BHG Group AB (publ)

Hi, my name is Gustav Orn. I'm the CEO of BSG, and I'm here together with our CFO Jesper Flemme. I'll give you a few highlights of the report, some future outlook, and our focus on the current actions. Jesper will try to further clarify the financial details, and we will both be available for the Q&A, doing our very best to try to answer all your questions. Slide three, please. I thought I would start this with a very short introduction of BSD, what we are and what we do. The group with Big Hama as its starting point was founded in 2012. Since then, we have grown organically and through some 25 acquisitions to the group we are today, approximately 13 million in turnover and some approximately 20 businesses. We are and we aim to remain a highly decentralized group based on entrepreneurial accountability. offering a high degree of freedom for the entrepreneur, also keeping the entrepreneur highly accountable for the results. The head office is very limited to keep central costs low and has in the last six months become even smaller. On group level, we are basically a small group function, a finance function, and complemented by a few very limited center of excellences. The business, since last fall, divided into three business units. Home Improvement, a do-it-yourself-based business making up some 50% of sales and based primarily on a dropship model with a Nordic focus with Big Hama as its lead brand. Value Home, a home interior business in the value segment, built primarily on a private label-based business model, making up approximately 34% of sales and with TradeMax as one of its lead brands. And Premium Living, the latest addition to the group, making up approximately 70% of sales, a highly international business in the premium segment based primarily on a wholesale model complemented with private label. Slide four, please. A few words about the highlights of the second quarter. Sales was down approximately 10% to 11% in the quarter compared to Q2 last year. an improvement from the historically weak first quarter, and we are confident that we with that have continued to take market share in a challenging market. Earnings improved significantly in the second quarter to an EBIT of 98 million Swedish crowns, driven by improving gross margin and cost control. We are also very pleased with a very strong cash flow in the quarter, a cash flow of plus 767 million Swedish crowns, driven by a significant reduction of inventory, being down with more than 400 million in the quarter and plus 500 million year to date. All in all, summarizing an improved cash flow effect of more than 900 million versus the second quarter last year. Slide five, please. A few words about the market development and the future outlook as we view it. Q2 was significantly stronger than Q1, partly driven by more favorable weather conditions. Spring came late, which you all know really affected the first quarter with a weak March. Demand in some of the spring categories was strong during the second quarter, but for some of the more capital-intensive categories, as doors, windows, etc., the market is still weak, partly driven by low activity in the housing market, and as a consequence, less renovations, this putting a dent in the demand in these categories. Looking forward, we expect the remaining part of 2023 and also into 2024 to remain weak in demand, driven primarily by lower disposable income as a consequence of rent increases and inflation. Even if rent levels most likely will continue to increase and even more fixed rent levels will convert to variable rent or fixed rents at considerably higher rent levels, we also need to take into account that we are most likely close to what we call peak rent. And with that, a significant part of the uncertainty of the future rent levels is decreasing. This reduction in uncertainty will most likely have a positive effect on consumer confidence. The price pressure in the market as a result of high inventory levels is still present and has been so for the second quarter, but we believe that it will decrease as inventory levels normalize towards the second half of the third quarter. Slide six, please. Our key focus areas are unchanged to improve profitability, strengthen cash flow, and to strengthen our financial position. To improve profitability, our focus is to drive sales and margin, and also to implement the earlier communicated cost-saving program of 150 to 200 million Swedish crowns. This program is on track, and the main focus is on organizational and warehousing costs. We are also, as part of our focus on profitability, investing in tech platforms in some of our main businesses, both to reduce cost and to enable future corporations to realize synergies. Cash flow was strong in the second quarter with 767 million Swedish crowns. To strengthen cash flow, the most important action is to reduce our inventory levels. We are very pleased with the progress in the second quarter and we are with a reduction of plus 500 million Swedish crowns year to date, currently ahead of our early communicated ambition to lower inventory with 600 million during 2023. We track this reduction weekly by entity and have well-defined goals on entity level to follow our progress against. Last but not least, our focus to strengthen our financial position. During the quarter, we have, in addition to the inventory reduction, sold 20.1% of our holding in Furniture One, this subject to an EGM decision in late July. thereby eliminating a put option and as a consequence, reducing both a potential cash flow effect and our acquisition related liabilities with some 470 million. During the quarter, we have also renegotiated our financing agreement and its covenants, allowing us more financial flexibility looking forward. Slide seven, please. As mentioned, we are very pleased with our inventory reduction in the second quarter. Reducing inventory is crucial, both to free up cash and also because high inventory levels is a cost driver, both from the extra warehouse space it requires and also from decreased efficiency in fulfillment. The focus has been to reduce our inventory of spring and summer products. And we have, as mentioned, reduced inventory by 410 million in the second quarter and with 510 million year to date. and is with that currently ahead of our plan to reduce the inventory with 600 million during the year. We have now reduced our inventory level the last four quarters in a row, and inventory is now down more than 400 million since the peak inventory level one year ago when we closed Q2 last year. With this said, also after reducing inventory with 600 million this year, we see room for further improvements and further inventory reductions in 2024. Slide eight, please. A few words about our strategic priorities on group level to take us back to the pre-pandemic levels on profit and cash flow generation that is our current short-term priority. Customer centricity. We have parts of the group who are super strong on this, and we have others where there's room for improvement. We are now measuring MPS in most entities and we're working hard to improve and we are utilizing both analytics and AI capabilities to improve this both from customer satisfaction and efficiency. As an example, we are already now using ChatGPT to improve both quality and efficiency in our product related content. Competitiveness needs to be a super focus in this challenging market and we are focusing on everything from supply chain efficiencies, warehouse consolidations, to online marketing to stay competitive. Sustainability is one of our defined key strategic focuses and we're trying to break it down into a few tangible focus areas when we can make a difference. On a business opportunity, within ESG, there is an increased focus on selling energy-efficient appliances, and another focus is to improve ourselves on sustainable packaging. Assortment expansion is an area that built this group to what it is, and we remain committed to offer a wide and relevant assortment, and now also looking forward to do this to an increasing extent, enabled by analytics and AI. And last but not least, simplification and consolidation. After 35 acquisitions and 10 years of focus on growth in a strong market, we need to simplify our structure and reduce complexity. As part of this, we are working hard to consolidate our business into fewer entities and thereby realize synergies. The ambition is to remain decentralized but gravitate from many smaller entities to fewer larger platforms. I spoke at great length about this and what we have done and are doing in the Q1 report, and will today settle with mentioning the fact that we, in the last six to nine months, have done a significant number of consolidation and also closed down a few businesses. And we have the ambition to continue on this journey. Slide nine, please. On business unit level, where we believe most of the synergies are to be realized, we have the following key strategic and operational priorities. On home improvement. Consolidation of our entities into fewer and larger platforms to increase competitiveness and simplify our structure and realize synergies. In order to do so, we need to invest in our tech platform to enable this consolidation. And one example of this is Big Hama Sweden, where we're currently investing. Reduce inventory is some of the non-dropship based businesses and reduce cost levels to reflect current tough market demand situation. And focus on growing sales through assortment expansion, through driving into company sales and in some entities expanding internationally. On value home, our focus is, as this is a primarily private label based business model, This is where we have the biggest overstock and we need to continue to reduce inventory levels. And we have also initiated the process to reduce retail footprint in some of the entities where we have physical stores. Upgrade tech platform and in value home more to improve customer experience and to reduce cost levels from older non-efficient platforms. Currently, we are investing in HFN or the TradeMax platform. and also here to consolidate into fewer and larger platforms to improve competitiveness. On premium living, the main entity in this group is Nordic Nest, a highly international business based on selling Scandinavian design in international markets with a main focus on Europe and a few selected markets in Asia. It is clear that internationalization is working and our focus is to continue executing on this strategy. Last year, we also initiated a work to improve efficiency in handling and fulfillment with an investment in auto store for automated picking. Here, we continue this work and with follow-on investments to improve efficiency. Thank you. And with this, I will leave the word to Jesper.

Thank you, Gustav. And slide 10, please. The second quarter of the year saw a clear improvement from a historically weak first quarter, despite underlying demand being weak. Net sales decreased 10.9%, reaching 3.5 billion SEK. Category-wise, the garden and outdoor furniture categories performed better than the group as a whole. Meanwhile, capital-intensive categories performed worse. From a geographical perspective, demand in the Nordic region was weaker than in other geographies, primarily driven by Sweden. Adjusted EBIT amounted to 98 million SEC, corresponding to an EBIT margin of 2.8%. Turning now to page 11 and the EBIT bridge. The product margin improved by 0.8 percentage points compared to Q2 last year, mainly due to strong performance over assortment of own brands, which generally has a higher product margin. Inventory handling costs was lower as we continue to see results from our cost-saving initiatives. Last mile and other direct selling costs was negative, mainly driven by inflation-related cost increases for last mile delivery. Marketing costs increased slightly because of mixed effects. The increase in organizational costs from same period last year is mainly due to investments in tech platforms. Personal-related costs are starting to come down, although cost savings have not yet had full effect. Finally, the increase in depreciation and amortization in relation to sales was primarily driven by weak sales and costs related to lease agreements. All in all, our EBIT margin amounted to 2.8% in the quarter. Moving on to cash flow, slide 12, please. Successful inventory reduction generated very strong cash flow in the quarter. Cash flow from operating activities amount to 767 million SEK. Our assessment is that we will be able to further reduce our inventory this year, but not as fast as during the second quarter. The right-hand graph showing the development in liquidity walks us through the starting period position of 478 million SEK adding the cash flow for operations and the impact of investing activities, a majority of which is M&A related, and finally deducting the financing activities, which includes proceeds from the share ratio in December, amortization of leasing liabilities and interest payments. Bring us to the period end, 1.1 billion SEC of liquidity at hand. Slide 13, please. The group's net debt amounted to 969 million SEK at the end of the quarter, and net debt in relation to LTM adjusted EBITDA ended at 4.1 times. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of 1.3 billion SEK. Acquisition-related liabilities amounted to 1.2 billion SEK at the end of the quarter. Excluding the liability related to Funture One, the liabilities would have amounted to 711 million SEK. Cash flow-wise, we assess that roughly 350 million SEK will be paid out during the rest of the year and another 50 million SEK in 2024. During the quarter, we also amended our existing financing agreement in order to provide additional flexibility from a covenant perspective. With that, I will hand it back over to you, Gustav, to summarize and conclude.

Thank you, Jasper. Will you please take me to slide 14? And I will do my best to summarize this. From a historically weak first quarter, we rebounded with a second quarter that is much stronger on both profitability and cash flow. We expect the market to remain challenging for the remainder of 2023 and also into 2024. We are unchanged prioritizing cash flow and profitability and the strengthening of our financial position. Also in challenging times, we need to continue to drive growth with initiatives as internationalization, in the company sales, marketplace, etc. Our cost reduction program of 150 to 200 million SEC is on plan. Simplifying our structure, including consolidations to realize synergies and also closing of non-performing businesses and reducing retail footprint is high on our agenda. In order to enable this consolidation and also to improve customer satisfaction and reduce cost, we are investing in tech in some of our main platforms. We are very pleased with our inventory reduction in Q2, and we are currently ahead of our plan to reduce inventory by 600 million SEC during the year. Selling 20.1% of our holding in F1 reduces our acquisition rate and liabilities and the potential cash flow effect with some 470 million SEC. Our renegotiated covenants gives us increased financial flexibility looking forward. The main trends that has built BHG to what it is, the migration to the online channel and the interest in home and home environment remains unchanged. And we see no reason why we should not be able to take BHG back to pre-pandemic levels on profitability and cash flow generation. And this is our short-term main focus. Thank you very much for listening. And now me and Jesper will be able to answer all your questions to our best of our abilities. Thank you.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad.

The next question comes from Benjamin Walstedt from ABG Sundal Collier. Please go ahead.

Good morning, guys, and congratulations on staying on track on the strategy you're running currently. A couple of questions from me. Ahead of the original inventory release plan, you say, I see you're still running rather steep discounts on several sites. Should we expect a larger than 600 million release for the full year?

No, our ambition is to change the 600. And I think, as Jasper pointed out, we see the very, very high pace of inventory reduction in Q2. We don't see that looking forward. Of course, we have ambitions to reduce it more, but we still remain with the 600 as our main ambition for the year. And I think we should also acknowledge the fact that even if it was Somewhat easier to reduce inventory in Q2, because spring and summer are sort of focused. It's going to be tougher going forward. And we also need to be very, very careful and keep a very, very good and important eye on availability and MPS on product. So continue to reduce inventory. There's definitely room for further reduction. But the 600 that we have set as the goal for this year still stands.

Perfect. Thank you. And then you also mentioned seeing stronger demand in Q2, and I think any additional favour here would be helpful. First of all, you note that the trend in – and I believe I'm citing here – you note that the trend in net sales during the second quarter is better compared with the first. Just to clarify, is this a comment on intra-quarter positive momentum and second – Is stronger than landing Q2 versus Q1 true also for, I guess, non-weather-related products? So inter-quarter momentum and is it true for non-weather-related products? Please.

I think you should start in the fundamentals. And what we see in the fundamentals is that disposable income is not up. That is down, if anything. And we also see it coming down further in the quarters to come. We see a small improvement, actually, in consumer confidence. And we see reasons to believe that that potentially can continue. We also see, as we saw already in Q1, a significant effect on what we call the capital intensive categories, where demand definitely is down. And then I'm talking about the doors and the windows, et cetera, et cetera. The weather related categories, as you say, that is where we saw the main increase in demand in the second quarter.

All right, thank you. And then a bit of a housekeeping question. Do we keep expecting earn-out payments of 400 million this year, i.e. expecting roughly 250 million to be paid out during Q3, please?

So 350 during the second half of this year stands. 350, okay. Thank you very much. Thank you.

Those were all my questions for now. Thank you. Thank you. The next question comes from Daniel Schmidt from Danske Bank. Please go ahead.

Yes, good morning, Gustav. I hope you can hear me. A couple of questions. If I got you right, Jesper, have you been sort of shifting around in terms of MNAT payments timing for the year? Because I think you said before it was supposed to be about 200 in Q2, but that sort of postponed into H2 then basically, but it's the same number.

Yes.

So you did 100 basically in Q2, right? Okay.

Maybe also I should clarify that to some extent when we have a very strong cash flow that can also affect the actual payment when buying additional shares from minority owners. So slight increase in that. Okay.

So the total earn out commitment for 23 is actually 500 and it was 450 before, right? Yes. Okay. yeah okay so you have another 350 to go and and just the timing of that is that mostly in q3 or is it equally divided mostly in q3 okay good um And then just coming back to sort of cash flow generation, I hear what you're saying in terms of reduction of inventory, maybe another sort of 90, 100 million for the second half of this year, but you do sound hopeful that you can do more in 24. What is a reasonable sort of, what's your target basically? Where do you want to sort of come back to?

I think that given the size of the business that we see today, I think it would be fair to aim against some 1.5 billion or so. I think that's a reasonable amount.

Yeah. And is it sort of the target to get there basically in 18 months time or is that going to take longer?

At least 18 months if I answer that way. Yeah, all right.

Good. And then just sort of the deal that you struck with the minority owner of Furniture One, that is still up for approval, of course, on the extra general meeting. But assuming that that happens,

and that sort of earn out disappears when would have that sort of earn up have been in time if you wouldn't have done this basically based on how we estimated that would have happened in 25 but i should say the the option was was valid to utilize at any point okay it was not within our control exactly when it was to be utilized

So that could have come on top of what you had in terms of commitments for this year already? Yes. Yeah. And given that you still consolidate the results on Furniture One, given that you do have some sort of buyback agreement also for these 20%, what is that... What price does that entail, that buyback agreement, and when?

So we will not disclose the actual terms, but just underlining that we now, if the EGM approves the transaction, fully control if and when such a deal would take place.

So, okay. So you can... So you can execute that buyback when you feel needed, basically. Is that what you're saying? Yes. Yes, that is within our control. But the price, I assume, is already set.

The price, we have agreed on a mechanism to calculate the price, yes. Okay.

But of course, that's all we are going to be able to know. Is that what you're saying? There's not going to be any extra information in connection with the GM? No. Okay. All right. Just a housekeeping question as well. A change of top line in reported numbers is basically the same as organic. I'm just thinking FX has moved quite a bit in many of the countries that you do sell in. Am I missing something here or is this the right number?

Sorry, I did not fully understand your question.

No, but I'm just saying that if you look at the reported top-line decline is 11%, then it's basically the same for organic decline. But the euro has probably moved 12% or something like that during this time.

So our definition of organic does not include the effect from FX. Oh, okay.

So the true organic is probably then

uh minus 15 or something like that given that we have been able to to adjust i mean you have so many effects you have also the the the our ability to adjust prices so so i will not comment on the exact number um

And just coming back also to Q2, in terms of the inventory write-down that you did in, I think it was Q4 last year, relating to outdoor furniture, greenhouses, jacuzzis, big ticket items that have been sort of of course lacking a lot of demand. Do you feel that did that sort of match the outcome for this particular season or was there a sort of slight net gain or net loss compared to what you thought?

I think we did a really good job I have to say. I mean trying to assess net sales value uh eight nine months in advance i i think we did a good job uh and also i should should say that without that impairment or right on the those products would have been very hard to sell given that the landing cost was simply too high yeah so no no material effect

And then maybe just sort of how we should model operational performance into the second half of this year. It's sort of a very difficult market, of course, still. And that, of course, shows in the numbers, although you did do a lot better in Q2 versus Q1, coming from a big loss to a decent sort of gain there. How should we look at Q3 and Q4 from a P&L perspective? You're saying that the market is still tough, especially for big tickets. You're seeing some slight improvement in consumer confidence. It sounds like you did have a sequential improvement in the quarter, but maybe that is partly also weather-related. Where are we basically looking into Q3 and Q4?

First, I should say that we don't give any forward-looking statements, so it's very hard for me to give any exact answers on that. I don't think I can say much more than what we've talked about before. We see some positives, we see some negatives, and we believe that the market will remain challenging.

But you will have more savings coming too, because you are saying that they are more to be, most of them to be realized in the second half, right?

We have more savings, yes. We see comparables coming down. So there's quite a few positives in the mix as well.

And how much of that sort of targeted savings that you announced for this year have been realized already in H1?

Maybe some 20 to 30 percent have been realized. But as you said, the majority is to be seen in the second half of the year.

And we should also mention significant cost increases in some of our cost lines as well. Of course, staffing costs, but also rent levels.

Yeah, sure. And especially since 1st of April when it comes to salaries, I assume in Sweden at least. But then the rent levels you already had by the 1st of January. Correct me if I'm wrong. So some difference versus Q1, of course, but maybe more of the same from Q2 and onwards into the second half. Because you're also seeing, I assume, freight costs coming down. So, okay. Thank you. I think that's all for me, guys. Thank you.

Thank you. The next question comes from Gustav Hagius from SEB. Please go ahead.

Thank you. Good morning, guys. I have a few questions on my own. So with the apparent change of ownership now, the main owner of BHG, there's there's still the financial targets that you've had for some time which imply five to ten percent growth per year stemming from m a and also the financial target of having a net that evda of 1.5 to 2.5 times as far as i understand you have not changed those but is that still a good guidance for the market as you see it or are those subject to change how to think about those

They still remain valid, and we have not changed them, as you know. We still think they are valid in the long-term perspective, but they need to be regarded in the long-term perspective. We're currently in a tough market situation. Our main focus now, as I commented earlier on, is to what we call the short-term ambition, and that is to take us back to the pre-pandemic levels of profitability and cash flow generation. But long term, we still believe that the financial goals we have over a cycle is valid.

Yes. But the organic growth is one thing. I'm more asking about the M&A growth. Now that you're starting to divest and consolidate your holdings, as far as I remember from the IPO, part of the strategy was to buy these storefronts to sort of cloud the search field for potential buyers that you would sort of own the Google. uh windows and now that you're sort of it seems like you're reverting from that that strategy to consolidate and be stronger sites is the m a target still valid in your opinion

The M&A target is still valid. We still believe in M&A. We still want to continue to do M&A. As we said in the report, M&A currently is not within our main focus, but we still evaluate M&A opportunities as they come in. And looking forward, we still believe it's going to be a key component in building busy to what you want to be and we will do acquisitions as add-on acquisitions i think a good example is the way we acquired svenson's and sort of and put it into nordic nest group at once so i think it would be more those type of acquisitions basically the platforms acquiring businesses to add to their existing businesses. But we will also, looking forward, invest in and look into potential further platform acquisitions. So it's definitely a key component, but it's not within our main focus right now.

I'm just thinking that perhaps... the analysis in retrospect of the value creation from from doing these acquisitions was not as good as they were so that's why it's asking if perhaps you would start to reconsider that strategy that may be a topic for another discussion but then i related them you have 6.5 billion in goodwill still if i recall correctly that and and part of that is stemming from these acquisitions that you now discontinue or consolidate but can you talk a little bit about that goodwill position and if you feel that that is over time gonna need some revisions?

Not where we stand right now I mean goodwill is tested on segment level so consolidations does not really affect the testing and we do not see any need for impairment now no

I guess part of the goodwill related to these brands that are now discontinued. How can it not affect

I think we should also clarify that quite a lot of the consolidations means that we still remain with several brand names and sites. I think a good example is Big Hama Finland, where we basically had four different businesses that we consolidated into one. We terminated one, yes, but the other three we have consolidated into one entity. But we still run three different sites, but under one organization and one IT platform.

so so constantly does not necessarily mean reduce the number of sites or brands but you're of course perfectly right if we were to discontinue any brand that value would need to be impaired

The main synergies does not come from reducing site. The main synergies comes from consolidating on entity level to reduce cost levels in running platforms, organizations, et cetera.

Yeah.

Okay. That's great. Thank you, guys. Thank you. Thank you.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

We have also received a question in the chat and the first question comes from Magnus Hohmann and it consists of two parts. So the first one is, you mentioned that a wide selection and availability remains at the heart of your business. Where is the balance between this ambition and your target to reduce inventory? It seems possible that your inventory reduction will exceed the 600 million Swedish crown target at the end of 2023. But will you see a limit in inventory reduction from where the sales potential is affected too much?

I think it's a very good question, actually. And we really work hard to balance this. We need to measure both inventory reduction and we also need to measure availability. And I would say that in all our businesses today, we measure availability. And the main focus, of course, is to not decrease availability on the most important and the highest turnover products. So there's still room to decrease inventory, but it will be done more on the tail and not to the same extent on the high-running products, because their availability definitely is a key driver. So measure that, be careful with that, and balance that, yes. But with that said, still room for significant inventory reduction, but we need to be careful and considerate when we do it.

Thank you. And the second question from Magnus is, Can you elaborate on how your interest costs will be affected following the renegotiation with banks?

I mean, we have communicated, of course, additional flexibility comes with a cost. And trying to quantify, I would say interest expenses would be 1.5 times the number that we reported in 2022.

And that was all of the questions from the chat. So thank you.

I'll just say thank you very much. Thank you very much for listening. Highly appreciate it. If you have any other further questions that you want to take with us, please don't hesitate to contact us. We will do our very best to answer. Thank you very much for listening and bye.