to a 75.1% turnover decline in the quarter and a 64.3% decline in the first 9 months. That concludes the segment review. I would like to hand over to Peter now.

Thanks, Tako, and good morning, all. Although we don't communicate actual figures on our financial position in our 9-month trading update, we would like to give you a brief update on the actions we have taken to maintain a healthy financial position. As mentioned in our half year results, our actions involve strict working capital management and cost control measures, all concentrated on aligning net debt and EBITDA levels as much as possible. We continue to align the inflow levels of our inventory with the outflow of our sales levels. As a reminder, our net debt is mainly related to working capital, and as such, adjustable to the sales volumes. To avoid limitations by our balance sheet, we proactively arranged the covenant holiday for full year 2020 and half year 2021 with all our relationship banks. This allows us, as indicated earlier, to seize sourcing opportunities that arise in oversupplied markets and to build our inventory positions for the seasonally stronger Q4, albeit in a very prudent manner. The measures to decrease operating expenses are ongoing. Besides scaling down temporary staff and not renewing fixed-term contracts, we have taken additional measures to downsize staff levels in severely hit business lines in both the B&S and the Retail segment. As a result, net debt-to-EBITDA as per the end of September was in line with the half year 2020. And as such, although not applicable at this moment, well within our covenants. Tako, back to you again for the outlook.

Thanks, Peter. Well, the trends we noticed in Q3 continued in the first weeks of Q4, which is traditionally our strongest quarter. However, the last few weeks have been subject to newly declared lockdowns in Europe. This uncertain situation makes it difficult to predict sales volumes for the upcoming holiday season, which, as I said, normally is our biggest and busiest season for Health & Beauty and the Liquor business. We will continue our focus on the cost control measures, as just mentioned by Peter. In this way, we will mitigate the impact on our EBITDA levels. We also maintain focused on further rolling out our digital-first approach to enhance operational efficiency and leverage opportunities in our online channels. Our aim is to provide a detailed strategic update during the Capital Markets Day planned in April next year. We hope to meet you face-to-face by that time, of course, but it depends on further COVID developments. We will update any publication on our corporate website in due course. And that ends the highlights for the 9-month 2020 trading update. I would like to open up for Q&A.

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

I've got 3. So the first one is, can you remind us how important value retail is within the group? So as a percentage of group sales, for example. Second question is, do you expect further margin pressure in Liquor Asia in Q4? And then a question on the Capital Markets Day that you've indicated. You are in the process of sharpening the strategic focus areas in light of the current pandemic. Do I read into this that your exposure to, for example, travel, retail and cruise ships might go in a review as well as that you might accelerate your expansion of your online business?

Thank you, Patrick, for your questions. For the value retail, I don't think we've ever indicated that the percentage performed. But I think if you would take previous publications, then it's in the line of EUR 250 million to EUR 300 million, our exposure in that market. I think margin pressure-wise for the liquor, we still see that pressure ongoing. As indicated in our half year press release, we expected to see the margins slightly increase moving forward. Well, that is indeed the line we have seen. However, we are still not at the levels we've seen in 2019. And we also don't expect to be able to meet that -- those levels for this year, although we do expect the upward trend and the upward line to continue. Pretty -- Capital Markets Day, I think it goes without saying that if a market is not there, then, yes, you don't need to focus on that market for the moment. On the other hand, of course, the online markets, that has been our focus point for a longer period of time, is also indicated in our -- in the strategic pillars we communicated at the beginning of this year. The exact details of the strategy moving forward, we will discuss at the Capital Markets Day. We are in the middle of redefining that...

And doing the assessments and basically looking at the whole plan.

We have our next question from the line of Tijs Hollestelle from ING.

I've got a question about -- a bit more background of the dynamics of the various end markets and businesses in the B&S division. Because -- yes, I mean, the first half performance was -- it was quite okay. I think, of course, also helped by the consolidation impact of Lagaay. And then there was a -- yes, a pretty sharp decrease in the third quarter. I assumed that, that is mainly the impact of the cruise business, because that is probably seasonal in the summer, and then July and August are quite important months for that business. But yes, the remaining remote business that is also split out of oil and gas, mining, army and then moving consumer goods, services in remote areas. Could you give us a bit of detail about what the seasonality and also the weight of that -- of those end markets in the overall B&S division is? Because for me, it's hard to track what is exactly going on quarter-on-quarter. So that's the first question, please.

I'll give some highlights on the background of the business. But Afghanistan, everybody knows that the withdrawal of the troops by the U.S. are part, and feeding the troops is severe. So also, the impact will be noticed when they evacuate Afghanistan. Well, in the cruise business, everybody knows that, yes, there's no more cruise boat sailing. And therefore, we have almost no existing business at the moment in cruise. We expect it will slowly, very slowly come back. Not this year anymore because cruise season is almost over. But we expect it will come back slowly, very slowly. And then the industrial sites due to COVID, you see, yes, that in many businesses, where the industrial sites supply basically raw materials to the industry, they have stopped supplying because, yes, well, this is a stagnating market, and industrial sites are toning down or they have completely ceased their business for now. So in these 3 areas, we see, yes, a difficult market.

And sorry, if I look at the fourth quarter, is it then, let's say, down another double digit? Or is it down single digits?

I think, Tijs, if you look at the seasonal patent of the different business line, we have the maritime -- well, the maritime 50:50 ship chandlers versus cruise lines. As you can expect, cruise lines, they have a seasonal pattern, whereas the second and the third quarter are the most significant, the third quarter of those 2 being the most significant. And if you look at the duty-free markets that we are serving, of course, that has a seasonal pattern that is travel-related. So in that part, you see, yes, the summer and the end of the year, usually peak. The government and defense, that is usually basically a straight-line throughout the year. You have -- the fast-moving consumer goods have the same. That's also basically a straight line. And you have the medical -- well, the medical part of that business relates to vaccines. Well, as you can imagine, those are also basically travel-related for the -- now for the most significant part. With travel being absent, now you see that you're not making the numbers you made last year. I hope that answers your question.

Yes, this gives a bit of a direction, okay? Yes. Then another question, would you provide, let's say, information whether the third quarter EBITDA year-on-year is up or down?

We have not given any indication about that, Tijs. And I would say it's in line with last year.

Basically in line, yes.

Yes.

And then also, the last question about -- I mean you commented already on your financial position. There are no -- also no major changes in the absolute inventory and trade payables and credit term positions as you have seen at the end of June?

Correct.

That is correct?

Yes, correct. That's correct.

We have our next question from the line of Robert Jan Vos from ABN AMRO.

I have a few questions as well. In HTG Health & Beauty, you mentioned oversupply as a reason for less distribution to physical retail in Asia. Can you elaborate a bit on this, please? And is it continuing in the fourth quarter? Then maybe on online, ideally, would you share growth in the online channels in the third quarter? And if not, maybe you can share whether or not online growth is accelerating through the year. So is Q3 higher than, for example, first half year growth in online channels? And then the third one, maybe to come back again on the B&S segment. You specifically mentioned that the situation started to deteriorate towards the end of Q3. And taking into consideration, Peter, what you said on seasonality, some businesses are seasonal, others are less seasonal. It still is a bit worrying that you lost almost 1/4 of your sales through -- because of deteriorating situation towards the end of Q3. So my question would be, is it fair to assume that -- based on the current market circumstances and what you know today, is it fair to assume that Q4 growth could even be worse than what you've seen or what you've reported in Q3 in B&S segment?

Well, the distribution of health and beauty products in China is -- has been slowing down a bit, but not to a worrisome level. I mean we see an oversupply in the market, but it's not something that we expect to continue going into next year. And especially now with the 11/11 Singles Day in China, we hope also that the online gift of perfumes and scents will pick up again.

So what we've seen, Robert Jan, is that certain duty-free suppliers in that market, of course, they were also missing sales. Now they started depleting their inventory, and as such, they became a competitor for now.