Hello and welcome to the B&S Group 9M2024 trading update. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only mode. However, you'll have an opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions. If you require assistance at any point, please press star zero, and you'll be connected to an operator. I will now hand over the call to your host, Peter van Mierlo, the CEO, to begin today's conference. Thank you.
Thank you. Good morning, all. Thank you for calling in, and great that you joined our quarterly call trading update of our nine-month results. Yeah, we had a good Q3. We grew approximately 12%. All segments actually participated in that growth, and year to date, we're at the level of 7%. Some segments were strong and in line with first six months. Other segments definitely outperformed the first six months of the year as well. I'd like to talk briefly about every segment, since the growth is particular for every segment, indeed. So, if I start off with Beauty, our largest segment, then we saw a growth of 11% in Q3, which is a very good growth. That happened especially in the B2C segment, 12%, as well as in the B2B markets.
B2C, as you know, very much concentrated in the US with FragranceNet, and B2B is the global business. B2R decreased a little bit -6% in Q3. So overall 11%, outperformed a strong quarter, outperforming the average of the full year. They're very well prepared for Q4 as well. Q4 for food, the storyline is more or less the same. So a very strong Q3 with a growth of 25%, year to date 18%. That growth came from all three subsegments. So as you may recall, food we drive the business of food out of three subsegments: maritime, duty-free, and food export. Maritime is concentrated around cruise businesses, where there's strong growth due to the operational excellence measures that have been taken. Duty-free has grown also in terms of better penetration in the market, new onboarded clients.
So that's positive, as well as Food Export grew and outpaced actually in such an extent that overall we're now on the growth path, whereas the first six months were a little bit difficult. That growth of 25% is more or less similar in all three subsegments. Again, a strong performance. Health grew by 30%. Very positive developments in this segment. It's not our biggest segment, as you know, but nonetheless, it's there and also penetrating into that cruise market, which is strong, especially a very interesting market for medicine and vaccines in the cruise market. Overall, a 30% growth, which is definitely positive. Liquors also grew actually in Q3, but as you know, in the first six months, growth was overall -6%.
We expect liquor still to be in a slight decrease in revenue compared to the 2023 situation for the full year. We are building operational excellence procedures within the wholesale business, with the different whole European wholesale businesses that we have in our group, that will lead to decreasing working capital needs and logistical better performance, due to the combination of warehouses that we have already partly implemented, actually, in Q3. Personal Care, another good quarter, with a growth of 8%. Expecting a strong Q4 as well, having also taken all the necessary measures to be able to perform a very strong Q4. So Personal Care remains to be in a very good shape. Travel Retail, year to date, growth was 19%. Q3 is 9%. That has everything to do with the quality of Q3 in 2023, obviously.
Overall, we would expect turnover to come out at the same growth level as what we've seen so far. So, if I look at the cost level, operational expenses that we've incurred are slightly below last year, or on the same level, maybe that's a better wording. Staff costs have increased due to inflation, but also availability in the market, and that's something that was budgeted for and expected. So overall, good Q3 and working hard to make Q4 successful as well. Yeah, this is only a trading update. So, as you know, we will focus on turnover and developments into the market, but let's open up for questions, and let's see if you have any thoughts.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the first question from Tijs Hollestelle from ING. The line is open now. Please go ahead.
Thank you, Operator. Good morning, gentlemen. Yeah, my first question is about the liquor business. You mentioned in the press release the rollout in the plan for the next, the integration rollout plan for the first half of next year, but I thought that was already planned for the second half of this year. Is that correct, or was there a delay? Can you comment on that, please?
Very good question. We're in the process of, as we speak, those teams. There's a clear path to integration. We are currently defining on every sub-business, sub-part of the business model of wholesale how that integration would take place and how it can be implemented. For example, we've already integrated the warehouses in the Netherlands. That's one. But the full plan, guys, will start in January 1st, but it goes without saying that we will take measures also in Q4. So it's both is true, actually, to be honest.
Okay. It's a lengthy process. Are you expected to take, let's say, a one-off cost in the fourth quarter, maybe next year on this, on this program?
No, not so much. No.
Okay. Yeah. Then also I got a question about, let me see. There was a remark about finance costs. You took an interest rate hedge. Can we expect, let's say, a higher net interest cost in the second half as compared to what was it? I think EUR 11 million in total in the first half. And if my information is correct, let's say 90% of the gross debt of B&S is based on variable interest rates and is then EUR 180 million due within one year. Is that kind of correct? And what can we then expect in terms of the, let's say, average interest rate? I think in your annual report, you stated between 5% and 5.5% or so on average. So can you elaborate a little bit on that?
Okay. That's a lot of questions in one question, guys, but let me start at the top and then work my way down, and please let me know if the answer did not fully meet your question. So first, your first question regarding the interest rate swap, which we concluded in the third quarter. So with regard to the variable interest rates, as you perfectly refer back to the financial statements, we, of course, have the market interest rates with the markup which we have in our financial agreements with our banks. A significant portion of this variable interest has been hedged during Q3. So we have fixed our interest rate for a significant portion of this financing with a variable interest rate.
And as such, we have locked in our interest rates for the remaining part of the duration of the fixed financing. With regard to your question on our interest expenses, first half versus second half, I would say, it's fair to say that it would resemble the developments in the markets. But as you can imagine, the closed Interest Rate Swap as per Q3 will have an impact on the second half of the year, whereas the outstanding balances throughout the second half of the year is on general higher as compared to the first half with the buildup of the working capital in Q3 towards our main turnover quarter, being the fourth quarter. Did I touch base on relative to your questions, Tijs?
Yeah, yeah, yeah. I'm thinking out loud because indeed you carry probably most of your debt right now, because of indeed the buildup for the on the inventories. It's also reflected in the seasonality of the bank covenants. Okay. I got a pretty good feel for that then. Thank you. And then one final for now, you mentioned, oh yeah, the seasonality of the fourth quarter in Beauty B2C. I think that it has the most heaviest weight in the overall, or is the seasonality the same in the B2B and the B2R? Is that the same?
No, it's fair to say that it's the B2C is the main. In which ways have you done the B2C and why? Because then your sales, it's very simple. Your sales continue throughout the end of the fourth quarter, based on the simple fact that you're selling to consumers. So these are actually the actual buying, actual gifting season is later in the fourth quarter, whereas to your B2B customers, you need to deliver upfront because they are also selling towards those end consumers. So the, again, the B2C, most heavy on the seasonality.
Yeah, B2R probably is a bit more similar.
As you know, guys, this is everything today to do with the special day, Singles' Day, Christmas, Black Friday, Thanksgiving, Cyber Monday, all those things. Yeah. Then turning into Christmas.
Yeah. It feels to me that, I mean, there's of course a lot of pressure on spending power of consumers, but I mean, the perfumes are kind of in low-end luxury goods, so that's probably, yeah, demand is still going relatively well. Is that also your expectation going into that season?
Yeah, and we do have business processes in place to work in different market circumstances.
Yeah. With your algorithms and your price, you can swiftly price up, down depending on the demand.
Yes.
Geographically. Yeah. Okay. That's your.
Based on your data analytics, you can optimize your process here.
Yeah. Okay. No, thank you.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the next question from Robert Jan Vos, who's from ABN AMRO. The line is open now. Please go ahead.
Yes. Hi, good morning. I have a couple of questions as well. I think, your Q3 sales was, quite a bit stronger than, the market had anticipated. Is there any color you can provide, about the effect of, higher prices, in combination with, yeah, the volumes, how, how, how the volumes developed? That's my first question.
Yes. Yes, sorry, Robert Jan Vos. Yeah, excellent question. Yeah. Well, I wouldn't. My reading of all our discussions is not so much that there's a huge price or quantity impact. I think it goes both ways.
Okay. Thanks. Maybe on Beauty, question, your comments read quite positively apart from B2R. You mentioned more intense competition. Can you elaborate on this? What do you mean by that? Yeah, I know what competition is, obviously, but does it come from a specific area or a specific competitor? Can you elaborate on that, please?
In B2R, you're more open to competition, right? So our B2C is our own platforms. B2B is our own network. So you're in a far better position to cope with us. And B2R, you're actually out there. And so it's more impacted by competition than the other two subsegments. It's just the name of the game is different.
Okay. That makes sense. That is the normal volatility in competition that you see.
Yeah. Yeah. Yeah. And you're more exposed to that trend in B2R than in the other two.
Okay. Clear. My third one, yeah. You keep your guidance for growth, for sales growth, unchanged at this stage of the year. That implies a quite wide range for Q4, between flattish and +8%. Why have you not narrowed it a little bit, or maybe putting it differently? What issues should we take into consideration for the fourth quarter? Maybe also I can add to this question, is there any color you can provide with China? It's always an important period of the year for you for the Chinese business. How is the weak economic climate impacting your business?
Yeah, that's an excellent question, Robert Jan Vos, actually, because that is what we were thinking about as well. It goes without; it is logical. If you look at our numbers, it is logical that revenue is so year to date; it's 7%, right? Or 6.9% or 6.8%, whether you take currency effects, yes or no, into account. I would agree that, but yeah, we haven't narrowed it because it's still what we expect; we would definitely expect to be in the north 50% of that 5%-7% guidance. And yeah, there are no reasons why we at this moment think that turnover growth would be lower than the 6.8% or something that we've realized year to date. Q4, and that's the reason why we haven't given you this guidance.
The risk of Q4 is bigger than the risk of the other Qs. Why? Because it's because of its seasonal pattern. So because it's higher, you know, the impact of differences in that turnover also has more effect on the full year than any other of the other quarters. So we were a bit on the conservative side in that regard, not saying anything. And I still think that's the right way to communicate to the markets. It is at the same moment. It's true that due to logistical cost. B&S free markets and no tariffs is better than a market where different geopolitical powers are trying to protect themselves. And that's true for China. That's true for the U.S. as well.
That's very helpful. That's very helpful. Thank you. And from the fact that you haven't put the word China in your press release, I conclude that it is something to take into consideration with that, that it is not a main topic for you at this stage. Is that correct?
Yeah. Also because last year, 2023, wasn't a high China year either. So, and obviously we're comparing to last year, so that does impact.
Yeah. That's a fair comment. Okay. My last one, if I may, from H1, I remember that your net debt position and covenant ratios were a bit weaker than most had expected. In your comments of today, you compare the current situation, so end Q3 versus end 2023. What can you say about the developments during Q3? And yeah, related to this, that's actually the main question in most recent years, and obviously related to seasonality, you managed to improve your net debt leverage quite substantially compared with H1. Is this pattern also to be expected for 2024? You were at 3.4, if I'm not mistaken. Will that be materially lower at the end of this year?
Okay. So looking at our balance sheet and the items you're just referring to, Robert Jan Vos, you will probably do not expect me to comment on your exact pinpointing of leverage ratios, but it's fair to say that the pattern in itself for our company is expected to be similar as compared to previous years. So the turning down of both the working capital and as such, and that during the fourth quarter, in our main sales quarter.
Secondly, looking at the position as per half year towards the end of the year, taking into account this seasonal pattern, it should also bear in mind that, during this year as well, we again have invested in buying out minority shareholders, and some other investments, which of course do need to be taken into account in our financial position, but in itself, the pattern, as we have historically been shown, so the wind down of the leverage during the fourth quarter, it's exactly expected and projected, during this year as well. Does this help anyway without getting too much pinpointing in the details? Robert Jan Vos, as you, I'm, we are, of course within a trading update, bound to not get in too much detail on the balance sheet.
No, this clearly helps. And thanks for providing this flavor. Thank you. Those were my questions.
Sure. Thank you, Robert Jan Vos.
Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the next question from Maarten Verbeek from The Idea! The line is open now. Go ahead.
Good morning. It's Maarten Verbeek, of The IDEA! Yeah. More or less follow up on Robert Jan Vos because that was also at top of my list is a question about your statement, about your covenant because, you will record a high profitability. You won't have that many cash outs concerning acquisitions. You have the JG&D cash out. Normally seasonality, working capital is wind down, so it also provides cash from that end. So on one hand, your profitability will go up and you generate cash, so your net debt should go down. That simply implies that why should covenants be a concern for you at your end? Or it must be that you, expect to have serious problems with your working capital development, but that's not the case.
No. That's a simple and fair question. The fair answer. The fact that we did indicate the fact that we would be within our covenant as for also the end of the year is the simple fact that we also indicate that within Q3, we were within our banking covenants. So as such, we believe that it would only be fair to also indicate this for the fourth quarter, especially given our previous indication that we were acting quite closely towards our banking covenant on the interest coverage ratio. As such, we believe that it will be a fair as well as informative just to provide this color towards yourselves.
Okay.
That's all?
Yeah. Yeah. But I thought you could have been a bit more firm about your year-end statement. There were some cautious nerves in there. While I was wondering why, but okay, fair. Secondly, you compare your working capital compared to year-end. I don't think that's a good comparison base. So could you share more or less the situation at Q3 this year compared to Q3 last year about working capital ratios, inventory ratios, receivables, etc.?
Yeah. Sure. I would say, to give at least some color without getting, again, sorry to repeat, but to be too much detail on the balance sheet, but to give some color, I would say inventory levels, as per Q3, up as compared to the same quarter last year, both in absolute vol, number, volume, and number of days. Trade debtors, I would say more or less in line with turnover increase or even, if you look at the turnover increase as for Q3 standalone, the trade debtors as per the end of the quarter, lower as compared to the turnover increase. So following the turnover, but not at the same pace as such, I would say a good trade receivable position.
Okay. Great. And then lastly, more or less as a combined conclusion, is it then also fair to assume that this year, you will meet your return on investment working capital of over 25%?
Being in your trading update, we did give some color on the expected EBITDA margin, whereas we expect to end at the lower end of the previously projected range. We believe it will be fair to leave it at that indication or that outlook just to make sure that we don't provide other information as previously shared, Mark, as you will hopefully probably be familiar with.
Yeah. Thank you very much for the answers. Thanks.
Yeah. Sure.
Thank you. We will take a follow-up question from Tijs Hollestelle from ING. The line is open now. Please go ahead.
Yeah. Thank you. Yeah. A few small ones. The first one is on the health business. I think you mentioned that you've got, you already see, let's say, the positive impact also of self-help measures. But if I recall correctly, at your capital markets day, the director giving the presentation also mentioned that most of your clients basically operated larger vessels. So can you give us a bit of a feel for the precise dynamics? And also maybe, in addition, is it, let's say, from a business perspective working that the sales guy from the health department joins the maritime food business sales team and that you just leverage on the existing relation? So how is that actually going?
Yeah. Very good question. Fair also. There is not that much synergy, to be honest. I mean, these are two different purchasing departments within the cruise industry, and as far as I know, all cruise companies keep those purchasing departments separate for efficiency reasons, so that's one. Secondly, since the last 12 months, Health has been targeting the cruise market. And, and that shows, that, that seems to be paying off, and so that's a, that's a strong development for that segment. That's the second answer. Yes, the cruise ships are being built, and so the cruise market will be strong, since the amount of CapEx which is invested in those vessels.
We also don't know them by heart anymore, Tijs, but you know exactly. If you Google a little bit, then you can find out which the cruise market is, which new cruise vessel is going to hit the market when and how many projected passengers can actually be on those cruises. Yes, those cruise vessels have the tendency to become bigger and bigger. If you own the right cruise company and if you're able to enlarge your product portfolio geographically and from a product perspective, then that it is an interesting growth market.
Yeah. That sounds to me like core business for B&S indeed. Yeah. Okay. That's helpful. Yeah. Also in small.
Yeah. Core business, core business for B&S, but it is relatively standalone due to that purchasing department, how they're organized, which is also interesting.
Yeah. That you are one of the larger suppliers of that market, so you're probably able to help them out in different locations or you can widen your product. Yeah. You can imagine you can do a lot in there, but okay. Yeah. I also had a question about Tastemakers. I thought that the contribution, the consolidation effect was a bit low. Is there also a big seasonality effect? Okay, you explain a little bit what's happened there?
Yeah. Correct. So they have their main part is the fourth quarter. So also they have a tendency of their sales and probably towards the end of the year, as they are also specialized in gifting surrounding the festive season.
Yeah. So exactly. So the annual turnover, I thought mentioned in the press release of EUR 1.3 billion. So that is still standing. It's not that it's decreasing.
Yeah. No, but please also bear in mind that the figure we have indicated, so the 1.4, resembles the Q3 alone, as we have included the acquisition as per the second half of the year.
Yeah. Okay. Okay.
Yeah. Great.
Yeah. And then one final question. I know it's indeed the trading update, but you of course mentioned that the gross margin of the group was decreasing a bit. Is there, let's say, a lot of concentration risk? Is there, let's say, relative weight within the business? Their gross margin is really weak or really strong or how is the picture within the business segments? Or is it just like what you have seen in the first half and also in the prior years? It's always a bit wobbly from one reporting period to the other?
Yeah. I would say it's fair to assume that the comments reflects the segments across the board.
Yeah. Okay. Yeah. Thank you.
Thank you. We will take the next follow-up question from Robert Jan Vos from ABN AMRO. The line is open now. Please go ahead.
Sorry to come back again. My question is a bit of a follow-up on Tijs' last question. You started the year by saying that you expect stable or expect stable gross profit margins. At half year, I think you said that the pressure on the gross profit margin was increasing. And now at Q3, it's a bit less clear, but the question would be, should we still assume that you can match last year's gross profit margin or is that considering also the wording throughout the segments of today's press release, is that not realistic? And if that is not realistic, your EBITDA profitability guidance, the lower half of 5%-6% still seems to suggest a bit of an increase year over year. Where is then the discrepancy between gross profit margin and EBITDA margin?
Yeah. I believe EBITDA, I mean, last year EBITDA wasn't at 5.0. So when it's at the lower end of between 5.6, then there is a slight increase. Yeah. And due to the arithmetical or the how you calculate things in a P&L, that doesn't have to be in the same line as gross margins because that's a different line.
No, I agree. Maybe I can be briefer in the question. Do you see the exact?
Theoretically, you can decrease gross margins and increase EBITDA depending on turnover growth, but anyway, that's a theoretical answer and not particular for, but I didn't give you any guidance on this.
No, I totally agree that that is absolutely a possibility. But then to make it very brief, do you expect that your gross margin, that you reported last year, 15.5%, that you will match that this year? Or will there be actual year-on-year pressure on the gross profit margin?
I would like to make the same statement you made as your last sentence, Robert Jan Vos, that it's fair to say that gross margin will be beyond the pressure, taking into account both the fourth quarter as well as the year as a whole. So looking at last year's 15.5%, the statement would also reflect on that percentage.
All right.
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That's very. Yeah. That's very clear. Thanks.
Thank you. It appears no further question at this time. I'll hand it back over to your host for closing remarks.
Okay. Well, thanks again for following us and thank you for your interest in B&S. We are looking forward to talk to you soon again. Thanks and have a great week and a beautiful Monday.
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