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

Hello, and welcome to the B&S Group Half Year 2021 Results Call. My name is Rosie, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to Tako de Haan to begin today's conference. Thank you.

Good morning, everyone. This is Tako de Haan, CEO of the B&S Group. And with me here today is Peter Kruithof, our CFO. Together, we will talk you through the first half results that we published this morning. Let me take you through the highlights first and then discuss the figures in more detail and provide the outlook for 2021. After that, there's, of course, time for questions. In the first half of 2021, delivery on our strategy and financial performance was pretty good. We further built our presence in selected geographies in our liquor, beauty and food business. We increased our majority interest in JTG, and us indirectly FragranceNet, making the next step in moving closer to the end consumer. The focus on higher-margin business in liquor and the introduction of selected product assortments in food, underline our focus on scalable and profitable growth. But we want to be clear that COVID-19 and the delta variant in particular, continued to have an impact on commercial activities. This impact exceeded earlier expectations. Besides sales impact, we clearly saw the indirect effects from the industry-wide container shortages, freight delays and product scarcity in the market. The weakened U.S. dollar also had a noticeable effect mainly in our Beauty business. Under these challenging circumstances, we still managed to realize a 29.2% growth in EBITDA. This was accomplished by our focus on higher-margin business, simplified operations and elimination of operating expenses. As the rollout of our Digital First programs continue, we see further signs of success. Year-to-date, well over EUR 80 million in commercial transactions ran over our newly developed B&S e-com platform. We are rapidly onboarding more and more activities and businesses onto this platform. Investments were made to digitize our end-to-end processes. This will help us further realize scalable business growth from existing and new customers. Growth is also realized by providing access to our long tail assortments, 24/7 from any place in the world. The focus on e-commerce activities, combined with our extensive marketing services, is further supporting our international expansion as well as the brand exposure for suppliers in current and new markets. We already noticed the effects of our flattened management structure in our execution power. And with the planned conversion of the remaining JTG shares to Beauty segment, we will see further improvements. Overall, I'm confident that by drawing on our strengths, leveraging our global network, broad assortments and marketing activities, we will continue to find synergies and create added value for suppliers and customers globally. The appointment of Arben as Chief Commercial Officer, will accelerate the execution of our commercial strategy further. Now let's discuss how these developments translate into numbers. Overall, turnover amounted to EUR 823.6 million, where organic turnover declined by 2.9%, turnover from acquisitions originated from Top Care. We should be mindful of the fact that COVID-19 impact on Q1 was very limited in 2020 and that our current turnover number is impacted by 3.8% FX effect as a softer U.S. dollar appeared to be in the market. EBITDA came to EUR 45.6 million, an overall increase of 29%. At constant currency, our EBITDA even amounted to almost EUR 50 million. Let me share some detail on the performance for each of the segments. B&S Liquor, the turnover was impacted by worldwide product scarcity. It affected sourcing activities, and we dealt with supply chain challenges that already started in Q1 of this year with a prolonged effect into Q2. Turnover in Liquor Wholesale Europe grew from increased focus on new geographies and the partial lifting of COVID-19-related restrictions for, amongst others, the hospitality sector. B&S Beauty turnover increased. This was a result of continued growth in online sales, increased focus on geographic expansion and the acquisition of Top Care in August 2020. Also here, we saw the turnover growth in Q2 was held back by industry-wide product scarcity and by euro to U.S. dollar FX impact on our B2C business. If you look at our Personal Care segment, we can see that it performed better than the same period last year. Further recovery was, however, held back by the newly inflicted COVID-19 restrictions and subsequent store closures in several European countries towards the end of Q2. In B&S Food, the duty-free and travel-related business recovered slower than initially expected. As planned, we saw a turnover decline in a remote business from withdrawal of the troops from Afghanistan. But on the other hand, the food business in the Middle East outperformed with growth from existing and new clients. In B&S Health, we suffered from the same slow recovery of the travel-related business. As mentioned before, and the travel vaccines business lagged behind our initial expectations. COVID-19 related sales in medical supplies declined when compared to 2020 given the stabilization of this market. On a positive note, we see the first positive results of the new projects in the industrial and remote tender portfolio. B&S Retail also continued to see the impact from the global travel restrictions, although around 90% of our shops opened towards the end of Q1, sales kept lagging. Passenger numbers did improve a bit towards the end of Q2, but overall recovery was much slower than expected. That brings us to the financial review. Peter, I would like to hand over to you.

Of course, Tako. And also on my behalf, of course, good morning to you all. Overall, turnover declined slightly by 1.5% or 2.9% organically. Constant currency, however, turnover increased 2.3% or 0.9% organically. This was driven by the USD exchange rate that affected especially results of our U.S.-based FragranceNet business. As Tako indicated earlier, we should bear in mind that Q1 2020 was impacted by COVID to a lesser extent. This is also reflected by our Q2 turnover that shows a growth to 3.1% or 7.1% at constant currency. Gross profit came in at EUR 127 million, compared to EUR 150 million for half year 2020. As a percentage of turnover, this was an increase from -- to 15.4% from 13.7%. This was mainly the outcome of shift in focus on higher-margin business in the liquor segment combined with a price increase as a result of scarcity in the market. Additionally, a more focused product assortment in our full business led to improved gross profit margin. Operating expenses amounted to EUR 81.2 million, broadly in line with half year 2020, where we should bear in mind that 2020 included a EUR 3.4 million positive effect from government grants. The gross margin increase combined with similar OpEx levels led to an EBITDA increase of 29.2% to EUR 45.6 million. At constant currency and when compared to an EBITDA for half year 2020 corrected for the received government support, EBITDA grew roughly 55% to close to EUR 50 million. EBITDA margin amounted to 5.5%, a clear improvement compared to the 4.2% in 2020. Net profit increased from EUR 12.8 million to EUR 21.8 million, of which EUR 40.7 million was attributable to the owners of the company. Net profit attributable to noncontrolling interest was largely attributable to the e-commerce business of FragranceNet. This bridge shows the elements that together lead to the slight turnover decline at reported rates for half year 2021. Travel-related markets continued to see a severe COV19 impact. Although the shift in focus on higher-margin business resulted in a higher gross profit in the liquor business, this product scarcity in the market also affected sourcing opportunities and put pressure on volume business, leading in the end to a turnover decline in half year 2021. The acquisition of Top Care contributed close to EUR 12 million and the development of the dollar exchange rate had a negative effect of EUR 31.7 million on turnover. We then look at Q2, despite COVID-19 impact lasting significantly longer than we expected, turnover grew 5.5% organically at constant currency. The acquisition of Top Care contributed EUR 6.6 million and the dollar exchange rate had a negative impact of EUR 16.6 million. That brings me to our financial position. As a result of ongoing focus on healthy working capital management, our financial position remains solid. Operating cash flow stood at minus EUR 29.1 million, while working capital in days slightly increased. This is the result of the inventory buildup related to our seasonally stronger H2 and particularly Q4, in line with previous years. In 2020, we delayed the inventory buildup, given the uncertainty in the market at that stage. We continued our strict measures related to a healthy working capital and cost control as initiated during the pandemic. These measures are concentrated on aligning net debt and EBITDA so that we can keep operating within covenants. Are the agreed covenant holiday still applied, net debt-to-EBITDA stood at 2.8 well within our covenant of 3.5. Return on invested working capital increased as EBITDA growth outpaced the growth in working capital. To give some more color on net debt, let me elaborate on the bridge showing the movement from year-end 2020 to half year 2021. As said, net cash from operations amounted to minus EUR 29.1 million, it was the result of the earlier indicated inventory buildup for the seasonally stronger H2. This is a trend in line with previous years. Investing activities related mainly to the acquisition of additional shares in JTG and as such FragranceNet. Financing activities were limited and related mainly to dividends paid to minorities of EUR 11.8 million to upstream cash. All in all, net debt increased by 3.2% to EUR 247.3 million when compared to half year 2020. That brings us to working capital. Inventory increased from EUR 355 million to EUR 376 million or from 78 to 87 days, the result of the earlier mentioned inventory buildup. Trade receivables decreased from EUR 182 million to EUR 168 million and also decrease in days following our ongoing strict credit management, and trade payables increased basically in line with inventory buildup. For the outlook, I'd like to hand back to Tako.

Thanks, Peter. As part of our growth ambitions, we presented our financial objectives for the coming 3 years. Although we're well on our way in the execution of our strategy, the impact of COVID-19 is lasting a bit longer than we anticipated at the time of formulating these objectives. To give some more color on how this affects our expectations, I want to zoom in on turnover and EBITDA. We expect sales levels below initial expectations in the second half of this year, driven by the direct COVID-19 impact on travel-related markets, which last longer than anticipated, the product scarcity in the markets that were expected to continue, the indirect COVID-19 impact on supply chain that is expected to continue, the FX effect, especially in our B2C business in the U.S. that is impacting the reported growth. On the other hand, we believe the EBITDA margin objectives to be feasible. This belief is driven by 3 things: first, the ongoing digitization of our processes, services and investments in our e-com platform, it enables the business to bank on opportunities in online channels across all products, all channels and all geographies. We will continue our focus on e-com higher-margin business and further optimization of our assortments. Secondly, our efficient efforts and cost control to structurally reduce operating expenses. This is supported by our Digital First approach and our efforts towards a flatter management structure. And third, last but not least, we remain focused on working capital management throughout all segments to ensure a healthy financial position. As such, we reiterate the net debt, EBITDA and working capital objectives. That ends this presentation, and I would like to open the call for further questions.

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

I've got 3 to start. So the first 1 is following, let's say, 1% organic sales growth in the first half as well as current market conditions, what's the level of organic sales growth that you now expect for the full year? Second question with, let's say, sales below what you previously expected, you more or less maintained your guidance for the EBITDA margin for this year. So what's behind this, what it was then on the positive side, compensating for the, let's say, sales below? And thirdly, if you could kind of give us a bit more fee for your expectations for liquor and beauty, in particular, for the second half?

I think, Patrick, if we look at the sales growth, indeed, the first half was, well, let's say, roughly 1%. If you look at the second quarter you look at the constant currency, then we're looking at a 7.1% sales growth. We have seen, however, towards the end of the second quarter that especially in the value of retail and also in the travel retail that the recovery from the COVID-19 pandemic is definitely taking longer than we expected. We also saw newly inflicted bans on store openings, on travel, et cetera, et cetera. So we forecast that the 7.1% is on the high side of what we expect for the second half. On the other hand, and that's also in line with your second question, although the sales is below what we've seen in -- or below our expectations. On the other hand, given the products scarcity in the market, we see that our gross profit margin is a little higher than we normally see in the end. If we look at the EBITDA first half, we were running at 5.5%. The second half, as always, at least sales-wise the heavier half year. Given that fact and the fact that most of the fixed costs are then already covered, we do expect that the EBITDA margin will increase. So on the 1 hand, an increase stemming from the seasonally stronger second half. On the other hand, an increase given the higher gross profit margin that we already saw in this quarter. If we then look at the liquor and the beauty, then I think that's also the effect that we expect to see in that business. We are, of course, looking at the market for -- also for opportunities to increase sales and increase sales maybe at a little lower margin to increase our market share. But especially the sourcing side is a little bit complex at the moment given the scarcity we saw and also given the complexity we see with the containers at the moment. Hopefully, that answers your question a little bit, Patrick.

Yes. Thanks, Peter. So on the first question, I think you had a, let's say, a target for this year of organic sales growth of around 7.5%, which have not reiterated. So what is your expectation now for the full year?

Honestly, given the current situation, it's a little bit difficult to forecast the growth at this moment. I think the growth will be a little bit less than what we've seen in the second quarter. In the second quarter, we were running at 7.1% at constant currency. I think the second half will be a little bit less. But yes, it also depends on the opportunities that arise in the market, given the scarcity we see.

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

Yes, my first question is about your new segmentation. I think that provides a lot of insight in the different businesses, so it's quite helpful. So we can monitor the gross margin development also the OpEx. If I look at, let's say, all the different business segments in the first half, is there any, let's say, exceptional both negative or positive in the OpEx level? And as a follow-up on that, do you expect any material change, let's say, for the different businesses in the second half of this year? That's the first question.

I think OpEx-wise, we have not seen any significant deviation from our expectations. Of course, even when comparing to last year, you should -- but I already indicated that, bear in mind that there was a EUR 3.4 million positive impact from the government grants to take us into consideration when comparing to the second half, I would say. Apart from that, I don't think we see any significant movement. Of course, if you look at the OpEx and you compare it to last year, although they seem stable, of course, the unfortunate reorganizations we had to take are indeed paying off. In other words, we are seeing lower staff costs than last year.

Okay. That's clear. And then in the cash flow statement, I noticed that the tax payments are relatively high. Is that, let's say, an after month of the government grants? Are you repaying some of those grants in this line? Or what can we expect for the full year in the cash flow?

No. The government grants were already settled last year. I think in the first half, we reported EUR 3.4 million government grants and in the second half, we repaid -- I think it was close to EUR 0.9 million. So that was all settled last year already. Tax payments and the P&L are basically the normal income tax payments we had to make, including the -- sorry, I was running through the -- including the expectations for the second half. In other words, you basically get an income tax filing, you pay on that behalf and that's it. Last year, of course, that was significantly lower than this year, especially given the impact on the 1 hand, the liquor business that showed quite a low result as such, also hardly any tax in the Netherlands. And on the other hand, also the retail segment that was a quite a lower result.

Yes. So the full year cash outflow on taxes should match, let's say, what we see in the P&L?

Correct.

Okay. Yes. Okay. That's clear.

Apart from a little bit deeper tax, of course, that's amortized on a yearly basis, but roughly, you're right.

Yes. Okay. Then I was reading about the success of your newly developed digital platforms and the EUR 80 million year-to-date revenues. I assume that the CapEx investments linked to that are quite limited. And we have seen a big storm in the past in the last few years, but I noticed that the CapEx levels are, in general, quite low. You provided, of course, guidance at the strategy update for some additional investments in the logistical system for some of the businesses. But the underlying CapEx is, I think, quite low as maybe EUR 10 million to EUR 15 million, both tangible and intangible per annum.

Well, let's say that roughly -- let's take the middle of that, that's EUR 12.5 million, that's correct indeed. IT-wise, we are expanding as much as possible. In other words, the majority of what we built on the e-com platform is expensed during the years directly.

Yes. Okay. And 1 final question. We have all seen indeed the developments in Afghanistan. I saw, I think, in some of the appendices that your revenues from the Middle East declined by about EUR 30 million year-over-year. So part of that is probably in the airport retail, but also in Afghanistan, what is, let's say, the quarterly revenue you are still getting from Afghanistan?

As you can imagine, with everything that's happening in Afghanistan, there will be hardly any revenue left for the second half of the year. I mean we've made what we made now in the last month, basically. But...

I think in general times, if you look at the Afghanistan business until, let's say, mid 2021, the withdrawal of the troops was roughly in line with what we expected. So in other words, for the half year results, no significant deviations. On the other hand, what you see is that a significant part of the business we did was also linked to the embassies. In other words, to the staff at the embassies and we were supplying them with the food as well. Well, I must admit that for us, that was a little bit of a surprise that the flight everything took at once. In other words, we had quite a surprise last week. We were expecting, let's say, roughly around EUR 20 million in the second half of the business. And as you can imagine, that business, of course, will not be there.

Of course, that I can imagine, but I'm also looking for the incremental decline, of course, so.

[Operator Instructions] Okay. It seems we have no further questions coming through. So I will -- apologies, we have just had another question and it comes from the line of Paul Hofman from The Idea.

The first 1 on that more than EUR 80 million sales across the platform. What can you say about the type of products which are being sold, where do you see the biggest advantage? That's the first one. And then the second one, probably also related to that first one. Yes, fragrance per net once the ambition was also, of course, not only to grow it, but also expand it geographically. If I look at the country websites, there are still 4, the Netherlands, Mexico, China and U.S.A. Yes, I thought that perhaps you would add more countries there? Or is it still in the planning or what can you tell about that?

Okay. So the EUR 80 million in our current platform, there is food products, some liquor products and beauty products. It is also a transition from the regular business to the online business. So it's not all new business. If we look at FragranceNet, we're expanding our FragranceNet business in Australia and in China as well. And a little bit in the Middle East, which is only starting as we speak.

We have a follow-up question now from the line of Tijs Hollestelle from ING.

Yes, as long as there's nobody else on the call or almost no one. The interim dividend, can you remind us what the underlying assumptions are? Is that the first half EPS and then your normal payout ratio? Or does it include, let's say, the performance in the third quarter? What are your assumptions on the announcements that you will make at the third quarter trading update on the interim dividend?

I think in line with what we published, I think, previous year or even the year before, we stopped paying interim dividends, and we only distribute a final dividend at July, which we will also do this year.

Okay. I forgot about that. That's 2 years, so you only paid dividends. Yes.

And [ revenues ] purposes because it's, of course, taking quite some time for both ourselves, but also, of course, for our shareholders.

Yes. Okay. And then I also had a question on the airport retail. Do you also sense, let's say, any change in the purchasing behavior of the passengers? Because I went on holiday, was at the airport. It looked to be quite busy, but I'm not sure your stores were open, but I'm not sure if there are any change in behavior of the consumers.

I think in general, what we are missing right now, of course, are the international passengers. In other words, you have some holiday flights in Europe. And of course, that's also what's reporting on that the number of passengers has increased quite a lot since last year. But if you look at, for example, the Chinese passengers, which, of course, are the high rollers of the airport retail business, then we are still missing those passengers. In other words, the spend per box is still on the low end I would say.

And of course, business travelers are also not back on par yet.

Okay. Yes. So it's a weak mix still. Yes.

Yes.

We have no further questions in the queue. So Tako, I will now hand back to you for any closing remarks.

Well, thank you for joining us today in a review of this first half 2021 results. And should you have any additional questions, you know how to reach us via the Investor Relations, Anke Bongers. So this concludes our call.

Thank you, everyone, for joining today's conference. You may now disconnect. Thank you.