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

Hello, and welcome to the BHG webcast with Teleconference. [Operator Instructions] Today, I'm pleased to present Gustaf Ohrn, acting President and CEO; and Jesper Flemme, CFO. Please go ahead with your meeting.

Thank you very much. My name is Gustaf Ohrn. I'm the acting CEO, and I'm also a member of the Board of BHG. I'm happy to share with you the short presentation. And together with Jesper Flemme, CEO, (sic) [ CFO ], who is also here together with me do our absolute best to answer your questions. Next slide. As you all know, the market is challenging, weakening demand and excess stock, not only BHG, but also in the market in general. As you all know very well, this is the result of geopolitical turbulence, inflation, et cetera, but also something we call corona rebalancing, very short put, what was strong during corona, both from a category perspective and channel perspective now has it tougher. And I also think it's important to keep in mind that even as the market remains challenging, which we believe it will be for the coming 12 to 18 months, the main structural trends of online migration and increased focus on your home remains unchanged and intact. And we also believe that the corona rebalancing effect will fade off over time. BHG has grown rapidly from some SEK 200 million in 2012 through organic growth and also some 37 acquisitions to this current size of approximately SEK 30 billion. Focus has been on entrepreneurial accountability to centralized structure and above all, growth. We aim to remain decentralized, but we also follow and understand that in today's market, we need to shift our focus more to profitability and more to cash flow and to reduce complexity and also realize those synergies that we know are there in order to reduce our cost levels. Next slide. In short, what we are doing is the following: We are putting in place a few structural changes and some organization changes to facilitate the change. We're executing the necessary cost reductions. We're taking measure to reduce our stock levels. We have already renegotiated our covenants with our banks, and we are now also done a stock write-down. I'll come back and address these actions in the following presentation. And I can assure you that we are doing these actions to prepare BHG for the uncertainty that we believe is to come in the coming 12 to 18 months, and we do this to future-proof the company. Next slide. A few words about the result of the third quarter. Sales came in what we believe, fairly strong, considering the market with a small growth of 1.5% in total numbers compared to last year. With this, we are confident that we have developed stronger than the market and that we have taken market share in this quarter. We should also note that our order intake is actually plus SEK 100 million stronger than sales, and this pertains primarily to the very strong segment of heat pumps, which has long installation times after placed orders. Although with a strong top line coming in higher than maybe anticipated, earnings came in lower than expected. This was driven by a weaker product margin, which we call gross product won and was a result primarily of price pressure in the market. Cash flow was better than last year, but still negative. This is primarily a seasonal effect of strong incoming and strong sales in the second quarter, which is then paid for in the third quarter. Next slide. The structural and organizational changes, a few words about that. The Board decided already in August that all, Adam Schatz have done a great job as CEO, which he truly has done. We believe it would be more beneficial for the group to have a new CEO with another skill set given the operational challenges that comes from a tougher market. And we're now currently looking for and recruiting for a CEO with a more operational background and a more operational profile. We have also decided and also communicated that we are dividing our business into 3 business units. We have Home Improvement under the lead of our Deputy CEO, Mikael Hagman. We have Value Home under the lead of [indiscernible] Christian Eriksson, and we have Premium Living under the lead of Bank Bergstrom. All three being experienced CEOs and entrepreneurs, and they will also join the management group on group level. Thereby, substantially strengthening the operational competence of the group. We have divided this business in this way because it reflects the buying behavior of our customers, but also because it reflects the difference in the business models between the companies in the group. Next slide. If we look at these 3 segments, Home Improvement is driven by a broad range of products and brands, strong on price, primarily driven through price matching and based on the drop ship model for deliveries with Bygghemma as our lead brand. Value Home serving the price-conscious consumer in the Nordics and Eastern Europe through primarily a private label-driven model, with Trademax as its lead brand. And Premium Living selling a unique range of Scandinavian design increasingly into the international markets, primarily through a wholesale model with Nordic Nest and Svenssons as our lead brands. And why we do this? And this is the important part because we believe that the main synergies lays within these business units with similar business models rather than on group. And we believe that by doing this, dividing this business in this way, this is the best way to reduce complexity and thereby realize these synergies that we know are there and thereby reduce cost. A short summary of the other actions. Next slide, sorry. We're also initiating cost reductions in the region of somewhere between SEK 150 million to SEK 200 million. The main reduction comes on organizational cost and warehouse costs. We have excess stock, as does the market in general. We have managed to reduce our stock levels with some SEK 100 million in the third quarter, and we have also initiated actions with the ambition to reduce it with an additional SEK 100 million to SEK 200 million in the fourth quarter, but we believe there's room for further reductions, and we're planning for in doing more reductions in 2023. We have already agreed on a temporary relief on our covenants, valid until the end of 2023. And finally, we have decided to do a stock write-down on the value of SEK 375 million in order to better reflect the value of the products and thereby also allowing us some further maneuverability. And my final remark would be, with the risk of repeating myself, we do all this to prepare for what we believe will be a challenging period ahead of me. We believe the market will be tough. Exactly how tough it will be, it's hard to judge. And we also do this to future-proof BHG and to make sure that we come out of this tougher period stronger than we went into it. Thank you. And with that, me and Jesper is happy to receive your questions and do our utmost to reply on them. Thank you.

[Operator Instructions] The first question comes from Carl Deijenberg with Carnegie.

So a couple of questions from my side. First of all, on the exceptions from the covenants. You're talking about in the English press release, you're mentioning certain covenants while in the Swedish press release, you're talking about the covenants. Could you maybe first elaborate a bit what does this mean? And does this imply that you are completely accepted from the covenants during this period? Or how should we interpret that?

We have not been completely relieved of covenants. We have been given a headroom that we believe is the headroom needed, given that we've also taken actions on both costs and inventory. So the covenants are -- two of them are the same as before, the leverage ratio and the interest coverage ratio, and we have also added a minimum liquidity covenant. .

Okay. And [indiscernible] on the loans that you are now changing the conditions on? Or is it the same as before?

So if we exceed the leverage accepted before that will result in a higher margin, yes.

Okay. And then another topic on the current trading. You're talking about here that you expect the sort of operational environment to become worse before improving. And then I'm just curious, is this facing anything on the current trading that you've seen here so far in October? Or is it just your view on the macro outlook?

That is just the view on the micro outlook. As we all know, it's very hard to judge where it will go, but we just estimate that it's going to be tough looking forward.

Okay. Fair enough. And then my final question is on this -- the earnout payments that you have now at 1.4, you're recording this. And maybe could you sort of elaborate or remind us how these write-downs are working? Is it that you can only write down on this earn-outs when you actually know that the payout will be lower? Or are these new numbers based on your sort of internal projections on the sales and earnings outlook that you're seeing now?

So the total amount of SEK 1.4 billion is always based on our best guess of actual payout. And in turn, the total amount is based on the underlying performance of the acquired businesses, which means the amount can go up and it can go down depending on how these businesses develop in the years to come.

And maybe I also should say as you might know that you can split in 2, you have the earnouts and they are revalued in the P&L. And then you have the put-option liabilities revalued in equity.

And then my final on that topic, if you could maybe remind us out of this SEK 1.4 billion, could you possibly provide any sort of time line on the payout structure of this? .

Sure. So roughly SEK 350 million next year. Another SEK 75 million in 2024 and then the risk of demand is spread 2025 until 2027.

We have one more question in the queue. [Operator Instructions] The next question is from ABG.

Yes, my name is Benjamin Wahlstedt. I understand that it's a difficult name to grasp. I think you are right in stating that sales were higher than expected. Maybe if you could give us a bit more flavor on why that is the case.

We don't give any forward-looking estimates, so it's hard to say that it's better than estimated. But we have some categories doing well, and I think it's important to remember that in current times, even if demand is weakening, there's also categories doing extremely well. One, as we mentioned, is heat pumps. Another one is generators, et cetera. And I think it's just important that there is segments doing really well and there are segments that is tougher. And one other things that we saw in the summer was that some of the outdoor categories, garden furniture, et cetera, was a category where we had a weaker sales than anticipated. And that is one of the main reasons why we need to do the stock write-down. Did that answer your question? Or do you want more?

Well, I always wanted more flavor. Is it possible to say sort of what portion of sales stem from, I guess, you could call them electricity adjacent or energy price adjacent categories?

I can't give you that number. And those product categories are still a smaller part of our assortments.

I understand. Is it possible to put a -- or first to sort of elaborate a bit on the cost savings program? What will you do?

It's important to keep in mind that we are not a monolith. We are sort of a business buildup of 20 separate businesses with their own CEOs running their business, but we see there is room for cost savings, and we've sort of run the group program. What is done exactly on entity level to realize these savings. I don't not know entirely, and I cannot disclose. But basically, we see that the main savings we can do comes from organizational changes and from warehouse savings. But of course, we're looking through all parts of potential savings.

Sure. I would imagine some employees are getting a worrisome call. Is it possible to put a number on this or say something about the employee cut down or the potential employee cut down at least?

Sorry, I can't help you with that one. We don't have that number yet, and we're still working on it, and it's not something that we actually plan to communicate. That is something that's handled by each entity and will be communicated if needed, through that entity. And also, of course, we're following all the regulations and informing everybody that we need to do.

Sure. Is it possible to put a time line on this change?

So we will start immediately. And from a cost saving perspective, I think that you will see roughly 40% fall into the first half of next year and the other 60% into the second half of next year. And just to be clear, that the amount stated SEK 150 million to SEK 200 million is a gross effect in 2023. Then we will see cost relating to premises and energy moving in the other direction so that the net effect might be some SEK 50 million lower.

Sure. And also just for our understanding, will this incur any NRIs in terms of severance pay or anything like that?

I can't -- right now, I would say it will not be any material amount. That's my best guess right now.

The next question comes from Daniel Schmidt at Danske Bank.

Just a couple of questions from me. Could you tell us what the net debt-to-EBITDA ratio was by the end of Q3 to start with?

3.4.

3.4. Okay. And would you give any indication of what additional headwind you have received?

No, I will just repeat that we feel that is the headroom needed to move on with the initiatives to reduce inventory and costs.

Yes. All right. And just coming back to the initiatives, which I've seen quite substantial and quite aggressive ambitions, which is, of course, a good and well needed, I guess, in the situation. But do you feel in any way that that's going to jeopardize the customer experience? Or how would you pay that?

No. We've been very clear on that, that we have done things that we believe can be done without hurting top line and without jeopardizing customer experience. We're also looking into the second stage if we need to do more structural things, if needed. But that has been the sort of -- the precondition for this cost reduction is to do it without any severe effect on top line or customer experience.

So you're not sort of proving customer support or stuff like that?

No.

Okay. Okay. And then a final question. You did mention, of course, the gross and the net effect and energy and premises and so on. What about the U.S. dollar in terms of sourcing? How do you view that going forward? .

I mean, as you know, if the U.S. dollar stays at this level, it can hurt individual quarters. In the long run, we still believe that we will be able to transfer those FX effects on to end consumers, but it might affect individual quarters. And will...

I totally agree without thinking given the sort of the sharp appreciation that we've seen lately over the summer into the autumn when it comes to the U.S. dollar. Is that making it a bit more difficult to tag along with the neutralizing price increases?

It's always difficult. And you should also remember that since we -- the product source from Asia paid in U.S. dollars is mainly flowing through our inventories, the effect, there's a lag on the effect in the P&L. So it's not that easy -- but for some of our business, absolutely, you're right. That is a challenge.

The next question is from Kepler Cheuvreux, We couldn't register the name.

This is Magnus Råman, Kepler Cheuvreux. I have a few follow-ups on questions already asked. In terms of -- first on, on staff reduction, could you give -- I appreciate that it's still in the sort of planning phase here, but could you give a lead in terms of the staffing that the businesses have -- the up-staffing that they have performed during the pandemic to meet increasing volumes. The decrease in staffing that you now plan, is that sort of on par, would you say, with what has been increased during the pandemic? Or is it more or less?

To be honest, that's quite a difficult question to answer straight out of my head. I mean you're absolutely right that we had to scale up during the pandemic because we were under sales pressure in some areas, and we have done so. There is also, we believe, an underlying growth in the market. So to give you the exact number, if we have reduced what we increase at that stage, it will be hard to say.

Sure. But the reason to ask is if we would sort of think of this staffing reduction as an adjustment for a sort of post-pandemic environment more than that is sort of a crisis measurement to protect profitability.

I think we should see it as both actually. I mean some of the things we need to scale up during corona or the pandemic was needed to sort out -- sort of need right then. It was also very limited time to realize synergies because we had to cope with the increasing sales pressure. Now there's an opportunity to look at those synergies and also with the structure train that we do, as I said, the main reason for the structural changes is to facilitate those. We have not been able to focus on that during the pandemic, but we don't do [indiscernible].

Excellent. And then on your gearing, you provided the 3.4x number for Q2. Could you just give the number on net debt would also be -- that would be good. And then I guess this, of course, that 3.4x excludes leases and earn-outs. What was the total gearing number? And also perhaps if you could reiterate that the covenants are based on gearing without leases and earn-outs, please?

Firstly, yes. So the covenant is excluding leasing liabilities and liabilities related to acquisitions. Net debt at the end of Q3 is 2.1%, but I don't have the number in front of me, if you add up also leasing liabilities and acquisition-related liabilities.

Sure. But we got the earn-outs in the release and the leases did not change materially sequentially.

No. No.

Great. Great. So -- and then let's see here. I think also in terms of the inventory questions here. You stated you cleared inventory of SEK 100 million, and you expect more in Q4. Could you provide your view of the market overall? Is your -- because you also mentioned that the main effect on your profitability or the decline in the margin is sort of a gross margin pressure from you responding to the overall market pricing. So do you see -- when you plan to become more aggressive, so to speak, of working out -- working down inventory in this quarter compared to Q3. Is that your view that the market is set it in the same direction?

I think in general, you are right. With weakening demand in very open comes to price pressure, and I think it's doing rightfully so also. I think there was -- in terms of an overstock situation, I would say that the situation were tougher for the summer season than it is looking forward because I think that was when we had almost a perfect storm in this category last year. As -- if you recall, sales was extremely strong. All the supply chains broke down. The lead times became extremely long. BHG and other actors placed big orders with long lead times that arrived sort of for the summer season primarily this year and then sort of sales weakening after the war in Ukraine. So because of that, there was a huge stock buildup. I think there's a general stock buildup in the market, but I think it pertains more to the summer season and those products then looking forward. With that said, I think the price pressure led to a very high degree. It would be dependent on how the market develops.

Sure. But in terms of that, just a final one on the inventory. You mentioned here, of course, one main reason for you to make the inventory write-down is seasonal products, i.e., summer auto furnitures and so on that you mentioned that was not in high demand over the summer months. Now I guess, you will not be looking to try to clear this over the winter because I guess there's hardly any market for it. And if we look to the next sort of Q2, and of course, it's a bit out in time, that's an important earnings quarter. And then you have sourced these items at much lower dollar rates than what we see now. And you have an excess inventory to save for that season, and you have also written down the value of that inventory. Is it possible that there will be a reverse effect, so to speak, in the next season for the sell-out of these items?

No, we don't believe so, but we are absolutely right in the sense that a very big part of the stock reduction will come in Q2 and Q3 next year because as you said, there's a high degree of summer products that it's very, very difficult to come with a very huge cost to try to liquidate today. But we -- as I said, we managed to reduce it down with SEK 100 million in the third quarter. We believe there's a room for an additional SEK 100 million to SEK 200 million in the fourth quarter. We will continue the job into 2023. But I think we should say that the main effects will come in the second and third quarter.

Thank you. There are no more questions at this time. So I hand the word back to the speakers for any concluding remarks.

We actually have one written question and that's related to if there's any need of goodwill impairment. And I will just say there's no need for goodwill impairment.

Good. And as a final remark, I just want to say thank you very much for listening. I can just assure you that we are doing everything we can, working extremely hard. We're not only focusing on cost and cash flow as it might look and we're talking about this. We're focusing on levers we can. We're doing our best to improve on our top line. And as always, also in crisis, there is opportunities and there will be even more opportunities. And when you talk about opportunities, you also talk about M&A, but it's not only M&A opportunities. There will be other opportunities arising as well. So doing what we can to improve on our top line, doing what we can to improve on our margins and, of course, focusing hard on both cost and cash flow. And also, as I sort of pointed out, doing our very, very best to get structurally right and to realize a lot of the synergies that we are confident that lays in the group. And last but not least, we're doing this to future-proof the company and make sure that we come out of this stronger than we went in. Thank you very much.

Thank you. That concludes today's call. You may now disconnect the lines.