B&S Group S.A. (BSGR) Earnings Call Transcript

Hello, and welcome to the B&S Full Year 2020 Results Call. My name is Patrick, and I will be your coordinator for today's event. [Operator Instructions] I am now handing you over to your host, CEO of B&S, Tako, to begin today's conference. Thank you.

Good morning, everyone. This is Tako de Haan, CEO of B&S Group. With me here today is Peter Kruithof, our CFO. And together, we'll talk you through our full year 2020 results as published this morning. First, let me take you through the highlights of our full year 2020 results. We will then discuss the figures in more detail, which Peter will do, and provide the outlook for 2021. After that, there is, of course, opportunity to ask questions, any questions you may have about what we presented. In 2020, the COVID-19 pandemic presented us with challenges we have never seen before. This forced us to rethink our business processes and concepts. COVID has proven to be a strong catalyst for change, and we used that to turn our challenges into new business opportunities. Our strong e-commerce performance is exemplary for the adaptability in these circumstances. When COVID-19 hit globally in Q1 2020, we had a financial strength and agility to implement strict control measures, not only to keep our people safe, but also to ensure business continuity. In an early stage of the pandemic, we implemented strict cost-control measures to reduce operating expenses as much as possible. As a reminder, our OpEx mainly comprised of staff cost. Besides bringing temporary staff levels in line with sales volumes and utilizing government support in the countries we are present in, we took further measures in H2 to be terminating fixed-term contracts and, ultimately, by carrying out a reorganization in segments which were severely hit to COVID. We evaluated our investment programs and made the clear decision to continue our investments in IT for development of digital services and e-commerce solutions to enable the business to leverage opportunities in those online channels. Another focus area was maintaining our healthy financial position to ensure business resilience throughout 2020. Our net debt is mainly based on working capital, and our working capital focus was aligning the inflow levels of our inventory with the demand in the market and as such, decreasing our net debt position. All in all, this resulted in a strong cash flow for full year 2020. And given this financial health, the company is proposing a dividend payment over 2020 that is subject to approval of the Annual General Meeting, of course. But let me hand over to Peter for more detail on the financials.

Thank you, Tako. Let me take you through our financial highlights of full year 2020. Driven by the COVID-19 developments, overall turnover declined by 5.9%, while organic turnover declined by 8.1%. Turnover from acquisitions originated mainly from the in 2019 acquired Lagaay Medical Group and the acquisition of Top Care, a small perfume wholesaler in Spain in 2020. EBITDA came in at EUR 90.3 million, an overall decline for 2020 of 21%. This is a substantial improvement compared to the 31% decline at half year 2020, on which I will elaborate in a minute. As mentioned, we managed to generate a strong cash flow amidst the COVID-19 pandemic and kept a strong focus on working capital, for which, of course, I would like to complement our financial department -- commercial department, sorry. As such, inventory in days substantially decreased while turn -- while debtor in days remained at similar levels. This should be read as an improvement, however, compared to 2019 as the contribution of Retail business steeply declined, which comes with no days of sales outstanding, of course. Let me put some color on performance at segmental level. Our liquor distribution to Asia was severely impacted by COVID-19 in the first months of 2020. When the lockdowns in Asia gradually lifted in Q1, the first signs of early recovery of sales were noticeable. This trend continued throughout 2020, albeit at low yet gradually improving margins compared to 2019 levels. This was due to the supply-demand imbalance in this market. Liquor wholesale in Europe was impacted by the social restrictions on end customers and the closing of public venues in Q1. This impact accelerated in Q2 as the social restrictions intensified. This somewhat stabilized in Q3 and, combined with our focus on new and intensified relationships mainly within the e-commerce, resulted in a turnover increase for Q3 when compared to 2019. This effect, however, was offset again in Q4, but sales declined to physical wholesale due to the second COVID-19 wave. In HTG Health & Beauty, our online distribution business to platforms and end customers performed well throughout 2020. This business showed resilience in Q1 and performed even better than anticipated in Q2. The strong performance continued in Q3 and Q4, and was driven by increased demand and more favorable sourcing conditions related to COVID-19. On the other hand, the temporary lockdowns of many countries throughout 2020 had an effect on our Health & Beauty distribution to physical retail outlets. In particular, the value retail in Europe that was forced to close by the end of Q1. When these shops opened again in Q2, our distribution began to show a slow but noticeable upward trend. This resulted in sales recovery to 2019 levels towards the end of Q2 and brought Q3 sales levels in these channels back in line with 2019 levels. The Q3 performance in value retail was, however, offset by declined perfume distribution to physical retail outlets in Europe. This was the result of the consumer shift to online channels. In Q4, the newly declared lockdowns throughout Europe again affected distribution to physical value retail outlets. Moreover, the distribution to physical retail in Asia declined due to market oversupply. In the B&S segment, the effect of COVID-19 on our business was varied. Our food supply business to remote and military caterers remained stable in H1, and the majority of our maritime business and international FMCG distribution also remained relatively resilient in Q1 and Q2. The acquired medical supply business even saw increased sales from COVID-19 developments in the first half of 2020. On the other hand, the subsegments, cruise and international FMCG distribution to duty free markets, came to a standstill already towards the end of Q1. The market circumstances for those 2 subsegments continued throughout 2020. After the stable H1 for our food distribution to remote caterers, the downscaling of industrial sites due to COVID-19 became evident from Q3 onwards. Also, our distribution to military caterers started to see declined demand from Q3 onwards. This was the result of geopolitical development. The performance in our medical supply business stagnated in the third quarter compared to Q2. This was due to the absence of travel-related business seasonality. In Q4, the segment continued to see less demand from remote markets as industrial sites remained understaffed and distribution to military caterers further declined. The Retail segment was severely impacted by COVID-19 restrictions. Sales came to an almost complete standstill towards the end of March, and this situation continued throughout the first half of 2020. Although most of our shops at airports reopened in the course of Q3, performance was lagging in the remainder of 2020 due to the very limited number of passengers. Early Q2, we set up a dedicated committee in the Retail segment for developing and executing an action plan with a primary focus on limiting the effect of COVID-19 on operating profit. Operating profit is driven by sales volumes, concession fees and staff costs. We scaled down temporary staff wherever possible and utilized support from government regulations in the first half of the year. In the second half, we took further measures by terminating fixed-term contracts and carrying out a reorganization. Moreover, we kept in close contact with all airports where we operate. We focused on reaching agreements for the suspension of or waiving of lease obligations and concession fees. Discussions to obtain waivers and renegotiations for existing concessions are nearing completion. In some cases, we terminated smaller contracts for which no sustainable continuation could be realized. That brings me to the financial review. As mentioned, the full year 2020 turnover decline of 5.9% or 8.1% organically was driven by COVID-19 developments. Gross profit came in at EUR 255 million compared to some EUR 272 million for full year 2019. As a percentage of turnover, it remained stable. This was the outcome of the before-mentioned lower margins in Asia as a result of market oversupply, which was compensated by the traditionally higher margins of our e-commerce business that gained even more momentum during COVID-19. Despite our cost-control measures that were concentrated on reducing variable operating expenses, our EBITDA margin over full year 2020 decreased to 4.9%. This has to do with our fixed cost base, combined with the sales decline over 2020. Given the seasonality of our business with a stronger second half and, in particular, strong last quarter, EBITDA declined to a lesser extent over the second half when compared to the first half. All in all, our EBITDA arrived at EUR 90.3 million compared to EUR 114.6 million for full year 2019, or a decrease of 21%. Net profit amounted to EUR 40.6 million, of which EUR 18.9 million came from minorities. This was the result of the growth of online Health & Beauty, FragranceNet, resilience of our value retail, top brands and the performance of our medical supply business, Lagaay. This bridge shows the elements that together leads to the turnover decline. Driven by COVID-19, organic turnover declined over EUR 141 million. The EUR 44 million acquisitive growth stems from Lagaay Medical Group and Top Care. The development of the EUR-USD exchange rate had a negative impact of some EUR 20 million on turnover. That brings me to our financial position. Solvency stood at 38%. This was the result of continued profitability throughout the pandemic, combined with a decreased balance sheet total. Our measures related to working capital and cost control, as discussed earlier, were concentrated on aligning net debt and EBITDA to allow the group to keep operating within its covenants. Although we proactively engaged with our relationship banks to agree on a covenant holiday for 3 test periods, our net debt-to-EBITDA on a pre-IFRS 16 basis stood at 2.3, well within our covenant of 3.5 and a clear improvement when compared to full year 2019. To give some more color on net debt, let me elaborate on the bridge showing the movement from year-end 2019 to year-end 2020. As mentioned before, our focus on working capital reduction resulted in a strong operational cash flow of EUR 147 million. Our limited investment activities were driven by investments in software and tangible fixed assets as well as investments in small acquisitions of 100% of Top Care and the remaining 49% in Aldodis. Final dividend for 2019 was canceled, leaving only dividend payments to minorities of EUR 13.3 million. All in all, net debt decreased by more than 37% to EUR 185.8 million. That brings us to working capital development. Inventory decreased from EUR 376 million to EUR 308 million or from 80 to 70 days. Trade receivables decreased from EUR 201 million to EUR 196 million and remained stable in days. Trade payables also remained stable compared to 2019, as we adhered to our regular payment terms during the pandemic. For the outlook, I would now like to hand back to Tako.

Thanks, Peter. I will first discuss our outlook per business segment, starting with our Liquor segment. As long as the European countries are in lockdown, we expect our Liquor business in Europe to be impacted to the same level as we have seen in Q4 of 2020. The Liquor Asia market started to recover at the end of 2020, both turnover and margin-wise. We expect this trend to continue throughout 2021. Our main focus for this segment will lie on gross margin improvements, driven by centralization and digitization of processes. This will allow for stricter purchasing policies and more active benchmarking. The Health & Beauty segment will remain our main driver for growth throughout 2020. We plan to expand our online B2C propositions to more regions outside the U.S., such as Australia and Middle East. It is our expectation that the lockdown measures will remain to have their effect on the physical retail clients during the first half and especially the first quarter. Within the B&S segment, the travel-related subsegments, cruise and duty free, are expected to remain difficult throughout 2021. At this stage, our view on the resuming cruise business relates purely to the question of profitability or possibility thereof in the foreseeable future. The primary business focus within this segment is currently the development and enhancement of business activities with opportunity for future growth. This includes brand representation for A brands in the noncore markets, development of marketing services for customers, digitizing existing services and further catering our assortment to global market trends and local requirements. The Retail segment is expected to remain severely impacted for the coming years. Forecast from the airport retail markets regarding passenger numbers for 2021 currently stands at around 40% at -- of the 2019 volume. Although we have reached agreement with most airports in 2020 on the contractual obligations and downsized our operations to a minimum, we don't see it feasible yet to break even in 2021. This is due to the expected turnover levels of around 40% when compared to 2019 levels. Overall, we will focus on markets where we see good opportunities for growth. We will continue the digitization of our services and business processes and also invest in e-commerce solutions. This enables the business to leverage opportunities in the online channels, both in B2B and B2C markets, across all product categories. We will continue our cost control measures to reduce operating expenses structurally, further rollout of our Digital First approach and implement a lean mindset for all functions. This way, we can enhance operational efficiency to support scalable growth. To ensure our currently healthy financial position, we remain focused on our working capital throughout all segments. That ends this presentation, I would like to open the call for further questions and hand over to the operator.

[Operator Instructions] Our first question comes from the line of Annelies Vermeulen from Morgan Stanley.

I just have a couple of questions. So firstly, on -- in the remote part, particularly on the military, you've talked about that being driven by geopolitical developments. Do you have a sense of to what extent those will be permanent? And do you think that some of that business that's gone essentially won't come back? And are there other remote sites that you could target instead to compensate for that? And then secondly, on the Retail part. particularly with travel, you've talked about that not returning for a -- back to normal for a number of years in line with, I guess, a lot of the airlines and airport operators are saying. Again, do you have a sense of how you're going to compensate for that? Again, are there other parts that you could redeploy those -- that kind of capability to in order to offset that? Or is it just the case of waiting until that growth returns to normal? And then lastly, I wanted to ask -- and apologies if I've missed it. But could you give me the organic growth by division, that would be helpful.

Okay. Let's start with question one on the remote and military. Yes, I think we all fully understand that it's mainly coming from the geopolitical developments regarding mainly the U.S. election. And as such, the number of troops in Afghanistan being scaled down. Will it be permanent? It's a little bit hard to say. However, we do expect that the volumes will not reach the 2019 or start of 2020 levels again. So we do expect that decrease to remain. Of course, we are fully focused on other missions as well, either with the UN or other peacekeeping missions. And of course, we also, together with the Lagaay Medical business, which is a nice add-on for our business, for that business we definitely see growth in those respective markets as well. If we look at the Retail. Indeed, we don't expect the Retail business to be profitable throughout 2021. During all the contract negotiations we had with the several airports, yes, we also managed to get extensions with most of them so that the loss-making years, so to speak, are compensated with profit-making years at the end of the contract. We had quite some discussions on the concession fees and especially the fixed component in that part for the years where passenger numbers are quite low. Well, that may -- range is that the breakeven level is reached at an earlier stage by us. I think if I were to indicate a percentage, I think, that's roughly towards the 50% sales volume of 2019. At that stage, we would be able to start being profitable again, especially with all the measures we've taken on -- yes, on our cost base and the unfortunate reorganizations we had to take in mind. If we look at -- I think the last question you had was on the organic growth per segment. If we look at the organic growth, HTG Liquors on a constant currency basis 4.1%; HTG Health & Beauty, also on a constant currency basis, minus 0.3%; B&S organically, minus 13.3%; and the retail minus 68.4%. Does that answer your question, Annelies?

Yes, that was very helpful. Very clear.

Our next question comes from the line of Tijs Hollestelle from ING.

Tijs Hollestelle from ING. I've got -- my first question is about the -- yes, the outlook statement regarding the Liquor business. What were roughly the growth rates in the fourth quarter for Asia and also for Europe? And also, if you can say something about the relative weight in the overall Liquor business, so the absolute revenue contribution of both Asia and Europe. Let's do the questions one by one. That was the first one.

I think if you look at Q4, Tijs, although we have never segregated these numbers, of course, but I do understand your question. I think in -- I know that in Q4, the total organic growth on a constant currency basis for liquor has been 7.2%. Well, that 7.2%, on the one hand, comes from the Liquor Asia market that was already quite rough in Q4 2019. So, of course, we managed to grow there with the markets attracting again. Throughout Europe, of course, it's been a little bit harder. Throughout Europe, we've seen a decrease in the fourth quarter. So a small minus in growth between bracket. If you look at total sales in liquors, those have been over EUR 460 million. I think you can roughly say that it's a 50-50 split, so 50% from the Asian market, 50% from the European market.

Okay. That's very helpful. And looking forward, if you -- if we all assume, let's say, that COVID-19 won't have any material perspective impact on Asia, do you expect that the business can then exceed the 2019 levels? Because as you mentioned, that was already affected by the Hong Kong riots in the second half of 2019, which you achieved EUR 170 million on an annual basis in 2019? Or is it too early to say anything about that?

It's a little bit difficult to say something about that at this stage. However, I must say that our primary focus in that market is on gross profit. In other words, I'm confident that we will exceed gross profit realized in that market in 2019. I'm not 100% sure if we will reach the turnover levels.

Okay. Yes, that's clear. Yes. And -- yes, and then another question about the performance of the B&S segment. The OpEx in the division is quite high in the second half, but I guess that includes some of the provisions you took on restructuring. So going forward, we probably see the immediate effect on the OpEx in the B&S segment already, I guess, in the first half. And have you -- let's say, the measures you have taken is that basically on the situation as it is right now, so there is indeed no comeback from cruise, Lagaay will continue to perform relatively okay, and then you have to take the pain from the year-on-year decrease in the Army business and also the remote area for industrial sites and probably then, around that, the duty free. Is that the assumption you as a management team took in altering the cost base?

I think that's fair to say, indeed. Of course, we look at all the different markets. Well, as you can imagine since there are also colleagues, of course, enforced it first instance, we tried to replace or to reposition most of the colleagues to markets where we expected growth and where we saw growth. On the other hand, yes, of course in the markets where we didn't see the growth and we were unable to replace our colleagues, yes, there we had to take the unfortunate decision to reorganize. And as such, let the people go.

And it's not only about reorganization, Tijs. It's also about restructuring, how we do our business well by reconfiguring and reorganizing the different apartments. We've made quite a significant efficiency improvement.

Yes. But the...

And of course, we are further digitizing whatever we do in the business processes. So that also helps us to become more efficient.

Yes. But the implied, what is it, EUR 22.5 million OpEx in the B&S division in the second half, that is likely to be lower this year?

I think that's fair to say. Yes, definitely right.

That's fair.

Okay. That's helpful and I get that. Yes, and then the last question, maybe it's too early. I'm not sure whether you are open for M&A, but what kind of potential targets you're currently looking at? Because I can imagine that all over more Dutch companies is coming to you, present themselves as being acquired. But is there any strategic view on what kind of products or what kind of categories you might want to add to the overall B&S family?

I think, of course, it's fair to say that we're open for M&A if and when it suits us. As you can imagine, we're mainly focused -- focusing on, let's call them, new tech companies. In other words, if we, yes, were able to find interesting companies within the product segments we're in and within the markets we're in, with a new tech feeling about them, then we're definitely open. So if have any interesting candidates, Tijs, then you're more than welcome to present them to us.

Our next question comes from the line of Paul Hofman from The IDEA!.

The first one, if I look at your outlook or more the strategic direction for the next few years, you talk about improve your position in business consumer further, not only in terms of more geographies but also in terms of a broader assortment. Yes, what kind of product groups are you looking at? Are you not afraid that you come more into the territories of the big names? And if so, what do you believe is your ultimate competitive advantage versus potentially these bigger names? Is that more the price positioning you take? And perhaps -- yes, perhaps you can take questions one by one.

Yes. So about different products, we'll add to that product segment a lot of healthy snacks, protein snacks and things like that, so more the healthy part of our food services. That is definitely what we are aiming for. And we've seen great markets in the Middle East for those products as well. So we will certainly, yes, further explore these markets.