BHG Group AB (publ) (BHG) Earnings Call Transcript & Summary

A warm welcome, and thank you for joining us for this webcast despite the short notice. We are delighted to have announced our very latest acquisition a little while ago. And look forward to sharing the rationale behind welcoming HYMA BHG with you. Before I start the presentation, 2 notes. Firstly, please read the disclaimer about forward-looking statements on the final slide of this deck. Secondly, for those of you who ask questions, which we will address at the end of the presentation. [Operator Instructions] Now without further ado, let us turn to Slide 2. And go through the transaction highlights. Subject to regulatory approval, BHG is acquiring 92% of HYMA from funds managed by Verdane and from HYMA management. Management will retain a minority stake in the business and so participate in the joint value creation unlocked by the combination. We have followed HYMA for a good while, and we are delighted to now be joining forces. HYMA is a fast-growing online category expert, serving customers within the garden tools and machinery, forestry, outdoor life categories. HYMA had net sales of SEK 744 million in 2020 and with the accelerated momentum that the business is currently enjoying, we expect net sales and EBITDA for the full year to come in at around SEK 1.1 billion and SEK 80 million, respectively. The fit with BHG is strong from a category and customer point of view as well as from a company cultures and synergy opportunities in areas such as sourcing, cross-selling, and the exchanging of best practices abound. The initial consideration, which corresponds to SEK 1.1 billion for 100% of the shares will be funded by a mix of cash on hand and the directed share issue to HYMA's owners. Verdane and top HYMA management will thus become shareholders in BHG. In addition to the initial consideration, the transaction includes an earn out, which is on 2022 performance and can amount to a maximum SEK 500 million. The acquisition is earnings accretive and the valuation, which corresponds to a 2021 EV/EBITDA multiple of 13.8x, excluding the earn-out, entails a significant discount to the valuation that the BHG shares traded at. HYMA will form part of our DIY segment and HYMA's current CEO, Anders Carlsson, who is a second-generation family member, will continue to run the business together with his management team. We expect to be able to do the acquisition in early Q3 following the customary regulatory process. Let us now turn the spotlight on the HYMA business. Turning to Slide 3. HYMA is characterized by the following traits: as an online expert already operating at considerable scale, HYMA runs on a data-driven, tech-enabled and results-oriented company culture. As you can see on the right-hand side of this slide, HYMA has a highly satisfied customer base. HYMA, just like BHG has focused on complementing its portfolio of well-known external brands with its own proprietary brands. Entrepreneurship and deep category expertise and passion permeate throughout the HYMA organization. And last but not least, HYMA again, just like BHG has a history and a culture where growth has gone hand-in-hand with cost consciousness and profitability. Slide 4, please. Over the years, HYMA has carved out leading market positions in core BHG categories, such as the tools, machinery, forestry, outdoors life and hunting and leisure ones. HYMA has a broad portfolio of external brands to which the business has gradually added a growing range of own brands. The latter make up around 20% of net sales to date and cover a wide range of products from tools and machinery to outdoor accessories. HYMA operates 3 main webshops, namely Hylte, Maskinklippet and Duab. These accounts for over 95% of the group's net sales. In addition, HYMA acquired Dogger, a small specialist outlet. As recently as March of this year. Through the acquisition, BHG does further strengthens its presence in important DIY categories with excellent opportunities to drive continued growth through a 2-way assortment exchange in Sweden as well as in the rest of the Nordic region. Moving to Slide 5. In addition to a strong fit from a category and product portfolio perspective, HYMA and BHG's DIY segment target and serve the same customer group. Our customers are hard-working. They're compassionate, resourceful, neighborly, family focused and to a large extent, value and outdoors and sustainable lifestyle. HYMA's strong position within its core categories and high customer satisfaction both lend themselves well to a targeted customer communication, including through social media, where the group has a devoted following on both Instagram and Facebook. Much of its communication revolves around its brand ambassadors. The emphasis throughout all customer targeting is on authentic, genuine and credible content. Slide 6, please, for the first of 2 financial slides. HYMA has made significant tech and operational investments in the past couple of years, including consolidating all its businesses onto 1 tech stack and moving into a new central warehouse as recently as a few months ago. Despite these investments, growth and profitability have developed strongly, and the groundwork has now been laid for an acceleration along this trajectory. HYMA has grown well over the past many years, including organic growth of close to 30% in 2020. Growth into 2021 has further accelerated and amounted to 46% for the first 4 months of the year. Again, we expect full year 2021 net sales to amount to roughly SEK 1.1 billion and adjusted EBIT to come in at around SEK 80 million. On to Slide 7. In our domain, besides ourselves, there are few Nordic online businesses of scale out there. However, HYMA is certainly one of these. By combining HYMA with BHG, further scale advantages will be achieved. On a pro forma basis, including Nordic Nest, but not HYMA, BHG sales amounted to SEK 9.9 billion in 2020, with the DIY segment accounting for some 57% of the total, [ making ] HYMA's SEK 744 million of net sales leads to pro forma 2020 picture for the combined business of SEK 10.7 billion, with the enlarged DIY segment accounting for just over 60% of the token. 2020 pro forma adjusted EBIT, including both Nordic Nest and HYMA, would have amounted to SEK 826 million. Operationally, this additional size and heft will translate into tangible benefits. Moving to Slide 8. And these tangible benefits will include improved scale in terms of sourcing and purchasing power. Further, as in a majority of BHG acquisitions and perhaps spend especially relevantly in this case, assortment exchange and cross-selling between HYMA's strong web shops and dedicated customers and BHG's major platforms with our vast audiences, present a clear opportunity for a sustained growth boost. Additional growth opportunities will arise from HYMA's nascent expansion into the neighboring Nordic countries with a recent launch into Finland and with Denmark next in line. BHG has a very strong position in these markets, which will help fuel HYMA's geographic expansion. And finally, BHG has a lot to offer HYMA in terms of key digital aspects such as some of the art traffic generation approaches. And the 2 way street usually exchanging best practices in areas such as big data and customer centricity is wide open. Slide 9. As I believe is made evident in the preceding slides, at least for those who have followed BHG over the years. HYMA shares many of the traits that also characterize us. And the HYMA management team has taken a similar path to that of BHG at key junctures. This has resulted in BHG and HYMA, sharing various operating models, having a strong cultural fit and each being well positioned to boost the others growth platform. Decentralized entrepreneurship aligned incentives and a shared road map, all provide the foundation for our next joint phase of profitable growth. Summarizing, before we open it up for the Q&A, Slide 10, please. Together, we will further strengthen several core as well as adjacent BHG categories. HYMA has a strong and complementary portfolio of own and proprietary brands, and we serve the same customer groups and together further strengthen our relevance with these. We are joined by our history of profitable growth, and HYMA will add further scale to the BHG platform. Same areas include sourcing as well as cross selling, geographic expansion and exchanging best practices. HYMA has a very strong management who are highly incentivized along the road ahead, and both Verdane and HYMA management will also become BHT shareholders. And finally, the transaction is earnings accretive. This concludes the presentation. And so let us turn to any questions we may have received in writing, and I welcome Jesper onto our little stage here. And we will turn our attention to the written questions, trying to take them in the order that we have received them.

So firstly, a question from Fredrik Ivarsson at ABG Sundal Cole and Fredrik's question, actually, is twofold. One aspect of Fredrik's question is to do with the valuation. And the other aspect is to do with the categories that we are now about to include into BHG and the degree of fit between our focus and HYMA's focus? So let's take those in that order. Firstly, when it comes to the multiple, we've already referenced the 14.8x EBIT to EBITDA based on our expected 2021 EBITDA in the business, excluding the earn-out. Now looking a couple of years ahead, 2 things, of course, will happen. One is that we're expecting EBITDA to grow. And even excluding synergies, which again are plentiful, that is 1 core aspect to answering the question. And the other core aspect, which should also be remembered is that we will have this business generating cash flow for 1.5 years before we reach -- or actually 2 years before we reach the point in time in which the earn-out is [ paying ]. So if we take both those into account, the round numbers, sub 14x EBITDA is actually what we're looking at for this transaction, including the earnout as well. Now the second question is whether the acquisition takes us into significantly 2 categories. Now the majority of the HYMA categories are actually a very, very strong fit with what we see as our core DIY categories. There are also, as we've mentioned in the presentation already, some areas that are adjacent to the core DIY categories. And we can lump them together perhaps under the leisure label. And looking at that leisure category, this is a category that we've been actively approaching our customers with for a number of years already. So on our major DIY platform sites. The leisure category is actually 1 of 6 or 7 or 8 main categories in our category tree. So in that -- also in that regard, I should say, the addition of HYMA's product assortment fits extremely well into our stated strategy. And I'll also just point to the fact that if we compare ourselves with some of the really big players on an international scale, such as Home Depot, for instance, you can see that the categories, that they serve their customers with are actually inclusive of such adjacencies as the leisure category. So I hope, Fredrik, that answers your question. If not, please add further questions to the trail of questions that we have here. Now the next question comes from Niklas Ekman at Carnegie. And Niklas' question is how much of HYMA's sales is generated online versus stores? And HYMA, just like BHG is an online first business. And just like BHG, we have our showrooms, also has 1 store actually per brand. So that's essentially 3 stores for the 3 main brands. And the rough split there is 80 plus and 20 minus online versus stores. So vast majority is generated online and the stores, of course, also play a role in terms of supporting the brand in a more general sense, just like the BHG showrooms do. Next, again, from Niklas is a question on synergies. And we have chosen, actually, as we have in all of our past 35 acquisitions, not to communicate a quantification of those. But we can point to the areas that will definitely generate synergies. We've mentioned our combined strength from a purchasing point of view, not least when it comes to the services that we [ merger ] like logistics, et cetera. We've mentioned the 2 way assortment exchange, which is a typical BHG synergy for most acquisitions and very much so in this case. So that will be a great opportunity to drive growth of the HYMA web destinations as well as the major BHG platforms. Next in line, we have the geographic expansion opportunity for the HYMA business. The HYMA business is, by and large, all based on Swedish consumers today. And as I mentioned, HYMA just recently took a step into Finland. And that's still a nascent initiative for them. We have an extremely strong position within DIY in Finland. And we also have strong positions in Denmark, which is the next market for HYMA to address. As well as, of course, Norway, which is somewhat down the line, but will also be addressed here. So geographic expansion is the third synergy I'd point to. And the final one, which can sound a bit fluffy, but it is very real, is in exchanging best practices. And here, I mentioned from BHG to HYMA, our best-in-class digital traffic generation approaches. And I think also, we can take a leaf for 2 from HYMA's [ customer obsession ] and the degree of customer loyalty that the HYMA team has created. So those are the main synergy areas. And let's see, another question from Niklas. Niklas is asking basically what earnings contribution is required for the full earn-out to be met. And we won't give you a number, Niklas. But what I can say is that we always [ structure ] acquisitions such that it is a tough target to meet. But at the same time, we have full confidence in the team, and we also have full confidence in the trajectory that the business is enjoying. And again, we have the synergy upsides that we just talked about. So in our opinion, with these elements, the full earn-out is achievable. But of course, that would be based on an EBITDA that has grown from the levels that we talked about now. We will not disclose a number there. Let's see, we have some of our, hopefully, incoming colleagues following the competition authority approval just cheering us on here. So thanks for that, Philippe at [indiscernible] put and a question or I think a couple of questions from Gustav Hagéus at SEB. Where the first question is to do with the fact that HYMA has been run as a family business and has a track record of being extremely customer-centric. How do we ensure that we keep this soul on the secret sauce? And this is a great question. And it is absolutely critical that we succeeded in this regard. But I would say that it is not so different from the majority of acquisitions we do. As you know, at [ GHB ], we have a very clear central strategy pulse. But within the frames that we define for our platforms, we give the management of those platforms a lot of room to maneuver. And we, again, have one of the, actually, key assets that made us so convinced that this combination was attractive is the HYMA management team with Anders Carlsson at the helm of it. So we will definitely ensure that Anders and team continue to feel that this is their business. This is our business. It's their business. That's how all of us in BHG feel and I have no doubt, actually, that we will manage to keep that HYMA ethos in place. And as I already mentioned, I think you rightly point out the extreme customer centricity of the company and the position it's established there. And I, again, say that, that's an inspiration to many of our other businesses, which we will definitely leverage also. And the final part of that first question, Gustav asks here is how do we ensure that we have alignment post the 2022 earn-out. And here, the way we've structured the transaction, we have -- or management, including Anders, CEO, they have retained a minority stake. And that minority stake will be longer than the 2022 earn-out. So that's the answer to that question. Secondly, Gustav is asking about our market share in a specific -- for a specific set of products, and Gustav, that's one we will have to come back to on. And finally, Gustav's question is about private label -- HYMA's private label outside of Sweden and Finland. And again, in Finland, that is really new for HYMA. And we will most certainly help accelerate the trajectory in Finland. But I think as your question is alluding to, it doesn't stop with Sweden and Finland. We definitely have clear and present opportunities in all of the Nordics. [ We're ] quite convinced that once we've taken a stab at those and establish the base in all of the Nordics, we do have clear and present opportunities also in mainland Europe for a significant part of that very interesting and attractive range of proprietary brands. And we have 1 final question unless, we will have any more coming in here from Mark [indiscernible], sorry if I mispronounced your surname there, Mark. But the question is basically how the business is performing right now. Very specifically, Mark was asking about May '21 versus May '20 and we won't disclose a percentage there. But as we mentioned, year-to-date growth into April, plus 46%, that trajectory is very much continuing. So no hard and fast number there, Mark, but the business is continuing to do really well into May. So we will wait for another minute or so to see if there will be any final questions, or perhaps half a minute, not to have this late call drag out for too long. Okay. So thanks a lot again for attending. And thanks, especially to those of you who also asked questions, and we look forward to interacting with you in the days to come. Thank you, and good evening.