Earnings Call: Q2 2021

Jul 22, 2021

Thank you, operator, and good morning, everyone. Moving to Slide 2, please. After our transformative performance in 2020 and into the Q1 of 2021, we are pleased to report a strong Q2. At the midway point of this year, we're demonstrating that our strategy of fueling organic growth with acquisitions continues to deliver. We have now officially surged past the SEK 10,000,000,000 sales level on an LTM basis, and we continue to capitalize on a plethora of growth opportunities. Our performance in the quarter was strong, not least given the daunting comps from the Q2 of 2020 And recent acquisitions have continued to grow very well indeed. The past 7 months have seen our 2 largest acquisitions to date, Those of Nordic Nest and Heimer, which we finalized as recently as yesterday. The outlook for further acquisitions remains bright. Slide 3, please. Today, as always, we will start by reviewing the results highlights. We'll then move on to the business update. I'll then hand it over to Jesper, who will cover the financial update before I summarize and we launch into the Q and A session. Slide 4, please. And on to the highlights then, Slide 5, please. Total growth in the quarter amounted to 31.8%, Taking net sales to SEK 3,650,000,000 organic growth amounted to 14.1% and pro form a organic growth, including the acquisitions of the past 12 months to 16.8%. This performance took place Against the backdrop of society gradually emerging from COVID induced lockdowns as well as us facing the toughest comps from last year. Adjusted EBIT came in at SEK278,000,000 corresponding to an adjusted EBIT margin of 7.8 percent And cash flow from operating activities amounted to SEK 336,000,000. The 2nd quarter was characterized by profitable, Cash generating organic growth, including a continued favorable mix shift towards a higher share of proprietary brands in DIY and a strong performance by our recently acquired operations. The quarter also saw the rollout of our FORT long term incentive program, which is a key tool For tying outstanding leaders to the group and for underpinning the BHG culture ownership and skin in the game, The 65 leaders who were given the opportunity to participate all made considerable personal investments into the program. Summing up, as a result of our size and of our data driven approach, we were able to further strengthen our market position during the quarter, Marked by an easing of restrictions for the first time since the pandemic began and a return to an everyday life less dominated by the pandemic. At the same time, the effects of the pandemic continue to impact the global supply chains in the form of longer lead times and bottlenecks for parts of our range. Slide 6, please. As you well know, our growth journey to date has been fueled by a mix of organic initiatives and M and A, An approach we are convinced conveys unique advantages for us and which we have every intention of carrying into the future. When it comes to the organic component, the quarter came in roughly in line with our guidance over a business cycle despite meeting the toughest comps from last year. Again, with a 14.8 percent organic growth this past quarter and 16.8% including Nordic Nest The other 4 acquisitions over the past 12 months on a pro form a basis, it is clear that we have continued to strengthen our market position. Slide 7, please. And moving to the business update, Slide 8, please. Our strategy remains focused on our 4 cornerstones. Firstly, the continued expansion of our leading product range, which exceeds the 1,000,000 SKU mark. Secondly, scale and the high share of own brands in our sales mix, with the quarter seeing strong overall growth and particularly so for our proprietary brands, and we clearly continue building scale advantages. Thirdly, creating the most appealing shopping experience And leading in the digital realm, we continued growing our digital footprint in the quarter despite the tougher traffic generation market, And we saw close to 110,000,000 visits to our destinations. And offering the market's best professional guidance, service and support, Including in the quarter continuing to extend the reach of our installation network within DIY as well as our own 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. Slide 9, please. Despite anticipating more challenging overall market conditions in the coming 12 months than in the exceptional past 12 months, We see ample growth opportunity. Our 4 cornerstones, which we just reviewed, continue to form the bedrock of our growth initiatives. In addition, geographic expansion in the Nordics primarily centered on spreading the footprint of our proprietary brands, But increasingly also tapping into additional European geographies. We estimate that the total European home improvement Opportunities here include expanding our services offering further and making better use of customer data to tailor the offering and to enhance the customer lifetime value. As the quarter demonstrates, we are on the path of increasing the share of net sales, which comes from our proprietary grants on the DIY side. And finally, M and A. As we have demonstrated, we are accelerating the pace at which we add critical mass under the BHGE umbrella. Our prospects for carrying out further acquisitions Both the bolt on and platform types are strong, thanks to our beefed up transactions and integration organization, our financial position and our view show. Turning to Slide 10 and digging somewhat deeper into the M and A aspects of our approach. With 35 acquisitions since our inception, 5 of which we have completed in the past 7 months, we are a serial acquirer. And our acquisition focus remains going forward. As before, we see ample opportunities in our home improvement domain. It is large enough to sustain our ambitions also in the long run, and so we will not stray away from it. As before, Acquisitions will help us grow faster, both by broadening and deepening our product range and by allowing us to jump start new geographies. As before, acquisitions will fall into 1 or 2 classes, somewhat smaller, but more likely more frequent Category catalysts that are bolted on to our platforms and adding new platforms to the business. Our acquisition approach, including our post merger integration playbook, is centered on ensuring a clear rationale and a clear plan for extracting synergies. The category catalysts are bolted onto one of our main platforms, which over time allows a full set of upsides to be gained. The synergy creation around the platform acquisitions primarily aims to maximize product assortment exchange, digital traffic generation, Leveraging business insights obtained from the data flowing through our growing footprint and leveraging economies of scale in terms of purchasing and other areas. Importantly, many of the platforms that are added in turn allow us to pursue an expanded range of category catalyst opportunities, which fits well into these new platforms. A great example of this is our recent acquisition of Svensson, which fits hand in glove into the Nordic Nest platform and which we would not have done had we not first secured the Nordic Nest platform. The pipeline of relevant acquisition candidates, both in our Nordic home markets and in large nearby geographies, is strong. During the quarter, we also strengthened the BHG team in both the transaction and integration side. And we significantly increased our credit lines From SEK2.4 billion to SEK3.3 billion, a large portion of which is currently unutilized. The conditions to further accelerate our acquisition rate are thus favorable. Turning to a brief update on Jaime, our 2nd largest acquisition to date, which we had the great pleasure of finalizing as recently as yesterday. Turning to Slide 11. So Heima. We have followed Heima for a good while and we are now delighted that we are 1. We explained the rationale for us joining forces with Heimark quite extensively in conjunction with communicating the deal on 9th June. So I'll just briefly reiterate the key points here. Heima is a fast growing online category expert, serving customers within the garden, tools and machinery, Forestry, outdoor life, hunting and leisure categories. Hanat net sales of SEK 744,000,000 in 2020. And with the accelerated momentum that the business is enjoying, we expect net sales to exceed SEK1 1,000,000,000 this year. The fit with BHGE is strong From a category and customer point of view as well as from a company culture point of view and synergy opportunities in areas such as geographic expansion, sourcing, Cost selling and exchanging best practices abound. Jaime will be consolidated from August 1 and from part of our DIY segment. Anders Karlsson, who is a 2nd generation family member, will continue to run the business together with his management team. As of yesterday, Our integration plan is now officially in full swing, and the collaboration with Anders and team gives me great confidence that our joint future is bright. Moving to Slide 12, please. Our business model combines a multi brand approach with acquisitions, both of which helped maximize our digital footprint and results in a broad and attractive customer base. Although traffic generation conditions were more challenging in the quarter In the preceding 12 months, our customer base continued to grow and our sound customer metrics remained intact. As you can see to the left on this slide, The increase in active customers, defined as customers who have made at least one purchase in the past 12 months, continues to underpin our goals. Over the past 5 quarters, our active customer base has grown by 52% and has now surpassed the 3,500,000 mark. The number of new customers in the past quarter grew by more than 20% on a pro form a basis on the back of strong organic growth as well as excellent growth in recently acquired businesses. Despite this strong growth in new customers, we maintained the share of repeat orders at around 40% of total. Our customers case on average €1.3 per annum as our product assortment is dominated by consumer durables. And our return on advertising spend continues to be excellent with significant first order profitability as evidenced by a marketing ROI well over 3x. Our investments into gaining further insights from customer related data across the group continue. These will help drive customer lifetime value and so unlock Further profitable cash generating growth. This is a key focus area for group management. Slide 13, please. A quick overview of BHGE as we stand today. On the left hand side, our CAGR since 2014 exceeds 40%. In this period, EBITDA has grown by more than 100 percent per annum. Our EBIT margin on an LTM basis stands at 7.9% and is generated by our over 100 customer facing web properties. And now moving over to the right hand side. These web shops have been visited Over 360,000,000 times in the past 12 months, generating some 4,000,000 orders from customers in 24 countries. And finally, our leading product portfolio keeps expanding. Slide 14, please. I'm handing it over to Jesper, who will walk us through the financial update. Thank you, Adam. We are pleased with our performance in the quarter, which again should be viewed against the backdrop of particularly challenging comps. As Adam mentioned, net sales increased 31.8 percent to reach SEK 3,551,000,000. Pro form a organic growth reached 16.8 percent and organic growth reached 14.1%. Adjusted EBIT amounted to SEK 278 1,000,000 corresponding to an EBIT margin of 7.8%. As in the Q1, the high adjusted EBIT margin was mainly the result of a strong quarter for the duty sales segment, Driven by a favorable price and product mix, including the continuously growing private label share of sales as well As good operational leverage due to high growth, while the Home Furnishing segment faced a weaker overall market. I will get back to the performance by segment in a little while. Turn to the sales drivers, Slide 16. Our market leading traffic generation and web team successfully navigated a traffic generation market that proved to be more challenging than in the past 4 quarters. The number of visits to the group's destinations grew by 20% to 109,000,000 during the quarter And generated 1,300,000 orders, while the conversion rates increased. Also, the overall AOV level, excluding the mix effect from Nordic Nest, increased compared with the year earlier period. Slide 17, please. The gross margin improved by 1.6 percentage points to reach 26.6 percent and the product margin amounted to 39%. Overall, the strong gross margin was driven by: 1, a growing share of sales from our own brands 2, our ability to offset cost increases in the supply chain by raising prices 3, a continued focus on maintaining the price points for bulkier products and 4, Additional costs and process efficiencies in purchasing and logistics, partly as a result of the high volumes. Let us now turn to our duty sales segment, Slide 18, please. The duty sales segment reported another very Net sales grew by 20.1 percent to reach SEK 2,184,000,000 of which organic growth amounted to 14.9%. The segment's Swedish operations performed particularly well, Including the Big Hema platform and the specialist units focusing on our own brands. Profitability in the digital sales segment was once again favorably impacted by higher share of sales from our own brands. The gross margin improved by 2.8 percentage points to reach 25.5 percent, and adjusted EBIT amounted to SEK230 1,000,000, Corresponding to a record high EBIT margin of 10.5%. Slide 19, please. The Home Furniture segment continues to build critical mass by combining organic initiatives and acquisitions. Net sales in the home function segment grew by 55.6% in the quarter, reaching SEK1.379 1,000,000, of which organic growth amounted to 12.3%. And pro form a organic growth, including Nordic Nest, amounted to 22 point 6%. All of the segment's units have continued to grow and the newly acquired businesses performed very well. The gross margin for the quarter was 28.4%. Adjusted EBIT amounted to SEK 80,000,000 corresponding to an EBIT margin of 5.8%. The lower margin compared with the year earlier period is mainly attributable to 3 factors: A mix effect from Nordic Nest, which has slightly lower gross margins than the segment's other operation, Effects from the ongoing fine tuning of the Danish operations new warehouse and the certain delay in price adjustments In order to offset cost increases in the production and supply chain. Finally, the strongest SEK during the period had a positive impact on EBIT. Turning to cash flow, Slide 20, please. Cash flow from operating activities amounted to SEK 336,000,000 mainly driven by the group's EBITDA. The change in working capital in the quarter was favorable. But compared to the year earlier period, the following can be noted. 1, last year saw an unusually favorable working capital position As a result of the exceptional growth in the quarter, 2, we continue to grow the share of sales from our own brands in the duty sales segment, which all else equal requires a higher inventory position 3, a deliberate adjustment of the range to reduce seasonal dependency. And 4, the fact that the group has chosen to actively counter the supply disruptions and extended lead times to maintain strong growth. The right hand graph Showing the development in liquidity walks us through the starting period position of SEK299,000,000 Adding the cash flow from operations, deducting the impact of investing activities, a majority of which is M and A related And finally, the financing activities, which are primarily related to the share issues completed in Q1 And the refinancing completed in the period, but also include amortization of leasing liabilities, bringing us To the period end, SEK 991,000,000 of liquidity at hand. The Lima transaction that was completed yesterday reduced our liquidity by SEK582,000,000. Slide 21, please. In the second quarter, we have completed a refinancing whereby the group's Existing credit facilities with SEB were replaced with new facilities provided jointly by SEB and Danske Bank. The new facilities have a total credit line of SEK 3,300,000,000 and a term of 3 years with an option to extend the agreement with 2 years. At the end of the quarter, we had unutilized credit facilities of SEK 1.8 SEK 1,000,000,000. The group's net debt amounted to SEK 509 1,000,000 at the end of the quarter And net debt in relation to LTM adjusted EBITDA ended at 0.5x, A significant outperformance of the medium term financial target range. We continue to see excellent M and A opportunities. And our strong financial position means that we can act decisively as the right opportunities materialize. Handing it back over to you, Adam, to summarize and conclude. Thank you, Jesper. Turning to Slide 23 to sum up. We've now passed the midpoint of the year. After a 2020 Q1 of 2021 in which online markets saw explosive growth, It is difficult to predict how the overall market will develop in the coming period. However, despite the strong comps over the past 12 months we now face, We are confident of our ability to continue on our path to profitable cash generating growth also in the coming 12 months and beyond. Summarizing the quarter, we surged past the SEK 10,000,000,000 reported LTM sales in the quarter and are now on a pro form a level of close to SEK 12,000,000,000 Excluding the Jaime acquisition, with Jaime, we add another 1,000,000,000. Our approach to combining organic initiatives with M and A continues to deliver and resulted in us further extending our Nordic online lead. Our 2 largest acquisitions to date, Nordic Nest and Jaime, were both completed in the past 7 months, as were 4 category catalyst acquisitions. The quarter also saw us significantly extending our credit facilities, leaving us excellently pleased to continue on an accelerated M and A journey. We launched the 4th iteration of our long term incentive plan co founded by the 65 participating BHG leaders and securing long term leadership engagement. Our customer offering, the BEG ecosystem, was further expanded And investments were made in strengthening our IT capabilities around key areas such as customer insights and product assortment exchange. And finally, with some 13,000,000,000 second performance sales, including Jaime, we have already covered a significant distance towards reaching our next milestone, I. E, becoming a SEK 20,000,000,000 net sales business. Moving to Slide 24. And this concludes our presentation. We will now open up the call for questions. Over to you, operator. Thank Our first question is from Niklas Ekman of Carnegie. Please go ahead. Your line is open. Thank you. A couple of questions, If I may. Firstly, if you can talk a little bit about the trends in here during the quarter. You have 14% organic growth. You said the trend was stronger at the start and then it gradually slowed. Is there any way you can quantify that or at least say if there were any tangible In the beginning versus the end of the quarter. Good morning, Niklas. Thank you. There weren't any very material differences, but I think the description in the quarterly report does present a fair picture. And looking into the 1st 20 days of the current quarter, we are pleased with how it has begun. So that's the picture we saw in Q2 and that's the picture we've seen thus far into Q3. Very good. Thanks. And On the margin side here, we're seeing a sharp increase in the gross margin, but the EBIT margin is down a lot. Can you explain a little bit the drivers here? This is mainly in Home Furnishing. And just if you can explain the drivers that would be very helpful. Absolutely. I'll just start by saying that it's a fantastic thing we feel to have such a broad base to stand on. We have 2 segments. We have customers in 24 geographies and we had a stellar performance in DIY. Of course, it was less stellar in Home Furnishing. So if we turn to the Home Furnishing segment, as Jesper briefly touched on, We did have continued interiming of the Danish warehouse facility. That was complicated by the pandemic itself. We had An outbreak of COVID-nineteen among the stats there, which forced us to actually close that warehouse down for a period of time. It's also been complicated in Denmark and beyond by the disruptions to the supply chains, which has meant that we have had a tougher time in optimizing the fulfillment operations. So that's just a new environment for us. And I do want to stress that it's actually the same environment for all of our competitors. So that is a significant contributor to the decrease on the home furnishing side. I do also want to say that With societies opening up, we do face a new environment now in both segments and we do face the stiffness comps from last year as well, Important to keep in mind, but the difference between the DIY environment and the home furnishing environment is that it was Slightly tougher on the home furnishing side and the market as a whole. Now pleased that Jesko also referenced when it comes to traffic generation Costs, again, so this is not particularly pertaining to VHGE. It really is a market wide phenomenon. And I'll also just finalize by saying that looking at the group as a whole, we did have The cost for the long term incentive program affecting results in the quarter. The corresponding costs for last year's program were 1, smaller by some SEK 7,000,000 and 2, they actually Fell into the Q3 of 2020, whereas we are charging the most recent one to the 2nd quarter of this year to the tune of SEK 18,800,000. So that's also important to keep in mind. Very, very clear. Thank you. And on this issue of rising input costs, how long does it take for you to mitigate it? And are you Now kind of going into Q3, are you at a stage where you have compensated for prices? Yes, so as we briefly mentioned in the report, our ability and speed at which we can compensate It varies a bit from category to category. And if we take the segment view, there is generally somewhat longer lag on the home furnishing side, including because we have a higher degree of competition from catalog based competitors on the own furnishing side. So that is part of the explanation. And as to actions, yes, absolutely, we have Taking those actions, we've addressed pricing and campaigns. And how this plays out through Q3, well, of course, depends on What happens in the market in 2 regards. 1 is competitors' moves. 2 is how consumer spend develops. That's very clear. Thank you. And finally, I'm just curious On your M and A agenda here as well, you mentioned your 5 acquisitions in H1 and the 2 very sizable acquisitions included there. You talk about a continued high activity here. But is it safe to assume a tangible slowdown here in In H2 specifically and more consolidation phase or are you still very active with M and A? We are still very active with M and A. We have really a super firm position as an acquirer in the Nordic markets, But we have also significantly increased our visibility in the European landscape, and we have an excellent bid flow of both types of acquisitions, Category Catalysts and Potential Platforms, both in the Nordics and in large adjacent geographies. And we have every intention of Keeping a high pace when it comes to M and A. It is, of course, quite difficult to be precise in terms of time line. But our intention is to at least keep that same pace going forward. That's very clear. Thank you so much for taking my question. Thank you, Niklas. Thank you. Our next If I can also start with sort of the margins with a very strong gross margin development and then offset By OpEx then versus tough comps in Italy. But how do you see the gross margin progression going forward? You've had some FX Support now, I think, for 3 quarters to the gross margin, but then you also have the element of higher share provider brands and so forth. When you look at your budget and so forth, do you see gross margin developing favorably also into H2 and Possibly beyond that, so what's your thinking? 1st good morning, Gustaf. First commenting on the FX. It is a quite hypothetical exercise to nail down the effect on the gross margin and even more so on the EBIT level, because of course as currencies move, while all of our competitors have more or less the same currency exposures, That arguably also impacts pricing in the market, so and consumer pricing. Having said that, I think it's still clear So we did have some headwinds on the top line and some tailwinds on the bottom line that we've at least ballpark in the report. And how that will develop into H2, of course, no one knows. When it comes to margins more generally, we are extraordinarily proud about the achievement on the DIY side. And we have every intention of continuing to focus on the full portfolio, but increasing The share of sales from private label is a theme that carries into the future as well. We have previously said that we've gone from more or less 0% to 20% in a pretty short span of time. We're actually now above 25%. There are also some Seasonal variations as to the share that comes from our private label assortment going forward. But we are very, very Safely, significantly above 20%. And again, the direction is upwards from here. And on the Home Furnishing side, We are displeased with the margin development. We've taken actions to address it. And how that translates into H2, again, as to my reply to Miklas, that will depend on the combination of our mitigating actions and how the market develops. Okay. And with regards to pricing, I note that your that Amazon is Seemingly sort of doing a bit of gray import from Germany being quite competitive in pricing and categories That you are generally quite strong in LOS Heimer. Do you think that there's a potential for you now that you're starting to get a little bit bigger grip in Central Europe Just a little bit of that sort of optimizing what you sell. Does it buy products from your suppliers? Obviously, a delicate question, but maybe give some So, Colin. Most definitely, we are quite actively pursuing assortment exchange between the group companies. But it's fair to say that we're far from optimizing the potential. So this is Very much a focus for group management to continue on this path. And we've also added some really interesting Businesses to the mix with Hofferbachenbruch being one example, with Svensson, Sanddorf on furnishing side being another example, But also very much so, as you say, on the Jaime acquisition opportunity. And so yes, definitely. And then I was thinking about the M and A strategy. With the IPO, I got the sense at least that there was Quite a lot of focus on integrating companies. You were talking at the time of combining warehouses to optimize costs and You were integrating FurnitureBox at the time. And now I feel that perhaps maybe it's just communication, but I feel that it's more of Acquiring the companies and letting them pursue sort of on a relatively free basis with their own management is Can you talk a little bit about sort of where you see integration potential going forward? Are you sort of starting in the strategy from more Integrating companies to more acquiring them. And then if you can give us an update on sort of your warehouse situation in general, how many warehouses are you operating now in We haven't changed the approach, but we do approach synergy opportunities somewhat differently. When it comes to the category catalyst ones, I think Furniture Box is a good example there. They are integrated into one of the platforms. And that allows us to unlock over time Full set of synergies. When it comes to the platforms themselves, those are put in place to act as planetary systems And these are the stars in those planetary systems into which eventually The category catalysts are integrated. And we differentiate the pace at which We address the back end between the various businesses in order to make sure that we don't lose the pace when it comes to the sales synergies. And the sales synergies, without exception, we always address from day 1. They include very much digital traffic generation capabilities and product assortment exchange. Svensons is now rapidly being integrated into the Nordic Net platform in all regards, Just as FurnitureBox was integrated onto the TradeMax Chile platform, the one we call Home Furniture Nordic. So we haven't changed the approach, but we do differentiate between the category catalysts and the platforms themselves. And how many platforms are you running them? Maybe you said that one. With High Mano, it's 5. 5, okay. All right. And with all the With the new credit facility and your targets and so forth, what do you reckon is your M and A firepower here for the second half? So we have, as I said before, close to SEK 1,000,000,000 in cash and we also have unutilized facilities of SEK 1,800,000,000 Before finalizing my position, that's reduced liquidity with NOK 582,000,000. Yeah. And lastly, wouldn't you I feel like you talk a lot about obviously Nordics and also Central Europe. But are you Wouldn't it make sense to give a stronger position also in the Baltics and Eastern Europe, given that you have your I believe you have a lot of Production there for your own French and business. And you have the French one platform, which seems to be doing quite well. Where is that hardware market consolidate? No, no, we are absolutely addressing it, but we're doing it on the own furnishing side and we'll continue on that path. We have a tremendous Development in Eastern Europe on the back of the 2018 acquisition of Furniture 1. And that growth continues. We've grown organically in Eastern Europe with Furniture 1. We are from time to time also looking at acquisition opportunities in Eastern Europe. And that we see a bigger deal flow currently from, call it, Central Western Europe in terms of actually both DIY and home furnishing than we do in Eastern Europe today. But Eastern Europe is a very integral part of our Golf Approach has contributed very nicely to our growth over the past 2, 3 years since Financial One became part of the VICI. Okay. Those are all my questions. Thank you, guys. Thank you, Christoph. Thank you. There are no further questions at this time. So I'll hand back over to our speakers. Great. Thank you, everyone, for calling in. And we look forward to the many individual calls that we will be having today and in the days to come. Wishing everyone a great summer. Bye.