Welcome to BHG Q2 Report 2024. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing hash five on their telephone keypad. Now I will hand the conference over to CEO Gustaf Öhrn and CFO Jesper Flemme. Please go ahead.
Hi, my name is Gustaf Öhrn, and I'm the CEO of BHG. I hope that you're enjoying the summer, and we're super pleased that you're listening in, and we are sorry if we are interrupting your summer holiday. I am here together with Jesper Flemme to present our Q2 report. We will also be available after the presentation to do our best to answer your questions. Slide two, please. The financial highlights of the report. Another challenging quarter from a market perspective, and sales was down approximately 30% organic versus the same quarter last year. Earnings came in with a profit of SEK 99 million in the quarter, and we are pleased that we managed to improve our result versus last year.
Please also be mindful that Q2 was our strongest quarter last year, where we had the majority of the positive effect from the inventory reduction sellout last year. As mentioned, top line was a challenge, and the improvement in earnings came from a reduced direct selling cost and reduced SG&A, both being the result of the hard work we have done in the last year. We can happily summarize that our hard work is paying off, and even by a slim margin this quarter, this was our third consecutive quarter with improvements on earnings. We had a positive cash flow of SEK 328 million, and a cash conversion of close to 170% in the quarter.
A strong cash flow and cash conversion, also considering the seasonal patterns, where Q2 is the strongest quarter of the year from a cash flow perspective. When comparing with last year's cash flow, please be mindful that we last year, as mentioned, had a massive inventory reduction. We reiterate the message from the last few quarters that we, for 2024, will prioritize profit over cash flow. Slide three, please. A few words about the market. Even with positive macro signs in macro indicators, demand in our categories remains challenging. The main driver of demand, disposable income, is still subdued due to primarily high interest rates. Even with strengthening consumer confidence following the first interest rate cut in the Swedish market, the consumer remains low on disposable income.
It is very comforting to see the increase in number of household transactions in the last two quarters, coming from low levels, but will, over time, have a positive effect on demand. If we look at the renovation index displaying the intention to renovate, it remains on low level, which mirrors our numbers as we, unchanged, see the strongest effect on demand in capital-intensive categories as doors, windows, floors, and other categories associated with renovations. We are confident that the macro indicators that we now see developing in the right direction will transform into demand, both from interest levels coming down and the increase in number of housing transactions. However, this with some delayed effects, as it will take some time before it filters through down to the consumer.
We are confident that the market environment will bounce back, but as a consequence of the above, we unchanged, believe, and plan for a challenging 2024. Slide four, please. As we communicated at our Capital Markets Day in May, our main focus is unchanged to secure profitable growth, and our first ambition is to take us back to the profitability of pre-pandemic levels of 5%, and then with further market normalization to the 7% we have in our, in our financial targets. The main focus areas for the profitability improvements are, one, growth initiatives. As you all know, growth being the main driver of profitability, and we have a number of growth initiatives in the pipeline, including internationalization, continued category expansion in relevant categories, and selling over external marketplaces. And two, consolidations. As you know, we are on a structural consolidation journey.
We have done a lot, but we still have a number of initiatives to be finalized in all three business units and to realize the synergy effects of the structural changes we have done. And 3, efficiency. Super crucial in a challenging market and remains a focus for us with initiatives in automation, where we see big potential in fulfillment, using AI as a tool to drive efficiencies in areas as content generation, customer service, and marketing, and from group-wide agreements, leveraging our sites to get better terms for all companies in the group. And lastly, to take us all the way to the 7%, we will need support from the market rebound that we now clearly see coming. Both market normalization and the return of the structural growth drivers, including continued online penetration. Slide 5, please.
Being more specific on initiatives from the last quarter and what is currently within our main focus based on these three levers include: starting with the growth initiatives. We drive geographic expansion in all three business units, but with a number of dedicated initiatives, and in the largest scale in Nordic Nest, where close to 50% of sales now is from markets outside of the Nordics, and where international sales continue to grow faster than the sales growth in the Nordics. Primarily within Value Home, we have businesses that have lost its perceived price leadership, and where we are refocusing our assortment back to the entry and low price segments. Winning in value is all about securing the best offer for the consumer and enabling this by a low cost base. Our second lever, consolidations.
As you know, this has been a major focus for us for the last 18 months, the ambition to simplify our structure and realize synergies. Going into this quarter, we have already reduced the number of entities in the group from 25 to approximately 12, primarily through consolidations. With a high pace, we are moving towards the goal of consolidating the group into some approx 7 platforms. Current focus on consolidations include: the biggest project is the ongoing consolidation in home improvement, consolidating several entities in different geographies into what we call the Nordic Do It Yourself powerhouse, creating a platform that enables localized offerings, but with consolidated support functions, a journey that is expected to take another 15 months to finalize.
In Value Home, we have, in the first half of this year, created a new private label platform that we call Hemfjäll Group, consolidating our two entities of Arc E-commerce and Hemfint, and adding the acquisition of Trendrum. We have consolidated three businesses with a similar business model into one entity with a combined turnover of approx SEK 800 million. All three front ends will remain unchanged and with slightly different customer propositions, but with consolidated mutual management and support functions to realize synergies. In Premium Living, it is exciting to see how the Nordic Nest Group continues to take shape. First, we acquired and added Svenssons as a category specialist in future, in furniture, sorry.
In the first quarter of this year, we acquired KitchenTime, and now in the second quarter, we have launched both KitchenTime as a category specialist within cooking and dining, and the consolidated LampGallerian under the new name of LightShop as a category specialist in lighting on the Nordic Nest platform. Our third lever, efficiency. Here we have a number of actions ongoing, but the actions that stand out in this quarter includes leveraging our inventory reduction by reducing our warehouse space in Value Home with 18,000 square meters and with further savings to be done. More about this in a minute. Using our size to negotiate group-wide agreements. In the first quarter of this year, securing a new agreement on last mile deliveries, having a very positive effect on this quarter's direct selling cost.
Using AI as a tool to create efficiencies, something we have done over the last few quarters with good results in content generation, but where we now have several initiatives in the pipeline and see huge potential within customer service, both to reduce cost and to improve on customer satisfaction. Slide 6, please. As you know, we have made a very extensive reduction of inventory in the last two years. From peak inventory in the second quarter of 2022, we have reduced our inventory with almost SEK 1.9 billion. This has been painful, but also necessary, and we are, after the reduction, significantly better positioned for improved profitability.
Because of the massive inventory downsizing and from the consolidation, we have been able to reduce our warehouse footprint, and as a part of the, our actions to right-size cost in the Value Home segment, reduce our cost levels. We have in June communicated that. We have already now in the second quarter, as mentioned, reduced our warehouse space with 18,000 square meters. We have also announced a planned reduction of 17,000 square meters in the third quarter and an additional reduction of another 10,000 square meters in the last quarter of this year. All in all, reducing warehouse footprint over the year with 38,000 square meters, with yearly cost savings of SEK 38 million. This on top of the reductions we made in 2023, with cost savings of SEK 30 million on an annual basis.
In connection with the warehouse consolidation, we have made a total review of our inventory, and consequently, we agreed with our auditors to do a SEK 99 million impairment of inventory. As we concluded that a small part, part of the inventory, after the massive inventory cleanup, was deemed not to be sold at a relevant sales pace due to limited service life, as, for example, end of life on batteries or from warranty periods coming to an end. Slide 7, please. Financial targets. As we communicated at our Capital Markets Day in May, we have updated our financial targets to better reflect the new strategy, the current market environment, and the strength and balance sheet.
As you all know, the previous targets were set in a different market situation, and the ambition with the updated target is to better reflect the current market situation and the revised strategy that we communicated at the Capital Markets Day. Our updated financial targets, in short, is to continue to deliver organic growth above the addressable market, to return to an adjusted EBIT margin of 5% in the first phase, and over time, further improve adjusted EBIT margin to 7%. On capital structure, our objective is to continue to strengthen our balance sheet and operate with a net debt to EBITDA target of below 2.5x. Dividend will be paid when free cash flow exceeds potential investments in profitable growth and provided that the capital requirements are met. Personally, I find them relevant, straightforward, and achievable. Slide eight, please.
As mentioned, we believe that the market will be challenging for the remainder of the year. With that said, we are also convinced that the market will rebound during 2025. We have spent the last 24 months playing defense, and we are confident that we have done the necessary work to be properly prepared when demand comes back. Strategically, we have defined a forward-looking and forward-leaning strategy that we presented at the Capital Markets Day. We call it the Olympia strategy. Structurally, which, as you know, has been a huge focus for us in the last 18 months, we have divided our business into the 3 business units, simply because we realized that this is where the main synergies are to be found.
We have divested and closed a few businesses where we did not see strategic value and where we did not see preconditions for profitability within a foreseeable future. But more than anything, we have consolidated our business into fewer and larger platforms. We do this to realize synergies and to build economies of scale. Operationally, we have put a lot of work and focus on building scalable solutions, including investments in IT platforms, automation, and using the consolidation to scale our best management into the remaining platforms. And lastly, but not least, prepare the group financially, lowering cost levels, reducing inventory levels, improving cash flow, and strengthening our balance sheet. As a result of the hard work, I can with confidence say that we are well prepared to capitalize on the market rebound when it comes.
Thank you very much, and with that, I will leave it to Jesper.
Thank you, Gustaf, and slide 9, please. A continued weak demand impacted net sales in the second quarter, which decreased 22%, reaching SEK 2.7 billion, and organic growth was -13.5%. Net sales performance varied between our segments, with Home Improvement contracting 12% and Value Home 24% organically, while Premium Living grew 6%, driven by strong performance outside of the Nordics. We continue to see a trend of weak underlying demand in several renovation and capital-intensive categories. Turning now to page 10 and profitability. Adjusted EBIT improved year-on-year and amounts to SEK 99.1 million in the quarter, corresponding to an EBIT margin of 3.6%. The improvement in profitability was mainly driven by reduced fixed cost base as a result of actions taken last year and so far this year.
Segment-wise, Home Improvement had a strong quarter with an EBIT of SEK 80 million, corresponding to an EBIT margin of 5.2%. Also, Value Home is reporting a solid profitability despite a weak net sales development. Premium Living had negative mix effects in a seasonal small quarter, resulting in a slight decline in profitability. Moving on to Slide 11 and the EBIT bridge. The EBIT margin improved by 0.7 percentage points compared to last year, mainly driven by the reduced fixed cost base and efficiency improvements in our last-mile operations. We are happy with the overall level of the product margin, but we see a slight decline compared to last year. The decrease was driven by especially a weak market for outdoor furniture and negative mix effects in the Premium Living segment. Last-mile costs improved, primarily through efficiencies and better group-wide agreements.
Both organizational costs and D&A are positives in the quarter, as we see the effects from the extensive savings and structural measures taken. All in all, our EBIT margin amounted to 3.6% in the quarter. Slide 12 and cash flow, please. Cash flow from operating activities amounted to SEK 328 million, driven by a positive working capital development as a result of inventory reduction and unseasonal profile.
The right-hand graph, showing the development in liquidity, walks us through the starting period position of SEK 370 million, adding the cash flow from operations and the impact of investing activities, including the positive effect from divesting Design Group, and finally, deducting the financing activities, which are primarily related to utilization of our revolving credit facility and amortizations of both term loan and leasing liabilities, but also include interest payments, bringing us to the period end, SEK 339 million of liquidity at hand. Slide 13, please.... The group's net debt amounted to SEK 1.2 billion at the end of the quarter, and net debt in relation to LTM adjusted EBITDA ended at 4.5 times. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 800 million.
Acquisition-related liabilities have increased through the creation of Hemfjäll Group and amount to SEK 508 million at the end of the quarter. Cash flow-wise, we assessed further payments of roughly SEK 10 million in 2024, and another SEK 260 million in 2025. With that, I will hand back over to you, Gustaf Öhrn, to summarize and conclude.
Thank you, Jesper. Then I will try to summarize. Macro indicators as inflation, interest rate, and number of housing transactions are all developing in the right direction. Disposable income is, however, unchanged low, and as a consequence, market has been challenging also in the second quarter, and we plan for a challenging market for the remainder of this year. But we are confident that we will see a market rebound in 2025. Our key focus remains unchanged to improve our profitability, and we do this through focusing on our three main levers of growth initiatives, consolidation, and efficiency.
The consolidation journey to simplify our business and realize synergies continues in the second quarter in all three business units, with the consolidation of a number of entities into the Nordic Do-It-Yourself Powerhouse, as well as the creation of Hemfjäll Group and the launch of KitchenTime and LightShop on the Nordic Nest platform. We have managed a massive inventory reduction, and consequently, we can reduce warehouse footprints and thereby costs in Value Home, and we have agreed with our auditors on a write-down of inventory. We have updated our financial targets to better reflect our updated strategy and the new market situation. Finally, after two years of hard work and defense, we are well prepared and ready to play offense when the market rebounds. Thank you very much for listening, and now we will do our very best to answer all your questions. Thank you.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Johan Fred from SEB. Please go ahead.
Yeah. Hi, good morning, guys. Thank you for taking my questions. Just the first question on outlook. You remain pretty pessimistic on the outlook for the rest of 2024, but given how weak the market for sort of outdoor furniture and those categories were in Q2, relating to last year's high campaign pressures, what do you expect for H2 in terms of category-specific campaign pressure and your comps into Q2? That's my first question.
Hi. Thank you. I'll do my best to elaborate a little bit on it. As we've said, we believe that, you know, the market's gonna remain challenging for the remainder of the year, and very much based on disposable income being, you know, not much higher. With that said, if everything goes as it looks right now, you know, disposable income will come up a little bit. I think we potentially could see a positive effect from the fact that, you know, we're doing quite well, I would say, on Home Improvement. I'm happy also with the development of Premium Living, but we do have challenges in Value Home, and Value Home has a proportionally smaller share of the business in the third and the fourth quarter.
Also, you know, some of the effects you see, there's still an overstock in some, in some categories, you know, outdoor furniture being one. Of course, that has a smaller effect in the third and fourth quarter than it has in the first and second. But I think it's important that we sort of... We still believe that it's gonna be a tough market this year, and I think it's important that we continue to plan for a tough market for the remainder of this year. But we're also, as we've said, becoming increasingly confident of the market turnaround that it is coming. The exact timing is very difficult to say, and also the fact that we are present in many geographies, many categories, which makes it even more difficult.
But this is our best judgment. I hope it gave you some sort of answer.
Yes, very clear. Thank you so much. A second question, just sort of a basic one, but your, your... In the quarter, your interest payments were roughly SEK 37 million, which includes both interest and amortization on these assets. How much of this was relating to lease amortization in the quarter?
So you want the financial net was SEK 45 million. SEK 40 million of those were bank interest and SEK 5 million were leasing interest. And looking forward, aiming for some SEK 35 million, SEK 35 million would be a fair number to guess for the coming quarters in total.
In total, I would assume lease interest would be roughly the same or could we expect a decrease due to your sort of restructuring of warehouse space and similar?
Some decrease, but it's only 5 out of 40.
Yeah.
So, it will be a small change.
Yeah, got it. Thank you so much. Those were all my questions for now.
Thank you.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you very much for listening in and prioritizing this on the beautiful summer day, and we wish you a continued good summer, and if you have any questions, please don't hesitate to contact us. Thank you very much!