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

Thank you for joining us on our conference call today to review BHG's second quarter 2021 results. This call is being recorded, and a replay of the conference will be available later today on our Investor Relations website. Together with me are Adam Schatz, President and CEO; and Jesper Flemme, CFO. Both will be available for Q&A later in today's call. With that said, I'll now turn the call over to Adam.

Thank you, operator, and good morning, everyone. Moving to Slide 2, please. After our transformative performance in 2020 and into the first quarter of 2021, we are pleased to report a strong Q2. At the midway point of this year, we're demonstrating that our strategy of fueling organic growth with acquisitions continues to deliver. We have now officially surged past the SEK 10 billion sales level on an LTM basis and we continue to capitalize on a plethora of growth opportunities. Our performance in the quarter was strong, not least given the daunting comps from the second quarter of 2020 and recent acquisitions have continued to grow very well indeed. The past 7 months have seen our 2 largest acquisitions to date, those of Nordic Nest and HYMA, which we finalized as recently as yesterday. The outlook for further acquisitions remains bright. Slide 3, please. Today, as always, we will start by reviewing the results highlights. We'll then move on to the business update. I'll then hand it over to Jesper, who will cover the financial update before I summarize and we launch into the Q&A session. Slide 4, please. And on to the highlights then. Slide 5, please. Total growth in the quarter amounted to 31.8%, taking net sales to SEK 3.55 billion. Organic growth amounted to 14.1% and pro forma organic growth, including the acquisitions of the past 12 months to 16.8%. This performance took place against the backdrop of society gradually emerging from COVID-induced lockdowns as well as after facing the toughest comps from last year. Adjusted EBIT came in at SEK 278 million, corresponding to an adjusted EBIT margin of 7.8%. And cash flow from operating activities amounted to SEK 336 million. The second quarter was characterized by profitable cash generating organic growth, including a continued favorable mix shift towards a higher share of proprietary brands in DIY and a strong performance by our recently acquired operations. The quarter also saw the rollout of our fourth long-term incentive program, which is a key tool for tying outstanding leaders to the group and for underpinning the BHG culture of ownership and skin in the game. The 65 leaders who were given the opportunity to participate all made considerable personal investments into the program. Summing up, as a result of our size and of our data-driven approach, we were able to further strengthen our market position during a quarter marked by an easing of restrictions for the first time since the pandemic began and a return to an everyday life less dominated by the pandemic. At the same time, the effects of the pandemic continue to impact the global supply chains in the form of longer lead times and bottlenecks for parts of our range. Slide 6, please. As you well know, our growth journey to date has been fueled by a mix of organic initiatives and M&A. An approach we are convinced can raise unique advantages for us and which we have every intention of carrying into the future. When it comes to the organic component, the quarter came in roughly in line with our guidance over a business cycle despite meeting the toughest comps from last year. Again, with a 14.8% organic growth this past quarter and 16.8% including Nordic Nest and the other 4 acquisitions over the past 12 months on a pro forma basis, it is clear that we have continued to strengthen our market position. Slide 7, please. And moving to the business update, Slide 8, please. Our strategy remains focused on our 4 cornerstones. Firstly, the continued expansion of our leading product range, which exceeds the medium scheme mark; secondly, scale and a high share of owned brands in our sales mix, with the quarter seeing strong overall growth and particularly so for our proprietary brands, and we clearly continued building scale advantages. Thirdly, creating the most appealing shopping experience and leading in the digital realm, we continued growing our digital footprint in the quarter despite a tougher traffic generation market. And we saw close to 110 million visits to our destinations. And offering the market's best professional guidance, service and support, including in the quarter continuing to extend the reach of our installation network within DIY as well as our own last-mile delivery capabilities on the home furnishing side. This is our ecosystem with a product offering at its base and the customer always at the center. And finally, an integral part of our execution approach includes leveraging our M&A capabilities to accelerate both growth and strategy execution. Slide 9, please. Despite anticipating more challenging overall market conditions in the coming 12 months than in the exceptional past 12 months, we see ample growth opportunities. Our 4 cornerstones, which we just reviewed, continued to form the bedrock of our growth initiatives. In addition, geographic expansion in the Nordics, primarily centered on spreading the footprint of our proprietary brands, but increasingly also tapping into additional European geographies. We estimate that the total European home improvement opportunity is some 15 to 20x the size of the Nordic [ realm ]. Further, we continue to build our ecosystem. Opportunities here include expanding our services offering further and making better use of customer data to tailor the offering and to enhance the customer lifetime value. As the quarter demonstrates, we are on the path of increasing the share of net sales, which comes from our proprietary brands on the DIY side. And finally, M&A. As we have demonstrated, we are accelerating the case at which we had critical mass under the BHG umbrella. Our prospects for carrying out further acquisitions of both the bolt-on and platform types are strong. Thanks to our beefed up transactions and integration organization, our financial position and our deal flow. Turning to Slide 10 and digging somewhat deeper into the M&A aspects of our approach. With 35 acquisitions since our inception, 5 of which we have completed in the past 7 months, we are a serial acquirer, and our acquisition focus remains going forward. As before, we see ample opportunities in our home improvement domain. It is large enough to sustain our ambitions also in the long run, and so we will not stray away from it. As before, acquisitions will help us grow faster, both by broadening and deepening our product range and by allowing us to jump-start new geographies. As before, acquisitions will fall into 1 or 2 classes, somewhat smaller but more likely more frequent category catalysts that are bolted on to our platforms and adding new platforms to the business. Our acquisition approach including our post-merger integration playbook is centered on ensuring a clear rationale and a clear plan for extracting synergies. The category catalysts are bolted on to one of our main platforms, which, over time, allows a full set of upsides to be gained. The synergy creation around the platform acquisitions primarily aims to maximize product assortment exchange, digital traffic generation, leveraging business insights obtained from the data flowing through our growing footprint and leveraging economies of scale in terms of purchasing and other areas. Importantly, many of the platforms that are added in turn, allow us to pursue an expanded range of category catalyst opportunities, which fit well into these new platforms. A great example of this was our recent acquisition of Svenssons, which fits hand in glove into the Nordic Nest platform and which we would not have done had we not first secured the Nordic Nest platform. The pipeline of relevant acquisition candidates, both in our Nordic home markets and in large nearby geographies, is strong. During the quarter, we also strengthened the BHG team in both the transaction and integration side and we significantly increased our credit lines from SEK 2.4 billion to SEK 3.3 billion, a large portion of which is currently unutilized. The conditions to further accelerate our acquisition rates are thus favorable. Turning to a brief update on HYMA, our second largest acquisition to date, which we had the great pleasure of finalizing as recently as yesterday. Turning to Slide 11. So HYMA. We have followed HYMA for a good while, and we are now delighted that we are one. We explained the rationale for us joining forces with HYMA quite extensively in conjunction with communicating the deal on 9th of June. So I'll just briefly reiterate the key points here. HYMA is a fast-growing online category expert, serving customers within the garden, tools and machinery, forestry, outdoor life, hunting and leisure categories. HYMA had net sales of SEK 744 million in 2020. And with the accelerated momentum that the business is enjoying, we expect net sales to exceed SEK 1 billion this year. The fit with BHG is strong from a category and customer point of view as well as from a company culture point of view, and synergy opportunities in areas such as geographic expansion, sourcing, cross-selling and exchanging best practices abound. HYMA will be consolidated from August 1 and from part of our DIY segment. Anders Carlsson, who is a second-generation family member, will continue to run the business together with his management team. As of yesterday, our integration plan is now officially in full swing and in collaboration with Anders and team gives me great confidence that our joint future is bright. Moving to Slide 12, please. Our business model combines a multi-brand approach with acquisitions, both of which helped maximize our digital footprint and result in a broad and attractive customer base. Although traffic generation conditions were more challenging in the quarter, than in the preceding 12 months, our customer base continued to grow, and our sound customer metrics remained intact. As you can see to the left on this slide, the increase in active customers, defined as customers who have made at least one purchase in the past 12 months continues to underpin our goals. Over the past 5 quarters, our active customer base has grown by 52% and has now surpassed the 3.5 million mark. The number of new customers in the past quarter grew by more than 20% on a pro forma basis on the back of strong organic growth as well as excellent growth in recently acquired businesses. Despite the strong growth in new customers, we maintained the share of repeat orders at around 40% of total. Our customers case on average 1.3 orders per annum, as our product assortment is dominated by consumer durables. And our return on advertising spend continues to be excellent with significant first order profitability as evidenced by a marketing ROI well over 3x. Our investments into gaining further insights from customer-related data across the group continue. These will help drive customer lifetime value and so unlock further profitable cash-generating growth. This is a key focus area for group management. Slide 13, please. A quick overview of BHG as we stand today. On the left-hand side, our CAGR since 2014 exceeds 40%. In this period, EBITDA has grown by more than 100% per annum. Our EBIT margin on an LTM basis stands at 7.9% and is generated by our over 100 customer-facing web properties. And now moving over to the right-hand side, these web shops have been visited over 360 million times in the past 12 months, generating some 4 million orders from customers in 24 countries. And finally, our leading product portfolio keeps expanding. Slide 14, please, and handing it over to Jesper, who will walk us through the financial outlook.

Thank you, Adam. We are pleased with our performance in the quarter, which again should be viewed against the backdrop of particularly challenging comps. As Adam mentioned, net sales increased 31.8% to reach SEK 3,551 million. Pro forma organic growth reached 16.8% and organic growth reached 14.1%. Adjusted EBIT amounted to SEK 278 million, corresponding to an EBIT margin of 7.8%. As in the first quarter, the high adjusted EBIT margin was mainly the result of a strong quarter due to sales segment, driven by a favorable price and product mix, including the continuously growing private label share of sales as well as a good operational leverage due to high growth, while the home furnishing segment faced a weaker overall market. I will get back to the performance by segment in a little while. Turning to the sales drivers, Slide 16. Our market-leading traffic generation and web teams successfully navigated a traffic generation market that proved to be more challenging than in the past 4 quarters. The number of visits to the group's destinations grew by 20% to 109 million during the quarter and generated 1.3 million orders, while the conversion rate increased. Also, the overall AOV level, excluding the mix effect from Nordic Nest increased compared with the year earlier period. Slide 17, please. The gross margin improved by 1.6 percentage points to reach 26.6%, and the product margin amounted to 39%. Overall, the strong gross margin was driven by one, a growing share of sales from our own brands; two, our ability to offset cost increases in the supply chain by raising prices; three, a continued focus on maintaining the price points for bulky products; and four, additional cost and process efficiencies in purchasing and logistics, partly as a result of the high volume. Let us now turn to our Do-It-Yourself segment, Slide 18, please. The Do-It-Yourself segment reported another very strong quarter, characterized by favorable growth despite particularly challenging comps, high gross margin and a record-breaking EBIT margin. Net sales grew by 20.1% to reach SEK 2,184 million of which organic growth amounted to 14.9%. The segment's Swedish operations performed particularly well including the big HYMA platform and the specialist units focusing on our own brands. Profitability in the Do-It-Yourself segment was once again favorably impacted by high share of sales from our own brands. The gross margin improved by 2.8 percentage points to reach 25.5%, and adjusted EBIT amounted to SEK 230 million, corresponding to a record high EBIT margin of 10.5%. Slide 19, please. The Home Furnishing segment continues to build critical mass by combining organic initiatives and acquisitions. Net sales in the Home Furnishing segment grew by 55.6% in the quarter reaching SEK 1,379 million, of which organic growth amounted to 12.3%. And pro forma organic growth, including Nordic Nest, amounted to 22.6%. All of the segment units have continued to grow and the newly acquired businesses performed very well. The gross margin for the quarter was 28.4%. Adjusted EBIT amounted to SEK 80 million corresponding to an EBIT margin of 5.8%. The lower margin compared with the year earlier period is mainly attributable to 3 factors: a mix effect for Nordic Nest, which has slightly lower gross margins than the segment's other operation. effects from the ongoing fine-tuning of the Danish operations new warehouse and a certain delay in price adjustments in order to offset cost increases in the production and supply chain. Finally, the strongest sector during the period had a positive impact on EBIT. Let's turn to cash flow, Slide 20, please. Cash flow from operating activities amounted to SEK 336 million, mainly driven by the group's EBITDA. The change in working capital in the quarter was favorable. But compared to the year earlier period, the following can be noted. One, last year saw an unusually favorable working capital position as a result of the exceptional growth in the quarter; two, we continued to grow the share of sales from our own brands in the Beauty sales segment, which all else equal, requires a higher inventory position; three, a deliberate adjustment of the range to reduce seasonal dependencies; and four, the fact that the group has chosen to actively counter the supply side disruptions and extended lead time to maintain strong growth. The right-hand graph showing the development in liquidity walks us through the starting period position of SEK 299 million, adding the cash flow from operations, deducting the impact of investing activities, a majority of which is M&A related. And finally, the financing activities, which are primarily related to the share issues completed in Q1 and the refinancing completed in the period, but also include amortization of leasing liabilities, bringing us to the period end SEK 991 million of liquidity at hand. The HYMA transaction that was completed yesterday, reduced our liquidity by SEK 582 million. Slide 21, please. In the second quarter, we have completed a refinancing, whereby the group's existing credit facilities with SEB were replaced with new facilities provided jointly by SEB and Danske Bank. The new facilities have a total credit line of SEK 3.3 billion and a term of 3 years with an option to extend the agreement with 2 years. At the end of the quarter, we had unutilized credit facilities of SEK 1.8 billion. The group's net debt amounted to SEK 509 million at the end of the quarter, and net debt in relation to LTM adjusted EBITDA ended at 0.5x, a significant outperformance of the medium-term financial target range. We continue to see excellent M&A opportunities, and our strong financial position means that we can act decisively as the right opportunities materialize. Handing back over to you, Adam, to summarize and conclude.

Thank you, Jesper. Turning to Slide 23 to sum up. We've now passed the midpoint of the year, after a 2020 and first quarter of 2021 in which online markets saw explosive growth, it is difficult to predict how the overall market will develop in the coming period. However, despite the strong comps of the past 12 months we now face, we are confident of our ability to continue on our path of profitable cash-generating growth also in the coming 12 months and beyond. Summarizing the quarter. We surged past the SEK 10 billion in recorded LTM sales in the quarter and are now on a pro forma level of close to SEK 12 billion, excluding the HYMA acquisition. With HYMA, we add another business. Our approach to combining organic initiatives with M&A continues to deliver and resulted in us further extending our Nordic online leads. Our 2 largest acquisitions to date, Nordic Nest and HYMA were both completed in the past 7 months as were 4 category catalyst acquisitions. The quarter also saw a significantly extending our credit facilities, leaving us excellently placed to continue on an accelerated M&A journey. We launched the fourth iteration of our long-term incentive plan, co-funded by the 65 participating BHG leaders and securing long-term leadership engagement. Our customer offering, the BHG Ecosystem, was further expanded and investments were made in strengthening our IT capability around key areas such as customer insights and product assortment exchange. And finally, with some SEK 13 billion in performance sales, including HYMA, we have already covered a significant distance towards reaching our next milestone i.e., becoming a SEK 20 billion net sales business. Moving to Slide 24. And this concludes our presentation. We will now open up the call for questions. Over to you, operator.

[Operator Instructions] Our first question is from Niklas Ekman of Carnegie.

A couple of questions, if I may. Firstly, if you can talk a little bit about the trends seen here during the quarter. You have 14% organic growth. You said the trend was stronger at the start and then it gradually slowed. Is there any way you can quantify that or at least say if there were any tangible differences in the beginning versus the end of the quarter?

Niklas, thank you. There weren't any very material differences. But I think the description in the quarterly report does present a fair picture. And looking into the first 20 days of the current quarter, we are pleased with how it has begun. So that's the picture we saw in Q2, and that's the picture we've seen thus far into Q3.

Very good. And on the margin side here, we're seeing a sharp increase in the gross margin, but the EBIT margin is down a lot. Can you explain a little bit the drivers here? This is mainly in home furnishing. And if you can explain the drivers here, that would be very helpful.

Absolutely. I'll just start by saying that, it's a fantastic thing we feel to have such a broad base to stand on. We have 2 segments. We have customers in 24 geographies, and we had a stellar performance in DIY. Of course, it was less stellar in Home Furnishing. So if we turn to the Home Furnishing segment. As Jesper briefly touched on, we did have continued in trimming of the Danish warehouse facility. That was complicated by the pandemic itself. We had an outbreak of COVID-19 among the stats there, which forced us to actually close that warehouse done for a period of time. It's also been complicated in Denmark and beyond by the disruptions to the supply chains, which has meant that we have had a tougher time in optimizing the fulfillment operations. So that's just a new environment for us, and I do want to stress that it's actually the same environment for all of our competitors. So that is a significant contributor to the decrease on the Home Furnishing side. I do also want to say that with societies opening up, we do face a new environment now in both segments, and we do face the stiffest comps from last year as well. Important to keep in mind. But the difference between the DIY environment and the Home Furnishing environment is that it was slightly tougher on the home furnishing side than the market as a whole. Now pleased that Jesper also referenced when it comes to traffic generation costs again. So this is not particularly pertaining to BHG. It really is a market-wide phenomenon. And also just finalize by saying that looking at the group as a whole, we did have the cost for the long-term incentive program affecting results in the quarter. The corresponding costs for last year's program were, one, smaller by some SEK 7 million; and two, they actually fell into the third quarter of 2020, whereas we are charging the most recent one to the second quarter of this year to the tune of SEK 18.8 million. So that's also important to keep in mind.

Very, very clear. And on this issue of rising input costs, how long does it take for you to mitigate it? And are you now kind of going into Q3? Are you at a stage where you have compensated for prices?

Yes. So as we briefly mentioned in the report, our ability and speed at which we can compensate varies a bit from category to category. And if we take the segment view, there is generally a somewhat longer lag on the Home Furnishing side, including because we have a higher degree of competition from catalog-based competitors on the Home Furnishing side. So that is part of the explanation. And as to actions, yes, absolutely, we have taken those actions. We've addressed pricing and campaigns. And how this plays out through Q3 will, of course, depends on what happens in the market in 2 regards. One is competitors' moves; two is, how consumer spend develops.

That's very clear. And finally, I'm just curious on your M&A agenda here as well. So you mentioned your 5 acquisitions in H1 and the 2 very sizable acquisitions included there. You talk about a continued high activity here. But is it safe to assume a tangible slowdown here in H2, specifically, and more a consolidation phase? Or are you still very active with M&A?

We are still very active with M&A. We have really a super firm position as an acquirer in the Nordic markets, but we have also significantly increased our visibility in the European landscape. And we have an excellent deal flow of both types of acquisitions, category catalysts and potential platforms, both in the Nordics and in large adjacent geographies. And we have every intention of keeping a high pace when it comes to M&A. It is, of course, quite difficult to be precise in terms of time line. But our intention is to at least keep that same pace going forward.

Our next question is from Gustav Hagéus of SEB.

If we can also start with the sort of the margins with a very strong gross margin development and then offset by OpEx and precious tough comps [ in Italy ]. How do you see the gross margin progression going forward? You've had some FX support now, I think, for 3 quarters to the gross margin. But then you also have the element of high share proprietary brands and so forth. When you look at your budget and so forth, do you see gross margin developing favorably also into H2 and possibly beyond that? Or what's your thinking?

First, commenting on the FX, it is a quite hypothetical exercise to nail down the effect on the gross margin and even more so on the EBIT level because, of course, as currencies move, while all of our competitors have more or less the same currency exposures that arguably also impacts pricing in the market, so -- and consumer pricing. Having said that, I think it's still clear that we did have some headwinds on the top line and some tailwinds on the bottom line that we've at least ballparked in the report. And how that will develop into H2, of course, no one knows. When it comes to margins more generally, we are extraordinarily proud about the achievement on the DIY side. And we have every intention of continuing to focus on the full portfolio, but increasing the share of sales from private label is a theme that carries into the future as well. We have previously said that we've gone from more or less 0% to 20% in a pretty short span of time. We're actually now above 25%. There are also some seasonal variations as to the share that comes from our private label assortment going forward. But we are very, very safely, significantly above 20%. And again, the direction is upwards from here. And on the Home Furnishing side, we are displeased with the margin development. We've taken actions to address it and how that translates into H2, again, as to my reply to Niklas, that will depend on the combination of our mitigating actions and how the market develops.

Okay. And with regards to pricing, I note that your -- that Amazon is seemingly sort of doing a bit of gray import from Germany being quite competitive in pricing in categories that you are generally quite strong in those HYMA. So do you think that there's a potential for you now that you're starting to get a little bit bigger grip in Central Europe to do a little bit of that sort of optimizing where you sell versus buy products from your suppliers? Obviously, relative question, but if you can give some color on this.

Yes, definitely. We are quite actively pursuing assortment exchange between the group companies. But it's fair to say that we are far from optimizing the potential. So this is very much a focus for group management to continue on this path. And we've also added some really interesting businesses to the mix with Hafa Bathroom Group being one example with Svenssons under Home Furnishing side being another example, but also very much so as you say, on the HYMA acquisition opportunity. And so yes, definitely.

And then I'm thinking about the M&A strategy. With the [ ITO ], I got the sense at least that there was quite a lot of focus on integrating companies. You were talking at the time of combining warehouses to optimize costs and you're integrating Furniturebox at the time. And now I feel that perhaps maybe it's just communication, but I feel that it's more of acquiring the companies and letting them pursue sort of on a relatively free basis with their own management is. Can you talk a little bit about sort of where you see integration potential going forward? Are you sort of sliding in a strategy from more integrating companies to more acquiring them? And then if you can give an update on sort of your warehouse situation in general, how many warehouses are you operating now in Sweden in total?

Sure. No, we haven't changed the approach, but we do approach synergy opportunities somewhat differently. When it comes to the category catalyst ones, I think Furniturebox is a good example there. They are integrated into one of the platforms. And that allows us to unlock, over time, a further set of synergies. And when it comes to the platforms themselves, those are put in place to act as a planetary systems that -- and these are the stars in those planetary systems, into which, eventually, the category catalysts are integrated. And we differentiate the pace at which we address the back end between the various businesses in order to make sure that we don't lose the pace when it comes to the sales energies. And the sales synergies, without exception, we always address from Day 1. They include very much digital traffic generation capabilities and product assortment exchange. Svenssons is now rapidly being integrated into the Nordic Nest platform in all regards. Just as Furniturebox was integrated onto the Trademax Chilli platform, the one we call Home Furnishing Nordic. So we haven't changed the approach, but we do differentiate between the category catalysts and the platforms themselves.

And how many platforms are you running then? Or maybe you said that one?

With HYMA, now it's 5.

Five. Okay. All right. And with all the -- with the new credit facility and your targets and so forth, what do you recognize as your M&A firepower here for the second half?

So we have, as I said before, close to SEK 1 billion in cash, and we also have our new [ flex ] facilities of SEK 1.8 billion, before finalizing the HYMA acquisition that reduced liquidity with SEK 582 million.

Yes. And lastly, you feel -- I feel like you talk a lot about, obviously, Nordics and also Central Europe. But are you -- wouldn't it make sense to build a stronger position also in the Baltics and Eastern Europe, given that you have your -- I believe you have a lot of production there for your Home Furnishing business and you have the Furniture1 platform, which seems to be doing quite well. Or is that how the markets consolidate?

No. No. We are absolutely addressing it, but we're doing it on the Home Furnishing side, and we'll continue on that path. We have a tremendous development in Eastern Europe on the back of the 2018 acquisition of Furniture1, and that growth continues. We've grown organically in Eastern Europe with Furniture1. We are, from time also looking at acquisition opportunities in Eastern Europe. But we see a bigger deal flow currently from, call it, Central Western Europe, in terms of actually both DIY and home furnishing than we do in Eastern Europe today. But Europe is a very integral part of our growth approach and has contributed very nicely to growth over the past 2, 3 years since Furniture1 became part of BHG.

There are no further questions at this time. So I'll hand back over to our speakers.

Great. Thank you, everyone, for calling in. And we look forward to the many individual calls that we will be having today and in the days to come. Wishing everyone a great summer. Bye.