Embellence Group AB (publ)

STO:EMBELL

Earnings Call Transcript

[Operator]

Welcome to the Embellence Group Q3 2025 Report Presentation. [Operator Instructions]

Now I will hand the conference over to the speakers, president and CEO, Johan Andgren; and CFO, Karin Liden. Please go ahead.

[Johan Andgren, executive]

Thank you very much, and welcome all to Embellence Group's interim report for the third quarter. My name is Johan Andgren, and I'm the CEO of the Group. And together with me today is Karin Liden, who is the CFO. Let's start to look at the business and what we achieved in the third quarter of the year.

In the third quarter, the organic sales growth was 5% and the positive development came from both brands and manufacturing, and we also grew in several of our key markets. However, and as we also highlighted in our last quarterly call, we continue to face currency headwinds mainly from the dollar and the British pound that negatively impacted our top line by 3%. This is something that we expect to continue in the coming quarters driven by the stronger Swedish krona. All in all, our net sales increased to SEK 174 million, up 2% versus last year.

Sales-wise, we delivered organic growth in 4 out of our 5 brands, the exception this quarter was Cole & Son, which organically was basically neck to neck with last year's sale but was impacted negatively by currency and by a weak U.K. market.

The largest of our 5 brands, Boråstapeter, continued to grow for the third consecutive quarter and our long-term strategic focus center on product development, new designs and initiatives in sales and marketing are continuing to deliver positive results for the brand.

Artscape also delivered solid growth organically but had a negative currency effect since most of the business is in U.S. dollars, but all in all, good double-digit organic development for the brand.

We also continue to grow in manufacturing. Our continued efforts in driving product innovation and developing quality products are paying off, and the manufacturing business delivered SEK 22 million, up 17% versus last year. We continue to take market share in a tough market and more and more collections and designs are placed in our manufacturing, which is a testament to the high-quality work that we are delivering.

In the quarter, our margin was stable at 60.6%, almost neck to neck with a year ago and is the fifth consecutive quarter above 60%. In the quarter, we had a positive channel and product mix, which means that we sold more from profitable channels, and we also sold more products that were higher priced, but we also saw a slight negative effect from both brand and segment point of view. But all in all, stable margins above 60%, which we can expect also going forward.

In the quarter, we continue to focus on a few selected focus areas that are both important and necessary for us to reach our long-term targets, and these focus areas are the D2C channel, international sales and the hospitality channel. Within these focus areas, we have made a few selective strategic initiatives that have increased our operational expenses. These initiatives are necessary from a strategic point of view, and it can be summarized into 3 areas.

Firstly, it's linked to organization. We have made a few selected recruitments, both on a group level and on a brand level. We have not had the right capabilities historically within the organization and are hence updating this to be better fit with the strategy and our objectives going forward.

Secondly, it's linked to our systems and platforms. In order to grow, we need to have the right basics in place, and we have taken the decision to implement new platforms to support our D2C growth. So far, we have rolled out 2 new platforms. And in Q4, we will roll out Cole & Son, and in first half year of '26, we will continue with Boråstapeter.

And thirdly, we have updated and changed our go-to-market model in selected geographies where we have some key markets have changed the agent and distributor set up to better fit the market needs.

All in all, these initiatives have increased our operational expenses by SEK 3 million, in line with our expectations. The increases include some costs that are more of a onetime nature as well as others that will be integrated into our base going forward, supporting us to achieve our long-term objectives.

All in all, we delivered an EBITA of SEK 24 million and an EBITA margin of 13.6%. And in rolling 12 months, we are at 14.3% EBITA margin versus 14.0% a year ago.

If we then move over to look at the brands in our portfolio. So in the quarter, our brands grew organically with 4%, but after currency effect, we were basically neck to neck with a year ago at SEK 152 million. We intensify our work on the 3 selected areas, which will help us drive growth going forward. It's the D2C channel, it is winning with our brands internationally, and it's the hospitality channel.

If we're starting off with our efforts in the D2C channel, we anticipate that more than half of our growth over the next 3 years will come from this channel. This shift is not only about capturing incremental sales, but it's fundamentally about reshaping the nature of our relationship with consumers. The channel gives us better margins. It's a growth accelerator, and it allows us to build closer connections with our consumers. As we continue to invest in digital infrastructure, content and talent, we are laying the foundation for growth that is both scalable and sustainable.

We are, right now, working on setting the core fundamentals and basics in place, and in the quarter, we implemented a new platform for Pappelina, and now both Pappelina and Artscape are live on the new platform, and we will continue to take Cole & Son live in Q4, and then follow up with Boråstapeter in the first half year of 2026.

During the third quarter, we also made targeted recruitments in the D2C, international sales and hospitality channels, ensuring that our teams have the expertise and capacity to deliver on our objectives. Our Head of E-com joined in September, and we also strengthened the organization with selected recruitments in some of our brand teams, all to support our focus on the channel.

International sales is another area of great importance for us, and we delivered growth in almost all of our biggest geographies, including the important market, United States, which is a sign of strength for us, and it perfectly fits with our strategy. We are actively refining our go-to-market models in selected regions. And in some areas, this involves direct engagement with key accounts and deploying dedicated sales representatives, while in others, we are evaluating and restructuring distributor or agent relationships to enhance the market success.

If we turn to manufacturing, we continue to make progress in the quarter. Our ongoing commitment to product innovation and quality development has yielded positive results with manufacturing generating SEK 22 million, representing a 17% increase compared to previous year. We continue to take market share in a tough market, and more collections and designs are placed in manufacturing, which is a testament to the high-quality work that we are delivering.

If we then drill further down and look more in depth for our brands, we grew organically in 4 out of our 5 brands. So let's then look a bit closer at Boråstapeter, where we grew for the third consecutive quarter. This is mainly driven by the Swedish market, but we also saw increases from both U.K. and Germany where we have made a strategic decision to change our go-to-market model and where we now go direct to retail versus handling the market through distributor, which we see positive effects from.

If we then move over to Cole & Son, which was the brand that didn't grow organically, even though it was basically neck to neck with last year's numbers, what is important to understand with Cole & Son is that we do see that the U.K. market is more challenging than other markets. When comparing to other listed companies in the market, we see that they are decreasing their brand sales by almost double digits, and we perform better, meaning that we are gaining market share in a tough market. Markets outside of the U.K., such as Italy and U.S. are performing well for the brand.

Even though the brand grows organically year-to-date, we are not satisfied with the development and are working on several initiatives to accelerate growth. We're both working on new collections, which we launched already in the end of this quarter, which I will share some examples of later on. And we will also launch the new D2C platform during Q4, among other things.

Wall&decò returned to growth in the quarter, supported by hospitality projects and positive sales development in the Italian retail markets. During the quarter, we rolled out several projects, including a project in Children's Hospital in Rimini in Italy, where we remade several different rooms in the hospital with impressive children's graphics. The prominence of projects such as this demonstrates our ability to win and execute on high-profile contracts, reinforcing our reputation for design and excellence and project delivery.

Pappelina recovered from last couple of quarters with negative sales development and grew slightly in the quarter. We launched a new website in July, which already shows a good development, and we are constantly working to improve the experience. In the middle of the quarter, our new Managing Director also joined the company and is now starting to get up to speed and are working on several promising initiatives linked to mainly distribution setup and go-to-market model.

Artscape had a quarter with double-digit organic growth but almost all sales are generated in U.S. dollars, hence had a big negative effect from currency and adjusted, the growth was 4%. The sales lift was driven by recovery from one of the larger do-it-yourself customers. And in the quarter, we also updated our website platform, and we see positive trends from this although from low levels. Worth noticing about Artscape, when we move in Q4 is that last year's Q4 numbers were positively affected by a large order from one of our big customers, leading to those numbers increasing by 51% in the quarter. Now we're seeing a more normal order pattern from our customers. So the comparison number in the quarter are significantly larger than where we expect to land this year.

If we then move on to look at some of the brand initiatives. We'll start off with Boråstapeter, where we, in the quarter, have strengthened our offering in our direct-to-consumer digitally printed on-demand portfolio that we call Studio. We launched some of our most iconic designs in grand versions, which is a larger scale pattern that suits more types of rooms and homes. And in parallel, we also launched new materials for consumers to choose from. And now we offer 4 different versions of materials, which provides good trade-up alternatives for consumers. So we launched 2 new materials where one is a more texture version than a normal one, and one has extra durable surface called Pro Surface.

In the quarter, we also launched a new collection called Anno II, which is a collection that highlights 300 years of Swedish pattern traditions from gilded letter designs of the 18th century to Jugendstil florals of the 1930s. All wallpapers have been carefully recreated from archive materials using hand-drawn originals and preserving the character of printing rollers, fragments and sketches. This historic collection features a wide variety of patterns, including small motifs and large floral designs and styles from Baroque to Art Nouveau, all expertly surface-printed.

I've selected 2 different wallpapers to showcase today from the collection. And if we start off with a picture on the top right corner, this design is called Skenninge, and it's based on an 18th century design and it's a reprint of Sweden's oldest paper print and wallpaper found in the collection of the Nordic Museum.

If we look at the image to the bottom right, the design is called Tullgarn, which is printed using the Borås Tapetfabrik, more than 100-year old surface print machine, the traditional technique that requires true craftsmanship, making each wall beautifully unique. This pattern also carries a remarkable story. So originally, it adorned from the servant's room at Tullgarn Palace, carefully chosen by Crown Prince Gustaf and his wife, Victoria, in the late 19th century. The wallpaper is believed to have been purchased in Victoria's home region in Southern Germany. And with permission from our Swedish King, his majesty, King Carl XVI Gustaf, our design team has faithfully recreated the pattern, allowing a historic treasure to be experienced in today's homes, truly amazing to see, and this is just 2 designs of the Anno II collection.

Moving on to Cole & Son, our brand from 1875 that celebrates 150 years during this year, and to this celebrates the launch of 2 new collections that captures the heritage and the future. We launched these two at the London Design Week, where visitors are arriving from all over the world to the Design Center in Chelsea Harbour. The Classic Collection Volume II is the second volume in Cole & Son's anniversary collection of classics, celebrating the artistic heritage. It consists of archive artworks brought back to life through fresh colors and patterns that captures the brand ethos of living art and living history.

The second collection is the collaboration between Cole & Son and Ardmore with the Baobab collection. This Design Meets Art wallpaper collection pays homage to South Africa's majestic Baobab tree, affectionately known as the Tree of Life. The wall coverings are vastly detailed and immersive and inspired by the rich nature that surrounds the Ardmore's home in South Africa with both giraffes, cheetahs, and much more. And when I visited our office in London this summer, our Senior Designer, Chase, showed me the full process of developing these designs and where she had made 10 different drawings of the same giraffe in order to make it look absolutely perfect, truly amazing work and good to see that it's now available in the market.

If we then move to Wall&decò. During the quarter, we launched new design collections in the Aquabout Wet System and in the Out System. So the Aquabout System is the new frontier of waterproof wallpaper, a patented waterproof wallcovering dedicated to bathrooms, kitchens, swimming pool areas, spas and any wet environment. The system is perfectly fit for the hospitality channel since you can remake a bathroom in just 72 hours, helping hotels not to shut down rooms for long but rather keep a high occupancy rate.

The Out System is the wall covering that is resistant to rain, yellowing and has anti-smog properties, bringing the great decorative power of wallpaper outdoors, giving patios and terraces a new look. And you can see one of our recent examples here in the middle of the slide called Cinnamon Shadows.

Now I will hand over to Karin, who will dig a bit deeper into the numbers.

[Karin Liden, executive]

Thank you, Johan. And here are some more details of our financial numbers for the third quarter. The net sales of SEK 174 million compared to SEK 170 million last year, represent a 2% sales growth. Currencies are strongly negative this quarter as well, minus 3%, which represents around SEK 9 million. Underlying organic growth for the quarter is 5%. Gross margin was 60.6%, which is on par with prior year and the fifth consecutive quarter above 60%. EBITA was SEK 24 million and net profit was SEK 13 million.

For the year-to-date, the period January to September, net sales is SEK 569 million. The organic development is 1% positive and currencies are negative 2%. Gross margin is 61.5% compared to 59.6% prior year, and this is an improvement with 1.9 percentage points, thanks to product mix, channel mix and efficiencies in manufacturing compared to last year. EBITA is SEK 82 million, and the margin is 14.4% year-to-date.

Net profit is stronger than last year, SEK 52 million compared to SEK 45 million. The main reason for this is lower finance cost, and we have lower interest expenses, which are primarily due to lower leverage, of course, but also better interest rates.

The new financing agreement we signed in April is both more flexible and have better terms than the prior one. Rolling 12 EBITA is 14.3%.

The operating cash flow in the third quarter was SEK 30 million compared to SEK 17 million last year. The stronger cash flow is a result of better working capital development.

Inventory has been reduced with SEK 10 million to SEK 144 million. This is in line with our plans where we build inventory ahead of the summer to secure delivery service during the holiday period.

Our leverage is 0.7x EBITDA compared to 0.9x last quarter. We continue to pay off our debt with the cash we generate. And this slide shows you the net sales and EBITDA development over time. We have a rolling 12 net sales of SEK 771 million and a rolling 12 margin of 14.3%.

And with this, I hand back to Johan for a summary and look forward.

[Johan Andgren, executive]

Thank you. So Q3 was a quarter where we grew organically with 5%, and where 4 out of our 5 brands grew organically. The strong Swedish krona had negative impact on the business with 3%, and we expect this to continue in the coming quarters.

We have intensified our work linked to our strategic priorities of D2C, internationalization and hospitality. And in the quarter, we made a few selected recruitment to strengthen our organization, both on a group level and in the brand teams.

We've also rolled out 2 new D2C platforms, both Pappelina and Artscape, and we will implement our new platform for Cole & Son in Q4 and follow up with Boråstapeter during first half year of 2026. We've also changed our distribution setup and go-to-market model in selected regions to better fit the growth strategy.

Within our brands, we've launched several new collections and also worked on product development with new substrates launched to further strengthen our consumer offer.

Looking ahead, we will continue to focus on product innovation and new designs in order to build and grow our brands. In parallel, we will increase our efforts in the D2C, international sales and hospitality across the group with updated systems, improvement of our basics and stronger organizations.

I also want to once again remind you about the exceptional quarter that Artscape had last year in Q4, making the comparison numbers very tough in the coming quarters.

With that, we will go over to questions.

[Operator]

[Operator Instructions]

[Karin Liden, executive]

It seems like we have no live question. We will go over to the written questions in the call. And first question comes from Marcela Klang in Handelsbanken. Regarding the extra costs taken this quarter to boost your sales organization and launch a new platform, do you expect extra costs also in Q4 and first half 2026? You mentioned that you've taken the first steps to update your brand's online platform with Cole & Son's new platform coming in Q4, and Boråstapeter first half 2026. When do you expect to see effects of these initiatives?

[Johan Andgren, executive]

Yes. Thank you very much. So if we take one step back, you can basically say that our operational expenses are divided into 4 different areas. So we have variable costs like shipping, commission, royalties, et cetera. We have activity-based costs that are like marketing and fares, and we have fixed costs more linked to facilities and personnel. And then we have onetime costs.

So in the quarter, we are increasing our sales. So of course, that drives a bit of the operational expenses. And then the rest is linked to the other 3 areas: activity-based, fixed and onetime nature. And in the quarter, we have taken strategic decisions to go after selected initiatives to help us reach our long-term targets, which means that we have invested into organization, sales and systems. All in all, increasing our operational expenses with SEK 3 million, where some are more of onetime effects and others will be part of our base going forward.

So we are launching the new platforms. Of course, that drives a bit of cost. We have done selective recruitments to strengthen our teams. And then we have also had a few one-offs linked to how we set up the new distribution agreements and go-to-market models in selected regions. All in all, we expect some of these costs to continue in the coming quarters and some that will be of more onetime nature.

[Karin Liden, executive]

Second question. Your Borås Tapetfabrik continues to grow sales strongly, up 17% year-on-year. How much free capacity do you have there? You mentioned that you have -- are capturing market share that is growing faster than the market. What type of players, competitors are you taking market share from? Are you seeing any M&A potential among your customers at Borås Tapetfabrik?

[Johan Andgren, executive]

So let's start to look on -- there were a few different questions there. If we're talking about the manufacturing unit that we are increasing our market share. So we see that more and more players are placing more of their design and collections within our manufacturing. We should also remember that the #1 choice for our manufacturing is to support our own brands for their own growth. It is still a little and small percent of our net sales, less than 10%. There is free capacity in the manufacturing unit, and it's more linked to the -- it's not like us choosing this, but it's more our customers choosing where they want to place their new collections. And of course, we are doing a good job with both product development, service and how we develop products, leading us to take this market share and having them place more and more designs in our manufacturing.

When it comes to the M&A questions, I mean, I've been in the business for 6 months, and my #1 priority for these 6 months has been to focus on our core strategy of getting back to organic growth and to build our brands. Since then, we have started to work on several different initiatives linked to D2C, internationalization and the hospitality channel. We've launched new platforms in 2 of our different brands. We have the third one on our way and then the fourth one coming in the first half year of 2026.

We've also worked on strengthening our organization and start to strengthen our distribution networks with more partners and agents down in the different selected areas. So that has been the main focus. Of course, in parallel, we are looking and scanning the market to see if there are interesting companies. It's not like there are hundreds of these companies out in the market. And it's most important for us that if there are any potential, they need to fit within our strategy, and we need to be able to see that we can do it better than they are off without us. Of course, we are continuously looking at this. And once we have something to communicate on the M&A front, we will get back on that question.

[Karin Liden, executive]

Then I have a couple of questions around Cole & Son, where the question is, how much of Cole & Son sales stems from the U.K., but also to provide some additional color on the organic development in the quarter considering it's a fairly easy comp.

[Johan Andgren, executive]

Yes. I think we're not sharing exactly the percentage of sales that are coming from the U.K. market for Cole & Son. What we can share is that it's the home market of the brand. And of course, that's a big chunk of the business.

Looking at the organic sales growth, we were neck to neck basically with the year-ago numbers. And year-to-date, we have increased our organic sales for the brand. I think it's also worth remembering that the U.K. market is a bit weaker than other markets in the globe. And when we compare to other listed companies out there, we see that their branded sales are down almost double digits, and we are basically -- and we're performing a lot better than that. So we know that we are gaining share, but in a tough market, of course.

[Karin Liden, executive]

Can you elaborate on the positive signals seen from upgrading the e-commerce platform?

[Johan Andgren, executive]

Yes. So I mean, this is a strategic decision that we have taken as a group. We have D2C channel, internationalization and hospitality channel that are very important for us. What we are working on right now is basically setting our fundamentals in place. So that means that we need to have the right systems in place. We need to have the right organization and we need to basically fix the fundamentals. So that is what we have been working on. We have launched 2 new platforms. The development so far with those 2 are positive. So we see good development from the new platforms, not maybe the first week of launch. But basically, the second week of launch with a different platform, we see that the development starts to pick up. And we expect this to also happen for the other brands that we are putting on the new platforms here in Q4 and in the first half year of 2026.

[Karin Liden, executive]

And then a question around the manufacturing. What share of EBITA is manufacturing representing?

[Johan Andgren, executive]

Yes. So looking at this, we don't share the different percentages of EBITA. It is -- our margin for the manufacturing unit is much lower than it is for the other -- for the brand segment. So that, we can share, but not go into more of the details. Of course, it is helping our business in general, otherwise, we wouldn't do it. But to remind you again, our #1 priority is to drive the growth for our own brands and to be a distribution partner for our own brands, making sure that we get good scale and efficiency that we are having for our own brands. And then, of course, that also leads into us being a good player for the external businesses since we get the good economies of scale.

[Karin Liden, executive]

And here's another question around manufacturing from [ Adam. ] Regarding the gross margin, are there more opportunities for manufacturing improvements? Or have those been more or less realized?

[Johan Andgren, executive]

So I think the #1 piece here when it comes to manufacturing is volume. I think the more volume we're getting into our business, the more we increase our efficience. We are constantly working on efficiencies in all our different areas. So it comes to everything from how we do the production lines, how we use colorways. We invested in a new color technique recently, which is helping driving efficiencies, and we are constantly changing our ways and becoming more efficient. So that is basically part of all our jobs working at Embellence Group, both from the brand teams and from the manufacturing unit. We need to become a bit better every day than we were yesterday.

[Karin Liden, executive]

Another question. Anything to call out in the U.S. market in terms of overall market growth and your own share?

[Johan Andgren, executive]

I think U.S. market is a market that is important for us. We believe that we have a lot of upside in the market. Several of our brands are underdeveloped, I would say, in that market, and we can increase the business in the market.

[Karin Liden, executive]

And final question. So far, what is the gross margin in the D2C segment? And what was the share of D2C sales for the quarter?

[Johan Andgren, executive]

So I think when it comes to the gross margin for the D2C channel, we see that the margins in the channel are better off than they are in the retail channel. Of course, there is no middle way. But it also leads to a bit of a different P&L all in all. So you see, you get a bit better margin on the top, but also more operational expenses down since you have more shipping costs. We ship one pack to a consumer versus a pallet to a retail store. So it's a bit different linked to the different cost structure of the D2C channel than the other one. So it will be a bit harder to follow. But all in all, it will be better on the top line and also bottom line, of course.

When it comes to our share of the business, last quarterly call, we shared that 8% of our branded -- our brand sales comes from D2C, and this is, of course, not something that we see should stay on that level, but we believe that more than 50% of our growth in the coming 3 years shall come from the online channel, helping grow that part of the business. Next time that we will share where the percentage of e-com sales is when we summarize the year 2025.

[Karin Liden, executive]

And with that, I think we have gone through the last question. So thank you very much. Any final comments, Johan?

[Johan Andgren, executive]

No, I think -- thank you very much. Looking forward to closing the year and see you back here in when we present the Q4 and final 2025 numbers. Thank you.