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

Hello, and welcome to the B&S Group Q1 2021 Trading update. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Tako de Haan, CEO, to begin today's call. Thank you.

Good morning, all. This is Tako de Haan, CEO of B&S Group. With me here today is Peter Kruithof, our CFO. Peter and I will take you through the highlights of Q1 2021 and what -- in the numbers we published this morning. After that, I would like to open the call for Q&A. Let me first give you some context through the first quarter of 2021. In Q1, the majority of our business showed continued flexibility in response to the impact of the pandemic. Our resilience was further supported by the recovery of our international Liquor business, our continued focus on e-commerce business and the shift to end consumers, our newly introduced marketing services, for which we are starting to see the first contribution of this already in our Food segment. Nevertheless, several markets in our portfolio remained impacted by COVID-19 restrictions. These are physically retail -- these are the physical retail and travel-related markets in our Personal Care, Food, Health and Retail segments. Overall, this resulted in a turnover decline of 5.9% in Q1 compared to a Q1 in 2020 or a 2.3% at constant currency. I would like to add here that comparing Q1 2021 to Q1 last year gives a bit of a distorted image as the impact of the pandemic only became significant from early Q2 2020 onwards. Now let me zoom in a bit more on the market circumstances on a segmental level. As a reminder, I would like to highlight that we have introduced our new structure with 6 operating segments during the first -- during the Investor Day in April. So from now on, we communicate and report our results based on these operating segments. To name them, B&S Liquor, B&S Beauty, B&S Personal Care, B&S Food, B&S Health and B&S Retail. Let me start with B&S Liquor. In Q1 '21, we have seen our international B2B liquor distribution pickup again, both in sales and margin. With the oversupply in this market behind us, our focus on margin business in the segment becomes more evident. However, this is slightly held back by an industry-wide supply chain challenge. There is the delays in sea freight and shortage of containers. The B2B Liquor business in Europe was still impacted by the continued lockdowns in several countries. The increased sales to customers with online presence only partially counterbalanced debt. When compared to Q1 in -- of last year, all this resulted in a turnover decline of 2.4% for our Liquor segment or an increase of 1.8% at constant currency. Next is B&S Beauty. The strong performance of Beauty continued in this last quarter. The increase of our turnover and margin was a result of our focus to the online business. This entails both our distribution to reseller platforms, such as Alibaba, Amazon ball.com, which we refer to as B2R channels and our direct delivery to end consumers, B2C channels. Although we forecasted in 2020 that margins would normalize within B2C in '21, this was not the case in our first quarter. In fact, we saw margin increase continue, which was driven by demand in this market. Naturally, this effect reverses with future inventory buildup and according purchase prices. This trend became noticeable already in the last weeks. The distribution to physical wholesale and retail B2B still saw the impact of the lockdowns due to COVID-19. Overall performance in this channel was in line with 2020. All in all, turnover increased by 18.8% in Beauty compared to Q1 in 2020 or a 24.7% at constant currency. B&S Personal Care segments. That the Personal Care segment mainly entails the distribution of daily care products such as shampoos, toothpaste, deodorants, to physical value and discount retailers. With value retail chains in Europe still closed to a large extent during the first quarter, the sales in Personal Care segment was lagging. The gross margin in this segment was aided by the extension of our private label, but similar to what we see in the Liquor wholesale business, the shortage of containers is causing industry-wide supply chain challenges. This is holding back margin growth in our segment at this point. In the past year, we have seen that sales picked up rapidly once the stores reopen. This is also the case in the first weeks of May 2021. All in all, turnover declined by 6.8% in Q1 of this year compared to Q1 of last year. B&S Foods. Within Food segment, we have seen most markets develop in line with what we saw in the second half of 2020. The duty-free and other travel-related markets remain severely impacted by the COVID restrictions. The remote business was lagging to the extent already forecasted. This follows the withdrawal of troops from Afghanistan. On a positive note, our international brand distribution services are starting to flourish. This is the result of our newly introduced marketing services. The first partnerships we formed with brands such as Mars, Heineken, evian and Perrier are clear evidence of this. It underlines our renewed focus on digital brand building, driven by social marketing with our strategic partner SOCIALDATABASE. However, it could not totally counterbalance the effect of COVID-19 in this segment. Overall, turnover decreased by 21.5% in the Food segment compared to last year or at constant currency, 17.9% decline. B&S Health. The Health segment continued to show mixed results. In 2020, we saw the merely positive impact from sales of COVID-19-related products, but they stabilized early Q1 in '21. In travel vaccines business, we saw a sharp sales decline compared to Q1 of last year. The medical supply business that is not related to COVID-19 remained pretty stable. The introduction of a dedicated tender team for industrial and remote projects started to pay off. The first new tenders were added to the portfolio in Q1, and we expect this to add further to our business during the year. All in all, turnover in Health segment declined by 26.1% of this quarter. B&S Retail. The performance in the Retail segment was driven by the renewed travel restrictions across Europe end of 2020. The majority of our travel retail shops remained closed until early Q1 of this year. Towards the end of this quarter, more and more shops opening up again. However, passenger numbers are still limited.This led to an overall turnover decrease of 85.1% when compared to Q1 of 2020. At the date of our Q1 publication, around 90% of the airport locations in our portfolio are opening up again. This majority of our shops are also open, although the turnover levels are less than 20% when compared to 2019 levels. As stated in our fiscal year 2020 results, our Retail business can breakeven at about 50% of our 2019 turnover levels. This is aided by the renegotiations of contracts for all our airport concessions and the strict cost reduction measures we already took, mainly related to staff cost. At this point, vaccination programs are in place and travel bookings for summer 2021 are starting to pick up. We, therefore, reconfirm our expectations that reaching the breakeven level is a realistic target by the end of 2021, notwithstanding reinforced travel restrictions in the coming period. And with that, I conclude the segmental review, and I would like to hand over to Peter for some color on our financial position.

Thank you, Tako, and good morning, everybody. Before giving some color on our financial position, I would like to bring you to your attention, the introduction of our return on invested working capital performance metric. Our EBITDA and working capital focus are combined in this metric, which divides EBITDA by working capital. We've been using this metric internally already for capital allocation and to keep our segments focused on our working capital. Now we are also introducing this metric externally. As clear performance indicator, our return on invested working capital is to remain above 25%. We expect this to be feasible at year-end. Putting some more detail to capital allocation, our focus remains on both EBITDA growth and strict working capital management in order to continue to boost our operational cash flow. This cash flow will partly be invested in our platform expansion and efficiency. More precise, we will expand our logistical platform for our Beauty segment, both in the U.S. and the Netherlands, and we will centralize our Liquor platform. Our maintenance CapEx will be around EUR 7.50 million to EUR 10 million, where I want to add that IT developments are expensed to the extent possible. Free cash flow will be used for dividend distribution to shareholders and the execution of our M&A strategy. Now zooming in on our financial position in the first quarter of 2021, our balance sheet and liquidity remained strong. Working capital in days declined significantly when compared to Q1 2020, and we do expect working capital as an absolute number to increase in the coming months. However, we remain focused on working capital in days. The increase is driven by recovery of market volume and the increased income volumes to meet customer demand. As said, we expect return on invested working capital above 25% to be feasible at year-end 2021. Tako, back to you for the outlook.

Yes. Thanks, Peter. In the strategic sessions we held in April, we already focused on shifting towards the end consumer in all our markets. We expect, therefore, our overall gross margin to improve gradually throughout this year. Our efforts to simplify operations and eliminate costs from decentralized activities will further optimize EBITDA margins. And as Peter just explained, our CapEx investments will focus on platform expansion and efficiencies. This way, we position ourselves to swiftly expand our reach, and we will do so by adding new geographies, products and services to our business portfolio. This is done both organically and through acquisitions. All in all, we're confident to meet our strategic objectives of this fiscal year and the financial targets has introduced this April. And that ends our highlights for Q1 of this year and the trading update. I would like to now hand over to the operator for Q&A.

[Operator Instructions] We currently have no questions in the queue. [Operator Instructions] And first question comes from the line of Paul Hofman from The Idea.

I actually have 2. In the Personal Care division, you talk about private labels. That's not a topic I heard a lot about previously. So what can you say about some details about the share? What is currently? Yes, what are the ambitions? And yes, what are the ideas about private labels? Not only in Personal Care, but also in other divisions? That was the first question. And the second question and last one. You also talk about these dedicated tender teams within the Health division. Yes, what is exactly different to your approach in the past, in terms of segments? In terms of customer targeting? What is new about these tender teams?

For the private label business, we are expanding our brands in the private label business for a wider market. And we're also doing social media campaigns to make better sales, of course. At the moment, it's a relatively smaller part of our business, but we expect it to grow rapidly now that we are pushing these with marketing activities.

Okay. And sorry, if I may interrupt, if it's small, do we talk about -- yes, low single digits? Or single digits, at least?

No. We're talking about -- we are talking about double digits, and I think we're running at about 15% to 20% of sales of Personal Care. So from a group perspective, it's relatively small. But for the Personal Care segment, it's quite a portion.

And a growing business.

Yes. That's helpful.

Then I think if you -- I think Paul had 2 questions.

Yes. Yes. On the tender teams.

Let's also answer the second question. If we're looking at the tender team. In the past, if we look at the medical segments, they were not too focused on tendering for, for example, UN project. Of course, B&S Group, as a whole, was focused on tendering on these projects, and so we've included employees for the health segment as well in that -- in the dedicated tender team. But they are now fully focused on tracking and following all the offers that are available on the market -- or tenders that are available on the market, and yes, subscribing and tendering to them, which is starting to bring the fruits we expected.

Yes. And it's not only that we tender on medical tenders, but we do this also for the combined tenders. There's many of the mining sites and things that have a very wide product tendering process, and we now include basically all our product segments in these tenders.

Okay. So it's both a product specialists in these standard teams as well as the customer group specialists?

Yes, you could say so.

You're right.

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

I have 2 questions as well. Firstly, on the acquisitive growth, it's around EUR 5 million in the quarter. Can you maybe share what it exactly is? And how much in annual sales should we take into consideration going forward and maybe also the consolidation date of this acquisition? Related to this, what is the current status of the M&A pipeline because it's also part of your ambition to add 7.5% points growth via acquisitions? So maybe an update there. And my second question is on Retail. You mentioned that 90% of the shops is now open, but that volumes are still at 20% of the 2019 level. So I was wondering, are you, in absolute terms, better off to have 90% open? And only 20% volumes versus keeping the shops closed until, yes, the volumes pick up to more material levels? Those are my questions.

Thank you. Thank you, Robert Jan. If we look at the acquisitive growth, then I think we're talking about, let's say, EUR 25 million to EUR 30 million on a yearly basis, which, of course, now the -- now the first quarter, since they are in the perfume business is not per se, high season. It's a Spanish company that is basically selling perfumes and a little bit of cosmetics in the international and the Spanish market. We acquired that company in July last year. And although sales-wise, it's contributing, it's a relatively small company. If we look at the M&A pipeline, and then I'm also going to look to the right side of my -- to Tako, but we are definitely having conversations with -- with a couple of companies, some a little bit further down the pipeline, some a little bit closer by.

Yes. And we're looking in the area of the B2B and B2C businesses, so that's basically what I can share about this topic.

Then the Retail question that you had. Yes, we think that it's the best thing for our business to already open some shops, but we have, of course, adjusted staffing levels to the footfall levels that we see in the airport. So at bare bone minimum, we have staffed our shops, but we want to maintain the service that we promised to our consumers.

And also on top of that, also bear in mind that the concession fee is that -- no longer contains a fixed part, and such as based on the turnover levels we have in the shops or the traveler numbers. So the fixed cost base is relatively limited in our shops. So basically, any sales we make are contributing to cover our fixed cost base.

We currently have no questions in the queue. [Operator Instructions] And the next question comes from the line of [ Pierre Fournier ] from [ Monitor ].

Just a question on the cruise subdivision. I think in the last year, you were hesitant in keeping supplying this industry because the margins were a bit thin, but at the same time, it gives you good relationships with brands. Just to understand what's your thoughts on this subdivision, do you intend to keep supplying crews at maybe higher margin? Would you exit to have a better return on net working cap? And just to understand your thought and to also know if there are some signs of improvement in bookings.

Well, the cruise business basically is, at the moment, nonexisting, as you can imagine, due to COVID. And we combined staffing with the maritime business. And of course, we will serve the cruise business going forward, although it's a very small part of our overall business. But combined with maritime, we think it can be a very efficient business still for us, and yes, we will not step away from cruise, of course.

We have no further questions in the queue, so I will hand the call back to your host for any closing comments.

Well, thank you for joining us this morning. If you have any additional questions, you know how to reach us via Investor Relations, and I think this concludes our update.

Thank you for joining today's call. You may now disconnect your lines.