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

Hi, and welcome. My name is Gustaf Ohrn, CEO of BHG. I'm here together with Jesper Flemme, CFO, to present our Q3 report. We will also be available after the presentation to do our best to answer your questions. Slide 2, please. I'm happy to present another strong quarter from BHG, double-digit growth for the first time in a long time and a step-up in profitability improvement. Really pleased to summarize that we have delivered on what we set out to do. We have taken market share in a strengthening market, maintained our cost levels and managed to leverage our fixed cost into profitability improvement, continued to improve customer satisfaction. Slide 3, please. For the fourth consecutive quarter, we continue to show organic growth this quarter with a significant step-up in growth levels, delivering a 13% organic growth and a double-digit growth in all 3 business units. We are confident that we, with this has taken market share during the quarter. We also report significantly improved profitability in the quarter, this quarter reporting SEK 92 million in earnings, which corresponds to a 76% improvement versus previous year. The improvement in earnings comes primarily from top-line growth in combination with direct selling costs and SG&A well in control, creating leverage for top line and improving profitability and demonstrating the scalability of our model. We report a strong positive cash flow of SEK 52 million following the normal seasonal pattern. Slide 4, please. A few words about the market development and our forward-looking outlook. This slide is from the central bank of Sweden and illustrating Sweden, our largest market and the market we unchanged see leading the way in market recovery and also serving as an example of the development we expect to see in most other markets with some time lag. Disposable income has improved during the first 3 quarters of this year, driven primarily by interest levels coming down in combination with tax subsidies such as the increased ROT-avdrag. Also, development in number of housing transactions has developed positively. Disposable income and housing transactions are 2 of the strongest drivers of demand in our categories, and our assessment is that demand has continued to improve compared to last year and that the market continued to strengthen also in the third quarter. Our forward-looking outlook remains unchanged. We foresee continued strengthening market driven primarily by disposable income improvements as seen here on the graph. In addition to positive total market development, we assess that the long-term trend of migration from the physical channel to the digital channel continues for the foreseeable future in our categories. Slide 5, please. Looking back, we all remember the crazy pandemic growth and then the challenging times following the pandemic and the consumer downturn. However, if we focus on the last 2 years, we have seen profit improvement for 8 consecutive quarters and growth in the last 4 quarters, this quarter with a significant increase in both growth rate and profitability. We have left what we call the restructuring phase and now execute our strategy with full focus on the profitable growth phase. Slide 6, please. Strong growth in the third quarter. Let me try to further clarify where this growth comes from. From a geo perspective, the main growth comes from Sweden being our largest market and continues to lead the way in market recovery with disposable income on the rise and showing solid growth. We also see an unchanged strong sales development in the important markets of Norway and Germany, driven by successful geographic expansion in many of our entities. The most challenging of our key markets is still Finland, which trails our other main markets in recovery. Considering this, we are proud to report a 7% organic growth in Finland for the quarter. From a category perspective, the main growth comes from strong sales development in the bathroom category, most likely the tax subsidy in the Swedish market of the increased ROT-avdrag has an unquantified positive effect. With that said, we also see an even higher growth rate in the Norwegian market in the bathroom category, indicating that there is also other positive contributing factors. We also see a strong positive sales momentum in categories of indoor furnishing, driven partly by the revamped entry-level assortment in HFM and also in categories at home decoration and garden. Slide 7, please. In an effort to clarify our forward-looking growth strategy, we have defined 5 layers of growth. First, 2 external factors. The total market is back to growth after a long period of negative development, driven, as mentioned, by disposable income, housing transactions, et cetera. And two, online penetration remains low in our categories. The online market has grown faster than the physical retail market, and we assess that it will continue to do so for a foreseeable future. On top of the external market-driven factors, we have 3 layers of international growth factors in our strategy. The first and most important layer is what we call operational excellence. The continuous work our platforms are doing every day with their operational focus, the relentless and constant work of being a retailer, working assortment and product, pricing, customer acquisition and securing customer retention through customer focus, et cetera. In this, we also include the operational growth drivers of category, geography and customer segment expansion. The second layer, which we call strategic initiatives [ where we from group ] is very active, driving initiatives that we see as key to secure competitive advantage for our businesses. This area includes areas such as unique assortment, additional revenue streams, securing competitive cost structure and data and AI initiatives, and I will come back to this in a minute. The last layer of growth is M&A. This has been pretty much on hold the last few years, even if we did 2 smaller acquisitions last year. But we are a company partly built from M&A, and it is unchanged and important growth tool for us. The key words of our current M&A strategy are bolt-on acquisitions to support growth in our platforms, this rather than platform acquisitions and a disciplined proactive approach, having a clear view of what we are looking to acquire, filling the white spots that we have identified and staying financially as well as strategically and structurally disciplined to our defined strategy. Before I hand it over to Jesper, let me spend 1 minute doubling down on the second layer of strategic initiatives. This is a key part of our strategy and where we put a lot of our current focus. Let's start with our main view of the competitive landscape. We believe that price transparency will continue to drive price and gross margin pressure. As a consequence, much of our strategic and tactical focus revolves around this and how to best address it. One, unique assortment, historically labeled private label, but comes in many shapes and forms, where the key advantage that we wish to secure is avoiding only competing on price from selling the exact same product as other vendors. Unique assortment often also having the advantage of taking out the middleman and thereby securing a higher gross margin. Two, additional revenue streams. There are several potential additional revenue streams to explore, but our current main focus is within what is often referred to as retail media. In short, securing media revenues on the traffic we have to our sites. This being a key enabler to a strong customer offer and thereby a growth driver. Three, cost structure as a strategic advantage. If you, as we do, believe price competition is a key factor, then having a superior cost structure is what enables the best offer to the consumer and will long term be the strongest competitive advantage you can have. We drive this with a focus on automation, efficiency and cost governance. And finally, what we call data and tech. We are a tech-driven business. There are so many ways to use AI in our business. We have a number of initiatives already implemented or in the process of being implemented in all 3 business units, driving both growth, efficiency and customer experience. And with that, I will leave the word to Jesper.

Thank you, Gustaf. And Slide 8, please. In Q3, we delivered double-digit organic growth for the first time since Q2 2021, driven by strong performance across all 3 segments. Net sales increased 10%, reaching SEK 2.6 billion and organic growth was 13.4%. The strongest acceleration in growth compared to the previous quarter was seen in the Home Improvement and Premium Living segments. In both segments, we're seeing increased demand in our largest market, Sweden, while Premium Living also recorded a sharp growth uptick in Germany. Turning now to Page 9 and profitability. Profitability improved for the eighth consecutive quarter. This quarter, profit improved by SEK 40 million, or 76% year-over-year, driven by improvements in all 3 segments. Adjusted EBIT amounted to SEK 92 million in the quarter, corresponding to an EBIT margin of 3.6%. Most notably, all 3 segments improved earnings by over 50% and margins by more than 1.5 percentage points. Moving on to Slide 10 and the EBIT bridge. Our EBIT margin improved by 1.3 percentage points in the quarter. Simply put, the improvement in profitability is driven by strong growth combined with solid cost control, providing scale on fixed costs as well as by efficiency gains in direct selling costs. The negative impact on product margin comes from the Home Improvement segment and is driven by: one, the divestment of IP-Agency; and two, clearance of seasonal products towards the end of the outer season to maintain healthy inventory levels. All in all, our EBIT margin amounted to 3.6% in the quarter. Slide 11 and cash flow, please. Strong EBITDA, offset by a seasonal negative working capital effect resulted in a cash flow from operating activities of SEK 52 million. The development in working capital was mainly driven by supplier payments following the seasonally high sales in Q2. The right-hand graph showing the development in liquidity walks us through the starting period position of SEK 473 million, adding the cash flow from operations and the impact of investing activities and finally, deducting the financing activities, which are primarily related to amortization of leasing liabilities that also include interest payments, bringing us to the period end SEK 262 million of liquidity at hand. Slide 12, please. The group's net debt amounted to SEK 1.2 billion at the end of quarter, and net debt in relation to LTM adjusted EBITDA ended at 3.4x. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 800 million. Acquisition-related liabilities amounted to SEK 204 million at the end of the quarter. Cash flow-wise, we have no more payments this year and around SEK 100 million in 2026 and 2027, respectively. With that, I will hand back over to you, Gustaf to summarize and conclude.

Thanks very much, Jesper. Slide 13, please. Now let me try to summarize this. Growth rate accelerating, double-digit growth in all 3 business units, increasing profitability with a 76% improvement versus last year. This being the eighth consecutive quarter with earnings improvements. We have seen market recovery for the first 3 quarters of this year, and our forward-looking outlook remains unchanged. We expect the continued market recovery driven primarily by improvement in disposable income. And finally, we have done what we set out to do. We have delivered on what we set out to do. Our focus remains unchanged to deliver profitable growth, targeting the 7% EBIT margin we have in our financial goals. Thank you very much for listening, and now happy to do our very best to answer your questions.

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

So 3 questions, if I may. First of all, you referred to an increased market share. I was wondering if you could give us an idea of what market you're referring to and what that market grew, please?

Benjamin, Gustaf here. I'll do my best. We are trying to follow all the data points we have. And I think we're getting better and better data points trying to follow market share, both on geography level and on category level. And most of those data points that we study, we're confident that we have taken market share in this quarter.

I was wondering as well if you could specify when demand picked up? Did any one month stand out in terms of growth?

I wouldn't really say that. I think if we look back at the beginning -- since the beginning of the year, as you recall, we had a very strong first quarter. We got sort of the warmer weather quite early, and then we had a tougher beginning of spring and the second half of the second quarter was definitely an improvement. And I think through the third quarter, it has been fairly flat with no larger variations. So we're very happy that it has continued to improve and continue to stay on a high level even if there were some seasonal changes primarily in the second quarter.

Perfect. And finally, I was wondering if you could comment on any FX or shipping-related gross margin support, thinking specifically about the weak dollar perhaps in FX and when we should expect the numbers, please?

No. Jesper here. I don't think there's any major impact to the numbers. And to put it very simple, I mean, the products sold in Q3 had been purchased in previous periods. So FX hasn't affected the gross margin that much.

And you don't expect any support going forward either?

I mean, looking into the coming outdoor season in '26, of course, if the dollar stays on this level, I would expect a positive impact.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

No further questions, and we have no written questions. So with that, I say thank you very much for listening, and wish you all a great weekend. Thank you.