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

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

Good morning, everyone. This is Tako de Haan, CEO of B&S. And with me here today is Peter Kruithof, our CFO. Together, we will talk you through our full year 2021 results that we published this morning. First, let me go through the highlights of '21, and we will then discuss the figures in more detail and provide the outlook for 2022. After that, there is, of course, opportunity to ask questions. In 2021, in general, the delivery on the strategy and financial performance was really good. Amidst the ongoing impact of COVID-19, we continue to bolster the business that we have but also looked at different business opportunities, in particular, e-commerce opportunities. We have invested in expanding our overarching e-commerce backbone with a direct-to-consumer platform. It allows us to serve both the wholesale and retail sales digitally and links our long-tail assortments to reseller platforms. Adding to this, we further built our presence in selected geographies in our liquor, beauty and food businesses. Next to that, we increased our majority interest in JTG and thus, FragranceNet.com, moving closer to the end consumer. Even more so, we have delivered a step change in synergy potential of our business by unifying our businesses' activities globally under the same B&S label, and completing an overarching technology backbone called B&S Infinity. This backbone enables us to service all channels with a full assortment in one go. Despite turnover being largely in line with last year, gross profit significantly increased by 12.7%. This was driven by our focus on higher-margin business and the expense of some volume -- at the expense of some volume details. This, in combination with our simplified operations and elimination of operating expenses led to an EBITDA increase of 28.9%. Let's discuss further how these developments translate into numbers. Overall turnover amounted to EUR 1.87 billion, a 0.4% increase compared to last year. Turnover from acquisitions was small and originated from Top Care only. EBITDA came in at EUR 116.4 million, an overall increase of close to 29%. Let me now put some color on performance at segment level. B&S Liquor sales declined by 6%, while gross profit increased by 55.5%. This is the result of an enhanced commercial focus in selected high-margin areas and channels that can be served at relatively low staff cost. The European liquor wholesale continued to see impact of our forced closures of bars and restaurants. The focus on selected EU countries reshaped results in the second half of the year. Additionally, the launch of our B2C web shops started to contribute in the second half. International liquor distribution was still impacted by the pandemic with industry-wide scarcity of containers. Our emphasis on higher-margin business and the general product scarcity led to significant gross profit increase. B&S Beauty turnover and margin increased, yet EBITDA and EBITDA margin slightly declined. This was due to staff cost increase following expansion of the online B2C businesses. B2B and B2R, in Beauty were impacted by product scarcity, yet, partly counterbalanced by our new business models. Online B2C continued to grow, driven by international geographical expansion, further turnover growth was held back by product scarcity, driven by the pandemic. Margins for this business were back at pre-COVID levels. Despite supply chain complexities driven by the pandemic, B&S Personal Care sales increased by 5.3%, while gross profit increased by 4.5% compared to fiscal year 2020. Performance was driven by increased sales to key clients, partly following the lifting of the COVID-19 restrictions in several European countries. Further sales growth was held back by high container prices, which put pressure on availability and prices of the private label assortment. In B&S Foods, sales increased by 3.3%, while gross profit was largely in line with 2020 levels. We saw less contribution of remote markets, which normally come at a higher margin. The abrupt ending of all military related business in Afghanistan in Q3 led to a sharper turnover decline and higher wind down cost in H2 than we originally projected. Our brand distribution services performed in line with expectations on turnover, yet slightly underperformed on gross margin. Duty-free and travel-related markets still saw the impact of COVID-19 restrictions on sales. Domestic markets slightly increased, however. Turnover, especially in the last quarter, was better. Adding to this, we had to account for an impairment loss on assets in this segment. Peter will provide you more detail about this in a minute. In B&S Health, sales declined by 15.4% with a margin decrease of 23.3%. The first 9 months of 2020 benefited from COVID-19-related sales, whereas the travel vaccines business in 2021 recovered only very slowly, and delayed care treatments resulted in reduced demand for hospital supplies. EBITDA margin significantly decreased as a result of the fixed cost base. Sales in Q4 were in line with the same quarter last year and driven by export business mainly. B&S Retail turnover levels were largely in line with last year and despite another round of temporary store closures at the end of Q4 more than doubled in the last quarter of 2021, when compared to the last quarter of 2020. Gross profit increased by 38.8% and EBITDA increased by 87.5%. The EBITDA number was positive in the second half of the year constantly. Virtually, all shops were reopened at the end of 2021, and recovery towards the end of the year was aided by a slightly higher-than-expected passenger number and spend per passenger. This now brings us to the financial review. Peter, I'd like to hand over to you.

Thank you. Good morning, everyone, also on my behalf, of course. Overall, turnover increased slightly by 0.4%, yet declined by 0.3% organically. Constant currency, turnover increased 1.7% or 0.9% organically. So mainly driven by the exchange rate but the fact that especially results of our U.S.-based FragranceNet business. Gross profit came in at EUR 287 million compared to EUR 255 million for full year 2020. As a percentage of turnover, this was an increase to 15.4% from 13.7%, this was mainly the outcome of a shift in focus on higher-margin business in the liquor segment combined with a price increase as a result of scarcity in the market. Operating expenses amounted to 81.2%, broadly in line with full year 2020. Gross margin increase, combined with similar OpEx levels led to an EBITDA increase of 28.9% to EUR 116.4 million or even to EUR 118.9 million at constant currency. EBITDA margin amounted to 6.2%, a clear improvement compared to the 4.9% in 2020 and a beat of our 2021 target of 6%. As Tako already indicated, we had to take an impairment loss related to the Food segment of EUR 10.2 million. Although we have taken measures in this segment already, and as such, we foresee positive developments. We also considered and had to consider less likely, yes, yet less positive scenarios. But the goodwill impairment test for the B&S Food segment, as such, became apparent that these less positive scenarios required an impairment. Despite the impairment loss, net profit increased from EUR 40.6 million to EUR 54.6 million, of which EUR 38.5 million was attributable to the owners of the company. This bridge shows the elements that together leads to the slight turnover increase at reported rates for full year 2021. 2021 turnover levels equaled to 2020 levels with turnover increase still halted by COVID-19 developments. Organically, turnover, as already indicated, increased by 0.9%, where continued travel restrictions and ongoing impact of the pandemic on hospitality and travel-related business held back further growth. Acquired turnover contributed 0.7% stemming from Top Care in the B&S Beauty segment. The development of the EUR/USD exchange rate had a negative impact of EUR 23.6 million on turnover. This bridge shows the elements that together lead to the turnover increase in Q4 2021. Despite COVID-19 impact lasting longer than expected, turnover grew 3.7% organically or 1.9% at constant currency. The development of the EUR/USD exchange rate in the fourth quarter had a positive impact of EUR 9.8 million on turnover. That brings me to our financial position. Working capital in days increased as a result of increased inventory. The increase is partly the result of inventory buildup to enable Q1 sales despite product scarcity in the market. Also, the 2020 levels were historically low following precautionary measures we took in 2020 during the pandemic. We continued our strict measures related to healthy working capital and cost control as initiated during the pandemic. These measures were concentrated on aligning net debt and EBITDA to keep operating within our covenants. Net debt to EBITDA stood at 2.5%, well within our banking covenant. At December 30, 2021, B&S refinanced its preexisting bank debt and centralized the majority of its financing agreements on the level of B&S Group. The new facilities allow for a net debt to EBITDA, including the IFRS 16 effect of 4.0% or 4.5% after considerable acquisition. Our return on invested capital increased to 24.8%, which is close to our target of 25%, the result of EBITDA growth outpacing 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 year-end 2021. Net cash from operations amounted to EUR 40.8 million the result of the increased inventory positions when compared to the low historical levels of 2020, investing activities related mainly to the acquisition of additional shares in JTG and such, FragranceNet. And all in all, net debt increased by EUR 42 million when compared to full year 2020 and stood at EUR 294.7 million at year-end 2021. Brings us to our working capital development. Inventory, as indicated, increased from EUR 308 million to EUR 382 million, 70 to 88 days partly, as indicated, the result of the historical low levels in 2020, partly because of strategic positions we took, given the scarcity in the market. Trade receivables remained almost equal to 2020 levels following the ongoing strict credit management and trade payables increased a little bit from EUR 103 million to EUR 107 million in line with the inventory buildup. For the outlook, back to you, Tako.

Okay. As part of our growth ambitions, we presented our financial objectives in April last year, for the coming 3 years. We are well on our way in the execution of this strategy. And excluding top line growth, we performed on all other targets. The outlook for 2022. We project certain uncertainties related to the prolonged pandemic. And we also see, of course, other related issues in markets in Europe. We expect demand for digital supply chain solutions to keep on developing further. B&S plans to leverage its B&S Infinity backbone and continue its focus on improved operational efficiency. We will do so by accelerating innovations and internal process improvements. We strive to expand sales within marketing and brand development solutions and plan to launch different direct-to-consumer business models in various geographies, starting with Australia, Middle East and some European countries. Our 7.5% average organic top line growth remains intact for 2022. Also, we will continue efforts to further enhance profitability with Hong Kong focus on higher-margin business, combined with cost control measures and operational efficiency. Return on invested working capital is key to maintaining our healthy financial position, and it is, therefore, that we embedded it as a key metric for all our segments, in particular, the days of sales outstanding and aging of inventory. That ends this presentation, and I would like to open the call for your questions and hand over to the operator.

[Operator Instructions] It does looks like we have a couple of questions coming through. And the first question comes from the line of Tijs Hollestelle from ING.

Yes, the first question is on your organic growth target for this year, 7.5% is also in line with your medium-term objectives. If we have to model that, what is the biggest driver behind that as you see the world today? I know there's a lot of uncertainty but I think also you can, at this stage, say that the COVID-19 should have a more limited impact if things stay as they are today on, for instance, the Personal Care business but I'm expecting that also on the Liquor business and maybe also the airport retail. Is that also baked in your expectations? Or are there other areas where you expect, let's say, significant growth? And also in addition to that, where do you see the biggest risk to top line growth? That is the first question.

That's a lot of questions, Tijs. But I would say, yes, we bake, of course, the end of the pandemic also in our forecast. Next to that, we hope and expect that product scarcity slowly resolves in the course of this year. And we also hope, of course, that Russia-Ukraine dispute comes to a fast ending because we don't know how that will further impact world's economics. Peter, anything to add?

Yes. I think in general, what we will see is, yes, of course, a gradual increase of the duty-free and the travel-related markets, a trend that we also saw in the last quarter, I would say, over the last half year that gradual increase will, as we expect, continue throughout the year, impacting positively, of course, our retail and our food segment with also the duty-free markets within the food segments, again, getting back to more normalized levels. COVID-related measures are almost completely released or too significant to extend throughout the world, recovering also the local domestic markets and that altogether should indeed lead to the growth combined with our continuing focus on the e-commerce market.

Yes. Okay. And then basically the same question for the EBITDA margin because you indeed indicated at the Capital Markets Day that you expect after achieving, let's say, at least 6% for '21, a 25% -- basis point increase in the years thereafter. That target is still standing. But if you -- yes, if I'm looking at the business today, then you already basically achieved that if you don't have, let's say, the negative EBITDA contribution in the airport retail in the first half, which is -- I think that is logic that you will achieve that. Also the volume recovery in the liquor business and in the personal care should then take care of that. But you're also specifically mentioning that you are focusing on even more higher-margin businesses. So could you provide a couple of simple and concrete actions of this strategy here for the most relevant businesses and also your self-help measures or your cost control initiatives, what are the areas you're currently focusing on to help the margin? So if you could explain that a little bit, it would be helpful.

I think a couple of things that are important with this respect, Tijs. One, of course, increasing volumes with maintaining our cost base is pushing the EBITDA margin upwards, which, yes, of course, is the trend in line with what we've indicated. Secondly, the digitization and further initiatives throughout the company also help us with the efficiency and as such, also help us increase the gross profit margin -- and as such, also the EBITDA margin, sorry. On the other hand, I think we should also take into account the inflation we see throughout the world and especially in Europe. And we definitely and clearly see that on our staff cost development as well as you can imagine. We see the same in the U.S. where basically inflation is very visible on the one hand, in staff cost. On the other hand, also in our marketing spend and delivery costs for the last mile. So that is pushing, yes, the EBITDA margin increase downward a little bit, which indeed, we hope to balance with the other aspect. Then initiative-wise, last year, we clearly focused on combining the backbone of all our liquor wholesale companies. That initiative is fully in progress at the moment, which, of course, should also lead to one, lower levels of working capital used. And secondly, also to efficiencies and also to gross margin increase in order to be able, yes, to make the best buy instead of every company buying for itself. And yes, that initiative is also rolled out within the Beauty segment and also pushing the margin upwards in that segment a little bit.

And on top, we're also stimulating cross-selling within the segments. So yes, we have a lot of customers that can benefit from the other products that we have in our portfolio. So that's also one stimulation that we are actively pursuing.

Yes. Okay. I mean I appreciate that you are being conservative. But I mean, with a bit more bully, I mean your EBITDA margin expansion cooked in theory would be much more than the 25 bps this year?

We truly hope so. We truly hope so.

Okay. That's clear. Yes, and then some financial questions. Do you already have, let's say, a concrete number for the CapEx for this year, a ballpark number?

It's roughly going to be in line with last year. However, we're also investing in a new warehouse in -- from beauty segments in the northern part of the Netherlands, which should become operational at the end of 2022 or the beginning of 2023. So that could push CapEx upwards a little bit. In general, yes, estimations would be in the line of EUR 15 million like last year's. That could be pushed upwards by EUR 10 million to EUR 15 million for the new warehouse.

Okay, yes. And yes, that's helpful. And then one final question. The increase in short-term liabilities on the balance sheet from what was it EUR 27 million to EUR 66 million what is exactly driving this?

We -- as indicated in our half, yes, it was a half year press release. We acquired additional shares in JTG and such also FragranceNet, of course, for the buying price of EUR 48.5 million, of which EUR 38.5 million was due in January 2022.

Okay. Yes. I forgot about this. Okay.

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

Yes. A couple of questions. In liquor, you reported a strong increase in the gross profit margin and back to 10.5%. This was obviously flagged by you earlier. Do you think that this 10.5% is a sustainable gross profit margin for this business? Or is there more to come? That's my first question. The second one, in beauty. You mentioned in the comments, increased operating expenses because of staff costs that increased following the expansion in the B2C business.Obviously, you should start to yield leverage there on a fixed cost base and then do more volumes. So my question is, are you currently where you want to be with your investments in staff in this unit? That's my second question. Then your CapEx, maybe for clarification, did you say, Peter, that normalized EUR 15 million and then on top, EUR 10 million to EUR 15 million for the new warehouse and that EUR 10 million to EUR 15 million, is that all for 2022? That will be a clarification question on CapEx. And then lastly, the cash out for the minority dividend was quite a bit higher than cash out for the regular dividend, if I do a very quick calculation, the payout is 65% on the minority interest. Can you remind us on how we should look at this going forward? So these dividend flows? Those were my questions.

We're fighting now on the last one. Let's start with the liquor business, the 10.5% margin that we expect to maintain for this year. As long as product scarcity continues to be in the market, we think we can maintain this level. Although in the second half of the year, you might expect that production and material shortages will allow for more product to flow into the market again. And that might impact our margin a little bit to the lower end. But in general, we expect that liquor could, yes, remain at this level for the first half of the year and then slowly decline a bit in the second half of the year.

Then beauty, the staff increase, yes, number-wise, indeed, I think we are aligned and I think the -- or no, I don't think I know. The main increase in staff cost is mainly stemming from FragranceNet. And there, what we've seen last year is that it's, yes, on the one hand, a quantitative number. On the other hand, it's also an increase of staff cost per employee. There has been quite some scarcity in the labor market in the U.S. in that market as such, also competitors like Amazon started increasing the per hour pay rate to their employees. And in order to, yes, maintain the levels, of course, we also had to increase our costs in the end, leading to higher staff cost numbers. CapEx, indeed, you're right. It's the maintenance CapEx of, well, roughly EUR 15 million and indeed the EUR 10 million to EUR 15 million one-off depending on how fast construction is going. It will be either the end of 2022 or the beginning of 2023, that, that CapEx will land. Then as for the payout to the minority shareholders. The majority of that payout is coming from FragranceNet and that paid out is basically for upstreaming cash to the group. In other words, we're paying dividends to, yes, partly to the minority shareholders and the remaining part is upstreamed to the group to be able to be used for, yes, basically the company's purposes. That answer your questions?

Yes, I think for now, yes.

So we have no further questions in the queue at the moment. [Operator Instructions] Okay, it looks like we have no further questions in the queue, so I'll hand you back over to the speakers.

Okay. Well, if there's no further questions, then I would like to thank you for joining us today in our review of the fiscal year 2021 results. And should you have any other additional questions, you know how to reach us via Investor Relations.

Thank you very much for joining today's call. You may now disconnect your handsets. Hosts, please stay on the line. Thank you.