BHG Group AB (publ)

Thank you. Please take me to slide two. Hi, my name is Gustav Born. I'm the acting CEO of BSG since August this year. I'm here together with Jesper Flamme, CFO, to do a short presentation of the Q3 report and do our very best to answer your questions. Slide three. Today's agenda in short, that we'll take you through the financial highlights of the quarter and a few words about the market and the strategic ambitions and the future in the structure of the business looking forward. Then Jesper will do a financial update and I will in the end do my very best to summarize and we will both be available for the Q&A. As I believe that some of you listened to in all our communication in conjunction with our recently communicated stock write-down, I do apologize that there will be some repetitions. Slide five. Short about the financial highlights. Sales came in in what we see as decent levels, considering the market circumstances. We have an overall growth of 1.5%. With this, we believe that we continue to take market share in a marketing with softening demand. It should be noted that order intake was approximately 100 million higher than sales, primarily due to sales of heat pumps with long delivery times, orders taken in Q3, but then will be delivered in Q4. With what we considered a relatively strong top line, earnings came in in a somewhat weaker than expected, with a realized EBIT margin of 1.5%, driven primarily by price pressure in the markets, and to some extent was on cost increase, primarily the direct selling costs. Cash flow was better than last year, but still negative, negatively driven by seasonal fluctuations, and is the result of strong sales in order intake in the second quarter that is then paid for in the third quarter. Slide six. To put a bit of context on why we are taking forceful actions on both short-term and also to provide some clarification on our longer-term strategic ambitions, we decided to provide some information about the recent market development and the longer-term development of the BHG group. This is our view of the market development, and as no surprise to anyone, demand was extremely strong throughout the peak of the pandemic and has since leveled off primarily due to what we called corona rebalancing effects, both in channeling and category. Basically being online and home, we were massively positively impacted by the pandemic effect and consequently suffered in the rebalancing. Since spring, also impacted by the war in Ukraine and the following geopolitical disturbances, rent increases, energy prices, and inflation. And as a consequence of all of the above, weakening consumer demand. We believe that by now much of what we call the rebalancing effect of the pandemic is diminishing, although not all gone yet. But the geopolitical effects, energy pricing, rent levels, etc., has been even further strengthened, leading to a now record low consumer confidence. Considering all of the above, we perceive BHE sales in the third quarter as a sign of strength. As an intro to the structural changes and the revised strategy that we are implementing, we believe it is relevant to take one step back and review the development of BHG in a longer perspective. Ten years ago, BHG was bighamma.se, a 200 million business in Sweden. Since then, we have had exceptional organic growth and been further fueled by some 37 acquisitions to take us to where we are today. The European business with 13 billion in sales. I mentioned this because the focus has been solely on growth. With this as a background and with a changing market situation, we need to and are in the process of revising our strategy to what we call Olympia or the next phase for BHD, including an increased focus on cash flow and cost levels. In a shorter perspective, viewing our business in a 12-month scenario, it becomes evident just how fundamental the change that has occurred in the last year has been. One year ago, we were still in a pandemic. Demand was strong. We were experiencing massive supply chain disruptions as a consequence of strong demand and weak supply. Visualized by astronomic freight costs with a container at the peak costing more than 20,000 US dollars to ship from Asia to Europe. Now, one year later, we have a war in Europe. We have an energy crisis of massive proportions. We have record high inflation. We have high and increasing rent levels. We have record low consumer confidence, falling demand, and the container freight from Asia now costing in the region of 4,000 US dollars. We believe and plan for a continued tough market in the consumer sector for the following 12 to 18 months. It is based on this scenario we are implementing the current short-term actions. We do so to future-proof BHA and to come out of this tough market situation, when it does normalize, stronger than we went into it. Please take me to slide seven. Short-term, as we have communicated two weeks ago, we have taken the following actions. We have implemented structure and organization changes to facilitate our revised strategy, including consolidations and synergies. More on this later. We are reducing our cost levels. We have targeted 150 to 200 million reduction, primarily in organizational cost and warehousing. We have reduced our stock levels with some approximately 100 million in the third quarter. And we have set a target to reduce the level with another 100 to 200 million in the fourth quarter. And we've continued further reductions to free X capital in 2023. In discussions with our banks, we have agreed on a temporary covenant relief until the end of 2023. And we have decided upon and executed a stock write-down of 375 million primarily on seasonal products that was not sold to the extent we planned for during this year's spring and summer season. Please take me to slide eight. As you have all understood by now, we foresee a tough market environment the coming 12 to 18 months with limited opportunities for growth in the organic business. And we are, as explained, taking actions on both cost and cash flow. However, with that said, we are retailers And as such, we must always look to drive top line. Also in a tough market, there is opportunities. And some of the potential sources of growth we see include. Several of our businesses have already, prior to the market downturn, initiated internationalization with sites in new market as a source of sales growth. The beauty of the online model is that this can be done with very limited cost and cash flow. We also see opportunities to grow through external marketplaces, making our product available in new markets through international marketplaces. This is primarily valid for our value home segment with its main business in the private label sector. To facilitate assortment expansion and inter-company sales between our different businesses without driving costs or stock levels, we are setting up an internal marketplace between our entities. In crisis, there is and will always occur opportunities. We are confident that there will be white spots available to grow in when competitors go out of business or leave categories, and we will be there to take them. And finally, currently our focus on M&A for obvious reasons is limited. But when the market recoups, there will be opportunities for those who are financially strong, and we plan and act to be so. And last but not least, in these tough times, it's important to remember that the structural trends that has taken us to where we are today, I'm talking about online migration from the physical channel and the interest in home and home environments remains unchanged and intact. A few words about our strategic ambition, our structural and the organizational changes. Please take me to slide 10. We have the last few months spent considerable efforts in defining our future strategy. This is done in a project we call Project Olympia, and we have defined what we believe is the next phase for BSG. The main ambition has been to define the future strategic direction for the group and also to reduce complexity, a needed initiative after 10 years of expansion and 37 acquisitions with focus on growth rather than simplification and consolidation. And also to find and realize synergies, both revenue synergies as through intercompany sales and cross-selling, but also cost synergies. As an example, we see big opportunities in supply chain, in warehousing, scalable IT platforms, et cetera. Please take me to slide 11. One of the structural changes we have done is dividing our business into three business units based on the consumer profile, but also based on the business model. Home improvement, based on a dropship model with Big Hama as its lead brand. This we will consolidate and build into what we call the pan-Nordic do-it-yourself powerhouse. Value home, primarily based on private label with TradeMac as a lead brand. We also here see opportunities to merge businesses and expand through external marketplaces. And finally, premium living, where we are accelerating the nationalization and the sales of premium Scandinavian design based on the wholesale model with Nordic Nest and Svenssons as lead brands. Dividing the business into these three business units facilitates complexion reduction, but also we do this because we are confident that this is where the main synergies are to be realized. The main synergies will be rather on business unit level rather than on group level. We have also operational strengths in our group management team with the three BU leads, which we all have extensive operational CEO experience. Please take me to slide 12. This means structuring our business in three levels, with group continuing to be a super slim structure, defining overall strategies, Corporate functions as finance, IR, and with center of excellences in areas as tech, HR, ESG, et cetera, to support the business unit. And the business unit, in which we define the strategic direction for the business units, and as mentioned, where the majority of the realization of synergies will take place in the areas mentioned as supply chain, warehousing, IT, et cetera. And finally, the entities, controlling all front-end functions, The customer understanding, defining the business concept, defining product and pricing, setting marketing and a promotion, et cetera. Thank you. And with that, I'll hand it over to Jasper.

Thank you, Gustav. In the third quarter, we further advanced our positions despite a difficult market. Sales were relatively strong, but profitability was weak. Net sales increased 1.5%, reaching 3.1 billion SEK. Organic growth amounted to minus 5%, and pro-form organic growth to minus 7%. Total growth was driven by the home furnishing segment, where the premium segment, led by Nordic Nest and Svenssons, showed the highest growth, along with our Eastern European furniture business, Furniture One. Adjusted EBIT amounted to 48 million SEK, corresponding to an EBIT margin of 1.5%. The EBIT margin was negatively impacted by primarily price pressure in the market due to weak demand. Turning to page 15 and the EBIT bridge. The product margin in the quarter was negatively impacted by price pressure in the market as a result of weak demand. Direct selling costs increased in the period as a result of elevated fuel prices and high inventory levels. The increase in organizational costs from same period last year is mainly due to increases in personal related costs. And as Gustav mentioned, we are executing on substantial cost reduction initiatives to adjust our fixed cost base to the lower demand. Finally, the increase in depreciation and amortization in relation to sales was primarily driven by weak sales and new lease agreements. All in all, our EBIT margin amounted to a disappointing 1.5% in the third quarter. Let us turn to cash flow, slide 16, please. Cash flow from operating activities improved compared to last year and amounted to minus 133 million SEK, negatively impacted by changes in working capital as a result of supply payments during the period. Reducing inventory is key to improving cash flow. Items held in inventory were reduced by 98 million SEK during the third quarter. A target has been set to initially reduce items held in inventory by an additional 100 to 200 million SEK in the fourth quarter, and thereby improving cash flow from operating activities. The right-hand graph showing the development in liquidity walks us through the starting period position of 274 million SEK, deducting the cash flow from operations and the impact of investing activities, a majority of which is M&A related. And finally, adding the financing activities, which are primarily related to the new share issue completed in the second quarter, but also include amortization of leasing liabilities, bringing us to the period end, 692 million SEK of liquidity at hand. Slide 17, please. The group's net debt amounted to 2.1 billion SEK at the end of the quarter and net debt in relation to LTM adjusted EBTA ended up 3.4 times. We have renegotiated and been granted a temporary relief on covenants by our banks. The relief will remain in force from Q3 this year up to and including Q4 next year. In addition, acquisition-related liabilities have decreased and amounts to 1.4 billion SEK at the end of the quarter, compared to 1.8 billion at the end of the second quarter. Cash flow-wise, we assess that roughly 350 million SEK will be paid out next year and another 75 million SEK in 2024. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of 500 million SEK. Handing it back over to you, Gustav, to summarize and conclude.

Thank you, Jasper. Q3 summary, trying to summarize this. We are considering the challenging market circumstances, happy with the top-line development and trust that we took market share in the quarter. We are doing structure and organizational changes to facilitate the implementation of the revised strategy. We have launched a number of actions to respond to the challenging market, including cost and inventory reductions to improve both profit and cash flow, as well as we have executed a stock write-down and renegotiated our covenants. We feel confident that our actions and our plan will take us back to the defined capital structure. With all these challenging messages, it feels important to again remind ourselves that the structural trends that has built BHG to what it is remains intact. I'm talking about primarily the migration from the physical to the digital channel and the continued interest in our home and home environment. Thank you and looking forward to do our very best to answer your questions.

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. We have our first question from the line of Benjamin Walford from ABG. Please go ahead.

Hello, and good morning. Just two short questions from me. So first of all, I know that direct selling costs seem to hurt margins, especially in the DIY segment. How can we work? Could you give us a bit more color on that, please?

So good morning, Benjamin. The direct selling cost, it's mainly the effect from inventory levels as fulfillment go up, and also the effect from increased fuel prices.

Sure, but these would be relevant for the home furnishing segment as well, right? And at least the way I'm calculating it, the share of sales is not higher this quarter than it was in Q3 2021 for home furnishing. So how do we understand that?

So if we look at the do-it-yourself segment, we have seen a decline in efficiency. That's the easiest way to describe it, driving fulfillment costs up in relation to sales.

Yeah, got it. Thank you. And then one more question. Your net debt to EBITDA ratio, Your report to 3.4, that's on proforma EBITDA. Is that the way the banks would measure your debt level as well?

Yes.

On proforma numbers, yes. Okay, perfect. That was it for me. Thank you very much.

Thank you.

Thank you. We have our next question from the line of Gustav Hades. Please go ahead.

Thank you. This is Gustav Haggis with SEB. A few questions, if I may. Firstly, on this stock write-down that you announced previously, could you give some more light on how that work has been conducted in identifying those items? Have you gone category by category? How have you accounted for this? Have you made a reduction in expected sell-out price? sort of halved it or have you written it down fully as unsellable? And if that's the case, where are these products? Do you still have them or have you disposed them somehow?

Thank you, Gustav. I will try starting to say that it has been a thorough job on SKU level, trying to really identify the need for write down. With that said, of course, we need a model. We can't go through all of our products. And the way we have done it, it's an accrual. And it's not like the products have been written down a hundred percent. It's a, you know, between 50 and 30 percent. And we still have the products and they are sellable.

And if I add, sorry, adding very much of those products, as we mentioned, this is spring and summer products. So the majority of the sale from those will come back next year in Q2 and Q3.

Yeah, but if you've written down the inventory value with half, I assume the sellout is also like 30-40% higher than the value in your inventory or as that accounted for. How much lower does the price need to be in order for you not to have capital gain and the summer months on these products if you sell them inventory value reflects the real realizable value as we see it right now okay um all right and then and on on the um on the one offs I recognize the 5.5 million gardening leave one-off, I assume that's for the departed CEO. Is that the total amount? Will there be additional costs related to this also in Q4 and 2023?

There will be no additional costs relating to changing CEO.

All right. And then on the same note for one-time costs, I note that you again now in Q3 bring up strategy work as a one-off. Can you confirm if Q3 concludes that apparent one-off or should we expect further one-time costs related to strategy work?

No, we do not expect any more costs relating to the strategy work.

All right. And then on the covenant waiver, could you shed some light on the level of generosity from the lenders? I assume you cannot go infinitely high in terms of gearing, or how is that new structure set up?

I will not disclose the, or we will not disclose the actual terms, but Of course, there's still a limit to the leverage that we can have during next year. But we feel that the headroom that we have now is the one that we need to be able to get back on track during 2023.

And in that scenario, if you feel that that is enough, I assume you have a a view on your organic sales decline for 2023. Could you confirm whether or not that's double-digit or not, going into that assumption that the waiver will be enough for you to ride through 2023?

As you know, we don't share any forward-looking prognosis, and we will not do that in this case either. So the only thing I can see is basically what Jesper said before. We, of course, do our plan. And, of course, we have our thoughts about next year. And we feel confident that we have the sufficient headroom needed. But I will not disclose any figures on what we calculate for. But the thing I can assure you is the reason why we're doing all the actions we are doing is that we think it's the prudent thing to do right now. Nobody knows how tough the market is going to be next year. But not making the precautions to prepare ourselves for a tough market would be the wrong thing to do. And that is what we are doing. We're preparing ourselves. What we believe can be a tough market. And we have set the plan and the actions so that if that happens, we should still be able to come through it.

All right. And a final one for me. Could you give us a little bit of an update on your warehouse status now? You obviously have Calamer and Helsingborg. I assume you try to consolidate as much as possible in there. But what's the strategy there and the potential and how many warehouses are you? posting at the moment and how many you feel that you will have by the end of 2023?

I will not share exactly how many we will have, but we have a number of warehouses today and it ties back very much to what I said in the presentation. We have 10 years of complete focus on growth and very little on consolidating. And there is significant opportunities to consolidate. One of them is warehousing. On top of that, we've also now, since our stock level has gone up, been forced to take on extra warehouses. I think some of those we will be able to get out of already next year. I think some of the consolidation measures, they will take longer because many of them are tied up in contracts, et cetera, and also requires some longer-term work on IT platforms, et cetera. But some of the savings from consolidations will be realized next year, and others will take longer. But it's a fantastic – For savings, yes.

Yeah, and on that note, do you also see any potential to consolidate or merge holdings of yours to make it a little bit less complex? I'm not sure if it's possible given the entrepreneurial or entrepreneurs in each company, but is that something that you also consider or is it within this 150 to 200 million savings that you communicated?

It's not within the savings. The savings is based on what we can believe we can do within the current structure. But yes, there is ambitions for consolidations within the group. With that said, we still very much believe in the decentralized model, and we very much believe that the accountability of the entrepreneurs is extremely essential. So we stay in that model, but we also see opportunities where we think there's better value and better focus if we decide to consolidate entities.

Great. Sorry, one final one. 5% negative organic growth performed in the quarter. I assume it was a little bit, or 7% performance, five reported then. I assume it was a little bit worse towards the end of the quarter than in the beginning. Could you give us a chance of what your exit rate was in terms of organic growth into Q4? You also write that you expect it to get worse before it gets better. So I assume you see deterioration here gradually.

Actually, it was relatively even throughout the quarter, so we haven't seen a huge difference in September compared to going into the quarter.

Okay, thank you. Those were all my questions.

Thank you.

Thank you. We have a next question from the line of Miklav Nikman. Please go ahead.

Thank you. Yes, a couple of questions. Firstly, can you elaborate a little bit on the recruitment of a permanent CEO? It sounds a lot from the profile you're describing that you would be looking at an internal recruitment, but that should be, if so, that should be done fairly quickly. Can you elaborate a little bit here what you're looking for? Are you looking internally, externally, or both?

We're looking both. We're looking for an operational profile and We have come a decent part in that work, but I can't share any more information on the process, as you can understand. But it's the operational background within online slash retail is what we're looking for.

Okay, thank you. Follow up on the covenants here. Am I right to assume that you've had a relief from covenants here, but you still have to pay higher interest rates if you're in breach of the initial covenants, which I believe are at three and a half times EBITDA. And if so, can you provide any kind of rough guidance for what you expect in terms of financial net for 2023, and particularly considering that interest rates have gone up quite a bit in recent months?

So you're absolutely right. A higher leverage comes with a higher margin from the banks. And I will not give you an exact number, but I can say that it might be a doubling of the margin from the banks. That's the way it can be.

A doubling of the margin and then also rising interest rates on top of that, you mean? Yes. Okay, fair enough. A little bit on the earnouts as well here. 1.4 billion, that's still a fairly high number. But as I understand, a very significant part of this is related to 2025 to 2027. I assume a significant part of those earnouts are based on expectations of strong earnings recovery. Is that correct? So if earnings stay at depressed levels, your earnout fees would be a lot lower than 1.4 billion. Is that a correct assumption?

Absolutely. I mean, I've said this before, and it's always the fact that when we close the quarter, it's our best guess of what the actual payment will be. But as you say, they are depending on performance on underlying businesses. And if profitability stays at this level, the amount to be paid out will be way smaller.

Very good. Thanks. And just also a follow-up here on your outlook statements here, where you're talking about a challenging next 12 to 18 months, and you're even saying that you expect things to get worse before they get better. Obviously, in Q3 versus Q2, you saw a sequential improvement in sales. You say that things have not deteriorated towards the end of the quarter. So what are you basing, and particularly considering the comparisons are gradually becoming easier here as well, what are you basing the assumption that things will get a lot worse before they get better? And are you talking top line or earnings or both?

We're talking primarily about top line, or at least I am. And it's very much based on consumer confidence. I wouldn't say that I have any more information than you guys on that one. But consumer confidence has come down very low. From my perspective, I think sales in general is holding up surprisingly well considering the consumer confidence in the market. But with the development that is happening right now, also disposable income will come down. And that is the reason why we believe that it's going to be tougher in the consumer sector in the 12 to 18 months to be. We don't know if that will happen or not, but it's definitely the prudent thing right now to plan for it and take the actions necessary if that realizes. And I think there's a good reason to believe that it will happen.

And with the measures you're doing now, do you think that... those will be sufficient to keep you above break even in the coming quarters as well. Obviously, assuming we don't see a very sharp slowdown in sales. But if we see a decline of a similar magnitude as we've seen now in recent quarters, do you think you are well positioned to stay above break even throughout 2023?

I'm not going to comment on that because then we start giving prognosis as forward, which we decided not to do. But as I said, I think we have done what is sufficient and needed to do in order to come back when we come out of this to the strong position we went into it and also to stay within the capital structure which we need to be within. But that's the only information I can share with you.

Fair enough. Thanks for taking my questions. Thank you very much.

Thank you. Again, if you have a question, please press star then one. To ask a question, please press star and one on your phone. There are no questions.

Thank you very much. Appreciate you listening in. Thank you.