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

Good morning, and very welcome to the live stream and teleconference of Embellence Group Q3. Before I hand over the floor to CEO, Olle Svensk, and CFO, Karin Liden, I will remind you that there is a possibility to ask questions after the presentation. [Operator Instructions] Thank you. And before further ado, please go ahead.

Thank you. Thank you very much. Good morning, everyone, and welcome to the Q3 report of Embellence Group. My name is Olle Svensk, and together with me today is Karin Liden, who will present the financials. So first, a couple of words about Embellence Group. We acquire, own and develop strong brands interior decoration. And in our beautiful [indiscernible] brands, we have Boråstapeter, Cole & Son, Wall&decò, Pappelina and Artscape, but also Borås Tapetfabrik we produce wallpaper in South of Sweden. Moving on to the quarter then. We deliver a strong quarter here in Q3. Looking at the geopolitical situation we have in the world, we are quite proud of the numbers that we are delivering. We achieved organic growth in all 3 months during the quarter, but also in all 3 segments that we have. So net sales amounted to SEK 183.2 million, with an underlying organic growth of 4.3%. Moreover, all the work that has been going on for a long period to lower our fixed cost base, it creates a good leveraging effect during the quarter. So our EBITA amounted to SEK 26.5 million during the quarter, which is a good improvement compared to last year. And we have no adjustment during this quarter at all. Looking a little bit ahead, I mean, focus is to continue to prioritize organic growth to get a better cash flow and robust profitability. But moreover, also to further strengthen our offering and reducing our cost base through digital initiatives, which can be our direct-to-consumer channel, but also our production footprint. Over to you, Karin.

Thank you, Olle. And as Olle just said, we are proud to present the total growth of 8.4% this quarter, of which 4.3% was organic growth. The sales of SEK 183.2 million and the EBITA of SEK 26.5 million leaves us with a margin of 14.4%. Also, this is an improvement compared to last year. And as Olle said, we don't have any adjustments to EBITA this quarter. Net profit in the period was SEK 13.2 million, it is down compared to last year, but one needs to remember that we had a write-down of an earn-out debt in the comparison period of SEK 16.9 million. The operating cash flow was SEK 13.2 million, which is lower than last year. During the quarter, we had an increase of accounts receivable following the very strong sales in the period. And one needs to remember that sales in Q2 was significantly lower. So the accounts receivable increases -- increased significantly, but also accounts payables decreased. I can also mention that we are reducing our leverage. The net debt to EBITA is 2.2 this quarter compared to 2.4 end of June. Looking at the trend charts for net sales and EBITA. We are increasing the rolling 12 trend for sales again, and the margin is recovering. We can see in the margin chart that when the sales return, the lower cost base provides a good opportunity for leverage. Looking further on to the different segments we have, starting with the Nordics. We had sales of SEK 64.9 million, this is just above prior year. And it's driven by the demand that returned in the Swedish market this quarter, and it's also supported by the launch of a new collection of Borosan, which is the professional assortment in Boråstapeter. The EBITA margin has strengthened to 12% despite the increase of product cost and the main reason for this is the lower cost base in the companies. Nordics represents a bit over 1/3 of the sales in the group. Moving on to Europe. We saw a growth of SEK 9.5 million -- 9.5% and reported sales of SEK 58.7 million, several markets contributed. The growth was especially strong in U.K., Italy and France. Germany continued to struggle somewhat. An already strong EBITA margin of -- improved. It's now 19%, thanks to the increase in sales and our implemented savings. Europe represents around 1/3 of the group sales in this quarter. And finally, Rest of World, which actually report a record quarter with SEK 59.6 million in sales. This is a growth of 16.7%. All major market contribute, but the growth is driven by the U.S. We also see a positive impact of single larger deliveries within hospitality to a number of smaller markets. Adjusted EBITA is 13%, which is lower than last year, it's negatively impacted by the sales mix. However, it is a step-up compared to the recent quarters. And Rest of World, this month is actually stronger than Europe and represents 33% of the group sales in Q3. Over to you, Olle.

So as a summary, again, repeating myself, we delivered a strong quarter. We delivered organic growth of a little bit more than 4% in a market that is challenging for us. We have the majority of our sales in typical retail sales, but thanks to -- from a low number, good performance of our direct-to-consumer sales, but also hospitality. We overall compensate that and more. So the net sales, as we said here, in total, up 8.4%. The hard work with lowering our fixed cost base has -- is delivering this month. Now when we have a good organic growth, we have delivered strong profitability, as you can see in the month -- in the quarter. So focus ahead, further focus on generating organic growth. We need to improve our cash flow and deliver a stable or strong profitability. So the work that we have been doing for several years will just continue to strengthen the offering, reducing fixed cost base and deliver on different digital initiatives. So as I have said now several quarters, we are building a high-quality company fueled by passion and professionalism. Thank you.

And now it's time for the Q&A session. Let's start with the questions by phone. Operator, over to...

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

Congratulations on what I think strong results in the quarter. Could you talk a bit more about Rest of World performance, please? You noted a number of larger orders in the quarter. Is it possible to elaborate on what share of Rest of World sales of these larger orders might contribute, please?

That was a good question. I don't honestly know exactly how much it contributes with. I hand over to Karin, who knows everything.

Hi, Benjamin. I think the sales in Rest of World is still dominated by our traditional sales channels, and it's still dominated by the U.S. It's -- but we have spoken around our efforts in hospitality for a number of quarters. And now we can see that we have a number of projects, which contribute to the growth. But it's still -- the sales is still dominated by our traditional sales, I would say.

We owe you on that one, Ben, I mean. I mean, what we see is that we have deliveries to Asia and also to some of the countries in North Africa, but also Middle East that are contributing. But the exact number we don't have right now.

I guess it's fair to assume then that you still -- I mean, adjusted for these individual larger contracts, you still grow organically quite meaningfully then?

Yes.

Yes. All right. Perfect. I was wondering as well, could you talk a bit more about the lower share of premium sales in Europe and Rest of World, please? What is this an effective specifically, please?

This is that mainly coming from Boråstapeter, who have had a good quarter in general, but not the least in outside the core countries. So it's deliveries from Boråstapeter into Europe, but also rest of the world.

Perfect. And then also a question on gross margins. And I assume Boråstapeter strong growth might be part of the reason, at least for the lower gross margin compared to Q2. Is there anything else you would like to add here on what might be driving this sequential decline in the gross margin, please?

No, I think you are right, Benjamin. I think that the gross margin is more a result of the sales mix than anything else in this quarter. You also need to remember that we have launched our professional assortment this quarter, which has a lower gross margin than our premium products.

All right. And then also you talked -- and you did in the Q2 report as well about reduced input costs. Is it possible to give us a ballpark figure for the magnitude of these reduced input costs going into Q4, please?

I don't have the magnitude on the top of my head, but we are talking reduced input costs primarily for the Swedish -- for the Boråstapeter for the Swedish companies. And we have seen significant reductions in prices on the same time purchases are primarily made in euros and which compensate or which offset part of this price decrease. We, however, anticipate to see -- to see these lower input prices coming through in quarter 4.

Perfect. And then 1 final question. You talked also about an increasing share of direct-to-consumer sales. Could you update us on roughly where you are as a percentage of total sales going direct to consumer, please?

We have received that question several times, but we are not disclosing on the level we are right now. What we can say is that we grow double digit there in percentage, but it's still a fairly low number. So we will have to come back to that when it's a little bit better. But thanks for reminding me about that question.

I will keep asking that question many more times, I believe.

I trust you.

But that's all I had for now.

The next question comes from Karri Rinta from Handelsbanken.

Firstly, I think you already alluded to this in terms of -- but just to double check, did FX have any meaningful impact on your earnings in the quarter? Or was it largely neutral? That's my first question.