Europris ASA

OSE:EPR

Earnings Call Transcript 2021-Q2

[Espen Eldal, Chief Executive Officer]

Good morning, and welcome to Europris presentation of the second quarter results. I know it's a busy reporting morning for analysts and investors, but I hope that you are comfortably seated and ready for today's presentation. Joining me today is CFO, Stina Byre Steven, who will present the financial details for the quarter and the Investment Relations officer, Trine Englokken, and she will manage the questions at the end of today's session. In May, it was 29 years ago, we opened the first Europris store at Støperigaten Stavanger. Since then, I'm really proud to say that we have had 29 years of consecutive growth for Europris. And at the age of 29, Europris has become a household name in Norway and the clear market leader in discount retail. But we still feel young and promising and are really looking forward for the years to come. The recipe for success in the 29 years has been hard work, and that was also the fact for the second quarter of 2021. Let's have a look at the highlights. In a challenging quarter, we delivered record results. The challenge was the store closures forced by the COVID-19 regulations by the government. But we responded quick and managed to have a strong sales growth after the stores reopened in May. Gross margin improved significantly through hedging of currency and freight costs, but also a positive contribution from the category initiatives we have done over the last couple of years that gave us a favorable change in sales mix. Costs are kept under control and profits increased. The employee engagement survey for this year showed that all-time high results. And we are really pleased with the efforts that our employees have done during the past year and delivering a very high score on the employee satisfaction ratio, it's very important for a sales driven organization like Europris. It's really pleasing to see the good results. And this has also been a very eventful quarter. At the last day ended the quarter, we announced the acquisition of Lekekassen, Norway's largest online toy store, and I will come back with more details on that acquisition later. When we look on the first half of 2021, we delivered growth in both sales and profits despite tough comparables. We are expanding sales and margins, even though we had more than 9% of the stores closed on average. The key to success is planning, quick adjustments and the corporate culture we have. We placed purchase orders early to secure enough goods for our stores. And we also ensured that we had enough logistics capacity to handle the growth and the high volumes. This was really important to secure that we could supply the demand in the market. On top of that, when stores were forced to close. We took swift actions to secure sales and to limit the costs. As I mentioned, the employee satisfaction survey came back at all-time high last year. And it's been a remarkable effort from all our employees during the pandemic. I'm really thankful and really impressed by the hard work they have delivered over the past year. And I have to admit, it has been a dilemma for us to send all administrative staff to work from home. At the same time as we have sent more than 2,500 store workers out every day to meet more than 100,000 customers on average. I'm happy to see that during the pandemic, we have only registered 67 cases of infection among our employees. That is on same level as the rest of Norway. We do not see any difference between store staff or administrative staff. We have not registered any cases of infection between employees and customers all the other way around. As part of the employee engagement survey this year, it was a section about COVID-19, and I'm very pleased to see that our staff has felt safe during the pandemic. They are pleased with the information they have been given, and they see that we have established good routines to prevent infections in stores and among our employees. Part of the training we have given our staff has been based on the online training program we have based on gaming technology. We have used that for many years. And this year, we have also added video-based training for all staff in the stores and also administrative stuff. And I think doing that is it's just part of the digital education we all go through during the pandemic. But you see that it's well received by our employees that we now take new steps into giving more training and education to all. Europris has delivered really high sales growth over the past 2 years, and we are comparing with the market growth since 2019. As the last year is very disturbing results due to different effects of COVID in the markets. But when you look at stack 2 years growth in the market, it has been a really strong retail market in Norway. Total growth of 13.6%, that is truly impressive. There are mixed effects in the market and especially shopping centers has been negatively impacted by social-distancing and temporary closing of stores. And the market winners, that has been groceries due to self stores and one-stop shopping concepts like Europris. What has driven the sales growth? Obviously, that is the closed borders and also increased consumption in private household following that people work from home and that there is less travel abroad. Stina. I think it's you to give some more details on the numbers.

[Stina Charlene Byre, Chief Financial Officer]

Thank you, Espen. In the second quarter, the chain had a total sales of NOK 2.2 billion. This is a like-for-like sales decline of 6.9%. There were 2 main factors contributing to this. The first was the 22% closure of stores in April. And the second one was the timing of Easter, which especially hit the chocolate and snacks category negatively. Now when you going into the second quarter, that the start would be challenging. And despite facing following tough comparables, we had sales growth in both May and June. And this was due to strong seasonal execution and growth in upgraded categories. The kitchen category was upgraded last year, and the home and interior category was upgraded this year, and they both performed very well. To shed some more light on the development in May and June. You might recall that at 27th of April, the chain had sales growth of 5.5%, and this was 5.1% when exiting the first half. When the stores closed rapidly towards the end of the first quarter, we immediately saw an increase in online sales. And as you can see, we had good growth in both the first and the second quarter. For the first half, the total e-commerce sales were $99 million, which is an increase of 83% and constituted 2.5% of the total chain sales. And after the stores closed, we were fast to expand our product offering online, but we see that the majority of sales are from high-value seasonal items and that low-value consumables are less exposed to e-commerce. And we are very pleased to see the development of our MER customer club, reaching 863,000 members at the end of June. This is an increase of 63% versus the same time last year. And this is due to successful recruiting campaigns and also the conversion of fixed multi buy offers previously available to everyone now to exclusive MER deals. And we continuously work on eCRM and on how physical and online can work together in order to drive traffic in both channels. The gross margin was 47.2%. This is an increase of 4.6 percentage points. And the largest effect was from unrealized currency. But even when excluding this, it was a good growth of 2.1 percentage points. Other factors that contributed positively were the fixed agreement for inbound freight, improved margins for the previously mentioned upgraded categories and also changes to the sales mix. OpEx was NOK 453 million. This is a decline of 1.4%. And the OpEx to sales ratio increased by 0.8 percentage points to 21.6%. Once again, Arepas delivered a record quarter. And the EBITDA level was NOK 537 million, up by 11.3%. And the mentioned good development in the gross margin and the continued good cost control more than offset the sales decline in the quarter. I will here comment on the year-to-date figures. And for the first half of 2021, the net change in cash was negative by NOK 348 million. This is an improvement versus last year of NOK 93 million. The negative change in net working capital was due to timing of accounts payable and from increased inventory due to higher demand. I can also mention that last year was positively affected by the postponement of -- postponed payments of public duties and that this year, we paid out NOK 111 million more in dividend. Europris exited the first half with a strong financial position, and we had cash and liquidity reserves of NOK 1.6 billion. And with that, I hand it back to you, Espen.

[Espen Eldal, Chief Executive Officer]

Thank you. On the strategy, there are no change since the last quarter. The key focus for Europris is what it has been for quite some time and with successful results. We will strengthen the price and cost position. We will improve the customer experience and drive customer growth. And on strengthening price and cost position, the most important initiative for the past years has been the new warehouse in Moss. And that project is now approaching an end. In the first quarter this year, we got approval of the acceptance test of the automation in the low Bay area of the new warehouse, and that will improve the picking of goods. After the acceptance test was passed, we started a slow ramp-up in the second quarter. And here, we have met some technical difficulties with the new software. These issues are now being addressed and the ramp-up will continue after summer. The delay in the ramp-up has not impacted our production or the deliveries to the stores. And we see that automated system when operating deliver the expected efficiency gains on the picking line of goods. We are in the final phase of the warehouse transition, and we see that the savings we have communicated are still intact and already contributing to the positive development you've seen in OpEx to sales ratio lately. When we started the project, that was based on expected volume growth at the time we made the project. And since then, we have experienced strong growth. And even though we are extremely happy for that growth, it means that we get high volumes during -- especially the summer seasons. That means that the new warehouse in Moss is not sufficient to handle the coming summer seasons. So we have to investigate other alternatives for handling the high volumes we see during summer seasons. During the summer, we sell spacious goods that demand more space at the warehouse. And we will come back with more details when we have evaluated how we solve the volume and capacity needs for the coming summer season. On the ÖoB transaction, we have no material news today. The dispute of the 2019 financial are being addressed currently at an external adviser, a third-party independent one. And we expect a decision during the third quarter, and then the option period for 6 months will start. Operationally and financially, ÖoB continued to struggle. And in the first half of 2021, they delivered a negative sales development and also with the decline in profits. Improving customer experience, that is all about continuously developing your concept and your categories. And in the second quarter, we are extremely pleased with the strong performance we have seen in the home and interior category, which we have upgraded this year. This category is quite important to us. It has a high level of own brands, private labels and also, thus, a very high gross margin. So driving these categories is important to build margins for Europris going forward. This is a category that performs well both in the physical stores and also online. And in the first quarter of this year, we acquired 67% of the pure e commerce player, Lunehjem.no, which operates in the home and interior category. So far this year, they have delivered strong growth in sales and profits. It's a well-run and very good company. We are pleased with the development we see, and we can now also learn a lot from their e commerce experience, and we can also benefit from joint sourcing and also joint development of solutions. So we look forward to learn more from Lunehjem and to work more closely with them in the years to come. Sustainability is rising on the agenda for everyone, but it's not easy to be a consumer these days. It's a jungle of different certifications from different organizations or authorities to prove that things you sell are sustainable. In our stores, we carry actually more than 20 different certifications on products we have. And to make it easier for the consumers, we have gathered these under one common umbrella symbol that you will see in our stores. And hopefully, this will make it easier for our customers to make the right choice when they go shopping. And I truly believe that Europris has an important role in sustainability. It's an important shift among our consumers, and we have to take part and take an active role in this important change. And I see sustainability as an opportunity for Europris. We should make it easier and also cheaper for the consumers to take the right choice and to shop sustainable products. On driving customer growth, that is the key for any retailer, you need growth to continue to develop, and we look at growth both on online and also in the physical stores. On the physical stores, we opened our third city concept store in the second quarter. It's located in Bergen at exhibition shopping center in the heart of the city. And this is our third city concept store. The first one was at Gunerius Oslo, and we are extremely pleased with that store's development. Second one was at Løren in the outskirts of Oslo. Here, the pandemic has meant that we don't see -- we are not able to see the full potential yet. So we need to have a year of operation before we can see the full results. But with these 3 stores, and I hope some more, if there are some land lords listening, we would like some stores at Majorstuen or Skøyen. So we need a little bit bigger base before we can draw good conclusions on the city concept, but it looks promising, and we will continue to explore that opportunity. The pipeline of new stores are promising for Europris. We have 11 stores in total in pipeline for the rest of this year and also the years to come. And on the digital side, on June 30, we announced acquisition of Lekekassen that's in strategic e-commerce acquisition for Europris into the toy category. And I'm impressed by the Norwegian competition authorities. They actually approved this deal last Friday. So the work can officially start. And the closing of the deal is scheduled for July 30. Europris acquired 67% of Lekekassen for a cash cost of NOK 501 million. And we are very pleased that Andreas Skalleberg will remain CEO and shareholder in the company. We are truly impressed by the company they have built, the competence they have both within e-commerce and also the product category. And we see huge potential for synergies and to drive sales both for Lekekassen and for Europris in the toy category. Lekekassen has proved that their technology platform is scalable. They have successfully entered Sweden back in 2019, and they are now in the final phase of entering the Danish market. With this acquisition, we get access to important e-commerce expertise. At the same time, as we see significant synergies through joint sourcing of products and services. I think the toy category is a very good example of a category where online is eating shares from the specialist physical retailers. And when the physical retailers that are specialists in toys, they struggle, that opens up an opportunity for a variety of retailers, just like Europris. So I believe that by taking the best sellers from Lekekassen and put that into the Europris stores. We can have a broad selection online at Lekekassen, and you have best sellers in the physical stores that will drive sales for both channels. At the same time, we get access to a very interesting customer group with the Lekekassen customers, and we believe in synergies also on the marketing and development of customer clubs. I have to admit, we had a very good match with the Lekekassen team. I think we are the same kind, and we share the same beliefs on the same culture, but it's also a very good strategic fit for Europris. And joint sourcing that has actually already started, and I was very pleased to see when we announced this deal 2 weeks ago that many of the key suppliers, they were listening into the presentation. And one of the questions that I came from the analysts where are the suppliers going to support you with they allowed the products into the Europris stores. And I can definitively say, yes, they will. Very positive reactions from the suppliers after the presentation. They believe in this structure and the way of doing business. So we are starting. We have already prepared test stores in Europris and is now working on the product selection. And the test will commence in the second quarter now in the second half this year, and we expect the full rollout sometime during 2022. So it looks promising. Also on the cost side, we have already seen synergies. Lekekassen is already on board with the Europris freight agreement from Far East. So choice for Christmas that are secured at fixed prices and also guaranteed delivery. So that looks promising. And we also see other synergies coming in, refinancing of Lekekassen, and we also will look at joint sourcing of freight to end consumers and also look at payment solutions. So I think it's got off from a really good start to corporation, and I think it's still more to come. With the technology platform that Lekekassen has developed, I believe that we may benefit from each other's customer segments as well. And I think that joint marketing and also utilizing the customer club of Europris will be one of the next steps that we will explore in the partnership with Lekekassen. To summarize it all, we'll have a quick look at our outlook. I think Europris is well positioned to exploit market opportunities, where we still see a significant untapped potential. Over the last year, we have recruited many new customers in our physical stores and the regular customers has increased their frequency of visits. And as Stina explained, the customer club MER has now reached almost 900,000 members. And with the recent online acquisitions, we are truly becoming a multichannel and omni-channel retailer. We are continuously adjusting the concept to the changes in the market and consumer behavior. And as I explained, the success we had since 1992, is the culture where part of our DNA is changed. We have constantly developed, always changed to changes in the market and making sure that we keep ahead of the competition. And variety retail is thriving, not only in Norway but in the rest of Europe and also in the U.S. And I think one of the key competitive advantages we have as a variety of retailers. And it's many that actually missed that point is that the broad selection we have of goods, gives us exposure to many different categories. And this, in combination with the low prices makes us more resistant to competition and shifts in consumer behavior. If we get more competition in one category, we can scale that a little bit down and scale up other products or categories. And we also see that the online threat is less towards our -- the low ticket items we carry. So less exposed to the e-commerce threat and very flexible in the concept. So when the specialist retailers are struggling, that opens up opportunities for retailers like Europris. Europris has a very healthy balance sheet and our long-term financial and operational ambitions, they remain unchanged. I think with that final remark, we will open up for questions.

[Trine Englokken, Business Controller]

The first question is coming in from Markus Heiberg. I take one question at a time. Can you please comment on how you see the opening of the Swedish border impacting demand? Do you expect the cross-border trade back to normal levels by the end of 2021?

[Espen Eldal, Chief Executive Officer]

I wish I had the answer to that. It's a good question, but I think we're closing the borders, that has immediate effect. You just stopped the train. When you open them, it's -- you don't have to go if you don't want to. And I think many Norwegians still don't want to go. And I think it will -- the effect will be gradual. It will come over time. When it's back to where it was, I don't know. It depends also on taxes and duties and what the government has done with reducing sugar tax and also taxes on alcohol and tobacco. I think it's a mix of different effects. So I think it will take time.

[Trine Englokken, Business Controller]

Can you elaborate on the freight agreement you have and when it will have to be renegotiated?

[Stina Charlene Byre, Chief Financial Officer]

Yes, we have fixed agreements throughout the full year. And then during the fall, it will be renegotiated with effect from 2022.

[Trine Englokken, Business Controller]

Over sales remains weaker year-on-year. What you can see that the key challenge currently? And how is the new store concept performing?

[Espen Eldal, Chief Executive Officer]

The key challenge is, of course, customer traffic. And Sweden has been hit differently by COVID-19 than the Norwegian market. And in Sweden, there are several other opportunities for one-stop shopping with the supermarkets like ECA MAXI, Willys and so on. So they have more possibilities to find everything they need at other locations. But obviously, the concept needs to be upgraded. I think the need maybe to be even sharper in the marketing and the pricing. And as a discount retail, you must be sharp on price and make sure that you are attracting customers. But I think getting to customer traffic, that is the absolute key.

[Trine Englokken, Business Controller]

And the next question comes in from Ole Martin Westgaard. I take one at a time here as well. You have a very strong gross margin in Q2. What was the key driver of this? And how should we think about the outlook for gross margin in the coming quarter? A, what was the hedging impact in the quarter? B, what was the impact from pricing? And C, what is the impact from mix?

[Stina Charlene Byre, Chief Financial Officer]

Well, to start off with the impact from currency, that was 2.5 percentage points in the quarter. So we had 2.1% excluding that. And then the freight agreement obviously affected positively. And then the 2 other factors were both the category development initiatives and the good development for those categories and also changes in the sales mix. For instance, we said the chocolate and snacks category had a lower share of sales in this quarter than the previous quarter. Or last year, so Q2 last year.

[Trine Englokken, Business Controller]

And how much of the margin improvement on OpEx to sales comes from the new warehouse?

[Stina Charlene Byre, Chief Financial Officer]

Sorry, could you repeat that?

[Trine Englokken, Business Controller]

How much of the margin improvement on OpEx to sales comes from the new warehouse?

[Stina Charlene Byre, Chief Financial Officer]

It's difficult to give one exact number, but it has impacted positively, but I can't give you an exact number.

[Trine Englokken, Business Controller]

And the last question is related to the cross border trade, which I think we have touched upon, it's just a minor detail on how has the sales trend been so far in July, post the opening of the Swedish border?

[Espen Eldal, Chief Executive Officer]

I think we are on the 15th of July today, it's -- that period is too short to draw any conclusion. So we have to come back to that when we report the third quarter.

[Trine Englokken, Business Controller]

And I think that was all for today.

[Espen Eldal, Chief Executive Officer]

Okay. Thank your very much, and have a nice summer.