Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2019-Q1

[Operator]

Hello, and welcome to the Byggmax Q1 Report for 2019. [Operator Instructions] And just to remind you, this conference call is being recorded.Today, I'm pleased to present Mattias Ankarberg, the CEO; and Pernilla Walfridsson, the CFO. Please go ahead with your meeting.

[Mattias Ankarberg, President & CEO]

Thank you, operator, and welcome to this Q1 conference call. I, Mattias, will start by going through the business overview and then Pernilla will dig into the financials in more detail. And we will talk off the presentation available on our website.At start, we think from the year, Q1 was good. Overall, sales and profitability increased. Sales was up 7.5%. Gross margin is good and cost control is good. And the EBITA margin, operating margin, so to speak, went up by 3.7 percentage points.We see that the market continued to grow in Q1 as it did in Q4, positively affected by the weather, although not as favorable as 2 years ago and we continue to take market share. And we continue to drive the initiatives that have paid off for us during the second half of 2018 and focus on driving profitable growth in 2019.Overview-ish on page 3, summary of the financials. The sales increased by 7.5% as commented earlier. Byggmax drives the main part, the Byggmax segment, and the market growth, of course, contributes. We are particularly pleased this quarter about the operational improvement, things partially under our control, which were positive, particularly gross margin and cost control though.Gross margin was up by 1.4 percentage points compared to last year to 33.4%, positively impacted by price/mix effect. And we continue to decrease, what we call, comparable costs. So that's costs excluding new stores and nonrecurring items. And that compares with cost decrease again and decreased by almost SEK 12 million in the quarter.Overall, EBITA excluding nonrecurring increased by 3.7 percentage points. There is positive impact of IFRS 16 included in that number, and Pernilla will go through that in more detail later. But on a comparable accounting principle basis, EBITDA excluding nonrecurring items also went up by 3.2 percentage points. So improved sales and improved margin.The market on page 4. We are aware in the Nordic consumer market for building material, and we estimated to have increased by 2% to 4% in Q1. There is very limited public information regarding this, but weather plays a big role in the short term and this quarter had a positive impact compared to the very long winter we had last year. We should say if we are into details that January and February were very sort of wintry in north part of the Nordics also this year, but March was more normal ramp up than last year, which is far from as favorable as when spring came early in 2017, but clear positive effect.Public information is available in the form of the industry application Byggmaterialhandlarna, which puts Swedish building material market overall at plus 2.5% -- 2.6% for Q1. That market -- that number includes both B2B and B2C, but mainly B2B, which as you all are probably aware by now, we are not focusing too much on that. We believe that the market is positively developing then for the second quarter in a row. And we believe still that sort of higher end of the market in terms of larger project is more passive.We compare our own sales development on page 5 to the market and to previous years. We give some more details of the development in quarter 1. So again, the total to the right-hand side increased by 7.5%. The Byggmax segment accounts for 90% of the group sales in the small quarter of Q1 and grew by 10.6%. Like-for-like sales is approximately at market and then the big driver of the Byggmax sales is that the new stores contribute by almost 7%, which is very positive and we're very pleased with that development. And we see that the Byggmax segment continue to take market share.The other segment of size in our group is Skånska Byggvaror, accounts for a very small share particularly in Q1, 7.5%, which reported sales decrease of 17.2%. The changes to the business model done last year impact that number. The order intake, so the customer orders placed in the first quarter or the value of the customer orders, I should say, actually increased in the quarter. And we are very pleased that it was driven also by the core categories that we are focusing on, so the ones we call Garden Living: conservatories, greenhouses and other garden-related buildings. However, the reported sales decreased as a larger share of the orders placed will be delivered to customers after the second quarter. We recognize revenue after delivery and these core categories have longer lead times than other categories. All in all, that pulls down the total number to 7.5% for the group.Speaking a little bit about the business for quarter 1 and for the year, turning to page 6 and starting with Byggmax. The focus for this year is to drive profitable growth, focus on our core business and the strategy of focused growth and being simple and efficient in our operating model.We continue to drive growth through 3 main focus areas. We continue to expand with stores. We plan to open 12 stores this year. We will continue to upgrade our offer and continue to add Garden departments and convert stores to 3.0. And we will continue to focus on e-commerce growth to expand the assortment and to add delivery options, particularly. And I will come back in a bit more detail on all of these 3 on the following pages.On the efficiency part, we will continue to focus on turning around Finland, which moved in the right direction in 2018 but more work to do. And we will, as we have done now in Q1 and previous quarters, continue to work on trimming the costs and simplifying our processes to minimize OpEx.A few more comments on the coming pages on the growth drivers, particularly. So page 7, store openings for Byggmax. Again, we're planning to open 12 new stores in this year; 10 in Sweden, 2 in Norway. And about 5 of the Swedish stores will be of the smaller format, which have been developed 2 years ago almost and 2 of them will have Garden department. We have not opened any stores in Q1, but we will open 8 stores in Q2, 3 on [indiscernible]. And we have announced several of the stores already in terms of location. We will add Garden departments to 2 of the existing stores in Q1. So as of now, we have 16 stores with Garden departments.We are driving a few initiatives to, what we call, upgrade our offer. And Garden department, we've talked about for quite some time now. And we'll continue to develop concepts and introducing into more stores as just commented.But we, on page 8, also would like to comment more about the Store 3.0 initiative that we communicated in the last quarter. We have developed an improved store concept that we have tested in 2 stores during the autumn with the goal to upgrade the offer to be more complete for the customer to serve the customer for both smaller and bigger DIY projects. And the upgrade includes adding some assortment in particularly electrical installation, ventilation, grafting and a small garden department. We also changed the layout and improved navigation in the store to make it a more clear department and a better store experience.And we have experience from running Byggmax 2.0, which give positive effects, which were communicated earlier. 3.0 is less ambitious in the sense that there is less ambition on the sales upside and particularly less investments required. So we believe that this could be a good driver for us. We have continued positive indications from these 2 test stores during Q1 and we are now converting stores -- existing stores into store 3.0. So by Easter, which is Thursday, we will have 10 existing stores converted to 3.0.E-commerce is an important area for us, so we're increasing the omnichannel and getting the customers to be able to shop where they want. We have done quite some improvements during Q1. We have done some back-end improvements including upgrading our technical platform and also the sites for the customers. New design, simpler checkout, better customer experience, more personalized and the new technical -- technological platform too as a base for further development. And then we have worked on delivery options, which we believe is an important part of the customer offer. We have now launched what we call collect@store for significant share of the assortment in both Sweden, Norway and Finland. And we have added new home delivery options for the customers in Sweden, so you can order for delivery specifically on evenings or express delivery.Skånska Byggvaror, which is a much smaller segment, we are now leaving 2018 behind us, which was the year of transformation and change and restructuring in many ways. And now this year, we are starting to build for growth. We will focus on building growth within the core business, the core categories of Garden Living. And we have growth initiatives in place to both develop new assortments and introduce to the customers and also to do more personalized both sales and more digital marketing efforts.In parallel, we, of course, continue to drive efficiency improvements. We see that the indications of the growth initiatives are positive. And again, with increased orders in Q1, we expect the growth in the peak season, which will contribute towards -- heavily way towards the second and third quarter in 2019.So that is the overview. And with that, I hand over to Pernilla to go through the financials.

[Pernilla Walfridsson, Chief Financial Officer]

Yes. The underlying result is developing positively. We have an impact of both IFRS 16 in Q1 2019 and one-off items in Q1 2018. I will start talking about IFRS 16 as it affects the profit and loss, the balance sheet and the cash flow.Byggmax has chosen to apply a method that means that comparable figures in otherwise 2018 will not be restated. We have instead included profit and loss on balance sheet excluding IFRS 16.So if we turn then to impact of IFRS 16, the main impact of IFRS 16 is that on EBITA for the balance sheet is that it increased with SEK 1.4 billion in Q1. Leases and that is the most list for store premises are no longer classified in profit and loss as lease rent and are instead reported as depreciation to a larger extent and also interest expenses.So IFRS 16 has affected EBITA by SEK 4.1 million and that is corresponding to positive effect on EBITA margin of 0.6%. The Byggmax group sales pattern annual impact is smaller and estimated impact on full year EBITA margin is 0.3%.The effect of IFRS 16 on net income amounted to a negative SEK 3 million in 2019, estimated negative annual impact of SEK 10 million to SEK 12 million. And the cash flow from operating activities is positively affected with SEK 65 million. And on the other hand, then cash flow from financing activities negatively affected by the same amount. So there is no effect on net cash flow connected onto IFRS 16.The first quarter entails the positive start to the year. Net sales in Q1 increased 7.5%. The gross margin increased 1.4% and we have a strong cost control in the first quarter.The EBITA excluding nonrecurring items increased SEK 19 million, and then that includes then this IFRS 16 effect of SEK 4.1 million.If you look at profit after tax that has not been adjusted for one-off and that is negatively affected by this SEK 4.1 million currency effect, but also the SEK 3 million connected to IFRS 16. The profit after tax was positively affected by one-off items of SEK 8.7 million.The sales development. The sales in Q1 increased 7.5%. The sales for the Byggmax segment increased almost 11%. New stores performed well and net sales for comparable Byggmax stores increased 3.1%. The sales for Skånska Byggvaror decreased 17% despite the order intake is increased. And the increase in order intake was driven by the core categories, while demand for other categories decreased following last year's change in the commercial model. And the sales decreased despite increased order intake as a large share of orders received will be delivered after the end of the quarter. The strongest sales month of the quarter was March.The gross margin increased 1.4%, positively impacted from price/mix effects. In total, negative impact from currency development in Q1.Cost control remained strong and we are continuously improving our efficiency. Comparable costs, costs excluding new stores and nonrecurring items, decreased almost SEK 12 million.And then we turn to the profitability per segment. The Byggmax segment developed positively with sales increase. The gross margin is developing in a good way and the comparable costs decreased. So the EBITA margin for Q1 improved 2.6%.Skånska Byggvaror saw lower sales, but the stable earnings and increased order intake.Then we also have this segment Other and that's -- we have a changed purchasing pattern for Byggmax that's resulted then in higher profitability in our fully owned distribution company [indiscernible].Net financial items for the quarter were negatively impacted by exchange rate effect and also by IFRS 16 effect.If we turn to the cash flow, the first quarter generated a cash flow from operating activities in line with previous seasonal patterns. The cash flow from operating activities is positively affected with SEK 65 million, while cash flow from financing activity is negatively affected by amortization of the leases’ liability with the same amount. The net cash flow in the period remained unaffected.I also want to remind you that given the effect of IFRS 16, profitability target has been updated to be based on EBITA instead then of EBITDA. The updated profitability target EBITA is 7% to 8% per year.And I then hand over to Mattias, again.

[Mattias Ankarberg, President & CEO]

Thank you, Pernilla. Why don't we close things off to 2 pages. First, a little bit of outlook. We have a somewhat optimistic view on the market development for 2019. We have now seen 2 quarters, although small quarters with positive market growth and our view is optimistic that, that will continue.We see from Swedish household data from the National Institute of Economic Research that the Swedish household's intent to resonate is high and has further improved as of their latest public research now in Q4.We also feel that our initiatives are in place and we are starting to see good delivery. And we are fully focused on driving profitable growth in 2019 based on the initiatives that we have.Summarizing on Page 24, all in all, a good start of the year. Small quarter but positive and particularly pleased with the operational things we can effect. Sales and profitability increased, helped by the strong cost control from gross margin.The market grew. We took market share and we are optimistic to continue growth. And we see our initiatives in place to drive profitable growth in our core business.That concludes the presentation. And I hand over to the operator for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Niklas Ekman of Carnegie.

[Niklas Ekman]

I'd like to start just by asking on Skånska Byggvaror. When you talk about the order books being strong here at the start of Q2, is there any way that you can quantify that effect? How significant? And is it strong enough for you to feel confident that you will show a return to sales growth in Q2 and now going into Q3 as well? And that's my first question.

[Mattias Ankarberg, President & CEO]

Niklas, so the order intake was positive compared to last year as you say. We don't want to put a number to it for competitive reasons. But it was, of course, better than flat, but it was not very positive. So it's an increase. What we are -- to the second part of your question, what we are positive to is that the order increase is driven by the core categories. So the ones we are focusing on conservatories, greenhouses and garden building, while we continue to decrease in order value on the other categories that were previously very loss-making for us. So I think that's all positive and as planned. I think our confidence is a bit higher now that we see that the plans are executed and we see the effect that we had hoped. Then we should, of course, remember that Q1 is much smaller than Q2. So this order book in itself does not give financial impact enough for the full Q2 obviously, but it's a positive sign that things are developing as we both had planned and hoped.

[Niklas Ekman]

Excellent. And can you just explain again here in more detail maybe why Skånska Byggvaror in Q1 here specifically, why it was down so significantly when you had an extremely easy comparison from the year before? If you can just explain the dynamics there, I think that would be helpful.

[Mattias Ankarberg, President & CEO]

Yes. Absolutely. So if you go back as you say 2 years, I mean, the reported sales is almost half, not really but almost. And we have done a lot of changes to Skånska Byggvaror during last year as all of you are aware. And the main changes were 2. One is to change the commercial model to focus on the core categories, where we have solid margin and to reduce our presence in the other categories, doors and windows and other things where we had trading goods and lost money basically in a very simplified way to heavy marketing and heavy promotions.The other thing we did that is take out a lot of costs to lower the base and be able to be profitable with a smaller top line. So the core categories are very seasonal in nature and particularly sold in Q2 and Q3, which means that Q1 and Q4 where the share of business for the noncore categories was previously high and boosted by promotions and marketing has now reduced a lot over 2 years. So that's I think the 2-year perspective. I hope that was reasonably clear. And then in terms of why this effects -- sort of effects sales now in Q1, if we want to go into that detail, I think there are 2 maybe specifics that could help clarify the picture. One is that the lead times from order placed to delivery is longer for the core categories. Conservatory has many elements to it and has several weeks, sometimes 2 months delivery lead times for delivery to customer. So that is 1 effect that makes the share of sale delivered later. And then the other effect is that the season picks up in March pretty much and that's where we see the market growth also. And that has also, of course, not being delivered as much during Q1. So I hope that answered your question, Niklas. Otherwise, feel free to follow-up.

[Niklas Ekman]

Absolutely. Absolutely. That was very clear. And turning to Byggmax. I'm curious you've had a fairly aggressive store rollout now in 2018. Can you talk a little bit about the path to profitability for newer stores because I think it takes a bit longer for your format to reach profitability compared to traditional retail? So if you could just map out how long it typically takes to -- for that investment to pay off.

[Mattias Ankarberg, President & CEO]

Yes. Very good. Happy to clarify that. Our box economics, so to speak, for new Byggmax stores is, as you say, a bit different. We are a destination category and typically take some time to establish ourselves. So we look at sales maturity in year 3. A typical Byggmax store lose money in year 1; breakeven-ish, small positive in year 2; and then is up to sort of average profitability by year 3. And we -- as we look at then the 2 data points, I guess, for Q1, if you're curious, 1 is that we have -- as we have increased the pace of expansion last year to 80 new stores -- 18 new stores, which was double from 9 earlier, we have a bigger negative effect of first year losses, so to speak, of new stores. That effect was minus, help me Pernilla, SEK 11 million, SEK 12 million -- SEK 11 million...

[Pernilla Walfridsson, Chief Financial Officer]

SEK 11 million...

[Mattias Ankarberg, President & CEO]

Negative on EBITA in Q1. So the new stores impact Q1 with minus SEK 11 million. The other point I think worth to mention is we see now that we have opened 18 stores last year. That's an increase in store portfolio of about 13% with non like-for-like stores by 7%, sales kicked for the Byggmax segment, which is good. We see that the sales maturity should be year 3. And we are already, so to speak, past the performance and also some of these stores are of the smaller format where we have much lower breakeven point. So that was a lot of data points, but economics are sales maturity year 3 and drag on profitability now, but the top line is promising based on what we can also report now in the Q1 numbers.

[Niklas Ekman]

And that was going to be my follow-up sort of what in terms of profitability for these newer stores. Do you see that they are basically delivering on par with what you've seen historically? I mean it sounds on the sales development that they have been slightly outperforming. Is that the right assumption for these newer stores that you've launched in 2018?

[Mattias Ankarberg, President & CEO]

Yes. They are -- it was a good year for expansion. We had better-than-planned top line a bit, and of course, that helps also the bottom line. Then again, it was a tough year in many aspects to the -- with -- for the market in 2018, but particularly, the small format stores performed very well in their first year compared to our expectations.

[Operator]

Our next question comes from the line of Nicklas Fhärm of SEB Equities.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Could I start by asking a question on the inflation and cost of goods, more specifically the timber price development? I haven't been able to collect data for the first quarter and I was just wondering -- we saw a deceleration in cost inflation towards the end of last year. And I was just wondering what your thoughts are on timber price change here in the year now in Q1, please?

[Mattias Ankarberg, President & CEO]

Good point, Nicklas. And that was a very big topic for us during last year. And we share your view that there was -- the peak sort of -- one thing, the price development is probably over. We saw starting -- raw material prices starting to tick down end of Q4-ish, if I remember correctly. And we have the same feeling that that's going to continue. So it's sort of gradually decreasing during Q1, held up decently by strong export and we can go into details on that if you like. But they are starting to decrease a little bit. At Q1, it's small as you know, it's 13% of our annual sales. So it means we don't buy sort of a lot of volumes in Q1. So it's too early to sort of say it will have a real impact on our raw material prices down, but taking the optimistic view, of course, we would hope that the big negative effect last year that kicked raw material prices up could now be offset and probably even reverse in our favor during declining raw material price development, but it's still too early to say.

[Niklas Ekman]

And do you think -- I don't know exactly how I should phrase this question, but if we take -- let's just assume at least a slightly more optimistic scenario for cost of goods, i.e., timber prices for the rest of 2019, do you think it makes sense all else equal to assume further improvement in year-on-year gross margin developments compared to what you actually recorded in Q1? Because obviously, you have adapted your pricing, but in this scenario at least, the costs will continue down.

[Mattias Ankarberg, President & CEO]

That's a good question. And I think, of course, it should be a positive impact of the declining of the prices of timber. What -- it -- the factors in play here will be also what consumer pricing would be, obviously. And we have a very clear pricing strategy, which is we would like to be the cheapest and we match competitors. So that will, of course, impact the picture. And then, of course, mix effect will impact the picture. But -- so it's hard to give sort of quantified number and isolating only that effect. But let's put it like this, timber is a huge part of our business. And if we get declining raw material prices and the consumer market lags that effect, then it should be quite positive for us in the coming quarters.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Agreed. Mattis, the next question, I would just like to understand, and I have to say it's very impressive, your costs -- your run rate costs are being down SEK 12 million in the quarter. And I just -- I would just like to understand where that saving is coming from, please, in slightly more detail, if possible.

[Mattias Ankarberg, President & CEO]

Yes. Absolutely. And it's a lot of hard work from a lot of people, but we can comment on it sort of on the most important points. And it's a dear topic to us. We are a discount retailer and to continue to drive efficiency is key. And I think we have decreased comparable costs, as we call them, in 7 out of 9 quarters now. So it's very good, but it's several points and it's both in Byggmax and Skånska Byggvaror. And it's efficiencies, I would say, particularly within marketing where we shifted more to digital, but also on the store cost side where we are running efficiency project. As an example, you could say that we still have [ a lot to do ] of course as all retailers' manual routines in the stores. And we have as an example invested in technology and new processes to change the process for receiving incoming goods where it was previously a lot of manual administration, and now we have a scanner function, so you can scan barcodes. It's sort of halfway rolled out and that means that we can be a little bit fewer people and save a few hours here and there and contribute to the lower cost. So it's not 1 huge cost program. It's continuous efficiency, and we have -- that is quite a solid base in our company to drive that all the time.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

And final question relates to stores and store costs. And I was just wondering, is the -- the reported costs for new stores that you charged your Q1 P&L with, is that an indicative number per store, per new store for the rest of the year? Is there any reason to why you would expect new store rollouts from Q2 onwards to be less expensive or for that matter more expensive? And what is your actual store growth guidance for this year, please?

[Mattias Ankarberg, President & CEO]

So I would say Pernilla jump in here, but the sort of costs per store for new stores has not changed a lot between different kinds of stores or locations. On average, I think that's roughly a good guidance, what you see. And we expect to open 12 new stores this year, of which 5 are the smaller format. We've shifted a little bit growth focus from new stores in '18 to more of the sort of upgrade focus with Garden and 3.0 this year, but still keeping high pace.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Excellent. Excellent. One small question, actually, still. I just noticed that the change in the working cap in this quarter is quite good and it seems to relate to less short-term debtors. And I was just wondering why, essentially. And if this is a trend that we should extrapolate into the full year as well.

[Mattias Ankarberg, President & CEO]

Okay. I'll start with an overview and then Pernilla can add to it, but one of the things we had done quite well during last year is to trim our sort of inventory and thereby working capital. And it was also a year of a lot of changed market conditions and changed purchasing patterns, but we have taken down that quite a lot. And if you look at, for example, inventory as now -- as of end Q1, it's flat from the year before despite the fact that we have 18 new stores. So we buy differently and we distribute goods a bit differently and that affects several working capital measures. And then I think, Pernilla can add to the financial aspect of it.

[Pernilla Walfridsson, Chief Financial Officer]

You also see effect between quarters. So you can also -- that you also see in historical figures, but it varies a bit towards the different quarters.

[Mattias Ankarberg, President & CEO]

I think that's the best sort of answer. And then how much to extrapolate, I think we should have to get back to you Nicklas. More later on that.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

But it sounds still -- even though it's difficult perhaps to put a number on it, but it sounds like you're managing capital and working capital -- I'm talking about more efficiently today than you did perhaps a year ago.

[Pernilla Walfridsson, Chief Financial Officer]

If you look at the inventory value, I mean, we have opened 18 new stores, but the inventory value is approximately the same as last year. So of course, Nicklas, that we should...

[Operator]

[Operator Instructions] And there are no further questions on the line at this time, so I would hand back to our speakers for closing comments.

[Mattias Ankarberg, President & CEO]

Thank you, everybody, for joining this call and look forward to talking to you again at the Q2 report.

[Operator]

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.