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

Hi. Thank you all for joining. And can you please take me to Slide 2. My name is Gustaf Ohrn, and I'm the CEO of BHG since November last year. I'm here together with Jesper Flemme, our CFO, to do a short presentation of the Q2 report and do our very best to also answer your questions. Please take me to Slide 3. Today's agenda in short, we will first take you through the financial highlights of the quarter and then a few words about the market, then we will do an update on the actions we are taking to act upon the challenging market environment. Then Jesper will do a financial update, and I will in the end, do my very best to summarize, and we will both be available for the Q&A. Slide 5, please. Short about the financial highlights. Q4 was another tough quarter. Sales came in at SEK 3.3 billion, a decline of 5.1 percentage points in the weak market. We see that as decent considering the market circumstances, and we estimate that we still did better than the overall market and that we continue to take market share. Both of our segments, Do-It-Yourself and Home Furnishing had a similar development with a decline of about 5% in the last quarter. Profitability was weak in the quarter. Jesper will talk more about that. But the main reason is weak demand in combination with too much inventory in the market. This, in combination leading to price pressure in the market. Highlighting the positives in the quarter, we are very pleased that cash flow improved. We're also very pleased that the inventory reduction was successful and that we over-delivered against our set and communicated targets. Also, of course, happy that we strengthened our balance sheet with a directed share issue, and we also start to see results of our cost-saving efforts. We will come back and cover all these points in a minute. Slide 5, please. A slide highlighting the extremely turbulent market conditions of the last 3 years. Here, you can see our organic growth development from 2019. Hitting the pandemic in the first quarter of 2020 with a massive growth in demand, plus 30% and at times above plus 40% of organic growth. And as you all know, the supply chain disruption following and then straight from the pandemic to the outbreak of the war in the first quarter of 2022, rent increases, inflation, energy crisis and as a consequence, softening demand. As a consequence of this, and as you all know, we are now in a contracting market after the massive changes to the market conditions of last year. It is challenging times, and we expect a challenging 2023, especially in the first half of the year. The beginning of 2023 has been tough with the consumers now really feeling the effects of inflation, rent levels. And now in January also being hit by the electricity bills from December. Demand is especially weak in capital-intensive product categories such as windows, doors, bath and floors. Further, we should mention that comparable numbers for January 2022 before the war in Ukraine started is challenging. Please take me to Slide 6. Given the challenging market and the outlook for 2023, we have taken several actions to respond to the situation. We are convinced that our efforts are gaining traction, and we are starting to see the results. In Q3, we communicated a revised strategy and the structural changes that we are making. We are focusing on simplifying BHG. We want to remain a decentralized structure but also realize the potential synergies. To enable the synergy realization, we have implemented a new structure with 3 business units that we communicated in Q3. These are based on similar target groups and similar business models because this is what we believe, whether synergy realization are primarily to be made. Going forward and starting now in Q1, we will also report on these 3 business units instead of the 2 that we report on today. We have, during this last quarter, also initiated the actions to consolidate both on company level. For example, we have consolidated Nordic Nest and Svenssons into Nordic Nest Group, and we also consolidated Nordiska Fonster together with [Haifa Group]. But we are also doing consolidations on functional level, for example, consolidating warehouses into each other. We have also initiated actions to close businesses that are not performing. And of course, we are doing our best to transfer that turnover to other entities as we have done in the quarter with the closure of Stone factory, transferring their turnover into Bygghemma Sweden and [indiscernible]. Our structural actions has generated some items affecting comparability in the quarter. We have also set an ambitious cost-saving plan with a target of SEK 150 million to SEK 200 million, primarily related to organizational and warehousing costs, and we can see the positive effects. For example, on inventory handling, where we see that the cost has come down in the quarter. Reducing our inventory is improved -- is key to improve cash flow, but also cost as inventory is a cost driver. I'm pleased to say that we have reduced our inventory by a further SEK 238 million in the fourth quarter, thereby exceeding the communicated target of SEK 100 million to SEK 200 million. The reduction in Q4 is on top of the SEK 98 million we reduced in the third quarter. With that said, our inventory is still too high, and we will continue to work in 2023 with the ambition to significantly reduce our inventory. We have also increased our flexibility with a temporary relief on our covenants with the covenants from our banks that we announced in the third quarter. And in December, we also strengthened our balance sheet with the SEK 800 million from the directed share issue. With our actions taken around our plan for the future, we are ready to take on what looks to be a challenging coming year. But as always, there will be opportunities. Slide 7, please. Let's have a look at our potential sources of growth in a tough market, international expansion. Many of our businesses are already expanding into new markets with a focus primarily on the Nordics and Northern Europe, and it's surprising how this can be done with very limited cost and cash flow in some categories and niches. In some of our businesses, we see this as a strong growth vehicle in these challenging times. We also see opportunities to grow through external marketplaces, making our products available in new markets, through international marketplaces, and we have examples where this is done very successfully within the group. There's also opportunities to drive more sales between our different businesses. This can be done without driving cost, and we are exploring what we call our own internal marketplace. And in a tough market, there will always be opportunities. We are confident that there'll be white spots available to grow in when competitors go out of business or leave categories. And finally, currently, our focus on M&A for obvious reasons is limited, but the market recoups there will be opportunities for those who are financially strong. Thank you. And with that, I'll hand it over to Jesper.

Thank you, Gustaf, and go to Slide 9, please. As Gustaf said, the market conditions continued to be difficult in the fourth quarter. Our sales remained relatively strong, but profitability was weak. Net sales decreased 5.1%, reaching SEK 3.3 billion. Organic growth was minus 3.7% and pro forma organic growth was minus 5.5%. Our 2 segments had a similar development in the quarter. Among our many businesses, I would like to highlight 2 of them in the Do-It-Yourself segment, we had a strong finish to the year, driven by its offering of energy-saving products in Home Furnishing, our Eastern European furniture business, Furniture1 had a strong development. Adjusted EBIT amounted to SEK 31 million, corresponding to an EBIT margin of 0.9%. EBIT margin was negatively impacted by price pressure in the market due to weak demand. Turning now to Page 10 and the EBIT bridge. The product margin in the quarter was 1.9 percentage points lower than in Q4 last year that was negatively impacted by price pressure in the market as a result of weak demand. Fulfillment cost was overall negative, driven by elevated fuel prices for last mile delivery, but this was partly offset by lower inventory handling costs. This is encouraging, an encouraging sign as we are starting to see results from our cost-saving initiatives. Marketing cost was a positive in the quarter. We had lower marketing costs and cost per click reduced further, a trend that started in the second quarter. The increase in organizational costs from the same period last year is mainly due to increases in personnel-related costs. As Gustaf mentioned, we are executing on substantial cost reduction initiatives to adjust our fixed cost base to the lower demand. Finally, the increase in depreciation and amortization in relation to sales was primarily driven by weak sales and costs related to lease agreements. All in all, our EBIT margin amounted to a disappointing 0.9% in the fourth quarter. Let's turn to cash flow, Slide 11, please. Cash flow was positive in the quarter. Our cash flow from operating activities improved significantly compared to last year and amounted to SEK 67 million, negatively impacted by changes in working capital as a result of supplier payments during the period. Reducing inventory continues to be key to improving our cash flow. We're happy to say that our inventory was reduced by a further SEK 238 million during the fourth quarter, exceeding the announced target of SEK 100 million to SEK 200 million. The work to reduce inventory continues. And in 2023, we target to reduce the inventory significantly. The right-hand graph showing the development in liquidity walks us through the starting period position of SEK 274 million, deducting the cash flow from operations and the impact of investing activities, a majority of which is M&A related; and finally, adding the financing activities, which are primarily related to the new share issues completed in the second and fourth quarter, but also include amortization of leasing liabilities, bringing us to the period end SEK 478 million of liquidity at hand. Slide 12, please. The group's net debt amounted to SEK 1.5 billion at the end of the quarter and net debt in relation to LTM adjusted EBITDA ended at 3.14x. As you know, we have previously renegotiated and been granted a temporary relief on covenants by our banks. This relief will remain in force up to and including Q4 next year. In addition, acquisition-related liabilities have decreased and amounted to SEK 1.25 billion at the end of the quarter compared to SEK 1.4 billion at the end of the third quarter. Cash flow-wise, we assessed that roughly SEK 40 million will be paid out next year and another SEK 50 million in 2024. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 1.3 billion. With that, I will hand it back over to you, Gustaf to summarize and conclude.

Thank you, Jesper. So trying to summarize this. It is a challenging market, and we expect it to remain challenging in 2023, especially in the first half of the year. We continue to prioritize cash flow and profitability. We have revised our strategy to better facilitate synergies. We are making structural changes, including consolidations and closings to continue to simplify the group structure. We have taken actions to reduce our cost levels and our inventory levels. We have strengthened the balance sheet and the further inventory reduction will free up more liquidity. And also to remember, the structural trends that have built BHG to what it is, remains intact. I'm talking about primarily the migration from physical to the digital channel and the continued interest in our home environments. Thank you very much for listening and looking forward to your questions.

[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABGSC.

So my first question pertains to earn-out from valuations. There's quite a significant negative effect in net financials, which leads me to an increase in earn-outs. However, in the balance sheet, they had added up to an amount or reduction of -- or a sequential reduction of some SEK 100 million. How do we understand this, please?

Benjamin. So the amount on our balance sheet is a combination of earn-outs and put option liabilities, and the earn-outs are revalued through the P&L and the put option liabilities are revalued in equity. So that's why we have a total decrease, but we have a negative effect in the P&L.

All right. It's the put option liabilities then. Could you also perhaps comment a bit on the overall conversion rate for BHG? It's up significantly sequentially even after like an all-time high in Q3 '22, please?

I would say it's primarily a combination effect. We actually see very different effects within different entities. Some are improving their conversion while traffic is down and others are doing the opposite. So it's hard to do a structural setting that that is the main issue. But in quite a few entities, we see the traffic being the challenge and conversion as a consequence is up.

And sort of following on that as well. Could you perhaps talk a bit about the combination of flat year-on-year growth in Home Furnishings in markets that I mean, estimates, I see are like low single digit decline. Higher conversion and a lower gross margin as well in the Home Furnishing segment. Could you talk a bit about how that relates to your target of protecting the margin in these suffer times? And sort of to elaborate. When I see higher conversion and lower gross margins, I think about campaigning, could you just give any comment whatsoever on that segment, please?

I think we should keep in mind that campaigning is one thing, but even more that or it puts the pressure on the price right now is price matching. In many of our businesses, we do price matching, and we know that price matching has to be done in order to be successful. And as the market price -- sort of price pressure increases, our price matching becomes more expensive. So I would say that the pressure on gross margin comes more from price matching than from campaigning. With that said, there's always an element of campaigning as well. Did that answer you question?

Well, partly, yes, absolutely. The higher conversion, should we or could we understand that as far as being too aggressive on price margin maybe?

There's always a risk for that, and we're trying to adjust it. We're putting a lot of effort into it, and we're doing it, working with our central team as well and not to do that. But I would say that in some entities, it's definitely a risk. And I think other entities have managed it better. On a general level, I don't think that's where we see the main problem.

Right. Perfect. Those were all my questions at the moment.

[Operator Instructions]

In the meantime, perhaps we can do a question that came in writing through the chat. It's Gustav at SEB asking what is a reasonable assumption in current market environment for volumes to start to grow year-on-year on comps? When was the last quarter of positive organic volume growth in the quarter? Also, could you please elaborate on the delta in earn-outs between Q3 versus Q4?

So if I start with the earn-outs, it's one of our units having an earn-out based on 2022 performance having a very strong Q4, resulting in a higher earn-out than we expected at the end of Q3.

And just breaking in there. We have 20 entities in the group. Some over-deliver as always, others under deliver. And this quarter, we had one company who substantially overdelivered. It happened to be one of the ones where we had an earn-out. But on a general level, I think we should be very pleased that our companies are doing well, even if in this case, costed us some money. And if I try to answer the first part of the question, then Gustav, it's very hard to try to draw conclusions on the forward-looking market, and I'm not going to ever going to try. I think what we've said is that we believe 2023 to be tough, and we believe that the first half is going to be tougher. But saying more than that, for me, very, very difficult to conclude. I don't know if you, Jesper can answer on the last quarter of positive organic volumes.

Not straight out. So I will get back to that one to you, Gustav.

Good. Next -- was that all answering all your questions, Gustav?

Let's hope so.

Good.

So we have another couple of questions from -- inviting from the chat. So one of them says, hi, looking at the working capital, again, negatively impacted but now by payables. When do you see that you can release cash flow from working capital on a regular basis? And do you feel that you can release cash flow from inventory without price cuts?

So firstly, the seasonal pattern is that the really strong cash flow is during the outdoor season, meaning Q2 and Q3, and we expect a really strong cash flow during those quarters next year. And the second one was...

Can we release cash flow from inventory without price cuts.

I can take that one. And I think on a general level, we need to be -- continue to be aggressive on price as long as the market is aggressive on price. With that said, we have an inventory write-down, as you know, we did in Q3, which should give us the needed flexibility to handle this in a good way. And as I said before, there is -- our stock levels, our inventory levels are still too high. And we still believe there's significant room to reduce those inventory levels and free up more liquidity. I hope that answers your question.

Then there's another one in writing on the chat is from Daniel Felt. Why did you use the proceeds of the directed share issue to repay debt as opposed to holding the cash on the balance sheet to protect liquidity for the challenging year ahead.

The answer is that we repaid debt to reduce financing costs. And since we have a revolving credit facility, we can easily utilize those if needed.

Those were all the questions from the chat at the moment.

Any further questions?

Just checking if there are any further questions from the phone line, please.

There are no more questions at this time.

Okay. Thank you very much. Thank you very much for joining and listening. And thank you very much. Bye.