Hello and welcome back to ABG Sundal Collier's Investor Days. My name is Benjamin Wahlstedt. I am an equity research analyst here at the Stockholm office covering the consumer space. With me on stage today, I have Embellence Group's CEO Olle Svensk to present his company. So, Olle, please go ahead.
Thank you. Thank you very much. Yes, my name, let's see if this one works. There you go. Yes, my name is Olle Svensk and I'm the CEO of Embellence Group, and I've been in this role for more than eight years. And to give you some fast facts about Embellence Group, well, we have five strong brands in our portfolio. It's Borås Tapeter, Cole & Son, Wall&decò, Pappelina, and Artscape. I will come back to that a little bit later. Our core business, that's in premium wallpaper. And our addressable market, it's estimated to be around $2 billion in the price positioning and in the core geographies that we are strongest. Our products are being sold in more than 100 countries every year, but the key countries for us, it's Sweden, U.S., U.K., and Italy. Head office is in Borås in the western part of Sweden.
From a supply point of view, we have three production sites. We do external sourcing as well. One of the production sites, the one in Borås, is the only one that we run as a separate entity. Coming back to our brands, Borås Tapeter is our largest brand. Probably many of you know it. It's the market leader in Sweden and in the Nordic area, having Sweden as its largest market. It's very much a traditional Swedish or outside Sweden, I would say, Scandinavian brand with a lot of heritage. Cole & Son, that's our second largest brand, mainly in wallpaper, based out of London and the UK. It's the supplier to many important places in the UK, such as the royal family and the castles, of course, also the Houses of Parliament and others.
Wall&decò is an Italian brand that is part of the group since 2018, only in wallpaper, in very, I would call, very technical solutions. Here we have wallpaper both for normal, I would say, indoor use, but also for facades and for wet systems as an alternative to tiles. Italy being the largest market for Wall&decò. Pappelina, that's rugs based out of Dalarna, Falun, and we have the production up in Leksand. And then the last brand, also outside wallpaper, that's Artscape, which is window film, having a very, very strong position in the U.S. market, but also in Canada and Mexico. But also, I would say it's like wallpaper for windows, very decorative and a very similar process actually to wallpaper. So that's us in a nutshell, so when I will hand out the quiz after the presentation, you know what to answer, all of you, right?
Our ambition as Embellence Group, well, we believe that the environments we are in, regardless if we are at home or at a hotel or wherever, kind of has an impact on your thoughts and your feelings. And our ambition is to, with the help of our design, have an impact here. Our ambition is also to be one of the leaders in interior decoration with a certain focus on premium wallpapers, but also complemented by other categories, which has a pattern-driven or very colorful design. And in categories like textile or rugs, which are two very large categories or sectors actually.
Our strategy, well, if we start with a foundation, which is more like the culture of the company, I would say, we have a very entrepreneurial, creative culture, which comes, I would say, as a given at some of the companies or the brands that we have acquired over the last five years. We want to go where others don't go. We want to lead in our respective geographies and countries. We run a very decentralized operating model. Many of our, the main competitors to our brands are family-owned companies. So we need to be fast, but also utilize the benefits of being part of a larger group. We are what we, our brand should be what we call autonomous, but also responsive and take the benefit. And all of them, I would argue, are stronger being part of Embellence Group than having them been run by themselves.
We have strong finances. That's another thing that is typical to us and we have had for many years. We have healthy gross margins, just shy of 60%. We have good cash flow and a reasonable EBITDA level. I will come to it a little bit later. Looking at the strategy then, and we had a Capital Markets Day during spring in May here in Stockholm where we shared this, and it's a little bit updated, but also the way we have been working for many years. First of all, we are dialing up and we have dialed up our efforts when it comes to generate profitable organic growth, so that's really the core of what we should do or what we do.
Looking at the kind of portfolio we have with strong brands with a rich heritage, this is what definitely any company should do and definitely we as well to run and drive for profitable organic growth. We do that by developing our brands even further, investing in brand building, making them even more exciting. We do that through product innovation, entering with wallpaper into new rooms or making our products even more sustainable, making them even more greener, which we have done over the last couple of years. It's also a matter of nurturing design icons. Design icons that mean so much more than just being a pattern on a wallpaper because it can send a signal for you as a consumer or architects and designers that I know, I know what I'm talking about.
I want to have a Kåhlensson cushion as an accent to this one colored sofa. To nurture our design icons is really, really important for us and what we are doing or trying to do all the time. In terms of expansion geographically, well, it's very much about Europe and where I expect, and we also have an okay position in North America, but where I expect us to grow over the last or the coming years will be very much North America and US specifically, but also around the Mediterranean basin, around the countries there. And from a channel perspective, the majority of our business is done through retail shops. It might be in Sweden, a Colorama shop that you might know, but it can also be an exclusive furniture dealer in Munich. But retail is our main part of the business.
Where we see growth and where we are growing and we expect to have continued growth, it's in two important channels. It's hospitality, hotels, spas, resorts, golf clubs, and also our own direct-to-consumer, our own online-to-end consumers, and one of the beautiful things of having a strong brand portfolio, but also continue to invest in it, is that there is a demand for our brands in Sweden or in the U.K. or Germany or in the U.S. Obviously, being a group, we look at the fifth pillar here, it's to utilize group synergies. We make every brand that we have in our portfolio and the future brands stronger by sharing certain resources. We do this today and we will continue to do that even better going forward. The last bit here that remains important is add-on acquisitions.
We have narrowed down the universe a little bit, but still when we see that there is a good strategic fit that will strengthen us as a group, we will make add-on acquisitions going forward. And this is our strategy and our way forward the coming three, four years. And this is our way of creating shareholder returns. And our financial targets, as communicated here at the Capital Markets Day in May, it's to reach net sales of SEK 1 billion organically by 2028, having profitability as EBITDA margin of at least 15%. Dividend, well, an ordinary dividend between 30%-50% in relation to net income and having a leverage that is not too high. It should be below 2.5. And let's take a quick look at our financials then.
After the first nine months, that has been a bit tough and challenging, I would say, from a retail market perspective in Sweden, in the U.K., also in France and to some extent in Germany. We have been able to grow our business, but we have also been able to grow it with better profitability than we did before. Even in the third quarter, where we reported an organic decline of 6-7%, we continue to keep a healthy level of our gross margin, good cash flow, and also profitability. We have improved the first nine months, our gross margin with a 3.9 percentage points and even more so the EBITDA to 2.1. We have been a company today compared to three, four years ago that is much more flexible and we can manage downturns in a totally different way or less market demand.
What we have done during this period, though, we have continued to invest for future growth in better production capabilities, technical production capabilities, in more brand building, and more sales and marketing efforts, and still, we have been able to deliver a healthy level, I would say, after the first nine months, and even more numbers then, so sales growth around 5%, gross margin, we're coming closer to 60%, 59.6%, EBITDA margin of 14.6%. We have reported improved net profit and also an operating cash flow that has been good and better than last year, so we as a company are much more flexible now than we were a couple of years back to navigate when we have a challenging market.
And looking forward then, we believe that it will probably take half a year or something like that that when the consumer market will continue to come back to us. We do see that housing transactions are going up in Sweden, in the U.K. and the U.S. as well. The two channels that are important for us in our future growth, direct-to-consumer and hospitality, we see strong demand. Overall, we see a very strong, and if you check that up, if you Google it when you come home, the investment level in hospitality, in hotels and resorts, it's massive. And more and more of them are starting to decorate their buildings actually with wallpaper. Having said that all, I think that's my presentation and now I leave up for a question.
Perfect. I have a couple prepared.
This spring, as you alluded to as well, you held a Capital Markets Day that launched a more organically tilted focus. You aim to leverage your strong existing brands to drive organic growth as opposed to perhaps acquired growth, that was the case a couple of years back. And I was wondering if you could talk a bit more about this decision, perhaps are there fewer interesting objects for sale, for example, or what's the reason?
I would say, first of all, personally, I believe, and I have always believed that with a strong portfolio, if you have a strong portfolio of brands with a certain heritage that we do have, the focus must be to drive profitable organic growth. That's number one. Having said that, I mean, since the IPO we did in 2021, there has been a change in our shareholder structure. We have had a change in our board of directors a couple of times. And now I would say we are very much aligned from management to board to ownership that this is the priority. First, we make sure to create profitable growth. Coming back then to the universe of add-on acquisitions, I'm certain that the company, I mean, I will leave this company during spring. And I'm certain that we will continue to monitor what is out there.
Where I know we will do that. The universe is, we have narrowed it down a little bit, but we are still interesting. Now we have a cash position and a balance sheet that allows us to do something as well.
I think we have a question from the audience. I will read it again, so just so it's picked up on the microphone, just so you're aware.
Okay, yeah, fine. If you look today in the market, I mean, you have wallpaper. They really need paper. Today you have the digital market and you talk about short ones. So my question to you, how much of your production is with a digital print? So you can do it short and fast.
So there's a question on the production and it boiled down to the question, how large share of production is digital print compared to traditional print? The digital print is much faster. I think that's actually the question for the audience.
The benefit with this setup is that it allows me to think seven more seconds, right? We do both digital and traditional, and we have around 20% of what we do is digital today. There are many benefits with digital, exactly as you say. I mean, it's make to order, majority of it, not all. You don't have to carry inventory, but then there are some limitations to it also in terms of color and you can't do gold and silver and such. But we are around 20%.
Thank you. You sort of alluded to this as well, the strong cash position. According to my estimates at least, including a cautious 3% growth next year, you will approach a net cash position during the year. So the question is, how will you put this cash to work, basically?
You're right. We do have and we will have a strong cash position by the end of this year. And first of all, again, I will come back to what we said at the CMD, our capital markets day. We will continue to invest or we will invest to have even better production capabilities that might be even more digital possibilities there. We will continue to invest in brand building and sales and marketing. But even after that, we will still have a strong balance sheet. Personally, I would guess that the board will propose a dividend in the area, in the neighborhood, what is the financial target, 30%-50% here. In addition, I would say we will continue to have a strong balance sheet to this.
It allows us probably to find bank financing even more if we need that if we stumble upon an attractive target, M&A target. In all fairness, and I think it's quite logical as well, we will have a new CEO coming here on board later on, and I mean, we should allow that person, him or her, to land in the company, to get to know it before we can expect any acquisitions. I mean, I would be surprised if there is a major acquisition the first six months next year because it's so important that that person is fully on board to do it.
That's a good answer, I think. Another one from the CMD maybe. You changed your segment reporting structure a little bit away from geographical segments to, well, reporting sales by brand, which also highlighted a very strong development in recent years for your external manufacturing. Could you talk a bit more about this success story? How large could this business area become, for example?
The success story is the reporting or the manufacturing?
Both maybe.
So if we start with the reporting, I mean, it makes sense. This is how we have looked at the business all the time. So now we are more transparent. Now we do it in the same way. I think it makes your life much easier, Benjamin, and other analysts, and also potentially, I mean, shareholders and investors to follow us. So that was perhaps a small step for mankind, but big for us. Looking at the manufacturing unit of Borås Tapetfabrik, the focus for that production entity, which is separated from Borås Tapeter into two legal entities a couple of years back, the focus for them is to serve our internal brands better and better all the time by being more efficient, better service level, more production capabilities.
But by doing so, also we know and we see, and right now you can, I mean, not only right now, you can see that others are interested in that as well. I see external manufacturing from Borås Tapetfabrik as a long-term opportunity and growth journey for us. But again, first priority is and will always be to serve our own brands better and better all the time.
There's another question from the audience.
What about e-trade? Do you have to say anything about that?
Now there's a question on e-commerce. Any thoughts or comments?
Yes, we do. I mean, we look at that or we do that in two ways. First of all, what we call our own direct-to-consumer. We have four of our brands sell directly to the end consumer in almost 40 countries, most of the brands at least. And then we have partners or customers who sell to the end consumer as well. So we do both of these. And if this is what you refer to, the e-commerce or the e-trade, we call it our direct-to-consumer. We are not disclosing what level, how much that is for us. It's growing. The good Benjamin asks me every time, what is your share of direct-to-consumer? And I have a piece of good news for all of you, including you, Benjamin. The new CEO, together with the board, might change this and start to disclose it, but I won't.
Okay. Another couple of quarters without the key piece of information then.
Yes.
Great. Maybe a final question. I get the impression that half the time I speak to you, Olle, you are in Italy or you are in the States at a trade fair, speaking to decorators, hospitality buyers about the current state of decorating, I suppose. What would you say are the most recent learnings from visiting all these trade shows? What is the sentiment in the industry?
I mean, you're right. You're right. I have been traveling and I'm traveling quite a bit, and that's one of the exciting parts of having this job. Sometimes it's not exciting. Sometimes it's like you have a long distance to work anyhow. Generally, the interior decoration sector, as we all know, has been through quite a challenging period. I would say since spring this year, I start to hear more and more positives, especially in the premium part, and this will, what I've said before, in the premium part of the market, and it's fueled by the push from hospitality. Still, consumer demand for interior decoration will probably take a little bit longer, but the activity level in hospitality and hotels is very, very big, and this is kind of the trend, I would say.
So the start of the recovery is near then, I take it?
Correct.
Perfect. Those are great finishing words. Thank you very much, Olle, for coming here to speak to us today, and thank you to all of those listening in.
Thank you. Thank you.