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

Good morning, everyone, and thank you for joining us today. I'm joined by our CFO, Jesper Flemme. I will walk you through the operational highlights and our strategic progress before Jesper covers the financials in more detail. I will come back to summarize, and then we will do our very best to answer your questions. Slide 2, please. Q2 highlights. The second quarter was another step forward for BHG. We delivered accelerating organic growth, continued to see improving profitability and generated strong cash flow, while at the same time, continuing to execute on the strategic priorities we communicated on our Capital Markets Day. The quarter was characterized by three main themes. First, our operational performance continued to improve. Organic growth accelerated to almost 10% and adjusted EBIT improved for the 11th consecutive quarter. Second, we continue to execute our strategy. We further increased our share of unique assortment, accelerated our AI initiatives and completed the first acquisition in a long time with the acquisition of Hillerstorp. And finally, we continue to see encouraging market developments. Demand improved across most of our key markets and categories, supported by stronger consumer purchasing power. Overall, we believe the quarter demonstrates that our strategy is working. Slide 3, please. Summarizing the key numbers. The most important takeaway is that sales growth accelerated and came in at plus SEK 3 billion in the quarter, representing an organic growth of 9.6%. This being a significant growth acceleration compared to the first quarter, and we can also happily conclude that we have continued growth in all 3 business units. Adjusted EBIT in the second quarter was SEK 134 million, a growth of SEK 60 million compared to last year, an improvement in profit, in both absolute numbers and EBIT margin, but somewhat negatively affected by an unfavorable product mix in the Home Improvement business unit. Operating cash flow of plus SEK 338 million is a strong cash flow and in line with the seasonal pattern. Leverage continued to decline to just above 2x EBITDA, giving us increased financial flexibility. Slide 4, please. Growth. We are very pleased to see that the accelerated growth that we saw at the end of the first quarter continued and accelerated during the important second quarter. The strongest contribution came from our Garden category, including Robotic Lawnmowers in combination with Furniture and Home Decoration also developing well. Importantly, growth was broad-based across our businesses with all major markets contributing positively. We continue to see strong momentum across the Nordic region, Germany and Eastern Europe. We saw growth in Finland also in this quarter, but we unchanged see Finland as the most challenging of our key markets. The improving macro environment is clearly helping, but our performance is primarily driven by our own execution, a stronger assortment and improved customer offering. Overall, we remain unchanged, positive regarding demand and market development going forward. We also expect the online market to grow faster than offline in our categories. Increased online penetration even further fueled by the current AI development, making the online shopping experience clearly surpassing the offline experience. Slide 5, please. Profitability. We are proud to highlight that BHG has now delivered improvements in adjusted EBIT margin, both in absolute numbers and in EBIT margin over the last 11 consecutive quarters. That demonstrates that the operational improvements we have implemented over the past few years continue to deliver results. That said, profitability in the quarter was somewhat below our own ambitions. The primary reason was an unfavorable product mix, where we saw strong growth in Gardening Equipment, partly driven by Robotic Lawnmowers, a category with lower gross margins that has in the quarter diluted the total gross margin level. We unchanged, see gross margins in branded goods as a challenging area, but the gross margin effect on Home Improvement that we saw in this quarter, we see primarily as a temporary mix effect rather than a structural issue. Our long-term strategy remains unchanged, and we continue to focus our efforts on strategic initiatives to support gross margins as unique assortment and additional revenue streams. This, in combination with our focus on efficiency and cost structure. Slide 6, please, strategic priorities. As mentioned, our strategic priorities remain the same as we communicated on our Capital Markets Day. First, we continue to increase our share of unique assortments. This strengthens differentiation while also improving our long-term margin potential. Second, AI is becoming an increasingly important tool to create competitive advantage, both for customer experience, thereby driving growth and creating efficiencies. During the quarter, we accelerated our AI initiatives together with our strategic partner, Algorithma, within key [ areas as ] improving customer service, quality, speed and efficiency, streamlining product upload and securing data quality, decision support and product information and customer guidance, helping customers find, understand and choose the right products easier and faster. We continue to execute on our strategy of build and trial and then to scale the solutions across the group where we see real measurable business value. And thirdly, we focus on executing our disciplined M&A strategy. The acquisition of Hillerstorp is an excellent example of the type of acquisitions we want to make, strengthening existing platforms with limited financial risk. Slide 7, please. A few words on the Hillerstorp acquisition. Hillerstorp fits extremely well into our long-term strategy. It strengthened one of our largest and most attractive product categories while adding a highly respected Swedish brand with a strong market position. The acquisition is product-focused, expands our offering, increases our share of unique assortment and creates attractive opportunities for cross-selling across several of our platforms. Equally important, it is an asset-based low-risk bolt-on acquisition in line with the disciplined M&A framework we presented at our Capital Markets Day. We continue to evaluate similar opportunities that strengthen our existing platforms while maintaining strict financial discipline. Slide 8, please. Let me conclude this section before I hand it over to Jesper with what is perhaps the most important message. While we cannot influence interest rates, consumer confidence or the broader macro environment, we can control how well we execute our business every single day. Our focus remains on supporting our business in being the best online retailers in our categories and markets, building the best online customer experience through the right assortment, competitive prices, the best and most relevant offering and efficient operations. The improvements we have delivered over the last several quarters are not driven by one-off actions, but by consistently executing on these fundamentals. We believe that continued operational excellence, combined with our strategic initiatives in unique assortment, AI and disciplined M&A will take us to the goal that remains unchanged and clear, to grow faster than the market while improving profitability. And with that, I will hand it over to Jesper, who will take you through the financial performance in more detail.

Thank you, Gustaf, and please turn to Slide 9. As Gustaf already mentioned, we delivered another strong quarter with organic growth of almost 10%. Net sales increased by 10.2% to more than SEK 3 billion, while organic growth amounted to 9.6%. Looking at our segments, what stands out this quarter is the broad-based growth across the group compared to the first quarter. Organic growth accelerated in all 3 business areas. From a geographic perspective, all of our major markets delivered growth during the quarter. The sales trend in the Nordic region remained favorable, mainly driven by Sweden and Norway. Outside the Nordics, sales growth in Germany and Eastern Europe was particularly strong. Turning now to Slide 10 and profitability. Adjusted EBIT increased by SEK 16 million compared to last year, reaching SEK 134 million. This corresponds to an adjusted EBIT margin of 4.4%. We're pleased with the profitability improvement in Premium Living and in Value Home with both the improvement and the profitability level. In Home Improvement, profitability also improved year-over-year. However, margin development was impacted by category mix effect, which I will come back to on the next slide. Moving on to Slide 11 and the EBIT bridge. The EBIT margin improved by 0.1 percentage points compared to last year, reaching 4.4%. Looking at the bridge, the main negative impact came from product margin, primarily within Home Improvement. As mentioned, this was driven by category mix effects. Garden, which has structurally lower margins, grew strongly during the quarter, while Bathroom, which has structurally higher margins was impacted by tough comparables. Marketing also had a negative impact compared to last year, reflecting the uneven demand across categories, mainly within Home Improvement, where this reduced marketing efficiency. At the same time, the other cost areas developed positively, most notably, organizational costs improved, reflecting continued cost discipline on operating leverage. Overall, the positive development across the cost base largely offset the pressure from product margin and marketing, resulting in a slightly higher adjusted EBIT margin year-over-year. Moving on to Slide 12 and cash flow. Cash flow from operating activities amounted to SEK 339 million during the quarter. The strong cash flow was driven by EBITDA together with a positive contribution from working capital. Compared to last year, accounts payable developed somewhat stronger than the inventory as we deliberately maintain higher inventory levels to support the strong growth in the Garden category. Turning to the graph on the right. Liquidity increased from SEK 301 million at the beginning of the year to SEK 565 million at the end of the quarter, supported by the strong operating cash flow. Slide 13, please. Turning to our financial position. Net debt amounts to SEK 935 million at the end of the quarter, and net debt in relation to LTM adjusted EBITDA improved to 2.0x compared with 3.0x at the same point last year. In addition, we had SEK 800 million in unutilized credit facilities at the end of the quarter. With that, I will hand back to you, Gustaf to summarize and conclude.

Thank you very much, Jesper. Slide 14, please. Let me conclude this with three key messages. First, our business continued to move in the right direction. We delivered our seventh consecutive quarter of organic growth and our 11th consecutive quarter of year-over-year profitability improvement. While we are not yet satisfied with our profitability level, the consistent progress over several quarters gives us confidence that our strategy is working. Second, we continue to execute on the strategic priorities that we have communicated to the market. During the quarter, we further expanded our unique assortment. We accelerated our use of AI across the businesses and completed the acquisition of Hillerstorp. These initiatives are all aimed at strengthening our competitive position and improving our long-term earnings potential in line with our financial targets. And finally, we remain firmly focused on operational execution and becoming the best online retailer in our markets and categories. As we have said before, we cannot control the macroeconomic environment, but we can control how well we serve our customers, how efficiently we operate and how disciplined we are in allocating capital. Those are the areas where we continue to improve every quarter. Overall, we believe BHG is entering the second half of the year from a position of increasing strength. Our balance sheet is stronger, growth has accelerated and the strategic initiatives we have invested in are beginning to deliver tangible results. While market conditions remain competitive, we are confident that our strategy, our market position and the capabilities we have built over the past few years provide a solid foundation for continued profitable growth and long-term shareholder value. Thank you very much for listening, and now happy to do our very best to answer your questions. Please.

The next question comes from Alice Beer from ABG Sundal Collier.

So Alice Beer calling in for Benjamin today from ABG. Firstly, I was wondering if you could quantify the gross margin impact from mix, please, related to the gross margin? And then also, what was the positive FX impact, if any?

I'll start with the gross margin, and I'll hand the currency over to Jesper. We haven't tried quantifying the exact effect on the mix. As we have said, it comes primarily in Home Improvement, and it comes primarily from the difference in sales between Garden and Bathroom where Garden is a high-margin -- sorry, a low-margin category. And this quarter also primarily driven by a very large sale of Robotic Lawnmowers, which is a low gross margin category. And there we had very strong sales. For Bathroom, which is a high-margin category with quite a high share of own brands, where we had a lower share of sales this quarter. So that's where it comes -- so that's where the difference comes from and the mix effect comes from, but we haven't quantified it.

And when it comes to currency, I think the effect is to be seen in the Value Home segment where we reported quite strong margins. I won't be able to quantify. But as I said, the effect is to be seen in the Value Home segment.

Okay. Moving on then your other external cost line stands-out as well as rather high, growing 18%. Could you explain this move as well, please? Is it AI tools or something else?

If you're looking in the P&L, you know that, that line includes also marketing that -- that grows in line with sales. So that explains most of the increase. If you instead look at the personnel costs, they only increased by SEK 3.6 million or 1.6% year-over-year.

I think we can add that we're very happy with our cost control when it comes to fixed costs.

[Operator Instructions] The next question comes from Daniel Schmidt from Danske Bank.

A couple of questions. And coming back to the gross margin, and I think you've been quite clear when it comes to the mix that you experienced in the quarter. But it's hard to get away from the fact that what you see the same mix in the coming quarters as well, especially on Bathroom being quite strong likely in the second half last year on the back of the hiked renovation deduction in the Swedish market?

I mean we had a strong Bathroom category development last year. That is definitely the case. But we're also quite positive looking forward into Q3 and Q4 because we have -- I think we have a very strong assortment. We have a high level of owned brands in the category. So we're still unchanged positive of how we can develop the Bathroom category. And I think the other main driver, Robotic Lawnmowers is a category that drops significantly now moving into Q3 and Q4. So the difference should be significantly lower than what we saw in Q2.

Yes. Okay. That makes sense. But if you add the U.S. dollar and freight to that, would you start to see the positive effects of the weak U.S. dollar fading in H2? And then on top of that, freight costs have gone up quite a bit. And I know there's quite a lead time, but still, how do you view those two components, if you add those to the equation?

I think you -- I mean, the direction you're speaking of is definitely the right one. The timing is hard to predict, as most of the products being sold in the Value Home segment has already been shipped or already in our inventory. So the direction is right. Timing is really, really hard to predict.

And I think we can say on freight prices, if [indiscernible] expand on that, that we have seen increases on freight prices, that is correct. And if you look percentage-wise, they're quite high increases. But be mindful that we came from very low levels, and we still view the levels of freight prices as quite reasonable.

But I'm sort of getting at, you're doing quite well now continuously on top line, and you've done quite a big journey when it comes to the cost footprint in terms of platforms and selling off businesses, trying to focus on where you're strong basically, which has worked out well, but it seems like you're flatlining a bit more now. Is there any other sort of cost measures that you want to take in the second half of this year if you don't see the gross margin turning?