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

Hello, and welcome to the B&S Group 9 Months 2021 Trading Updates. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions]. I will now hand over to your host, Tako de Haan, CEO, to begin today's call. Thank you.

Good morning all. This is Tako de Haan speaking. With me here today 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, there will be time for Q&A. So, let me continue by sharing some general inflow before going into more detail per segment. The development of our e-commerce backbone is now completed. It enables a relatively fast rollout of our new B2B and consumer sites for every product category and geography in our portfolio. It fully supports our strategy of growing our e-commerce business further, both on our own and reseller platforms. So I'm pleased to say that our strategy execution is on track and working while we continue to look at new opportunities to expand. The focus is on expanding not only online but also in new geographies and with new services. An example of such new service is the recently launched signature beauty concept, a concept that serves premium beauty brands with a distinct end-to-end growth proposition. Brands in this portfolio, we already have include Boller, Schiphol, [ NAIF] Natural Skincare and Citizen Cosmetics. Our EU Liquor and Personal Care business see recovery in demands, but container shortages and product scarcity holds back sales growth. We expect this effect to continue in Q4. We do feel encouraged by the recovery of our Travel Retail business in Q3 and the first part of Q4. Some weeks ago, we signed a memorandum of understanding to operate 3 shops at Hamad International Airport under the Capi brand. Capis our consumer electronics concept in our B&S Retail segment. The international travel-related market in food and health, on the other hand, recover only very slowly from COVID-19. The situation in Afghanistan further pressured results in these segments. Our financial position remains solid with working capital levels increasing towards the seasonally stronger fourth quarter, in particularly, for liquor and beauty categories. Now, let me zoom in a bit more on some market circumstances per segment. B&S Liquors overall turnover for 9 months of this year continue to see impact from industry-wide scarcity and continued container shortages. Sales levels in our European Liquor business were above 2019 levels, with Q3 sales higher than Q3 of last year. This was realized despite the shortage of products and the impact of Brexit on our sourcing routes. In the International Liquor business, our continued focus on higher-margin business resulted in lower turnover but had a side effect on margins. All in all, turnover declined 5.5% in the first 9 months or 8.5% in Q3, but as said, margins improved. B&S Beauty managed to increase overall sales despite scarcity of goods that impacted B2R and especially B2B sales. Our B2C channels continue to grow online sales. This was driven by geographical expansion to China and Australia and supported by the decreased euro-USD FX impact. Further growth in Q3 was held back by product scarcity, as expected, and also communicated during the first half year numbers, we are pleased to see that the margins for online sales in Q3 were back at pre-COVID levels. B&S Personal Care performed in line with the same period last year, beating earlier expectations. This was the result of shop reopenings across Europe by our key clients during the third quarter and adding some new customers. Further sales development was held back by high container prices. This affected the private label assortments in terms of availability and pricing. B&S Food saw an overall turnover increase in Q3 in our domestic markets because of relaxation of COVID restrictions. Turnover in our remote business, however, declined further due to abrupt ending of all military related business in Afghanistan. This happened much faster than the anticipated gradual withdrawal of troops that we mentioned earlier this year. B&S Health turnover in Q3 2021 was in line with Q3 of last year. Year-to-date, turnover decreased compared to 2020. Last year, we benefited from COVID-related sales in the first 9 months. The travel vaccine business recovers only slowly as many travelers select destinations much closer to home. Also, postponed care treatments resulted in reduced demand for hospital supplies. B&S Retail saw the position results from easing the travel restriction -- sorry, positive results from easing the travel restrictions after Q2. The summer holiday season further help to drive sales up and nearly all of our shops have reopened. Turnover in Q3 came in really close to our expectations. The first new business opportunities are also starting to materialize. Opening of the airport shop in Zurich this month and the mentioned expansion in Middle East are on the horizon. That basically concludes the segmental review. I would like to hand over to Peter for more color on financial.

Thanks, Tako. Good morning all. Let me give you a short update on our healthy financial position. Our strict working capital management, of course, continues, while we do see, however, buildup of inventory levels from half year 2021 onwards. This is fully in line with our sales forecast. The precautionary measures of a covenant holiday with our relationship banks ended as per half year 2021. Backwards, this proof not needed as we managed to keep well within covenants at all 3 waved measure moments. As per September, net debt-to-EBITDA was, of course, also within covenants, and we are confident to reach our net debt-to-EBITDA target of below 3.0 at full year 2021. Tako, back to you for the oulook.

Yes. Thanks, Peter. Looking at last quarter of this year, we expect our Liquors, Beauty and Personal Care business to accelerate overall performance in terms of sales and margin. As you know, Q4 is traditionally the strongest quarter. Also, the upward trend in Retail is affected to continue in this last quarter. On the other hand, the Food and Health segments are not expected to perform as Q3, that is because the Afghan tender business that we expected in the second half of this year will simply not be there anymore. Overall, turnover growth for 2021 is held back by the long-lasting effects of COVID. These effects resulted and are still resulting in product scarcity, container shortages and later than anticipated recovery of international travel related markets. But ending with a positive note, I would like to reiterate that due to our continued focus on higher-margin business, we remain confident to deliver on our EBITDA margin targets for this year. That ends our highlights for the 9-month trading update. I would like to open the call for questions. Hand over to the operator.

[Operator Instructions] And the first question comes from the line of Paul Hofman from The Idea.

Can you hear me.

Yes. We Can hear you.

Sorry. Okay. A number of questions. The first one on your Retail lag. You also mentioned as you're about to open a new airport or at least a shop there, what are your plans in that area? I mean, of course, you've been a bit reluctant in the past about this unit. Are you now confident you can further grow this business? Or is it simply still, let's say, a status quo and let's see how this will develop? Or what explains your enthusiasm to expand at this moment?

So, we were...

Sorry. no, go ahead, please, sir.

We can answer them one by one or you can provide all your questions.

Yes, yes. Sure. One by one is perfect.

Okay. So we were always enthusiastic about our retail business. But of course, we had to scale down a bit because of the whole pandemic. But we've never stopped investing into the retail business. And we're now finally on track that we can reinvest further into opening shops and expand in Middle East. We have 3 shops in the plan for Qatar, and we're looking for other shops as well.

Yes. coming back to that, is there also -- I mean, clearly, there are regions where you want to expand. Is there opportunities or also regions where you want to consolidate or when you want to perhaps reduce the number of shops? Or is it still -- is this the minimum platform that you currently have?

No, we're very happy with the shops that we have currently. We're not closing shops further or changing our strategic direction for the retail business. We're looking into more opportunities basically also in Africa and Middle East.

Okay. All right. A second question about the product scarcity on container shortages. Yes, of course, it doesn't -- isn't really perhaps a surprise, if you look at the global developments. But how did you see it develop? Is it worsening during the past quarter? I can -- if you look at the future, of course, it's difficult to pinpoint when it will end. But yes, what are your expectations? Is it something of the first half next year that it will ease or improve? Or would it take longer? Do you have any visibility on that -- in that field?

Yes. I think, in all honestly, that's a little bit different to -- or complex to predict. And that's also the indications you see, for example, from the container liners. In general, I think, if we look at Q3, it was -- well, definitely not better than we expected. Let's put in [indiscernible] and I think definitely for the first half of 2022, as per current expectations, we expect to see that effect.

And of course, if you look at product scarcity, that is also driven because of packaging materials, cars and all the other packaging stuff -- This is often produced in the Far East, and containers are really expensive instead of 1,500, 1,600 per container, you pay 16,000 per container now. So nobody wants to move products from the Far East to Europe to package their goods. So everybody is trying to limit that as much as possible. .

No, that's clear. Perhaps a final question about the Liquor division. You specifically mentioned International Liquor business, lower sales with a higher gross margin. But if you look at the European part, if I make that -- if I can make the distinction, that was already realizing sales growth. So I imagine also, we saw that margin improvement already happening there. Or put differently, the whole Liquor vision achieved a margin improvement in the third quarter.

Yes. That's correct.

A small addition. The main margin improvement of course in the International Liquor distribution instead of the European wholesale distribution over in the European wholesale distribution that we see sales levels already passed the 2019 levels. So quite positive on that.

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

Just to confirm -- [indiscernible] indicated that product shortage effect likely to continue in the first half. I assume that also implies that your organic sales growth target of 7.5% for next year might not be achievable. Is that fair to assume? And then secondly, what does that mean for your margin target for the midterm?

I think in general, Patrick, that's fair to assume, although it's a little bit difficult and complex given all the changes we see currently in our environment to look too far ahead, almost, I would say. So of course, our strongest quarter is always the fourth quarter. So of course, that also applies to next year. So for now, it's a little bit difficult to project already, if and when or what level of organic growth we can reach next year. But in general, given our expectation of the first half, it's going to be a little bit complex. I think EBITDA margin-wise, I think we will, as we've also seen this year, be able to increase that. I think, of course, increasing our turnover in line with our growth target would have helped. On the other hand, the scarcity is also increasing the margins a little bit. So as such, we also expect for the coming year to increase our EBITDA margin in line with our targets.

Helpful. And then on -- you don't report FragranceNet.com separately, but obviously, that is doing very well. So by the year-end, how big is this going to be as part of the overall group? And perhaps is it possible to give a bit more flavor on where we are with the expansion in the different regions?

I will do the first part of the question. And I think looking to the right, then back over to the second part. If we look at the first part, although we've never indicated that before, we are running at -- or our FragranceNet of roughly 15% as per Q3 of our total sales. Of course, they have quite a strong and very heavy seasonal pattern. So towards year-end, that share is a little bit bigger than 15% of our total sales. And that's only the FragranceNet part. Then as far as our expansion is concerned?

Yes. So we recently opened a DC in Australia, and we have set up distribution in the Middle East. And this is on top of the Chinese distribution and beauty that we already have. So yes, we're looking at rapid expansion in the B2C area for FragranceNet.

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

A couple of questions from my side. A bit of an add-on to Patrick's question. You do not specifically say anything on the organic sales growth target, but it's pretty clear. I think that at 0.5% 9 months, you will not achieve 7.5% this year then taken into consideration what you said about the first half of next year, during which product scarcity seem to continue, why have you not adjusted your target for 2021 to 2023? Those were set fairly recently in April. So why not update your view on that? Because it sounds as if you will definitely not meet 7.5% this year and probably not also in 2022? That's my first question. The second is on the important fourth quarter. If I'm not mistaken, Chinese New Year is always very important. Can you share what the visibility is on the demand related to Chinese New Year and also taking into consideration the restrictions that were put in place again in several countries in Asia? Those are my questions.

Peter?

I think for starters, if we start with our views on the medium-term objectives, I think no, honestly it's a little bit difficult for now for now to predict. I think definitely at year-end, of course, we will have a better view. And then yes, we might have to adjust that for the medium to long term. I think at the end, we provided indeed these guidelines for 2021 to 2023. I think for now, as indicated, it's a little bit difficult to forecast already at least for the second half of next year. We will come, however, with an update on that. I think, if we look at the visibility for Chinese New Year, well, of course, Chinese New Year is in February next year. It depends a little bit on the, on how these markets, especially COVID-related will develop in the coming months. I think for now, if we look at our inventory positions and the level that is already presorted, of course, the season mainly goes for liquor, then yes, we are positive on Chinese New Year. If and when the entire Chinese economy again goes into a lockdown, then, of course, we might be facing some difficulties within the Liquor segment. But for now, we are still quite positive. Does that answer your question? Robert?

Yes, that's clear. I mean, I'm still a bit puzzled what is precisely the reason why the visibility versus April and today is -- has deteriorated so much because you now said that you can -- you don't have that visibility before the end of the year? What are the main three reasons? Is that the product scarcity that is more pronounced than you had expected? Or is it a container -- the shipping costs or is it a combination? Because we haven't even discussed the other 7.5% M&A. Yes, it seems that -- at this moment, it seems that these ambitions or targets as you mentioned them in April are not feasible at all.

Well, if you look at where we were in April, we -- I think we generally expected the vaccination level would help us to overcome the COVID problems and that also product scarcity would be a little bit better towards the end of the year. But I think COVID hit us longer and harder than we could have anticipated earlier. So this certainly one of the reasons. And this is also leading to the high container prices, product scarcity and therefore, yes, where we are.

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

Yes, Most questions have been answered. But indeed, to go all on Patrick's question, the B2C business in Beauty, how much currently of the FragranceNet revenue is already coming from, let's say, outside of the U.S., more or less, you probably don't disclose that, but the actual amount on FragranceNet? So that's the first part of the question. And then, as you indeed recently opened a DC in Australia, and I believe you already have something in the Middle East indeed, how much utilization that you already have in those areas? And do you have kind of a longer-term revenue target for these regions? That's the first question.

If you look at Australia, Tijs, that we already shipped a lot of product to Australia from the U.S. So we're getting closer to the consumer by opening this DC. So we do expect further growth in that area. -- but it's not a one-for-one, right? Because we will serve the same consumers that we have already served in the past. And now that will be taken over by the Australian DC route. I'm not sure, Peter, you have any numbers on outside of the U.S.

Yes, of course, we have the numbers. On the other hand, I don't think we.

Percentages.

We have published that before I think if I look at -- I think we're running at roughly 10% of our total sales that is now coming from outside from outside the U.S. and, of course, increasing on a day-to-day basis.

And it's fair to assume that the U.S. revenues since you are quite frank that also have some raw boost to Retail throughout the COVID-19 period last year?

Yes, of course, definitely. If we look at last year, then growth was around 30%, 25% to 30%. And this year, again, year-on-year, they are increasing by 12.5% on a constant currency basis, of course. But.

So I guess one of the prime growth drivers going forward, a bit depending on how the market situations are is coming from, let's say, filling up or acquiring more absolute revenue amount from these other areas?

Yes as well as category and product expansion in the U.S. itself. If you look at a competitor platforms, then I think roughly 40% to 50% of sales is coming from cosmetics. And I think, if you look at the FragranceNet, we are currently way below that. In other words, if we continue to increase our own assortment with cosmetics with hair care products, then of course, the number of recurring customers increases and as such as our sales increase.

Great. Yes, yes. And then a second question on the -- basically on the operations, is it fair that if you're currently not executing, let's say, significant upgrades of warehouse automation or inventory management systems or any other efficiency improvement programs at the moment? And also are search program currently in the planning for the foreseeable future?

Yes. We are also and always looking for efficiency improvements, of course. That doesn't always mean you have to automate, right? You can also simplify your [ warehouse ] routes and storage locations. So there's more than just automating and finding the efficiencies. We have a new operation in Atlanta for FragranceNet now. And that also helps us to get more efficient and cheaper way to serve our customers. So there's multiple ways to find efficiencies, and we will always continue to find and look for opportunities.

Yes, yes, that I understand. But there's no -- anything going on which could have a significant impact going forward? Or do you still have to reach, let's say, full benefits of having Atlanta up and running 100%?

Yes. That is more the case than our heavy investments in automation.

I think in general ties, if you look at the plans we presented in April, of course, we indicated that we would buy or build 2 new warehouses to further increase efficiency, one; and secondly, to also be able to grow in the future. That goes for the Beauty segment. And for the liquor segment where we could then centralize our inventory position and a sort of decrease our working capital those brands are, of course, still now being executed.

Yes, some benefits that we expect. Okay. And a last question on the retail business. I'm sensing that you have been quite successful in reducing the cost base at around breakeven level, maybe a bit above that at the moment there. So provided that indeed the modest recovery and passenger numbers continues, you have already a positive year-on-year swing on the EBITDA and given that you have a negative EBITDA in the first half of this year. . But if I remember correctly, during the COVID-19 period, you immediately also negotiated lower concession prices and/or rental prices with the airport operators. Is it fair to say that it might also limit, let's say, your earnings recovery going forward or at least that the margins back to pre-COVID levels are still a bit further out? Is it a fair assumption?

And the last part, I don't fully understand where you're coming from, Tijs. Yes, I think in general, your memory serves you will Indeed, of course, we have renegotiated the contracts on the 1 hand, releasing the minimum annual guaranteed concession fees. Secondly, we also extended quite a number of our contracts. Well, of course, as shown in our half year report in the first half of 2021 was still quite negative, although less than the second part of 2020. In general, and I think we are quite happy about that. The third quarter was a positive quarter, EBITDA-wise, which indicates that, indeed, as we told last year, we're running at occupancy levels or passenger levels of 45% to 50% of 2019 then we're at breakeven. Well, we reached that level and indeed, the operation is at breakeven again. . Of course, third quarter is always the holiday last season or at the last part of the holiday season. On the other hand, yes, we also have a smaller peak at year-end. So the fourth quarter is also a little bit heavier on passengers, and also the number of passengers keep on increasing. So we're quite positive still on the retail segment, which yes, of course, also [indiscernible] or at least we wanted to expand that operation in Qatar.

There are no further questions in the queue. So I will hand the call back to your host for some closing remarks.

Yes. So I just want to thank you all for joining us this morning. And if you have any further questions, you don't -- you do know how to reach us via Investor Relations. So wish you all a good rest of your day. Thank you so much.

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