Embellence Group AB (publ) (EMBELL) Earnings Call Transcript & Summary

Welcome to Embellence Group's Conference Call. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Olle Svensk; and CFO, Karin Liden. Please go ahead.

Good morning, everyone, and welcome to the presentation of Embellence Group's Q2 2023 Report. My name is Olle Svensk; and with me today, I have Karin Liden, who is the CFO. So Embellence Group, we acquire, own and develop strong brands in wallpaper, textile, rugs and other interior decoration. Moving on to some highlights then for the Q2. Needless to say, consumer demand remains very challenging, especially in dealer and retail segment and certainly in the northern part of Europe. Our net sales came close to SEK 170 million, which is down 10.5% compared to last year. Thanks to being able to take down our fixed cost over the last years, we still achieved a healthy profitability, thanks to as well, streamlining as well as price increases and good cost control. Our adjusted EBITA amounted to SEK 18.4 million, which is equivalent to 10.8%. Inflationary pressure compared to last year, the same period, is of course on a very high level. However, as we have indicated before, we do see input material prices going down, I would say, in more or less all areas. But it will take a little bit more time until we can see it also in our gross margin. Having said that, our gross margin in the quarter was very strong, but Karin will cover that later on. So going forward. Continued focus on managing our cost base. The cost-saving program that we implemented end of last year is delivered now month by month, and it was -- we estimated it to SEK 9 million full year, and it's going on as planned. Further efficiency improvements have been made, and -- but we cannot rule out that there will be some more as well. Now over to you, Karin.

Thanks, Olle. And I will talk a bit about the key figures of the quarter. As Olle said, the net sales was SEK 169.9 million during the period compared to SEK 189.9 million last year. This corresponds to a decrease of 10.5%. And the low demand is particularly visible in the Nordic countries, while Europe shows more resilience. The adjusted EBITA was SEK 18.4 million; and the margin, 10.8%. As Olle said, we managed to defend the gross margin well, and we actually had a level above 60% this quarter. And the main reasons for this is the price increases we've implemented over the last 12 months, the cost-saving program from last year, but also continued cost control. And of course, the cost savings and cost control also applies to the operating expenses. The operating cash flow was SEK 12.2 million in the period, and this is a decrease compared to last year. Of course, the lower EBITA level is a main reason, but we have also seen an increase in working capital. And the main reason for this increase is a higher inventory level. Most of it is a planned increase. It's partly a stock buildup to prepare for several larger launches in a couple of our companies. So we have launches in both Nordics and U.K. during Q3 and rest of the year. But it is also seasonality to prepare for holidays. We close down a couple of our factories during the holiday period, and we do that every year. And also, we need to admit that part of the increased inventory is due to the lower sales than we anticipated in the quarter. If we continue with the next slide, we see the quarterly development of net sales and adjusted EBITA over the last years. Going into the different regions. Nordics, as we have said before, has been mostly impacted by the weak consumer demand. We see a decline in all Nordic countries, but the largest in Sweden, which is also our main market. The EBITA is decreasing due to the lower sales volumes. And here, as we -- for the group in whole, the cost-savings program and cost controls compensate, but only partly. Nordic represents 35% of all sales in the quarter, and the share of premium is also 35%. Continuing with -- sorry, too fast. Continuing with Europe. This is actually the largest region in the period with 37% of the sales. Demand is -- has shown to be more stable in Europe, and net sales is almost on par with last year. However, there is a mixed picture between countries and brands. We have a solid growth in Switzerland. U.K., Italy and Poland are stable. While it's been a somewhat weaker performance in Germany and France. The adjusted EBITA holds well and is even higher than last year. The share of premium is 83%. If we look at the Rest of World, it's down 10.7% to SEK 48.3 million. And also in Rest of World, we have a very mixed performance between countries and brand. We see a weak development in the U.S., our largest country in Rest of World. But also here, the development differs between brands. As we mentioned in the CEO statement of the report, one example is that Boråstapeter has developed very well in the U.S. during the quarter. Adjusted EBITA is SEK 4.6 million, which is lower than last year and explained by the weaker net sales. Rest of World represents 28% of total sales in the period, and 94% of the sales is premium. Looking at our financial targets. We have a target to reach SEK 1.2 billion in sales, maintain margin of EBITA above 15% and the leverage below 2.5% (sic) [ 2.5x ] long term. We also have a dividend policy to pay between 30% and 50% of the net profit for the period, which we also did. We paid SEK 0.80 per share, which corresponded to just about 30% of the net profit 2022 as a dividend in May. And back to Olle for a summary.

Thank you. Yes, of course, we are not happy with the overall net sales performance of the group in the quarter, especially in the Nordic has been very challenging. However, I think I need to mention as well that, from different reliable sources, we hear indications that the market is down in the dealer segment with somewhat -- something between minus 20% and minus 30%. So we are navigating in a very challenging market environment, I have to say. In addition to this, I also need to say that I am happy that we've been able to decrease our fixed cost base. So we do defend our margins quite well, both in terms of gross margin, but also being -- reaching an adjusted EBITA of 10.8%. So good and healthy profitability due to the streamlining and price increases that we mentioned here before. Our own direct-to-consumer sales is continuing to grow with a high double-digit level. We will continue to manage our costs going forward as well. And as I mentioned before, there might be further initiatives that we will implement going forward. Input material costs are, of course, higher than a year ago, and we have compensated that with price increases. But the good news is that we see that they are now coming down a bit. So going forward now in 2023, it's -- we will continue to focus on profitability, a stable cash flow and make sure that we have a good and resilient balance sheet. We do see pockets of growth in the market where we will invest with focus in those areas. So streamlining and further cost control, we will continue with that, increased cooperation between our brand houses as well. And we are undergoing a strategic review of our Italian brand, Wall&decò. Having said that, we are now open and willing and ready to take questions.

[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABG Sundal Collier.

So let's follow on your final point there, the Wall&decò strategic review. I was wondering if you could perhaps elaborate on sort of conclusions drawn already, and whether or not you've sort of realized any cost savings here already. Or anything like that would be interesting, please.

I mean, the start of this work we -- was from 1st of June, so a little bit early, but it will relate to the product offering, but also the cost structure as such. But it's a little bit early to give any more clarification on it. But we're spending a lot of time right there now. And as I've mentioned before, with Wall&decò, we are increasing our efforts in the hospitality segment, where we see good growth, while dealer segment, there is a slowdown as well. But you have to hold that thought, Benjamin, a little bit, and we will come back with further details later on.

No worries. I can try to remember the question for next time as well. So you comment as well on slower sales to retailers. Could you perhaps update us on your views of current retailer inventories? Or if you can comment on that at all, please?

I mean, on inventory level, I think they are as low as they ever have been right now. I don't see any retailer taking on inventory right now. They are -- rather, they order what they sell all the time. And that -- so I don't see any further inventory reduction from retailers. So we are on a very low level. And as we are, the retailer and the dealer segments out there, they are trying to manage their cash flow as good as they can.

And on a similar note, to sort of better understand the sales growth figures here. Are there any significant timing effects in major projects or similar that could have affected Q2 specifically? Or are we looking at run rate figures sort of in all segments here, please?