Earnings Call: Q4 2020

Jan 29, 2021

Thank you, operator, and good morning, everyone. Moving to Slide 3, please. Final quarter of 2020 continued much in the same strong vein as the previous two quarters, adding the acquisition of Nordic Nest in December to the picture CAPP is an exceptional and transformative year for us. With the acquisition of Nordic Nest, BHG has essentially reached the midterm financial targets we communicated in conjunction with our IPO in March of 2018, including becoming a SEK10 billion business. As a consequence and to reflect our continued journey, we're updating our financial targets this morning, more on which later. 4th quarter performance demonstrates that demand has remained strong, characterized by solid growth in our home furnishing business, but powered especially by outstanding growth in our DIY business. Today, we'll start by reviewing the results highlights, Then move on to the business and financial updates before summing up and launching into the Q and A session. I'll kick it off, And I'll then hand it over to Jesper to cover the financials before I summarize and we move on to the Q and A. Slide 5, please. Please note that none of these numbers nor the ones on the subsequent slides include Nordic Nest since we consolidate the P and L of Nordic Nest only from the 1st January this year. Growth accelerated somewhat compared to the 3rd quarter. Total growth amounted to 43% And organic growth was 36%. Net sales reached SEK2.4 billion. Adjusted EBIT came in at SEK194 1,000,000, Corresponding to an adjusted EBIT margin of 8.2%, more than SEK200 1,000,000 cash flow from operating activities was generated in the quarter, and so Cash flow for the full year almost touched SEK1 1,000,000,000. The underlying performance drivers in the quarter were similar to those of the previous 2. Consumer interest in online shopping in general and in home improvement specifically has remained on a high level and BHG has been well placed capture the resulting demand. Both segments again performed well with the Home Furnishing segment now delivering robustly for a 9th consecutive quarter, While the DIY segment continues to be the most clearly favored by the strong trading conditions since the Q2 of 2020, Our 2 largest platforms within DIY, Wighemadot S. C. And BHG Finland, accelerated further compared to the Q3, growing by some 40%, While some of our niche private label based units again grew at truly exceptional rates, we reiterate that we Slide 6, please. We continue approaching growth through a mix of organic initiatives and M and A. When it comes to the organic components, we're now reporting our 5th quarter in a row with growth above the 16% level, our communicated target over our business cycle. With the 35.5 percent organic growth of the 4th quarter, the full year 2020 came in at an organic growth rate of 33.7%, which was comprised by the Home Furnishing segment growing 30% and the DIY segment growing by 37%. Slide 7, please. Our strategy remains focused on our 4 cornerstones. Firstly, the continued expansion of our leading product range, which now stands around the $1,000,000 SKU mark. Secondly, scale and a high share of own brands in our sales mix, With full year growth at 44%, not least fueled by our private label range and as evidenced by the gross margin trajectory, we continue building scale advantages. Thirdly, creating the most appealing shopping experience and leading in the digital realm, we grew our digital footprint significantly in the quarter, resulting in visits Our destinations exceeding €300,000,000 for the full year. And fourthly, offering the market's best professional guidance, service and support, Including in the quarter further extending the reach of our installation network within DIY as well as our owned last mile delivery capabilities on the home furnishing side. This is our ecosystem with a product offering at its base and the customer always at the center. And finally, an integral part of our execution approach includes leveraging our M and A capabilities to accelerate both growth and strategy execution. Moving on to the business update. So turning to Slide 9, please. As we enter our 9th Year since inception, some key metrics describing who we are today at a glance. On the left hand side, our CAGR since 2014 exceeds 40%. In this period, EBIT has grown by more than 100% per annum. Our EBIT margin on an LTM basis stands at 7.8% and is generated by our over 80 customer facing web properties. And now moving over to the right hand side, these web shops I have been visited over 300,000,000 times in the past year, creating some 3,000,000 orders from customers in 19 countries across Europe. And finally, our product portfolio is leading in terms of its breadth and depth. Slide 10, please. We announced the NordicNest acquisition on the 13th December. NordicNest is a leading online player with a focus the affordable luxury segment for tabletop, lighting, interior design and other smaller home furnishings items. The business, which in round numbers turns over SEK 1,000,000,000 today, has customers in many European as well as international markets. The largest geographies are the Nordics, Germany, the U. K. And South Korea. We're convinced that the combination of BHE and Nordic Nest is a winning one. From a customer, product and geographical perspective, we now cover the full spectrum from value for money to affordable luxury And from large furniture such as beds and couches to table decor and design. The geographic footprint of the group has also significantly expanded. And last but not least, the cultures of BHE and Nordic Nest are a perfect match with a strong focus on profitable growth, cost control and customer centricity. Slide 11, please. As I've already mentioned, Adding the SEK1 1,000,000,000 sales from Nordic Nest, we are now within touching distance of the SEK10 1,000,000,000 in net sales that has been our target since early 2018. The time has come to raise our sights and stake out the path forward. With us announcing updated medium term financial targets, This reflects our strong vantage point in markets that we are convinced will continue to grow. We're setting out to double the business again from SEK 10,000,000,000 to SEK 20,000,000,000. We reiterate that this trajectory will follow from combining organic growth at least in line with the market with acquisitions To deliver a combined growth in the 20% to 25% range per annum, the new profitability target is to achieve an adjusted EBIT margin of at least 7%. The past year demonstrates that 7% does not represent the ceiling for what the business can deliver. However, we are in a growth phase and we will continue to focus on growth. We will not compromise on this by prioritizing profitability at a higher level and the established target. The capital structure and dividend policy targets remain as before. Moving on to Slide 12, please. Our business model combines a multi brand approach with acquisitions, both of which help maximize our digital footprint and result in a customer base that is both broad and attractive. As we stated a couple of quarters back, we're step by step increasing the granularity with which we communicate customer developments. Our ongoing acquisition agenda, however, means that our consolidated internal data today covers the main platforms rather than the complete BHG universe. With this said, as you can see on the bottom left hand side, we've seen a steady increase in the number of active customers during the year, reaching well over 2,000,000. This represents a growth in active customers of more than 50% year on year. A few words on this customer base. The largest cohort consists of customers who are active in the labor market and in their prime when it comes to improving home environments for their families. We have a roughly fifty-fifty split when it comes to gender, with men being more prevalent within DIY and women within home furnishing. On the bottom right hand side, we show how the delta between our fully loaded gross margin and marketing investments keeps expanding. The significant increase in gross margin is the result of both pricing Betagen's operational efficiencies and the growing share of net sales from our own brands. The slight increase in marketing to sales, which at 5.7% is still at market leading levels, It's connected to the increase in net sales from our own brands. The net result of these developments includes very attractive customer acquisition metrics with a strong return profile already on a new customer's first purchase. We're committed to constantly enhancing the customer experience, The commitment which was put to the test during the exceptional demand peak of the Q2. We've cut lead times and we've clawed our way back since then. We will continue investing in systems and in processes to ensure that we meet or surpass our customers' expectations. I'll now hand it over to Jesper, who walk us through the financials in more detail. Thank you, Adam. As we now put the 4th quarter behind us, We can see that a high level of growth has been maintained. The patterns from the 2nd and third quarters of the year were largely repeated in the 4th, Even and high growth in the home furnishing segment and accelerated growth in the duty sales segment. As Adam mentioned, net sales increased 43.2 percent to reach SEK 2,355,000,000 And organic growth reached 35.5%. On the back of continued favorable market conditions, We reported the strongest EBIT and EBIT margin for our 4th quarter to date, reaching SEK194 1,000,000, which corresponds to an EBIT margin of 8.2%. The high adjusted EBIT margin was the result of, 1, A favorable price and product mix, including the continuously growing private label share of sales in the Do To Self segment 2, operational leverage and fulfillment, logistics and SG and A due to high growth and 3, Positive currency effects, which I will get back to. Moving on to Slide 15. Turning to some of the sales drivers in the quarter. Similar to the performance in the second and third quarter, the continued strong trading conditions led to a Strong growth in the number of visits to the group's destinations, which increased by 53% to 78,000,000 during the quarter We generated 865,000 orders. Although the trend in the number of visits to the group's destinations was strong, The conversion rate increased somewhat compared with the year earlier period. As in the 2 preceding quarters, a chain product mix resulted in a lower AUV than in the year earlier period. However, as the record high gross margin for the period demonstrates, The decrease in AOV did not have any negative effect on earnings since an advantageous AOV structure could be maintained In relation to the delivery options relevant to a given category. In other words, the AOV for bulky products, which are sent on pallets, remained high and the high growth for small parcels could be managed by delivering to service points. Slide 16, please. As a result of continued strong market conditions and the group's position, profitability for the quarter was very high. Strong top line growth at 43.2% resulted in strong operating leverage translating to a gross margin increase Of 54.8 percent and an EBIT increase exceeding 100%. The gross margin improved by 2.0 percentage points to reach 27.2%, exceeding the previous record that was set in the preceding quarter. The product margin amounted to 38.4%. Just As in the Q3, the gross margin improvement was driven by a growing share of sales from our own brand, Continued focus on maintaining the price points for bulk products, additional cost and process efficiencies in purchasing and logistics And finally, positive currency effects from the stronger SIC, resulting in a favorable impact on the gross and EBIT margin by 0.9 percentage points. Let us now turn to our Do It Yourself segment, Slide 17, please. The do it yourself segment closed the year with strong growth and exceptionally high profitability. Net sales grew by 49.4 percent to reach SEK1.439 million, of which organic growth amounts to 39.4%. The segment platforms in Sweden and Finland continued their strong trend from the previous quarters. At the same time, the Danish operations As well as a number of the more specialized operations in Sweden, particularly those with a high private label share of sales grew very strongly. Profitability in the duty to sales segment was favorably impacted by higher share of sales from our own brands, and both gross and EBIT margin Reached record high levels. The gross margin improved by 2.0 percentage points To reach 25.1%, adjusted EBIT amounted to ZAR143 1,000,000 corresponding to an EBIT margin of 9.9%. During the quarter, we continued to develop our customer offering, including The continuous expansion of the product range, expanding the base of products for which consolidated delivery is offered And a further rollout of installation services. The installation platform has now been introduced in the Finnish market. Slide 18, please. The home furnishing segment is now in its 9th consecutive quarter of strong growth and solid margins. Net sales in the Home Furnishing segment grew by 34.7% in the quarter, reaching SEK923 million, of which organic growth amounted to 30.1%. Net sales were strong and even across all geographical markets, led by the category specialist, Lampjalareen, which reported growth rate of nearly 100%. However, net sales were somewhat negatively impacted by bottlenecks In certain areas of the product supply chain, not leased as a result of the shortage of foam for upholstered furniture throughout Europe. The stricter Danish restrictions also had a certain negative impact during the final week of the year. The gross margin improved by 2.4 percentage points to reach 30.3%. Adjusted EBIT reached 63 point $6,000,000 2nd in the quarter, corresponding to an EBIT margin of 6.9%. The somewhat lower EBIT margin for the quarter is attributable to transaction costs relating to the acquisition of Nordic Nest, The relatively high cost of online marketing in Eastern Europe, which in turn were linked to product bottlenecks Let us now turn to cash flow, Slide 19, please. Cash flow from operating activities for the full year amounted To SEK994 1,000,000 corresponding to a cash conversion in relation to adjusted EBITDA of 105.9%. The main drivers behind the strong cash flow was the group's EBITDA as well as a favorable working capital trend. The right hand graph showing the development in liquidity walks us through the starting period position Of SEK 270,300,000 adding the cash flow from operations, deducting Impact of investing activities, a majority of which is M and A related and some the most related to Nordic Nest. And finally, The financing activities, which again primarily related to Nordic Nest in the form of a new term loan of SEK 1,000,000,000 That also include amortization of leasing liabilities, bringing us to the period end of SEK299,000,000 of liquidity at Slide 20, please. The group's net debt amounted to SEK1.8 billion at the end of the quarter Despite the acquisition of Nordic Nest, our strong year to date operating performance meant that net debt in relation to LTM adjusted EBITDA Ended at 2.2x, within our medium term financial target range. Our financial position is strong. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter or SEK 300,000,000, which means that we can continue to execute both organic and inorganic growth initiatives. I'll hand it back over to you, Adam, to summarize and conclude. Thank you, Jesper. So summarizing on Slide 22, Q4 caps a transformative year for us with stellar growth, profitability and cash flow generation. We're reporting a 5th quarter in a row with a rough target growth. Nordic Nest joined us and now constitutes a new vertical within our Home Furnishing segment. Our gross and bottom line margins are at industry leading levels on the back of sound mix development and strong operational control. Strategy execution is in motion revolving around our 4 pillars, which make up the BHG ecosystem. And finally, On the back of having come within touching distance of our previously communicated financial targets, we're today staking out the path forward, including targeting to reach SEK 20,000,000,000 in the medium term. Thank you. This concludes our presentation, and we'll now open up the call for questions. Thank We have a question from the line of Gustav Pagios from SEB. Please go ahead. Thank you, operator. Good morning, guys. A few questions, if I may. Firstly, Adam, you mentioned that trading has continued into January. If you can confirm that We should interpret that as the organic growth being roughly at the same pace in January compared to Q4. And if you could Leverage a little bit on the trends in term of month, if it has accelerated or declined towards the end. And the last, if you could remind us sort of the phasing typically in Q1 if January is small or a representative third of that quarter? Thank you. Thank you, Gustav. So as we comment on in the report, and actually, it's the 3rd Report in a row where we basically say the same thing, which is we expect the reversion to more trend like growth, which over a business cycle should be something like 15% per annum organically. We can still confirm that the above trend growth that we've seen In the past three quarters has continued into January. So without being too specific, the answer is yes. It's More or less in line with what we've seen through the Q4 thus far into the month. And the Q1, as you know, seasonally, It's not our strongest quarter from a top line point of view. And January, I think, is roughly similar to February, taking into account the additional days of the month, of course. And then March is slightly stronger than the 2 preceding months in the quarter. Great. That's very clear. And could you remind us sort of when you saw Exceptional growth starting last year on the back of COVID-nineteen. Was that sort of end of March Or early April or could you remind us? It was in the final days of the Q1. So when I think people realized that this thing that was coming to us from far away was not An isolated epidemic, it was actually going to be a global pandemic. I think the initial couple of days when we sort of Understood that this was dawning on everyone. The market was a bit taken aback. And then after that initial 3, 4 day period of Slightly more hand back trading, we saw this significant increase in Demand, and that was more or less the last week of March. And then as you know, it continued basically throughout the Q2. The Q3 was also excellent, although at a slightly lower level than the Q2. And now the Q3 is sort of somewhere in between the 2. All right. Okay. If I turn to M and A, I understand you keep roughly I mean, your new target simply means that you're Keeping your old growth targets being 10% M and A and 50% organic. And you already have about 10% M and A growth This year, I guess, from the Nordic Nest acquisition, could you elaborate a little bit on your hunch on whether or not we will see additional acquisitions In the next few quarters and if you could also elaborate a little bit on what you see your financial capacity is to add M and A Without going for new equity near term? Thanks. As you're alluding to, it was difficult So forecast precisely the pace of M and A in a shorter period of time like a quarter or even a couple of quarters. But over the course of the year, I hope I don't have to eat this up, but I can say with full certainty that there will be more M and A. And there will with all certainty be more M and A of the types that we call category catalyst acquisitions. Whether we will see opportunities in the order size order that we Just did with Nordic Nest, that when we definitely see opportunities, but whether sort of all the stars will align And we will grab opportunities to go for those types of acquisitions. That depends on a number of things. But Category catalyst acquisitions. Full certainty, yes, there will be such acquisitions this year. And then coming Back to seasonality because I think it's important in this regard as well. The second quarter is seasonally Our strongest cash flow quarter always. And so we do expect that seasonality to hold up well this year as well. And in terms of firepower, where do you see your firepower? If you look at your internal budgets for how you will perform this year Compared to your where you're comfortable in terms of leverage, what's your firepower for M and A this year, you think, Adam, roughly? I will actually not quantify that other than to say that we feel that we have sufficient firepower. And you know, although we did revise our financial targets, our net debt to EBITDA target remains. But the way that's phrased, we said that we can temporarily also move outside of that range if we see that we can quickly come back into it following an acquisition. Our relationships with the financing community, including our house bank, is excellent. So We don't feel that we're significantly constrained to follow through on our plans. Okay. A few more questions, if I may. Firstly, you mentioned that you're rolling that out now also in Finland and you're breaking it out a little bit from your current organization to give it a little bit more room internally. Could you give us a little bit of flavor of where you're at currently in terms of share of sales coming from installation in January or end of last year? If it's margin accretive already today and current growth rate as you envision it? Yes. So the easy question to answer is the one on margin accretion and the answer is yes. It's absolutely margin accretive to us. When it comes to share of revenues, it's actually very small if we look at that as an isolated P and L. But we do see that it's strategically important to us. As you know, our mission is we make living easy, and this is a crucial A building block for moving ever closer to that mission. And I think arguably also we have some product sales that might not otherwise have happened if we also didn't offer this additional service, which goes so much hand in hand with some of the product change within DIY. Great. I might have some follow ups, but I'll get back in the queue and let someone else talk. Thanks. Thank you, Christophe. We have a follow-up question from the line of Gustaf Gheus from SEB. Okay. Thanks. Yes, a few more then. Nitty gritty ones. Could you give us some guidance on CapEx And lease payments for this year? And secondly, with regards to the earn out payments In Q4, could you confirm whether or not that mainly relates to Furniture 1? And if you could elaborate a little bit on you have any further commitments financially to the previous entrepreneur there and your ability to possibly remain keep him within the organization also going forward. Thanks. So if we start with the Fermity 1 Questions. So we did spend SEK 180,000,000 in the 4th quarter relating to acquire another 20.1 from the non controlling interest in Financial 1. So that's what you see in the cash flow. And when it comes to The IFRS 16 or the leasing payments, that would be in line for next year. So it's roughly, as you see in our cash flow statement, it's $40,000,000 in amortization and another $10,000,000 $12,000,000 in interest. And I think the last question was maybe when it comes to additional payments to Ference 1. Is that correct? Yes, I mentioned that your ability to remain that entrepreneur or your if you see that he's going to still be around And also if you have a CapEx guidance for us for next year, that would help. Yes. So if I may just comment further on Furniture 1. Yes, he's a great entrepreneur. He's much appreciated. He's happy being part of our universe, And we very much expect them to continue driving the business to new heights. And coming back maybe to the CapEx, we have said before that we're aiming for some 1% of net sales. So with the high growth that we have had this year, we are not there. So I would say slightly below 1% for next year. Okay. That's great. Those were all my questions. Thank you. Thanks again. We have one more question from the line of Carlos Grailingen from Berenberg. Please go ahead. Hi, good morning, everyone. Thank you for taking my questions. I just have a question relating to the wider markets. So obviously, you guys have shown stellar growth Across the wider market, but can you talk a little bit more about the wider market characteristics? How has The brick and mortar, been losing market share to online players, to which extent have you taken market share? And what have we In terms of overall growth in the wider industry now that people are sitting at home realizing that their homes need to do some sort of refurbishment. You can just elaborate a bit about the general market conditions and your growth trajectory and penetration rates. Absolutely. Thank you, Karlsper. That's a good question. And I guess many of us also read and listened into Big Mac's 4th quarter results. We feel that the way that their CEO put the conditions now on the DIY side, which of course is their exclusive market, It's quite in line with how we view the DIY side of our business in terms of total market. So I think the way he put it was that The market for DIY in 2021 will definitely be bigger than in 2019, but it won't be as big as in 2020. And that's now referring to the total market. And in our case, we, of course, are an online player, And we fully expect, and I guess all market analysts are with us on that one, that online penetration will continue increasing. And we believe that there will be sort of a major growth in the online section of the DIY market in 2021. So that's sort of our market outlook. And for 2020, the market for DIY still and was the total market was Unusually strong, just as the Big Mac also mentioned. So we agree with that characterization, although there sort of isn't objective data out there yet. The market for B2C was much stronger than B2B, and we believe that The Swedish market was probably the strongest of the 4 Nordic markets in terms of total market, again, growing by on the B2C side, perhaps just shy of 20%. And as you know, we had organic growth in the quarter within DIY of 39% or so. So that's on the DIY side. If I move on to Home Furnishing. I think the market developments have been very different In the Northeast, compared to some of the Mainland European markets where especially there was sort of a forced online conversion That was much more market than in the Nordic markets, where the offline alternatives Became truly offline, meaning shut down. And by and large, that hasn't been the case in the Nordics, with a few exceptions during specific Times like in Denmark right now. But that has meant that we haven't just forced online penetration increase, but it's sort of been The normal online penetration increase in the Nordics. And if we look at the trajectory of our Home Furnishing business, it's sort of Almost boringly predictable trajectory since the Q3 of 2019, we've had organic growth around 30% quarter to quarter to quarter. So it hasn't been noticeably affected by changed consumer behavior the wake of the pandemic. Does that answer your questions, Carlos? Yes. Thank you. That was very clear. I just I think for one follow-up because following the IPO and in terms of the wider market research that we've seen, Online penetration has been some 10%. So is it fair to assume that online penetration has continued to accelerate in line with your recent growth Trajectory that online will continue to take market share or would you say that the overall do it yourself and home improvement market has grown as well or should we consider this a relatively flattish market with online continuing to take penetration? I think I'm just trying to understand which extent have the wider market grown or are you guys just continuing to win? So the answer for DIY in 2020 is both those things have happened. So the market has definitely grown at significantly above trend growth. We believe that trend growth for both of our segments It is perhaps slightly, slightly north of GDP growth over a business cycle. And what we saw in the DIY market in 2020 was many multiples of GDP growth occurring in the total market for DIY. And then, of course, online has grown faster than the offline market because online penetration has also taken a leap forward. So our growth within DIY is 40% level or so across the 4 Nordic countries, is the combination of a very strong total market and continued online penetration increase. Thank you. That's very clear. That's all for me. Thanks. And we have one more question from the line of Frederic Ivo Schan from ABG. Please go ahead. Hi, guys. My question was actually asked already, so I'm very happy with the answers You're given. Thanks. Thank you, Frode. As there are no further questions, I'll hand it back to the speakers for closing remarks. Thank you, everyone. We look forward to speaking to you again in conjunction with reporting our Q1 2021 results. Thank you. Wishing you all a good day.