Axfood AB
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Axfood AB
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Welcome to the conference call. [Operator Instructions]Now I will hand the conference over to the speakers, CEO Klas Balkow; and CFO Anders Lexmon. Please go ahead.
Thank you and good morning, everyone. And, of course from our side, thank you for joining today's call. As you've heard, I have our CFO Anders Lexmon with me and we are here to present to you the Axfood's interim report for the first quarter 2023.And in the investor section of our website you will find the presentation material for today's call. And the recording as usual will also be made available after the presentation.But with that, let's get started and please turn to Page #2. Here you'll find the agenda for today. We will first have a brief market overview and then I will go through our first quarter performance. After that, Anders will take you through our financials. And following on this part I will talk about the progress we are making with the new and highly automated logistics center in Balsta outside Stockholm, which of course is a part of our strategic agenda. And then the outlook for the year and a quick summary before we open up for questions.Now please go to next page, Page #3 and let's now turn into the first quarter's development for the market as a whole and for excellence. So again, turn page and we are now on Page #4. The market growth amounted to 9.2% during the first quarter, entirely driven by higher prices and consequently growth has been significantly weaker than the overall food price inflation. Like the rest of Europe, inflation in Sweden remained very high during the first quarter as a result of external factors such as the effects of the pandemic, climate change and the war in Ukraine. The entire food supply chain has faced enormous cost increases over the past year.And in Sweden, we have been hit particularly hard also due to the weaker Swedish krona. According to Statistics Sweden, consumer prices on food increased approximately 20% in the first quarter compared to a year ago. High costs for food along with higher cost for electricity and fuel for example, are rising interest rates have created a challenging scenario for many households.And our focus is to protect consumer interest and we are working hard to mitigate the cost pressure. But gladly we have seen prices of certain raw materials declining for some time and the pressure faced by many of our suppliers has begun to ease and we are now working intensively together with our suppliers to ensure that is also reflected in the prices to our consumers. And actually which has already started to happen in certain categories such as dairy, bread and fruit and vegetables. Although many factors could still impact the situation, these are nevertheless positive signals and our hope is that now food price inflation has peaked.With that, go to next page, Page #5. And in this challenging time, it is clear that a growing number of consumers are choosing to shop with us particularly at Willys. That is a clear proof that what we do is appreciated and this enable us to further strengthen our position during the first quarter. In total, we grew approximately 20% which was double the rate of the market.In e-commerce, our sales decline almost 5% which was less than the market where the decline rate was minus 14%. However, if we exclude the divested Mat.se, our sales actually increased by 2%. So in that, we are clearly outperforming both on the total market and online.Please take next page, Page #6. And if we look at our sales, our consolidated net sales for Axfood grew 16% during the first quarter. This increase is attributable to high food price inflation, but also increase in the new customers. The share of retail sales and e-commerce was 5.8%, which is clearly higher than the overall market.And I will go through sales by segments in more detail shortly, but before that, go to the next page on Page #7 and let's look into our operating profit. In total, group operating profit amounted to SEK 695 million and the operating margin was 3.6%. The reported operating profit includes item affecting comparability of minus SEK 55 million related to the restructuring of our logistical operations and the transition to the new logistical center in Balsta.Also would like to remind us that the prior year period included among certain costs as capital gain of SEK 221 million for the divestment of Mat.se. And all items affecting comparability for the first quarter and prior year comparisons are included in the Dogab segment.The adjusted operating profit, which excludes items affecting comparability increased approximately 15%. The increase was mainly the result of strong growth and effective cost control. However, earnings were negatively impacted by the fact that we have not fully passed on our suppliers' price increases to our consumers. We also had a higher market investment in both our store chains and in Dogab which resulted in highest share of campaigns.Higher rental and electricity cost also had a negative impact on our profit. And as you may know, rents for the vast majority of our stores and warehouses were indexed up from January 1, based on the inflation rate as of October last year, which is in line with a contraction of the terms which are basically standard for the commercial leases. The adjusted operating margin ended up at 3.9%.Now let's move on and we are now on Page #8 and I would like to cover our segments and we'll start with Willys. Net sales growth for Willys amounted to a full 24% and like-for-like retail sales increased by almost 22%. The exceptionally strong development was attributable to pricing and volume growth from increased in-store customer traffic. The positive trend in cross-border shopping continued and Eurocash sales increased. With that said, comps were tougher than before as a first quarter last year was only partly affected by the pandemic-related restrictions. Also the first quarter is usually a seasonally weaker quarter for the border trade.Our operating profit increased 24% and amounted to SEK 454 million corresponding to an operating margin of 4.3%. The very strong growth in like-for-like sales compensated a lower gross margin as continued price increases by suppliers were not fully reflected in prices consumers. Also higher share of campaigns as well as higher costs for rent and electricity negatively impacted the profit.Let's move on now to Page #9. And Willys' momentum is very strong and it has been clear for some time now that many of our customers are returning for the grocery shopping to Willys as growing number of consumers have come to appreciate the changed offering over the past year.And on this slide you see a chart with a number of new members in Willys Plus, our loyalty program by month -- rolling 3 month averages. New memberships picked up significantly from August last year and went from around 25,000 a month to basically double that to around 50,000 or so. The total numbers of members now in the Willys Plus program is now approaching 3.4 million.And with the ambition to offer Swedish cheapest bag of groceries and various type of loyalty promoting activities, Willys is establishing a position as the obvious choice of food store for an increasingly broader consumer base. As a testament to its success, Willys has been the most recommended chain in the Swedish food retail market now for 3 years in a row.We're now leaving Willys and let's go now to Page #10 and look into Hemkop. Our net sales growth for Hemkop amounted to 14%. In terms of retail sales growth, Hemkop once again displayed a solid performance slightly stronger than of the market and continued to gain shares in the traditional grocery segment. In total retail sales, which includes Tempo, increased by 11% and 9% in the like-for-like basis.The development in the larger stores in central urban locations was more favorable than development in stores in the residential areas and in the Tempo chain. The operating profit for Hemkop amounted to SEK 71 million and the operating margin was 3.9%. And similar to the situation for Willys, but of course at a different magnitude, the growth in like-for-like sales offset an overall negative impact on profits from inflating less than the suppliers, a higher share of campaigns and increased costs for rent and electricity.If we continue with Hemkop and please turn to Page #11. And Hemkop continues to develop this concept, strengthening its sustainability profile and invest in an increased presence and modernization of existing stores. And these investments are clearly generating results for Hemkop, and it's clear that Hemkop is also attracting our more price-conscious consumers through some of their campaign activities, not at least [indiscernible].Let me now comment on Snabbgross. So we now move on to Page 12. Snabbgross delivered a strong start to the year. Sales increased 23% in total and 19% on a like-for-like basis. The development was mainly due to the recovery of the [indiscernible] restaurant market after the pandemic as well as food price inflation.Snabbgross has also continued to make progress with the Snabbgross club member concept. However, more challenging comps now and the weaker restaurant market resulted in a weaker volume trend, particularly towards the end of the quarter.Operating profit amounted to SEK 30 million, corresponding to an operating margin of 2.6%. The strong growth was offset by negative product mix effects, costs related to new stores and marketing for Snabbgross Club as well as higher costs related to rent and electricity.Please now turn to Page #13, and we'll look into Dagab. Net sales for Dagab increased 18% in the quarter, mainly attributable to the sharp increase in sales to the store chains. Dagab's result was impacted by cost affecting comparability, which I had mentioned before, and the operating profit amounted to SEK 207 million. The adjusted operating profit amounted to SEK 261 million and the adjusted operating margin was 1.5%.The higher profit was primarily driven by the strong growth and productivity was good despite all the restructuring operations. However, the profit was impacted negatively by increased market investment to support Dagab's customers and higher logistical cost as a result of lower delivery reliability, mainly due to high volatility in demand.So with that, I would like you to turn page and go to Page #14, and I will hand over the voice to Anders. So Anders, please go ahead.
Thank you, Klaus. And then we are on Page 15. And let me begin with the cash flow for Q1. If we compare with last year, the operating cash flow was SEK 948 million lower mainly due to inventory buildup ahead of Easter and also higher inventory due to the restructuring of the logistics operation with the new logistics center in Balsta.We also had a couple of high invoices in Q4 related to automation investments, which was paid in the first quarter. The dividend paid out and the negative changes in working capital was supported by higher utilization of our credit facilities. At the end of Q1, we utilized approximately SEK 1.5 billion of our credit facilities compared to approximately SEK 1.7 billion last Q1.Please turn page to Page #16. Looking at the financial position, the net debt has increased compared to Q1 last year due to higher leasehold debts connected to the new logistics center in Balsta. Compared to year-end, the interest-bearing loans increased due to the dividend payout and the increase in net working capital.The equity ratio is fairly stable over the last couple of years, however, improving slightly from Q1 last year, which was negatively affected by the bridge financing of the Bergendahls acquisition.Total investments, excluding leasehold for the first quarter was in line with Q1 last year. However, the investments in the retail operation was higher. And at the same time, the investment in wholesale was lower. We have a high ambition of new store establishment this year and we have already established 4 new group-owned stores in Q1. We also, at the same time, see a lower pace in investments related to the new logistics center in Balsta.And then let's turn page to Page #17. As I mentioned before, the cash flow for Q1 was negatively affected by the development of the change of working capital, which also had an impact on the net working capital as a percentage of group sales. A reversal of this effect is partly expected in the next quarters. Also we continue to focus on payment terms on both accounts receivable and accounts payable.The capital employed has increased over the last years, mainly due to the recognition of leasehold debt. We have had a diluting effect on the return on capital employed. However, at the end of the first quarter, the capital employed was in line with year-end 2022 and we don't expect to see any major further increase in the near future.And thereby, Klas, I hand over to you again.
Thank you, Anders. And we're now on Page 18, but let's now right away go to Page #19.We have a couple of strategic focus areas and here you can see them. And we have, as you know, a full agenda for 2023 to continue to develop Axfood and all our businesses.Today, I will focus on one of these strategic focus areas, namely supply chain. So please go to Page 20. In parallel with managing the prevailing inflationary environment and changing customer behavior, we are continuing our work to become even more efficient and reduce our costs.And all of you that is following the webcast, I hope now that you can see a video playing. With respect to the overall efficiency and reducing costs, we are now carrying out the largest logistic investments in the history of our group to improve the competitiveness of our own concepts and our wholesale customers and offer a more comprehensive and affordable assortment. And the most significant of our logistic investment is a new logistics center in Balsta, which is now in operational.And in early February, we made the first deliveries from Balsta of products from the dry assortment. This was, of course, a big milestone, one of many and a fantastic achievement considering the complexity of this project. And right now over 170 stores are receiving daily deliveries of a total of approximately 2,800 pallets of goods from Balsta. And the deployment of Balsta is a work-in-progress that will continue throughout 2023 and into 2024, with the addition of deliveries from the refrigerated and frozen range as well as e-commerce and a gradual increase in customers receiving deliveries.And we are now on Page 21. Our outlook for the year is unchanged, and it covers investments, items affecting comparability and new store establishment. And as for the latter, we are accelerating the pace compared to previous years. So far, we have opened up 4 new stores, all of which are Willys.And please turn now to Page 22 and the last slide of today's presentation. Let me sum up. Food has probably never attracted as much attention as it is now attracting to the consumers in general, which we have a great understanding for. As a food retailer, it's therefore more important than ever before that we are able to ensure our offering is relevant and competitive.With our various concepts, we once again succeeded in gaining market shares and attracting even more customers during the quarter. It is our outstanding employees who make this possible every day, which I'm incredibly thankful for. We also continue to invest in our offering and efficiencies and made major strides in our long-term focus on logistics, which will ultimately allow us to become even more competitive.And the power and agility we have developed in recent years are competitive advantages. They allow us to create value for all our stakeholders to maintain a strong financial position and to continue investing to be a leader in affordable, good and sustainable food.With that as a summary, I would like to hand over to the operator to open up the line for questions. Thank you.
[Operator Instructions] The next question comes from Fredrik Ivarsson from ABG Sundal Collier.
A few questions from my side. I think I'll take them one by one.So first one on the gross margin. You said gross margin in Willys is down, but on a group level, it's actually up a little bit, I think more than 30 basis points. And I suppose that's due to Dagab. Can you start by just explaining this sort of dynamic and what happened in the quarter?
Well, Fredrik, I presume that you're looking at the P&L and the gross profit and gross margin in the P&L, right?
Yes.
You can't compare actually the actual gross margin in that change because this is what we recognize and we have a dilutive effect in -- or mix change effect in that gross profit. You not only have costs for products, so we also have costs for labor and depreciation and so on in that gross profit. So you can't compare that gross profit actually.
Yes. Okay. That's fair. I understand.
If I understand your question right.
Yes. So to be clear, our gross margin for our products is down as we have commented, but the reported is a functional reported gross margin, which is comparable.
Yes. That's super clear. And then focusing on Willys' gross margin because now we see that the CPI is actually getting above PPI. So due to that sort of information or effect, is it fair to assume that this pressure on Willys gross margin that we've seen over the last year or 2 will ease a little bit going forward?
Well, of course, we are in a very competitive market. And one of our most important KPI is to make sure that we maintain our price position in Willys. But clearly, which we are also indicating now is that the price pressure from our suppliers is easing up. That should allow us to see a lower food inflation rate. And we also see in some of that is already coming down in the end of the quarter and we hope that that will ease up obviously.
Good. And last one from me. On the cash flow obviously, that's a bit tricky to forecast due to everything that's happening within the logistics and so forth. So how should we view net working capital and especially inventories, of course, over the coming quarters? Is it -- I mean it's usually quite stable over the year, but I assume we can expect inventories to decline from here, right?
Yes. As I mentioned, Fredrik, we had a quite big calendar effect in Q1 to Easter and we assume that we will come back to more normal levels coming in quarter.
Sorry, I missed that. That's all my questions.
The next question comes from Daniel Schmidt from Danske Bank.
A couple of questions from me. Coming back to the discussion on producer prices and you mentioned, Klas, that the pressure is easing a bit. At the same time, is it fair to say that sort of the rhetoric in the market has been dialed up another notch when it comes to sort of what happened in late March with comments from [indiscernible]? I think they all announced the price cuts on part of their assortments. Do you think that that sort of -- is that in any way working against your capability to compensate for producer prices going into Q2 and onwards or sort of has the map sort of changed?
I don't -- I think that our focus has been as always to make sure that we continuously work to be efficient and to have a full bag of groceries out there in the market. You'll see in certain campaign activities from others, but that's in a few hundred of articles for us, it's the full bag that we are working on. And we've seen campaigns -- significant campaigns activities from -- during the full quarter and also during previous years as well. So I don't see that as a major change in that.
Okay. And maybe it's more sort of a marketing trick than what it really has in terms of impact on the consumer then. And then maybe moving on, sort of you mentioned and that there's been an ongoing dilemma during last year when it comes to Dagab's delivery reliability. And it comes back to, I think, Anders mentioned volatility in demand. Are you seeing any change to that in terms of what you can do to improve that situation? Of course, you can't do much about the volatility in demand, but on your side?
Yes. No, but it's a fair point. And that's -- it's a number we're working hard on right now. I think it's -- compared to the effects from the pandemic that we saw a year ago or in 2022, I think it's easy enough that we are getting better and better service levels from our suppliers. But as we are in a situation right now where I would say where we've seen a significant increase in demand and volatility related to the campaigns that has been somewhat disturbing the numbers, we are also fairly strict in terms of how we are measuring our numbers.And then in addition, which we are handling right now, it is the conversion to the new logistical center in Balsta, where we're operating with 2 large warehouses at the same time. And of course, that has not helped during this transition period. So that has an impact, must be clear to say.
Yes. Now that I understand.
But overall, I just want to say, Daniel, that I think we're starting to see better and better and better support from our suppliers versus a year ago. And I think that's the most important part.
All right. Good. And then just final from me on the [ Horiaca ] business and maybe not that surprising, you mentioned you start to see certain volume decline towards the end of the quarter. And of course, you had a sort of tremendous pickup in this business last year. And sort of, could you say anything about the significance of that sort of certain volume decline?
Yes. Yes, I don't want to overdramatize it, but I also want to say that we see -- it's -- as you say yourself, it's kind of expected a bit, not want to overdramatize it. But -- and I think also, if we look at when we had the downturn during the pandemic, we also see that Snabbgross managed to handle the environment somewhat better as well as we are supporting more cafe and restaurants that is more like the pizzerias and so forth that I think that I judge that will not have a high impact if we will see a downturn in this part of our industry due to the pressure on our households.
The next question comes from Niklas Ekman from Carnegie.
Just a few questions from me as well. Firstly, coming back to the campaigns that you talked about here. We saw a lot of noise in the media in March, April, where all your big competitors were out cutting prices. And I recognize that these were really just campaigns rather than any kind of price war. But given how much noise there was, have you noticed any impact on your sales because you were not as vocal -- even though I guess you're following prices, you were not as vocal. Have you noticed any change, any loss in momentum for Willys, for instance, even temporarily, would be interesting to just hear your thoughts.
I don't want to comment too much on the second quarter, Niklas. But I think overall, if you see, as you point out, there's been a few campaign activities. But if I look at, there's been significant measures at the same time, price studies in the market from independent price studies that confirms Willys' strong performance in the market. That has also been, you can say, on the positive side as well when you look at it. So yes, that's kind of an answer, I think.
Okay. Fair enough. And second question on inflation. You talked about peak inflation and you show this graph where we see inflation coming down in March, but that's the year-over-year effect. If we look sequentially, prices were still higher in March than in February. So I'm curious, are you actually seeing inflation coming down sequentially? And going forward as well, is that what you're expecting? Or are you rather expecting inflation to level out at the current level?
It's a good question. Of course, there's a lot of things that is impacting this. But what we have seen in a few categories, actually, it's going down, but you also have categories like related to sugar that has gone in the other direction. How this mix will fall out, we'll see. But I think -- and I want to send that signal is that the price pressure that we've seen in 2022 and the beginning of 2023 is now very different coming now in April, May and moving forward.So now how this will level out, there are many factors obviously affecting this, but I think that we are seeing an ease in that. But as you point out, we are still compared to 2022 or 2021 at a higher level. We have not seen the dramatic price cuts, but the pressure on price increases has gone down.
And can I also ask you, say several times here today, you said that you have yet to fully pass on the cost increases. How soon do you think you can catch up? And I'm not just talking input costs now, but you mentioned electricity, rental cost, wage costs increasing as well.
No. That is obviously -- if you look at historical and the low margin business that we have in the industry, it tends to, over time, be reflected. Now I think if you look at our side, we are also working to mitigate some of the cost pressure that we are getting, as I mentioned, in terms of electricity, fuel, rents and so forth. We do that through more efficient operations, through investments in our logistics, et cetera. So we are working on our side fairly hard now to mitigate some of the costs that we are getting. And obviously, it helps with the amount of new customers that is coming into our stores. That also helps to mitigate these costs.
Very good. And just a final question on the Balsta fulfillment center. This is set to replace 6 fulfillment centers. Can you -- as far as I've understood, can you tell us a little bit about the time plan here? When do you expect to be able to close the first of these fulfillment centers? When will that transition be completely executed? Can you tell us something about the time line?
Yes. The plan is to -- we are working now on the dry assortment. And as I pointed out, we have significant volume now that is going out from Balsta. And we are in this transition for the dry assortment that we will be done and ready way before the summer. And then we'll start with the refrigerated assortment and then we will start end of the year with the freeze assortment. So you can say in one way that over 2023, when we're done with that, we will then close down the warehouses. But also we are handling this in a very managed and controlled way. So we are not putting ourselves in into any risks.
Okay. But if I understand correctly, that means that the closures of the existing -- of the previous fulfillment centers, that will not happen until towards the end of the year?
Correct.
The next question comes from Magnus Raman from Kepler Cheuvreux.
That's Kepler Cheuvreux. So many questions have already been asked. I was interested in this time line for closing down existing warehouses that you just discussed. But if I could just follow up on that, is it fair to assume that by H1 2024, all of these 6 warehouses, existing ones will be closed? Or is it so that you might keep any of those existing ones in the longer term?
No. If we are running this transition now in a controlled way. And as soon as we are also lifting out all the volumes when we do that and we also do it geographically. But of course, we need to get into the freeze and the refrigerated assortment before we can close them down. But when that is done, we are phasing out them in line with the plan. So we are well ahead in plan. But I think also, of course, we are not making anything that is stupid here, so we make sure that if we need to prolong a month or weeks or so, we'll do that. But we are working according to our plan. We are in line with our plan to take this structured move from these warehouses over to Balsta, which will happen in 2020.
Great. Great. That's very clear. And then if you could just elaborate on these investments in Dagab to support customers as you discussed, one sort of cost pressure in Dagab in the quarter. Can you elaborate a little bit more on those investments and --
More than...
-- [indiscernible].
Yes. And I think that what it is related to that obviously from -- we're all now supporting with various campaigns and activities. And in that part, Dagab is also supporting with volumes. And we have seen, as I commented, we had a significantly higher share of campaigns now that has affected obviously this volume that goes out that also has an impact on Dagab.
All right. And then just maybe a little bit more technical question here, maybe if I understand that in terms of the [ marked-down ] valuation here, I arrive at a very different sort of implied valuation for the total marked-down business when looking at [ Chinavik ] valuation compared to yours? Is there any sort of liquidity preference differences or anything like that or just a very different sort of methodology in valuation here?
Well, Magnus, I can't answer for the Chinavik evaluation actually. So I have not any insight in what they have done. We have been quite clear that we have the valuation that of [indiscernible] SEK 200 million, and that's what we have adjusted for in the first quarter.
All right. And then did you mention -- maybe I haven't read out fully on it, but did you mention sort of multiple supply or something in that methodology?
We have looked at the valuation of Mathem that is set now in the financing round that is now taking place in Q2.
All right. That's clear. Great. Yes, I think that's all from me. Maybe the final one just to see here the sort of dynamics of the market. You noted that Hemkop is outperforming the market growth slightly and then Willys, of course, massively. And we see from the ICA report this morning, that ICA Sweden is losing market share. Is it fair to assume that apart from [ Needel ], it's only Axfood's banners that are actually winning market share in the Swedish grocery market?
Yes. Well, I wish I could answer that because I don't see the other numbers. But I think if the overall total market is growing 9%, and obviously, we have almost 20% growth, we have to relate to that. And then there are some of the other actors that is releasing their numbers. But in general, of course, we are pleased to see that Hemkop is performing in their traditional segment very well at this time.And obviously, as you point out yourself, Willys is attracting significantly more new customers at this point of time, which, of course, is related to that price value has even been more important at this stage. So there is some logic behind that.
The next question comes from Simen Aas from DNB Markets.
So I have 2 questions. And one is a follow-up on the Dagab question. So on the market investment, just to get that all clear. So how should we think about this going forward? Do you think it's affecting for the remainder of the year? Or was this kind of a Q1 effect?
No. I think you can see it as it depends a bit on how the activities goes. I don't see that's going to be a long-term approach on that. But we're also taking now -- everyone is now taking part to mitigate and to work towards the pressure that consumers is facing at this stage. So -- and obviously we've seen some of the important products for consumers has been flying out of the shelves that hasn't had an impact. So I think it's more of where we are right now.
Okay. Can you quantify the effect or is it hard to do?
No, I don't want to do that. We -- it's part of the mix here. And again, I want to point out as well is part of the mix is also one of the maybe larger impact is also the transition that we are now doing with the warehouse -- between these 2 warehouses, which is more an effect that we are facing at this stage that is more important, I would say.
Okay. Okay. And then my final question is a more technical one. But the net financial came in at around SEK 80 million [indiscernible]. Is this kind of a new run rate to use for the remainder of the year? Or how should we think about that?
Yes. Simen, we have some difficulties to hear what you're saying actually. Can you try to repeat that question again?
Yes. So on the net financial line, it was at around SEK 80 million. How should we think about this for going forward? It makes a new number, or how should we think about that?
Well, we have increased lease liabilities, of course, and we also have higher interest rates that will reflect a little bit higher cost in the financial net share, if I understood your question right.
Yes. Okay. That was all for me.
[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Well, we'd like to thank you for the questions, and thank you for listening in and I hope you all have a good day. Thanks a lot. Bye.