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Edited Transcript of BSGR.AS earnings conference call or presentation 27-Aug-19 8:30am GMT

Half Year 2019 B&S Group SA Earnings Call

Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of B&S Group SA earnings conference call or presentation Tuesday, August 27, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anke Bongers

B&S Group S.A. - Manager of IR

* Gert Van Laar

B&S Group S.A. - CFO & Member of the Executive Board

* J. Bert Meulman

B&S Group S.A. - CEO & Member of the Executive Board

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Conference Call Participants

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* Lucas Ferhani

Deutsche Bank AG, Research Division - Research Analyst

* Patrick Roquas

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Robert Jan Vos

ABN AMRO Bank N.V., Research Division - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the B&S Group Half Year 2019 Results Call. My name is Rona, and I will be your coordinator for today's event. (Operator Instructions)

I am now handing you over to your host, Bert Meulman, to begin today's conference. Thank you.

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [2]

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Hello, good morning. This is Bert Meulman speaking, the CEO of the B&S Group. With me here is also Gert Van Laar, our CFO; and Anke Bongers, our Investor Relator. I will take, together with Gert, through -- you through the results of the half year under review and of course afterwards, we can discuss, and we are able to answer any questions you might have.

To start with, let's just go to the financial highlights half year and allow me to share my personal view on this first half year. We are pleased that we had a double-digit turnover growth we have realized. It was always the promise to our market -- to the market that we are fast-growing distribution company. The result is, of course, that we have a clear focus on serving selective channels and specialty markets and that we have a very valuable strong -- and strong value-added service to our clients. We are very diversified. And thanks to this diversification, we did not see impact on geopolitical factors like Brexit or the trade war between the U.S. and China on our overall results. We heavily invested the last years on IT, our logistics platforms. And also, we made a lot of investment in M&A. And we have been able to leverage our scale and our role and value chain in this first half year, in particular, in Health & Beauty.

Let's go to this half year highlights. Top line growth of 17% (sic) [17.1%], of which almost 7.5% was organic. All our 3 segments have contributed positively to this growth, but it was HTG which really fueled the growth. The EBITDA grew also significantly to EUR 52.9 million. When you would make comparables with IFRS -- differences of IFRS 16, of course you come to EUR 48.1 million, but -- so we made a good growth. Our solvency, our net EBITDA, it is all remaining within the predetermined objectives. Gert will provide you later with some more financial slides.

Key developments, when we go to the next slide. B&S Group is a unique distributor in consumer goods, for which demand continued to be strong in the channels and markets we serve. We invested heavily in HTG, in infrastructure to see that we are able to serve e-commerce. So we have invested in robotized logistical platforms, and that is very important. That worked out very well. We are connecting new clients. We are connecting new bigger clients. We -- this way, we are improving our service to, for example, Asian markets.

Our logistic operation in the B&S segment is on track. It was -- we had to give you bad news at the end of last year by telling you how constrained everything was. We worked on it. It cost -- small growth -- it came at a price of a small growth the first half year. So we were able to serve our clients in a good way after we solved everything. So after June, we saw also improvement in revenue. So we are happy with -- things are really going on track there. When we talk about our selective M&A, and we announced the acquisition of Lagaay Medical Group, which is active in medical. And medical is, for many of our clients, also a service offering, (inaudible). So we supply cruise ships. We supply oil and gas. We do military. We do United Nations. These are all clients who also need these kind of products. We can combine shipments. We can combine clients. So this mutual approach is for us important. We will integrate it, this company, in the B&S segment but also physically, so that will be a great fit.

Also these smaller regional airports of Rotterdam and Weeze, we closed last May. It helps us because we have some other small regional airports. We do a full offering of duty-free, tax-free, nice Health & Beauty items. That's very important for us, so we have now nice collection. It will help us in the purchase. It will help us in the marketing. It will -- we will be able to do a better expansion also in the future in that segment.

Yes, so Retail performed well as expected. So we should be happy with that. Gert, I'd like to hand over to you to do the financials.

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Gert Van Laar, B&S Group S.A. - CFO & Member of the Executive Board [3]

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Bert, thanks. Good morning, everybody. If you look at Slide 8, we managed to grow our turnover by 17.1%, corresponding margin by 19.9%. Gross profit increased to 14.1%, primarily the result of the increased demand in Health & Beauty as Bert explained, was further boosted by the sourcing synergy within the category and especially in Health & Beauty, we saw those synergies working for us.

EBITDA grew 15.2%, positively impacted EUR 4.8 million, however, as indicated before, it's the effect of IFRS 16 but unfortunately, as we clearly stated during the Capital Market Day, impacted by the EUR 4 million cost we had in the B&S segment. As FragranceNet realizes over 60% in its EBITDA, obviously, within the second half of the year and even more in global state in the last quarter of the year, that -- combining that with straight line depreciation of the intangible associated with FragranceNet, we saw hardly any bottom line contribution from FragranceNet. Also, the same applies to the depreciation of the right-of-use assets following the IFRS and the other assets at FragranceNet. So that is impacting the bridge between EBITDA and operating profit.

If you look at the overall turnover growth on Slide 9, following the questions from this morning, some more detail on that one. The acquisitive growth is, of course, only realized in HTG. And as such, given the breakdown of the organic growth, we had an 0.5% growth in B&S, 1.6% in Retail and 13.6% organic growth in HTG. The rest stems from the acquisition of FragranceNet. That's the 28.5% growth indicated before.

Looking at our financial position, our financial position is a solvency of close to 34%; net debt, 2.9, remained well within the predetermined objectives, realized that in the net debt, the first time inclusion of the net debt we assumed when we acquired FragranceNet in October last year, which includes almost EUR 75 million of our debt. So on a comparable basis, net debt is slightly lower than last year if we would exclude net debt associated with the acquisition. And as the other ratios, the 2.9 and 2.7, as net debt-to-EBITDA, also direct impact of the acquisition. We still aim -- and we'd like to reiterate that we still aim to bring back that relationship net debt-to-EBITDA pre-IFRS 16 to around 2.5, 2.6 by the end of the year, in line with what we have said during the Capital Market Day.

On Slide 11, there's a bridge in -- also in net debt from last year December to June 30. And we can see that this -- the main item there is the investing activity coming from investment in software and the logistical infrastructure especially in the HTG where we significantly expand this to realize the growth we are realizing already in Health & Beauty segment, and we will realize in the future in the segment.

The half year '18 negative cash flow from operating activities was EUR 48.2 million. This year it's only EUR 0.4 million. And variables and points raised during the full year results, where we had a very high level of receivables outstanding, the cash inflow from those receivables were realized in the first part of this year.

Number of inventory days decreased from 98 -- to 98 compared to the 103 last year, so also there the focus on working capital, which we committed to when we presented the full year results.

Moving to Slide 12, working capital. We have communicated extensively in our approach to working capital, primarily consists of inventory. Inventory levels built up over the first half year to the third quarter in order to service our customers in peak season. We continue that philosophy as part of the success. And we are -- as Bert has said at the many discussions this morning, we are very pleased with the buildup of the inventory we have at present and also the inventory quality on hand is fully in line with the expected company turnover growth, and it indicates our support -- supports our growth expectation for the coming 6 months.

Increase in trade receivables, in line with business. Inventory down -- inventory days down to 98 from 103 and working capital, down from 107 to 100. Those were -- that was a flashback on the first 6 months.

Let me hand over to Bert for the outlook for the full year.

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [4]

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Thanks, Gert. Thanks for the expectation -- explanation. Let's talk about what we expect for the second half. Let's break it down in HTG, B&S and Retail. When you talk about HTG, our fastest-growing business, we have a good inventory position, which is reflecting the demand we see with clients. So we saw good growth in Europe. We saw good growth in America. We saw good growth in Asia in Health & Beauty, so that will remain. With Liquor, we don't -- we see exactly the -- we see the same. Europe is strong. Asia is okay, so that's perfect.

Trade wars, we are not too worried in this moment about trade wars. We're not worried about Brexit. Brexit is quite -- for us quite simple. We don't have a huge position on Brexit. So we don't know what is going there. But we don't have in the U.K. a huge position. So we -- for us, what will happen, it's not of a big influence to us when we talk about U.K. markets. We have always said that if something is happening in the U.K. and there is shortage of merchandise, we are able to fill this out because we are shipping our merchandise with -- also with custom documents. And if so, there is a [fronter] and other suppliers from EU countries which are not used to work with custom documentation. When they have a constraint, we will, for sure, not have this constraint.

When we talk about B&S, I told already that after June we saw growth coming back in the business. So we -- our distribution is not constrained anymore, so we are able to do that. We focus on military, oil and gas and there is -- the market maritime is difficult. So we don't stay away from there, but we have to await a better momentum. Lagaay is taken over per second half of the year, so that will be integrated, so that will also contribute to our business.

When we talk Retail, in Retail, we can say it showed only growth of 1.6% in the first half year, but we will open new shops in Vienna. We will open a new shop in Helsinki. We will open a new shop in Malaga airport. And then of course, that's not for the second half, but then for the year after, we will open Abu Dhabi. So we don't need to worry about growth in the Retail segment as well. So that is also -- I think we are rather set. So that's in a nutshell our expectation, our outlook. So that would end our presentation.

I would like to open the call for your questions and hand over to the operator. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Patrick Roquas from Kepler.

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Patrick Roquas, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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I've got 3 questions, if I may. The first one is on new clients. Bert, you mentioned to connect new clients. Any news on Alibaba or AliExpress? That's the first one. The second is on, let's say, the outlook for the full year. The consensus is still at around EUR 144 million for EBITDA. That's -- and basically it requires that second half should show a pretty big swing of around EUR 20 million. Can you kind of help us understand what the drivers for the second half should be in terms of -- I am aware of organic growth, normalized logistical costs. And obviously, IFRS, Lagaay, and then also probably still some contribution from FragranceNet.com. And then thirdly, is on working capital, do you expect that, let's say, the improvement you saw in the first half can be sustained by year-end?

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [3]

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Let's first talk about new clients. And we should be careful. We should be vigilant. We are a commercial operation. We don't like to discuss our clients or suppliers. Somehow in the Investor Day, we talked about, it came up on the table, that we talked about Alibaba and AliExpress. And they are a client of us. And we don't want to tell a little bit more. We don't want to give more insight. We don't regret that we said it, but we should not focus on clients. But with this -- the typical clients like Amazon, like ball.com, these are typical clients we have. They are all fast growing. And they have a good future in front of them. So that's why we like them.

When we talk about our EBITDA end of year, of course, we cannot give you forward-looking promises. We should be careful giving you this kind of things. But what -- we -- of course, we like to reflect our future with you. The seasonality of our business, it -- with buying business like FragranceNet. But also we see that in our other business, Health & Beauty has more -- became more and more important in our business. And that is a very seasonal business. And so when we bought FragranceNet that we said that 65% or 60% of the profit is even realized not in the last -- second half year but in the last quarter of that business. So you can imagine when you do -- you see with everything, all your costs are -- not all but a lot of costs are straight. So first half year, you have the cost almost equally divided per month. And then of course, you see the last year, you see us -- last half year you see a spike in revenue. Your costs remain flat, so that's, of course -- yes, that will give an enormous improvement. So yes, we don't want to reflect this kind of numbers with you. But we are optimistic. We see the order intake of our clients. Yes. So we are optimistic about the second half of the year.

When you talk about working capital, we are steering as much as possible, of course, this kind of ratio. Sometimes you -- things happen like that your clients order very late, like what we had last year, and then, of course, you get out of line. We don't see these indications right now. This is so this -- for this moment, it's business as usual. So yes, we feel happy. We feel confident in this. This days -- these days are also in line with what we had the years before. So for us, this is what we consider as a normal situation. I hope I -- we answered your question this way, accordingly, Patrick.

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Operator [4]

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There are no further questions in the queue. (Operator Instructions) Okay, the next question comes from the line of Robert Vos from ABN AMRO.

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Robert Jan Vos, ABN AMRO Bank N.V., Research Division - Analyst [5]

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Yes, on B&S, you incurred -- on the B&S division that is you incurred EUR 4 million additional costs in the first half. That was what you have guided. My question is, there are no further costs associated with the issue with the warehouse anymore in the second half. Is that correct? And secondly, what are the, let's say, the underutilization losses that you still see in the second half? Or in other words, how long may it take for the division to return to the -- to what you say, profitability at stable margins? And what is that margin? Is that around 7%, 8% that you reported historically? Can you give a bit more flavor there?

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Gert Van Laar, B&S Group S.A. - CFO & Member of the Executive Board [6]

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Yes. Let me answer the question, Robert Jan. Indeed, we have -- we don't expect any additional cost for the second half year. And if you would label the capacity we have in that warehouse for -- and the capitalization and the utilization, we are -- for next year we're using part of our warehouse because we're integrating Lagaay, which we recently acquired. We'll be transferring the operation of that business to our operation in Dordrecht, also utilizing the warehouse out here. So that is making use of it. And we have also said during the Capital Market Day that we will use the coming years to come back to a margin. And of course, whether the margin is 6% or 7%, we don't know exactly. Of course, also then it's heavily dependent on what is happening in the market. But we are damn sure that it won't be the margin we had in the first 6 months of this year.

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Robert Jan Vos, ABN AMRO Bank N.V., Research Division - Analyst [7]

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Okay, that...

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Gert Van Laar, B&S Group S.A. - CFO & Member of the Executive Board [8]

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So we're working there on longer-term relationship of contracts, gaining business not at the expense of our margin, but at a stable margin.

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [9]

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And when you talk about underutilization, I think what we have calculated for the biggest part of our storage, we would be good for the coming 3 to 5 years, including growth.

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Robert Jan Vos, ABN AMRO Bank N.V., Research Division - Analyst [10]

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All right. That's clear. And is it fair to assume that also compares with the first half that you report on today, that we should expect a sequential improvement in the second half in B&S, not so much from maybe the underlying business but from the -- yes, the annualization basically from the issues of -- with the warehouse. Is that a fair comparison there?

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [11]

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Yes. Yes. I think that's fair to say. Yes.

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Operator [12]

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The next question comes from the line of Lucas Ferhani from Deutsche Bank.

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Lucas Ferhani, Deutsche Bank AG, Research Division - Research Analyst [13]

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Hello, I just wanted to come back on FragranceNet.com. So I remember when you acquired it, you said it was growing roughly at around 8% historically. Just want to know whether you're seeing the growth currently in line with that or maybe faster now that you can have some client synergies. And also compared to the overall HTG division at 13% I think you said, I just want to know how it's growing overall. I know you don't fully disclose that but just some color. And also on the rollout of the business model in Europe, can you give us an idea of the plan, meaning when you think it will hit the P&L? Is it a matter of months or more years?

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [14]

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Okay. Let's talk a little bit -- let's discuss FragranceNet. And we -- you're right, we predicted a growth rate of roughly 8%, so slightly higher than the organic growth rate of the HTG group. What we see now is that it's way more, it's I think roughly more -- a little bit more than 10%. So we are growing there in a healthy way. It's also because of the investments we made in -- like in warehousing that we opened a second warehouse in Nevada to serve -- to target Californian clients so that we have shorter lead times. So that helped us. Of course, that brings up conversion rates. And that brings us in a good position in that market. Yes, Gert, HTG is...

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Gert Van Laar, B&S Group S.A. - CFO & Member of the Executive Board [15]

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Well, I think if you look at the -- of course, your question is also the rollout of FragranceNet, but that's something we are discussing internally, and that also is taking place -- in a pace where we can handle it. We expect FragranceNet to continue the growth, as Bert just indicated. That is part of the 13.6% organic growth of the HTG group in total, fueled -- as Bert said in the press release as well, fueled very much by the Health & Beauty segment.

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [16]

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The -- when you say rollout in Europe or other parts of the world, you must not forget that FragranceNet in the U.S. has more than 6 million clients, customers. And we are not in that position in Europe. So if you say when that will happen and how is that impacting the P&L, you -- that's, of course, that -- we are profit oriented, so that's really ahead of us for the shorter term. And also, when we talk about outlook and the future, we -- you will see that the benefits we make from, like, this new warehouse in the U.S. and doing business to business. So basically, supply of retail chains in the U.S. that will fuel our growth for this month way more than to start a B2C kind of business.

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Gert Van Laar, B&S Group S.A. - CFO & Member of the Executive Board [17]

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And that brings us to -- there is one more question?

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Operator [18]

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There is. Your next question comes, again, from the line of Patrick Roquas.

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Patrick Roquas, Kepler Cheuvreux, Research Division - Equity Research Analyst [19]

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On organic growth for HTG, my line was a bit disrupted. You indicated around 13.6% organic growth, if I understood well. What is then, let's say, the difference between, on the one hand, Health & Beauty care and Liquors on the other? Just indicative, what kind of growth rates are you seeing there?

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Gert Van Laar, B&S Group S.A. - CFO & Member of the Executive Board [20]

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Patrick, that's the information we don't disclose because it's so competitively sensitive that others would have looked at that figure with a lot of pleasure if we would have disclosed that. And that said, we are healthy enough. Yes.

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [21]

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Okay. I guess that will bring us to the end of this presentation. Thank you very much for your participation.

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Anke Bongers, B&S Group S.A. - Manager of IR [22]

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Now over to you.

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J. Bert Meulman, B&S Group S.A. - CEO & Member of the Executive Board [23]

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Operator?

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Operator [24]

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Thank you for joining today's call. You may now disconnect. Hosts, please stay on the line.