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

Hello, and welcome to the B&S Group 9M 2024 Trading Update. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Peter van Mierlo, the CEO, to begin today's conference.

Thank you. Good morning, all. Thank you for calling in, and great that you joined our quarterly call trading update of our 9-month results. Yes, we had a good Q3. We grew approximately 12%. All segments actually participated in that growth. And year-to-date, we're at the level of 7%. Some segments were strong and in line with first 6 months. Other segments definitely outperformed the first 6 months of the year as well. I'd like to talk briefly about every segment since the growth is particular for every segment indeed. So if I start off with Beauty, our largest segment, we saw a growth of 11% in Q3, which is a very good growth. That happened, especially in the B2C segment, 12% as well as in the B2B markets. B2C, as you know, very much concentrated in the U.S. with FragranceNet, and B2B is the global business. B2R decreased a little bit, minus 6% in Q3. So overall, 11%, a strong quarter, outperforming the average of the full year, and they are very well prepared for Q4 as well. For Food, the storyline is more or less the same. So, a very strong Q3 with a growth of 25%, year-to-date 18%. And that growth came from all 3 subsegments. So as you may recall, Food, we drive the business of Food out of 3 subsegments: Maritime, Duty Free and Food Export. Maritime is concentrated around cruise businesses where there's strong growth due to the operational excellence measures that have been taken. Duty Free has grown also in terms of better penetration in the market, new onboarded clients. So that's positive as well as Food Export grew and outpaced actually to such an extent that overall, we are now on a growth path, whereas the first 6 months were a little bit difficult. That growth of 25% is more or less similar in all 3 subsegments. So, again, a strong performance. Health grew by 30%, very positive developments in this segment. It's not our biggest segment, as you know, but nonetheless, it's there, and also penetrating into that cruise market, which is strong, especially a very interesting market for medicine and vaccines in the cruise market. So, overall, a 30% growth, which is definitely positive. Liquors also grew actually in Q3. But as you know, in the first 6 months, growth was overall minus 6%. We expect Liquors still to be in a slight decrease in revenue compared to 2023 situation for the full year. And we are building operational excellence procedures within the wholesale business with the different European wholesale businesses that we have in our group. That will lead to decrease in working capital needs and logistical better performance due to the combination of warehouses that we have already -- partly, we've already implemented actually in Q3. Personal Care, another good quarter with a growth of 8%, expecting a strong Q4 as well having also taken all the necessary measures to be able to perform a very strong Q4. So Personal Care remains to be in a very good shape. Travel Retail, year-to-date growth was 19%. Q3 is 9%. That has everything to do with the quality of Q3 in 2023, obviously. Overall, we would expect turnover to come out at the same growth level as what we've seen so far. So if I look at the cost level, operational expenses that we've incurred are slightly below last year or on the same level, maybe that's a better word. Staff costs have increased due to the inflation, but also availability in the market, and that's something that was budgeted for and expected. So overall, a good Q3 and working hard to make Q4 successful as well. Yes, this is only a trading update. So there's -- as you know, we will focus on turnover and developments into the market. But let's open up for questions, and let's see if you have any thoughts.

[Operator Instructions] We will take the first question from line Tijs Hollestelle from ING.

Yes. My first question is about the Liquors business. You mentioned in the press release the rollout in the plan for the next -- the integration rollout planned for the first half of next year. But I thought that, that was already planned for the second half of this year. Is that correct? Or was there a delay? Can you comment on that, please?

Very good question. We're in the process of -- as we speak, those teams, there's a clear path to integration. We are currently defining on every subpart of the business model of wholesale, how that integration would take place and how it can be implemented. For example, we've already integrated the warehouses in the Netherlands. That's one. But the full plan, Tijs, will start in January 1, but it goes without saying that we will take measures also in Q4. So it's -- both is true, actually, to be honest.

Okay. It's a lengthy project. Are you expected to take, let's say, a one-off costs in the fourth quarter or maybe next year on this program?

No, not so much. No.

Okay. Yes. Then also I got a question about -- let me see, there was a remark about finance costs. You took an interest rate hedge. Can we expect, let's say, higher net interest costs in the second half as compared to what was it, I think, EUR 11 million in total in the first half? And if my information is correct, let's say, 90% of the gross debt of B&S is based on variable interest rates. And is then EUR 180 million due within 1 year? Is that kind of correct? And what can we then expect in terms of the, let's say, average interest rate? I think in your annual report, you stated between 5% and 5.5% or so on the average. So can you elaborate a little bit on that?

That's a lot of questions in one question, Tijs, but let me start at the top and then work my way down. And please let me know if the answer did not fully meet your question. So your first question regarding the interest rate swap, which we concluded in the third quarter. So with regard to the variable interest rates, as you perfectly refer back to the financial statements, we, of course, have the market interest rates with the markup, which we had in our financial agreements with our banks. A significant portion of this variable interest has been hedged during Q3. So we have fixed our interest rate for a significant portion of this financing with a variable interest rate. And as such, we have locked in our interest rates for the remaining part of the duration of the fixed financing. With regard to your question on our interest expenses first half versus second half, I would say it's fair to say that it would resemble the developments in the market. But as you can imagine, the closed interest rate swap as per Q3 will have an impact on the second half of the year, whereas the outstanding balances throughout the second half of the year is on general higher as compared to the first half with the buildup of the working capital in Q3 towards the -- our main turnover quarter being the fourth quarter. Did I touch base on both your questions, Tijs?

Yes, yes. I'm thinking out louder because indeed you carry probably most of your debt right now because of indeed the buildup for the -- on the inventories. It's also reflected in the seasonality of the bank offers. Okay. I got a pretty good feel for that then. And then one final for now. You mentioned -- the seasonality of the fourth quarter in Beauty B2C, I think that it has the most heaviest weight in the overall. Or is the seasonality the same in the B2B and the B2R? Is that the same?

No, it's fair to say that it's -- the B2C is the main -- it was heavy on the B2C. And why? Because then your sales -- it's very simple, your sales continue throughout the end of the fourth quarter based on the simple fact that you're selling to consumers. So these are actually the actual buying and actual gifting season is later in the fourth quarter, whereas to your B2B customers, you need to deliver upfront because they are also selling towards those end consumers. So the -- again, the B2C is most heavy on the seasonality.

Yes, B2R probably is a bit more. And as you know, Tijs, this is everything to do with the special day, single day, Christmas, Black Friday, Thanksgiving, Cyber Monday, all those things.

And entering into Christmas.

Yes. It feels to me that, I mean, there's, of course, a lot of pressure on spending power of consumers. But I mean, the perfumes are kind of in low-end luxury goods. So there's probably -- yes, demand is still going relatively well. Is that also your expectation going into that season?

Yes. And we are not -- we do have business processes in place to work in different market circumstances.

Yes. With your algorithms and your -- you can swiftly price up, down depending on the demand geographically.

Yes.

Yes. Okay. That's...

And based on your data analytics, you can optimize your process here.

[Operator Instructions] We will take the next question from line of Robert Jan Vos from ABN AMRO.

I have a couple of questions as well. I think your Q3 sales was quite a bit stronger than the market had anticipated. Is there any color you can provide about the effect of higher prices in combination with, yes, the volumes, how the volumes developed? That's my first question.

Yes, sorry, Robert Jan. Yes, excellent question. Yes. Well, I wouldn't -- my reading of all our discussions is not so much that there's a huge price or quantity impact. I think it goes both ways.

Okay. Maybe on Beauty, a question, your comments read quite positively. Apart from B2R, you mentioned more intense competition. Can you elaborate on this? What do you mean by that? Yes, I know what competition is, obviously, but does it come from a specific area or a specific competitor? Can you elaborate on that, please?

Well, in B2R, you're more open to competition, right? So our B2C is our own platforms. B2B is our own network. So you're in a far better position to cope with that. In B2R, you're actually out there. And so it's more impacted by competition than the other 2 subsegments. It's just the name of the game is different.

Okay. That makes sense. That is the normal volatility in competition that you see.

Yes, yes. And you're more exposed to that trend in B2R than into the other 2.

Okay. Clear. My third one, yes, you keep your guidance for growth -- for sales growth unchanged at this stage of the year. That implies a quite wide range for Q4 between flattish and then plus 8%. Why have you not narrowed it a little bit? Or maybe putting it differently, what issues should we take into consideration for the fourth quarter? Maybe also I can add to this question. Is there any color you can provide on China? It's always an important period of the year for you for the Chinese business. How is the weak economic climate impacting your business?

Yes. That's an excellent question, Robert Jan, actually, because that is what we were thinking about as well. It goes without -- it is logical. If you look at our numbers, it is logical that revenue is -- so year-to-date, it's 7%, right, or 6.9% or 6.8%, whether you take it -- whether you take currency effects, yes or no, into account. I would agree that -- yes, we haven't narrowed it because it's still what we expect, but we would definitely expect to be in the north 50% of that 5% to 7% guidance. And -- yes, and there are no reasons why we, at this moment, think that turnover growth would be lower than the 6.8% or something that we've realized year-to-date. Q4, and that's the reason why we haven't given you this guidance, the risk of Q4 is bigger than the risk of the other Qs. Why? Because it's -- because of its seasonal pattern. So because it's higher, the impact of differences in that turnover is also -- has more effect on the full year than any of the other quarters. So we were a bit -- we were on the conservative side in that regard, not saying anything. And I still think that that's the right way to communicate to the markets. It is -- at the same moment, it's true that due to logistical costs [Audio Gap] free markets and no tariffs is better than a market where different geopolitical powers are trying to protect themselves. And that's true for China. That's true for the U.S. as well. And they are the same.

That's very helpful. And from the fact that you haven't put the word China in your press release, I conclude that it is something to take into consideration that it is not a main topic for you at this stage. Is that correct?

Yes. Also because last year, 2023, wasn't a high China year either. So -- and obviously, we're comparing to last year. So that does impact.

Yes. That's a fair comment. Okay. My last one, if I may. From H1, I remember that your net debt position and covenant ratios were a bit weaker than most had expected. In your comments of today, you compare the current situation, so in Q3 versus end 2023. What can you say about the developments during Q3? And yes, related to this, and that's actually the main question. In most recent years and obviously related to seasonality, you managed to improve your end year leverage quite substantially compared with H1. Is this pattern also to be expected for 2024? So you were at 3.4, if I'm not mistaken. Will that be materially lower at the end of this year?

So looking at our balance sheet and the items you're just referring to, Robert Jan, you will probably do not expect me to comment on your exact pinpointing of leverage ratios, but it's fair to say that the pattern in itself for our company is expected to be similar as compared to previous years. So the turning down of the -- both the working capital and as such and net debt during the fourth quarter in our main sales quarter. Secondly, looking at the position as per half year towards the end of the year, taking into account the seasonal pattern, it should also relatively be bearing in mind that during this year as well, we again have invested in buying out minority shareholders and some other investments, which, of course, do need to be taken into account in our financial position, but in itself, the pattern as we have historically shown. So the wind down of the leverage during the fourth quarter is exactly as expected and projected during this year as well. Does this help anyway without getting too much pinpointing in the details? We are, of course, within a trading update, bounded to not get in too much detail on the balance sheet.

No, this clearly helps.

[Operator Instructions] We will take the next question from line Maarten Verbeek from the IDEA!.

It's Maarten Verbeek from the IDEA!. Yes, more or less a follow-up on Robert Jan because that was also a top of my list is a question about your statement about your covenant because you will record a high profitability. You won't have that many cash outs concerning acquisitions. You have the [ JTG ] cash out. Normally, seasonality, working capital is wind down, so it also provides cash from that end. So on one hand, your profitability will go up and you generate cash, so your net debt should go down. That simply implies that why should covenants be a concern for you at year-end or it must be that you expect to have serious problems with your working capital development, but that's not the case.

No. That's a simple and fair question -- fair answer. The fact that we did indicate the fact that we would be within our covenant as for also the end of the year is the simple fact that we also indicated that within Q3, we were within our banking covenants. So as such, we believe it would only be fair to also indicate this for the fourth quarter, especially given our previous indication that we were acting quite closely towards our banking covenant on the interest coverage ratio. And as such, we believe it will be fair as well as informative just to provide this color towards yourselves.

Yes. But I thought you could have been a bit more firm about your year-end statement. There was some cautiousness in there, whilst I was wondering why, but okay, fair. Secondly, you compare your working capital compared to year-end. I don't think that's a good comparison base. So could you share more or less the situation at Q3 this year compared to Q3 last year about working capital ratios, inventory ratios, receivables, et cetera?

Yes, sure. I would say, to give at least some color without getting again -- sorry to repeat, but too much detail on the balance sheet, but to give some color, I would say inventory levels as per Q3 up as compared to the same quarter last year, both in absolute number, volume and number of days. Trade debtors, I would say, more or less in line with turnover increase or even if you look at the turnover increase for Q3 stand-alone, the trade debtors as per the end of the quarter are lower as compared to the turnover increase. So following the turnover, but not at the same pace as such, I would say, a good trade receivable position.

Okay. Great. And then lastly, more or less as a combined conclusion, is it then also fair to assume that this year, you will meet your return on investment working capital of over 25%?

Being a trading update, we did give some color on the expected EBITDA margin, whereas we expect it to end at the lower end of the previously projected range. And we believe it will be fair to leave it at that indication or that outlook, just to make sure that we don't provide other information as previously shared, Maarten, as you will hopefully probably be familiar with.

We will take a follow-up question from the line of Tijs Hollestelle from ING.

Yes. A few small ones. The first one is on the Health business. I think you mentioned that you already see, let's say, the positive impact also of self-help measures. But if I recall correctly, at your Capital Markets Day, the Director giving the presentation also mentioned that most of your clients basically operated larger vessels. So can you give us a bit of a feel for the precise dynamics? And also maybe in addition, is it -- let's say, is it from a business perspective working that the sales guy from the Health department joins the Maritime Food business sales team and that you just leverage on the existing relations? So how is that actually going?

Yes, very good question, fair also. There is not that much synergy, to be honest. I mean these are 2 different purchasing departments within the cruise industry. And as far as I know, all cruise companies keep those purchasing departments separate for efficiency reasons. So that's one. Secondly, since the last 12 months, Health has been targeting the cruise market. And that shows -- that seems to be paying off. And so that's a strong development for that segment. That's the second answer. Yes, the cruise ships are being built. And so the cruise market will be strong since the amount of CapEx, which is invested in those vessels. And we also -- and I don't know them by heart anymore, Tijs, but you know exactly. If you Google a little bit, then you can find out which cruise market is -- which cruise -- new cruise vessel is going to hit the market, when and how many projected -- how many passengers can actually be on those cruises. And yes, those cruise vessels have the tendency to become bigger and bigger. And if you won the right cruise company and if you're able to enlarge your product portfolio within -- geographically and from a product perspective, then it is an interesting growth market.

That sounds to me like core business for B&S indeed. Yes. Okay. That's helpful. Also, one small...

Yes, core business for B&S, but it is relatively stand-alone due to that purchasing department, how they're organized, which is also interesting.

But you are one of the larger suppliers of that market. So you're probably able to help them out in different locations, you can widen your product, you can -- in my view, you can do a lot from there, but -- okay. I also had a question about Tastemakers. I thought that the contribution, the consolidation effect was a bit low. Is there also a big seasonality effect? Can you explain a little bit what happened there?

Yes, correct. So they have -- their main quarter is the fourth quarter. So also they had a tendency to -- of their sales and probably towards the end of the year as they are also specialized in gifting surrounding the festive season.

Yes. So exactly, so the annual turnover, I thought mentioned in the press release of EUR 13 million. So that is still standing, it's not that it's decreasing.

Yes, and -- no, no. But please also bear in mind that the figure you -- we have indicated, so the EUR 1.4 million resembles the Q3 alone as we have included the acquisition as per the second half of the year.

Yes. Okay. Okay. And then one final question. I know it's indeed the trading update, but you, of course, mentioned that the gross margin of the group was decreasing a bit. Is there, let's say, a lot of concentration risk? Is there, let's say, relative weight within the business where gross margin is really weak or really strong? Or how is the picture within the business segments? Or is it just like what we have seen in the first half and also in the prior years, it's always a bit wobbly from one reporting period to the other?

Yes, I would say the last, but I would say it's fair to assume that the comment reflects the segments across the board.

We will take the next follow-up question from line Robert Jan Vos from ABN AMRO.

Sorry to come back again. And my question is a bit of a follow-up on Tijs' last question. You started the year by saying that you expect stable -- or expect stable gross profit margins. At half year, I think you said that the pressure on the gross profit margin was increasing. And now at Q3, it's a bit less clear, but the question would be should we still assume that you can match last year's gross profit margin? Or is that considering also the wording throughout the segments of today's press release? Is that not realistic? And if that is not realistic, your EBITDA profitability guidance, the lower half of 5% to 6%, still seems to suggest a bit of an increase year-over-year. So where is then the discrepancy between gross profit margin and EBITDA margin?

Yes, I believe EBITDA -- I mean, last year, EBITDA wasn't at 5.0%. So when it's at the lower end of between 5.6%, then there is a slight increase -- due to the arithmetical or the -- how you calculate things in the P&L, that doesn't have to be in the same line as gross margins because that's a different line.

No, I agree. Maybe I can be briefer in the question. Do you expect...

Theoretically, you can decrease gross margins and increase EBITDA depending on turnover growth. But that's a theoretical answer and not particular for -- but I didn't give you any guidance on this.

No, I totally agree that, that is absolutely a possibility. But then to make it very brief, do you expect that your gross margin that you reported last year, 15.5%, that you will match that this year? Or will there be actual year-on-year pressure on the gross profit margin?

I would like to make the same statement you made as your last sentence, Robert Jan, that it's fair to say that gross margin will be under pressure, taking into account both the fourth quarter as well as the year as a whole. So looking at last year's 15.5%, this statement would also reflect on that percentage.

It appears no further questions at this time. I'll hand it back over to your host for closing remarks.

Okay. Well, thanks again for following us, and thank you for your interest in B&S. And we are looking forward to talk to you soon again. So thanks, and have a great week and a beautiful Monday.