Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2020-Q1

[Operator]

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

[Mattias Ankarberg, President & CEO]

Thank you, and welcome everybody to this Q1 2020 conference call. As usual, we will talk to a presentation that's available on our website. And I will start by going through some business updates and then hand over to Helena for more of the financials. On Page 2, excuse me, overall, Q1 2020 was a very strong start to the year for us. We should start by saying that during this period, we have had health and safety as the top priority, health and safety of our colleagues and customers during this COVID-19 situation that we are all in, and we will come back to that later. Financials in very brief summary. Net sales, very strong, up 23% with 21% like-for-like growth, combination of very strong market growth, including what we call a stay home effect and also own initiatives that add to the growth, and we'll comment more on this also later. We continue to see a very strong gross margin on the back of last year's all-time high and continued solid cost control in the quarter. EBITA increased by SEK 27 million to minus SEK 51 million, and the EBITA margin increased by just over 5 percentage points to minus 5.8%. Also note that now the rolling 12 EBITA margin is at 5.4%. And we also -- we are also largely maintaining the plans already communicated for 2020.On Page 3, go through some of the most important key events in the quarter. And first on the list is the COVID-19 situation, where we have taken a lot of precautions to operate in what we call a responsible way and also increase our flexibility, and I'll come back to that soon. We have also taken precautionary actions on the financial side. And as you are aware, the Board of Directors quite early on withdrew the dividend proposal earlier communicated. On the business side, we have, during this time, also continued well in executing the plan we had for the year. We have upgraded another 13 stores to Store 3.0. We have not opened any new stores in the quarter, but we have communicated 10 openings for Q2/Q3. And we also are happy and a bit proud to be awarded the Most Sustainable DIY Brand in Sweden by the Sustainable Brand Index. I'll now go through a few points regarding the business side, the market, the COVID-19 impact and also the execution of our own plans. And I'll start on Page 4, where we elaborate a bit on the market, which was unusually strong in the first quarter. This was basically 2 main effects driving the development in the quarter. Firstly, it's important to note that the market growth was very good throughout all of the quarter, including January and February. We had -- as you know, in the short term, we are impacted by or the market is impacted by weather, and it was quite favorable weather compared to last year. And also, we are in the sort of medium-term impacted by renovation from the housing transactions, and that market has been negative development for quite some time, but actually picked up during the second half of 2019. So both those factors, we believe, contributed to a good market growth throughout all of the quarter. And then in addition, secondary effect is a clear boost during the second half of March, which is exactly timed with the acceleration in the COVID-19 pandemic, and we call it a stay home effect. We see a clear effect that when people are spending more time on their homes, they seem to be spending also more money on taking care of their homes. So that's the second effect.We -- as you have, those that follow us for some time, there is no public data on this consumer building materials market, and we typically try to guide you with some estimates. And this time, it's, of course, a bit more difficult than usual given the late and big impact, but our view is that the Nordic consumer market for building materials increased strongly and around 10% to 15% in the quarter with probably more for outdoor products. On Page 5, we would like to elaborate the impact of COVID-19 pandemic on Byggmax in a couple of headlines. And first of all, we'd like to note that in this situation we are fortunate we have stores that are located on freestanding properties and not in shopping centers, and therefore, not experiencing the same dramatic loss in footfall that others are doing. We have a concept built on self-service with very little touches, and we have a big share of our store space as outdoor shopping and customers do a lot of their shopping outdoors. So we are lucky in a sense or fortunate that we have a better position than many other retailers in this sense.We also are fortunate so far that we have a low supply chain exposure to Asia and Southern Europe. So we've had manageable disruptions, so far, quite small. Even so, we have taken a lot of precautions in the situation to be able to operate in a responsible way. And we have both done a lot of actions to ensure the health and safety of our staff and our customers. And just a couple of examples on the health and safety of our staff side, obviously, in addition to following regulations around staying home and systems and quarantine regulations, we have introduced stricter hygiene routines. We have increased store cleaning frequency. We have set up cash point covers. We have set up -- we have canceled new store opening events. We canceled all kinds of sort of campaigns.We have also, for people working at our head office, moved people to work from home. And the customers are also helping to ensure a good environment, and we have helped the customers to help everybody. We have set up or enabled handwashing stations in all stores. We have info signs in all stores. We have distance markers. We -- in the stores that have it available, we promote self-checkout.And lastly, on all these points, we've also done a lot to promote e-commerce and home delivery in this situation. We have also chosen to list all these actions and continue to update what we are doing on our website, which is available for those of you interested in reading more.So we have taken a lot of precautions. And then when we come to the effect of this whole situation on Byggmax Group, it's, of course, a very tragic and challenging effect for all of our society. And it feels a little bit strange to use the word positive and COVID-19 in the same sentence, but we are experiencing a positive impact from COVID-19 on the financials for Byggmax in Q1 2020.Basically, demand increased in this form of a stay home effect towards the end of March, second half, and the disruptions that we have seen to our operations and our supply chain are so far minor and manageable. What this means for the future, we will allude to a little bit at the end of this, but of course, largely remains to be seen.We can also note that we have tried to contribute to society in a little bit new ways during the situation. We have had free delivery of product, free home delivery for people who are 70 years of age or older, a risk group. And we have donated personal protection equipment in the form of face masks to Stockholm region hospitals.So with that, I leave the corona impact, the COVID-19 impact and turn on Page 6 to an update of our own plans for the year. And the heading is that the own initiatives we are driving are adding to the growth we're seeing in the quarter. And comment quickly, firstly, on store upgrades, where the big focus has been Store 3.0. We had an expectation of increasing sales by 3% per store compared to benchmarks, and we are exceeding that in Q1. So pleased about that.E-commerce is a very big priority for us, as you know, where we have a good position, and we continue to see very strong growth, and we are now as a group on 18% share of our revenue in Q1 that's online or e-commerce. Store expansion, no new stores in Q1. Skånska Byggvaror build-out is very much on track, and the efficiency improvements that we are driving are also on track. And I will now give some more inform -- go through some more information on 3 of these topics on the following pages.So firstly, on Page 7, regarding the store portfolio. This is an overview of the Byggmax store portfolio development. And as we have highlighted the development in the Store 3.0 concept, we have upgraded a further 13 stores to Store 3.0 in the quarter to now a total of 43, which represents 27% of the Byggmax store portfolio. We also have 18 stores still with Garden departments. No additions in the quarter. And we have 13 stores of the small format that we introduced just over 2 years ago, also no changes in the quarter. And again, no new stores in the quarter, but 10 communicated for opening during the year, of which 7 are in Sweden and 3 in Norway.Secondly, on Page 8, we continue to strengthen our e-commerce position. It is a top priority. As you are aware by now, we also see that customers are increasingly digital, particularly during this COVID-19 pandemic. And we are being able to support growth in this area through the actions we have done and are doing to improve and increase the assortments to leverage the new and improved site that we have in place and importantly, the many delivery options that we have launched during last year with express deliveries and collective store options, et cetera. Overall, very good growth and 18% online share for the group in Q1. Thirdly, Skånska Byggvaror, an update on Skånska Byggvaror. Skånska Byggvaror has seen a good trend for the last 18 months, and that continued also now in Q1 2020. Good positive financial development with a sustained sales momentum, both on the reported sales and the order intake in the period, and continuous improvements in profitability. We continue to see effects from the plan that we have in place and execute the plan. And the plan is quite simple around growth initiatives in core assortment categories and in digital sales and marketing areas and in combination with continuing to trim the efficiency. With that business update, I hand over to Helena to go through some of the financials.

[Helena Nathhorst, Chief Financial Officer]

Summary of the financials, and we'll start with the sales development. Byggmax had a very strong sales development in the first quarter. Sales derived from our 2 segments, Byggmax and Skånska Byggvaror, where Byggmax stands for 92.4% of the group's net sales figures.Net sales for the first quarter amounts to SEK 879 million, an increase of 22.9%. There's a negative impact on sales of 1.3% from currency. Approximately 20% of sales are outside Sweden in the first quarter. We have strong sales growth in both segments. Byggmax net sales increased by 23.2% to SEK 813 million, and the Skånska net sales increased by 19.4% to SEK 67 million. Like-for-like sales development at 20.7% for all units. As mentioned, we see 3 main drivers for the sales growth, good market growth throughout the quarter, primarily the early spring. We see sales growth from own initiatives such as store upgrades, e-commerce improvements and the new stores. And there is an additional sales growth from how we call it the stay home effect during the second half of March. So that's the sales summary.If we move to the next page, we can go further down the P&L and we have the net sales. And the gross margin for the first quarter is still very high. This amounts to 32.7%. It's a slight decrease from last year's all-time high level of 33.4%. The difference is a result of product mix with more outdoor products and some negative currency impact.On personnel and other external costs, excluding new stores, there's an increase of SEK 11 million, mainly attributable to onetime and ongoing COVID-19 precautions and currency effect. One-off is related to health and safety to staff and customers in-store and also making sure that all our employees have the possibility to work remote from home.So in total, we have an improved operating profit of SEK 27 million. It's driven by strong sales growth, gross margin in line with expectation, and continued cost control with some impacts from COVID-19 precautions and currency effects. And both segments contributed to the operating profit improvement.Let's go to Page 12 and comment on cash flow. The cash flow from operating activities amounted to SEK 220 million for the first quarter, and the movements are driven by strong net sales development, high accounts payable from increased activities in supply chain and lower prepayments due to financial precautions.So from that summary of the financials, we go back to market outlook.

[Mattias Ankarberg, President & CEO]

Thank you. Wrapping up soon, a couple of points. Firstly, on the market outlook. We have chosen to be quite humble about the outlook. That means the fact that we are now in a situation, which -- with the COVID-19 pandemic that creates uncertainty and new situation for a lot of people and maybe the usual metrics are not fully right to give foresight.But however, we think it's very clear that in the short term, customers will travel less and spend more times in their home. And usually, this means a good home improvement demand just as in Q1.We, of course, have no certainty on this, given again, new situation. So it remains to be seen whether this will actually boost the demand for the coming quarters or if there would be new situations with increasing disruptions that may impact also Byggmax.Could also mention that, of course, this situation impacts suppliers and the sort of supplier market and pricing of input goods, and that it also remains to be seen how that will play out over time.Longer term, if we look beyond the next couple of quarters, I think everybody will agree that we're facing a new economic situation, which -- with the new macro environment and housing market, and that would probably impact DIY and input goods in many ways. We think it's worth to note that Byggmax has a low price concept, has historically done quite well in also tougher economic times.And then, lastly, on Page 14, something we can be very clear about is our own plan for the year. We basically remain or maintain, I should maybe say, the plans that we have already set out for the year, given the good start. We do continue to take additional precautions regarding health and safety and operate with a bit more flexibility. But the 5 main areas that we have -- that we are focusing on for the year remains.That means we will, firstly, continue to do store upgrades. We plan to upgrade another 15 or 20 Byggmax stores to Store 3.0. That means that we will end the year with close to 40% of the store portfolio as Store 3.0. We will also add 3 more Garden departments during the year. We are very focused on maintaining the good growth momentum in e-commerce and continue the efforts we have done with increased assortment and improved customer experience in many ways. Store expansion, already communicated 10 new stores, as I said, 7 in Sweden and 3 in Norway. And in Sweden, about 5 of those are in the newer smaller format.Skånska Byggvaror's plan is in progress, and we maintain the plan, growth initiatives within assortment, digital sales and marketing. And we continue, as always, in Byggmax, to have several efficiency initiatives and improvements in place to continue to improve both the cost and margin side in the ways that we can.So with that, we hand over to operator to open up for questions.

[Operator]

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

[Niklas Ekman]

Just a couple of questions, please. Firstly, if you could comment a bit on the sales growth during the quarter. You talk about these 3 different drivers in the quarter. Am I right to assume that you had a growth rate of roughly 15% already before the COVID-19 outbreak? And if so, does that mean that sales growth accelerated to over 30% in kind of the last 2, 3 weeks of March? Are those assumptions more or less correct?

[Mattias Ankarberg, President & CEO]

Yes, that is more or less correct.

[Niklas Ekman]

And can you say anything about the start of April? Because I assume that it's a similar market conditions that you're seeing both in terms of weather and COVID-19 impact. So is there any reason why growth should have been much slower at the beginning of Q2?

[Mattias Ankarberg, President & CEO]

No. I think -- well, we can say something about that and I think you are pointing out the right factors. And we should -- there's been Easter weeks, 2 weeks. And Easter for Byggmax is a bit binary. Sometimes Easter is early and there is winter and people go skiing and basically no -- at least no positive impact on sales. Or we have a rather late Easter with good spring weather and good DIY conditions, you see quite a good positive effect of Easter. And in this case, it's the latter. It's been good weather and the positive effect. And of course, people are staying much more home because they are told so by their national authorities.So it's fair to say that the conditions or sort of the sales has continued well and the demand has been good or very good for the start of April. And then again, there is, of course, no certainty that, that will continue or if that is a peak that we are now sort of just over. But we have not as others maybe seen a short-term effect in March and then back sort of to same or lower, but we have seen a continued good sales trend in -- over Easter.

[Niklas Ekman]

Okay. And with that in mind, because you are still saying that you are humble and you are still a bit uncertain what the actual impact will be from COVID-19. But given what you've seen so far, I mean, what kind of disruptions are you worried about that could rain on this parade, so to speak, or make the sales growth much lower in the coming months?

[Mattias Ankarberg, President & CEO]

I think under any sort of normal circumstances, we would say that such a good and early start to the season means likely very good spring season overall. So we will be quite positive. You're right about that.And then I think there is not a single sort of risk factor that we could point to. We are more trying to be a little bit humble, as you say, to the fact that there is a lot of newness in the current situation. But I guess if we were to have a sort of major issue in suppliers, that would hurt us, we don't see that at the moment. If we were to see some kind of lockdown or COVID-19 wave 2 of unprecedented levels, that would, of course, hurt. We don't see that at the moment. Or if we think it's just for the temporary people are buying earlier than later, but we -- that's usually not the case.So we are maybe just being a little bit humble on the approach to the situation rather than pointing to a specific single risk factor that we have on the table.

[Niklas Ekman]

Okay. Yes, fair enough. And turning to online sales. You mentioned a few times here that you had very strong online sales growth. And given that this is only 18%, I mean, 18% is a high number, but it's is it -- was the growth strong enough to have a material impact on your group growth in the quarter?

[Mattias Ankarberg, President & CEO]

Online grew faster than the total in the quarter, and then we can clearly see an acceleration of sort of digital customer behavior as the COVID-19 pandemic accelerated. And although that may feel a little bit like a long time ago now, that was only sort of 2 weeks at the end of the quarter. So good growth and better growth on the total and accelerating digital behavior towards the end.

[Niklas Ekman]

Okay. And can you say anything about what to look for in the gross margin here going forward, given the different aspects here? On the one hand, you have lower timber prices. On the other hand, you have mix effects that were negative. In this quarter, you have currency effects that, I guess, will continue in coming quarters as well. Did you see any risk that the gross margin will continue lower the way you saw in Q1?

[Mattias Ankarberg, President & CEO]

Well, there is always a risk. But I think we feel very good about the level we established last year. It was very high. It was -- for the full year, an all-time high by more than a percentage point. And if we could be sort of close to that level, we would still be very, very pleased. We do see that sort of underlying product margin per category is in line with last year and very solid. But exactly as you commented, the mix effect made a big difference in Q1. That will not be the same negative impact in Q2 because the mix effect is similar to last year when we are in high season. But then again, the currency effects will probably impact also in Q2, and it is the Norwegian kroner that impacts us most.We have seen earlier that usually sort of changes in input goods sort of lead to changes in consumer prices and sort of neutralized currency effect. But it usually takes 1 or 2, sometimes even 3 quarters before that happens. So we would continue to expect a negative drag on the gross margin from the NOK in Q2, and then we'll see how the other effects play. But again, if we were reasonably in line with last year, then that we would still be very pleased given that, that was such a good level.

[Operator]

And the next question comes from the line of Fredrik Ivarsson from ABG.

[Fredrik Ivarsson, Research Analyst]

One question from me as well. On OpEx, that increased some 10% in the quarter. And understanding that a fair share of that increase stemmed from one-offs related to the virus, what was the impact from those one-offs? And maybe if you could confirm that we shouldn't see such one-offs in Q2?

[Mattias Ankarberg, President & CEO]

Yes. OpEx was up to SEK 20 million or around 10%, as you say. SEK 9 million of those SEK 20 million were due to new stores. And out of the remaining SEK 11 million, there were, I guess, 2 effects. One is currency and the other one is regarding COVID-19, and that is also broken down into, exactly as you said, one-offs, which is more take precautions, hand washing stations, protective covers, equipment to work from home, et cetera. And the other one is more ongoing. People are told to stay home more, so you need more people to have some redundancy for sick leaves, et cetera. And you are right, Fredrik, the one-offs we should see -- we should not see in Q2. But of course, we will probably have to operate with a little bit more staff redundancy, et cetera, given the situation.

[Operator]

[Operator Instructions] And we have a follow-up question from the line of Niklas Ekman.

[Niklas Ekman]

Yes. Two quick follow-ups. Firstly, if you could elaborate a bit on the cash flow being very strong in this quarter. You mentioned here working capital situation, but it's usually working capital rises in Q1. In this case, it fell sharply and you had a SEK 200 million plus positive effect in Q1. Can you elaborate a bit on this? And how much of a temporary nature was this development?

[Helena Nathhorst, Chief Financial Officer]

Yes. Our cash flow is affected by seasonality, and the spring is slightly earlier this year. So we have stronger cash flow earlier coming out. Also, we had some sort of factors from precautions in the cash flow, where we have effect from lower amount of rent prepayments. And then when it comes to accounts payables, we have not used any cash discounts. So some more -- not totally like-for-like behavioral, but especially the sort of earlier season has impacted the cash flow.

[Niklas Ekman]

Okay. And then also a question on the earlier decision here to withdraw the dividend proposal. I know this is a Board issue, but I would still be interested to hear your thoughts here given at that point, you talked about the uncertainty related to COVID-19. And given that COVID-19 so far appears to have been very positive for you, I'm wondering if you could elaborate a bit here? Where you premature in making this decision? Or if you could just elaborate a bit here on what the motives were for this decision?

[Mattias Ankarberg, President & CEO]

Yes, happy to. And I think we can be quite transparent also. We chose -- when this whole pandemic situation occurred, we've chosen to take a quite careful approach, and that included the Board's decision to withdraw the dividend proposal.That was -- I don't know the exact date, but around early mid-March. And I think where we see now sort of 4, 5, 6 more weeks, we can see that the sales has increased and it's been quite positive for us but it's probably -- we're not aware of at the time. So maybe it was premature. But at the time, we were playing better safe than sorry and made that decision early on.

[Operator]

And we have one more follow-up question from the line of Fredrik Ivarsson.

[Fredrik Ivarsson, Research Analyst]

Quick follow-up on the payables. You mentioned that you haven't used any cash discount. Can you confirm that you have maintained that sort of strategy? Or have you started to use more cash discounts already in Q2?

[Helena Nathhorst, Chief Financial Officer]

No, we haven't started using that yet.

[Mattias Ankarberg, President & CEO]

It's usually something that we do in an increasing amount as the spring builds up and where we could see a really good development, maybe that's something that comes into play, but it's, again, something which -- one of the financial tools which is currently in the -- has been in the play safe side. So we'll see -- follow the developments and we activate it, but Helena is right, it's been on the cautionary side so far.

[Operator]

And as there are no further questions, I will hand it back to the speakers.

[Mattias Ankarberg, President & CEO]

Well, thank you, everybody, for joining this call and look forward to speaking again at the Q2 call. Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.