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

Good morning, everyone. This is Tako de Haan, CEO of B&S Group. With me is Peter Kruithof, our CFO. And also on the call is Mark [indiscernible]. First, let me go through the highlights of the first half of this year. We will then discuss the figures in more detail and provide the outlook for 2022. After that, there's, of course, opportunity to ask any questions you may have. In the first half of 2022, turnover grew double digit and was driven by the Liquor segment and supported by the Retail and Food results. However, industry-wide supply chain challenges and increased product scarcity had their impact on our gross margins in the first half of 2022. In addition, we had to take a provision of USD 7.5 million on a doubtful debtor in the Food segment. Also, staff costs continue to rise. This is due to a tight labor market in Europe as well as expansion in increased hourly rates for warehouse staff in the U.S. Despite these challenges -- challenging economic circumstances, we made good progress on our strategy. With the recent acquisition of the French beauty company, we strengthened our direct-to-consumer activities and gained direct access to the brand owners in the premium beauty segment. Also, our Retail segment is expanded with the upcoming openings of the shops in Abu Dhabi and with the newly won tender contracts in Barcelona and Palma de Mallorca. Besides our investment in acquiring the French beauty company, we invested in progressing our operational efficiency and digital transformation. More specifically, we expanded and further automated our B2C warehousing. We realized additional warehousing capacity for B&S Personal Care and further centralized our operations to our IT backbone. We're also proud to publish our revised sustainability program Reach with Impact today. This is yet another milestone in the execution of our 2021 to 2023 strategy. All in all, we are strategically in good shape to navigate to the global economic development. But nevertheless, the impact of the macro environment on our half year results is clearly visible. This translates into the following numbers. Overall, turnover increased by 19.4% to EUR 983.2 million, where organic turnover increased by 18.8%. EBITDA came in at EUR 40.6 million, an overall decrease of 11%. When corrected for the provision in the Food segment, it comes to EUR 47.7 million, a slight increase versus the same period last year. All segments contributed to the turnover growth. Turnover from acquisition originated from the beauty company that we acquired in quarter 2. So let me give some detail on the performance at segmental level. B&S Liquors turnover increased by 37.9% and gross profit increased by 43% compared to the same period last year. EBITDA margin increased significantly as a result of the strong position -- stock positions and relatively low staff cost when compared to the other business segments. Our European Liquor wholesale business benefited from the lifted COVID restrictions for hotels, bars and restaurants from the end of Q1. Our International Liquor distribution saw relatively high demand in the current market, driven by good stock positions. The B&S Beauty segment increased turnover by 4.6%, with slight decline in gross profit due to the ongoing product scarcity that pressures our purchase prices. EBITDA and EBITDA margin decreased due to staff cost increase. This increase was driven by the online B2C business in the U.S. Q2 turnover growth was better than Q1 and driven by the consolidation of the French beauty company. B2B and B2R sales were impacted by the product scarcity and price increases leading to limited product availability for some key customers. Online B2C continued to grow. Driven by the strong U.S. dollar, margins for this business decreased back to pre-COVID levels. B&S Personal Care increased turnover by 9.8% and gross profit increased 11.5% compared to the same period last year. EBITDA margin increased 21.4% as more turnover was generated at similar cost levels. This performance was driven by increased sales to key customers as a result of the reopening of shops compared to the first half of 2021. This was further aided by well-managed stock positions. Further sales growth was held back by high prices of the private label assortment driven by a strong U.S. dollar. We continue with the B&S Food segment. We see an increased sales with 15.1%, while gross profit decreased by 26.8%. This is the result of a provision of USD 7.5 million for a doubtful debtor as well as the altered business mix with less contribution of remote markets, which normally comes at higher margins. EBITDA margin stood at minus 1.7%. Corrected for the provision, gross profit increased 9.3% and EBITDA margin stood at EUR 2.9 million. Food Services increased turnover, mainly driven by the maritime market that profited from the automated order flows. Margins were aided by increased food prices, resulting in increased inventory value. This effect is likely to diminish in the second half as purchase prices increase as well. The Government and Defense business saw pressure on turnover and gross profit decreased when compared to the first half of last year due to the rising food prices combined with the long-term contracts at fixed selling prices. Our brand distribution services performed better than anticipated on turnover. This was the result of a stronger-than-expected recovery of the Duty Free and travel-related markets. The domestic markets also slightly increased turnover driven by our Dubai operations. B&S Health saw a slight increase of sales by 1.3% with a margin increase of 2.6%. This was mainly driven by the vaccine business that was picked up in after lifting of the travel restrictions. EBITDA margin, however, still declined because of the increased fixed cost base. Last but not least, B&S Retail realized a 244.8% growth in turnover and almost tripled its gross profit when compared to last period -- to the same period last year. Turnover growth in Q2 was less steep than in Q1 as Q2 2021 also saw some recovery during the summer holiday fee. EBITDA grew as well, albeit to a lesser extent than the sales and gross profit. This is the result of the increased fixed cost base to operate the shops. That brings us to the financial review. Peter, I would like to hand over to you.

Thank you, Tako. And good morning to you all. Let's start with our key figures. Overall, turnover increased by 19.4% and 18.8% organically. At constant currency, turnover increased by 15.1%, 14.5% organically. This was driven by the strong U.S. dollar, but positively impacted, especially due to the [ results ] of our U.S.-based FragranceNet business. Gross profit came in at EUR 139 million compared to EUR 126.8 million for half year 2021. As a percentage of turnover, it was a decrease from 14.1% and from 15.4%. This was the outcome of the global economic development as well as the provision in the Food segment. Corrected for the provision, gross margin stood at 14.8%. Operating expenses amounted to EUR 98.4 million, an increase of roughly EUR 17 million when compared to half year 2021. This was mainly due to the increased staff costs following the tight labor market in Europe, increased hourly rates for warehouse personnel in our U.S. operations. Marketing costs also increased, driven by the expanded direct-to-consumer business and the increased prices. The gross margin decrease that was, to a large extent, driven by the provision, combined with the increased OpEx levels led to an EBITDA of EUR 40.6 million. When corrected for the provision, EBITDA amounted to EUR 47.7 million. The EBITDA margin amounted to 4.1% or 4.8% when corrected. Net profit stood at EUR 16.7 million, of which EUR 12.3 million was attributable to the owners of the company. Net profit attributable to noncontrolling interest amounted to EUR 4.4 million. This bridge shows the elements that together leads to the 19.4% turnover increase at reported rates for half year 2022. The organic increase of almost EUR 120 million was driven by the Liquor segment and the stack were indicated aided by Food and the Retail segment. The acquisition of the French beauty company contributed EUR 4.5 million and the development of the euro-USD exchange rate had a positive impact of EUR 35.4 million on turnover. This bridge shows the elements that lead to the turnover increase in Q2 2022. Turnover grew 17.3% organically at constant currency. The acquisition of a French Beauty Company contributed EUR 4.5 million and development of the dollar exchange rate had a positive impact of EUR 23.2 million on turnover. That brings me to our financial position. Net debt increased as a result of investing activities and increased working capital. Working capital increased as a result of especially increased inventory positions. This increase is mainly the result of the early inventory buildup in H1 in order to preserve margins for the second half of the year given the rising purchase prices and scarcity in the market. Also, please keep in mind that H1 2021 levels were low, given precautionary measures we took during the pandemic. As a result, net debt-to-EBITDA stood at 3.7 at half year 2022. Give a little bit more color on net debt. Let me elaborate on the bridge showing the movement from year-end to half year. Net cash from operations amounted to minus EUR 23.8 million, the result of the inventory buildup as Jeff mentioned, investing activities, mainly related to the acquisition of the French beauty company and the payment for the remaining part of the acquisition price for the JTG shares at the beginning of 2022. Financing activities, mainly related to new lease contracts that Tako indicated for the Personal Care segment and dividend paid to minorities in order to upstream cash. All in all, net debt increased as stood at almost EUR 415 million. That brings us to the working capital development. Net working capital increased to EUR 518.4 million compared to EUR 442.1 million at June 30, 2021. Inventory increased from EUR 376 million to EUR 452 million, from 87 to 95 days, the result of the earlier indicated inventory buildup. Trade receivables increased from EUR 168 million to EUR 205 million mainly following the strong second quarter. Trade payables increased from EUR 101 million to EUR 139 million, in line with the inventory buildup. And for the outlook, Tako, back to you.

Thanks, Peter. So let me give a bit of more detail on how this affects our expectations. I want to zoom in on the turnover of gross margin and EBITDA margin for this fiscal year. We expect our turnover growth to continue, but not as steep as in the first half of this year. This growth will be driven by Personal Care, Retail and the European part of our Liquor business. Margins, on the other hand, were flatten, mainly driven by the increased product purchase prices following the product scarcity. Considering the effect of the global economic developments on our gross margins as well as our staff cost on the -- and the other operating expenses, we expect our EBITDA margins for this year to be around 5%. We remain focused on our working capital management and the returning to normalized levels at fiscal -- at the end of fiscal 2022. Our strategy execution continues with digitized operations and enhancing synergies between our business segments. We will also continue to roll out our sustainability program and prepare for our fiscal year 2022 sustainability reporting. This ends the presentation. I would like to hand it back to the operator and open the call for questions.

[Operator Instructions]. This question comes from Tijs Hollestelle of ING.

Yes, my first question is about the provision, and we already discussed it a little bit in the morning, but I also [indiscernible] large customer in the Middle East in the Food and Beverage segment, for which he is going to have a credit insurance, yes, this is not something B&S normally does. So I guess you have run through the existing agreements with all of your customers and probably [indiscernible] also prohibited your sales force to make such rather deals. Could you confirm that, please?

That's totally confirmed.

Yes, so that's a truly one-off.

That's a true on-off.

And then also on the subject because if I look at, let's say, the performance in 2021 of the Food division, was there already kind of an impact on the EBITDA margins of this customer? It has been a little bit above 1%, I believe, in the last 2, 6 months reporting periods.

Provision wise, definitely no. Of course, that partnership was already in the numbers. So turnover-wise, yes. What -- those partnership came at a quite low gross margins. So excluding the partnership, margins potentially would have been higher.

Yes. So a little bit of an impact. And what is your [indiscernible]? Because also there were a lot of things going on in that Food division last year. What is your feel for the kind of underlying performance going forward of this unit?

I think Food is picking up again, especially our B2B commerce side that is really helping us to make some traction again in the international market.

Yes. But is it, let's say, a 4% EBITDA margin or 7%. I understand there are always dynamics that can impact it, but what is kind of the through-the-cycle EBITDA margin for this business as it is today with your businesses you still have?

I think if you look at the Food segment, then we've definitely seen a couple of trends during this year and during last year. One, of course, we had to scale down of our let's say, our remote business. Well, those business came at a relatively high margin. So without that business, the margin was a little bit depressed. This year, the segment has been really focusing on gross margin, and we already see quite a significant improvement in that part on the one hand, and that we should not forget, of course, helped by the inflation. In other words, if your inventory is in your warehouse, then it becomes more worthy just by being there. But also the focus that the segment has been fully on increasing that gross profit margin. That is one. Second, well, I don't think we will get back easily to that 7% we had in, well, let's say, 2017, maybe a little bit 2018, but margin gross -- our EBITDA margin is definitely going to improve moving forward in that segment?

Yes. Okay. That's clear. Yes. Then a question on the OpEx level of the Beauty division has increased sharply. I think you explained it well, labor cost, IT cost, high marketing expenditure in the first quarter, at least. What is your feel for the second half? Do we see a similar increase or will it be flat? How should I look at it for the Beauty segment?

We expect that it will flatten the second half of the year. The marketing costs are stabilizing again. And we have taken most of our salary increases by now. So we don't expect it will go up a lot further.

Okay. That's helpful. And the acquisition of the French beauty company and that this is being consolidated for how many weeks in the second quarter? And does it have the same, let's say, seasonality as your current Beauty business? Or should we, let's say, take 60%, 65% of the -- what is it annual turnover of EUR 33 million annual turnover of that acquisition for the second half?

It's been consolidated since May 1, onwards. So 2 months in the numbers. And indeed, seasonality wise, you're fully correct. Of course, there being a beauty company. Also the vast majority of sales is generated in the second half and especially in Q4.

Okay. And I think also with the press release of the acquisition, it should make EUR 2.5 million EBITDA, so a margin of a little bit more than 7.5%. Is that also under pressure now, seeing the same dynamics as your current business?

A little bit less in that segment. But the complexity we also see and face in that company. They are sourcing direct from the brand owners. So they have to absorb the price increases that the brand owners boost to them. They range from, let's say, 20% to 30%. And yes, of course, we also need to take into account the price elasticity with our customers, where if we see that consumption is not there, we will also have to take a little bit of that, those increases ourselves. That's -- given the fact that's, as indicated, the vast majority is in Q4. It's now early to really anticipate on those prices.

Okay. And you're mentioning investments of EUR 61 million in the cash flow, and that includes this acquisition for the French beauty Company, but also the JTG investment. Can you give us the breakdown of the investment?

As indicated in our full year report for the shares in JTG in total, we had to pay EUR 48.5 million. EUR 10 million of that was paid in year 2021. EUR 38.5 million was paid in Q1. And for the acquisition of the French beauty company, we paid EUR 17.5 million. And the remainder is regular CapEx that we always have.

Okay. The CapEx is also in that, yes. Okay. And for full year CapEx, what do you expect, CapEx and [indiscernible].

For this year and for the second half, we don't have any significant investments on plan. So basically, what you will see is roughly the line we also had in the first half.

Okay and yes, there are no CapEx commitments for the second half or maybe for 2023. You're flexible on the CapEx?

We're reasonably flexible in CapEx. And for this year, we have no further commitments. Small shop openings and things like that, which I referred to in the tax as well. So we have Abu Dhabi, we have Barcelona, Palma de Mallorca that are opening up this year.

Yes. And one final question on the balance sheet. I understand the dynamics of the price inflation effect on your inventory levels. That's basically business as usual, also the buildup as we have seen that before. Yes, the problem is a little bit that the stock market is always a bit nervous when the leverage ratio is close to the bank covenant. So, yes, the reason I'm asking this is, in the past that B&S proactively managed, let's say, a potential breach of covenants. So what is your leeway with finances towards the end of the year because it probably depends a lot on the timing of the cash collection of receivables. And then not hampering, let's say, your operational business, if you have opportunities, you have to purchase other inventory for revenue later. So what exactly are the dynamics? What can we expect with these regards?

What you normally see and normally would expect is a significant inventory buildup in the third quarter of the year, that inventory is then, of course, sold in the fourth quarter again, significantly decreasing the inventory position. What we have seen this year with indicated price increases coming up in the second half, we already took our positions in the first half, as such, increasing our inventory position earlier than we usually do. And of course, with the Q4 sales, that position will significantly decrease again in the end, yes, of course, resulting in a lower working capital need as per year-end.

Yes. Okay, even with a kind of a bandwidth of unpredictability, you're probably building, you're not concerned on that.

No, there's no concerns.

Yes. Okay. Because in the past, we had, I think, there's about 1 year and you had a pretty big payment in January. So therefore, I'm asking, but that gives me comfort at least on this matter. Okay.

Next question comes from the line of Patrick Roquas from Kepler Cheuvreux.

So I almost got the impression that this was a one-on-one with Tijs now. Just kidding. I've got a couple of questions. The first is on the provision for the -- in relation to the Food division. Yes, it seems pretty sizable also taking into account for the sales of this division in the first half and the fact that's related to one client. So why was this not insured? And also -- does this highlight, let's say, or is there sufficient risk management in place with regard to debtors? That's the first question. Shall I -- should I ask the others? Or do you want to answer these first, tackle?

Put all the questions on paper, and then we can think about the answers as well.

Okay. All right. Then on the inventory position, yes, I can see the rationale for some restocking at the same time, consumer climate is very unpredictable. So doesn't it include certain risks that if consumer spending would drop that inventories remain high. And in relation to that, can you give any guidance for the level of net debt by the year-end? Then on your Beauty division, is it fair to say that FragranceNet saw negative volumes in the first half despite the expansion in Australia and also despite, let's say, the deal that you closed? And then on the CapEx, I missed part of the answer that you gave to Tijs, but could you give me the breakup of the EUR 61 million in CapEx or investments, sorry, and also reiterate some of the amounts that you mentioned, so EUR 48 million, EUR 38 million and EUR 70 million first half this year. That's it.

Provision-wise, this is definitely on the high side and on the high side for the Food segment. That's -- yes, let us be clear on that. This is one partnership we had within that segment, where we sold quite significant amounts to that customer. Usually, and this is the -- the only exception of this size that we have within our portfolio, our customers are either credit insured or we still have the title documents in hand. Well, here, we build up a partnership with a company, a company that was, let's say, a growing company. The outstandings, we started seeing delays in those payments. Well, there, of course, again, we ask for a reconfirmation on the numbers on their side. After really pushing through in the end, it turned out that the -- that company was showing a loss. Based on that loss and the fact that the loss was significantly bigger than also they expected, showed us that, yes, control was not up to standard at that company. Then internally, we had to perform, of course, an impairment review on the outstandings we had with that company, and that review led to the EUR 7.5 million provision we had to take into account, or we consider this definitely to be a one-off given the remainder of our accounts receivable portfolio. This being the one exception that was in that portfolio.