Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the Byggmax conference call. [Operator Instructions] Just to remind you this conference call is being recorded.

Today, I'm pleased to present Mattias Ankarberg, CEO. Please begin your meeting.

[Mattias Ankarberg, executive]

Thank you. Welcome everybody to this conference call. As usual, it is myself, Mattias, and our CFO, Helena, who will take this call, and we will talk through the presentation that's available on our website. So, I will start with the business updates and then Helena will cover the financials.

So starting on Page 2 in our presentation, we had a very good quarter. First quarter of -- really good strong start to the year. We are now facing quite exceptional comparable numbers from last year's COVID period, particularly during the first half of last year. But despite that, we continue to grow quite well. 14% sales increase in total and 1% positive like-for-like. The market has clearly stabilized at a good level, and we continue to take market share, which is very positive.

Gross margin continued to increase for us and cost control was really strong, continues to be driven by acquisitions of new stores, but also in this quarter, specifically through some external factors around electricity prices and currency.

We have, of course, our eyes on supply situation for quite some time, but now particularly so with the horrible and tragic war in the Ukraine -- causing even more disruptions. We have been fortunate to so far have -- continued to have a manageable situation with good supply overall, and Byggmax does not have any suppliers from Russia, Belarus or the Ukraine.

Profit -- operating profit measured as EBITA decreased somewhat to minus SEK 4 million in the quarter compared to plus SEK 7 million last year. For those of you who know us, that's a new level which is clearly well above all years prior to 2021.

On Page 3. So it's been a good quarter, but it's also been a really busy quarter for us. Quite a lot of things happened. We have focused on upgrading our store portfolio through our Store 3.0 concept at a record high pace. We now end the quarter with 81% of the store portfolio upgraded. We opened 2 new stores. We made a small acquisition of the Danish e-commerce company, and we also have launched a new and quite ambitious agenda to climate challenge. All of these points we'll go through in a few minutes.

On Page 4, before we jump into the details, it's perhaps more important than ever to underline the -- competitive position of Byggmax these days, which is the low price position or the discount position. Particularly in these times of inflation and general higher pricing environment, we see that consumers are more price aware and do price comparison more than ever, which typically benefits discounters in -- across all the retail categories.

And we have had a very strong low price position for many years. We continue to have that. And we have starting to get, as this year starts -- in different countries, comparing products in DIY and construction materials and we continue to be awarded and win rewards for the best prices in the markets. So this is an important part as we move into '22, of course.

We also continue -- on Page 5 -- to take market share from the market. And we have data from external institutes now since 2022 -- Norway and Sweden, for the Nordic consumer DIY market, the B2C market, which is what we compare ourselves before. And there are actually 2 important points on this page.

The first one is that the market, which increased a lot during COVID and remained flat all-in-all last -- has now clearly stabilized at the new level, which is clearly higher than before the pandemic, although not as high as during the pandemic. This was the case during the second half of last year, and is clearly a case now in the first quarter. So the market decreased a little bit this quarter, minus 2% to 4%, but still not -- level than before the pandemic.

And the second point is, of course Byggmax continues to take quite a lot of market share. This is in local currencies. So we grew by 13% in the quarter, which is continuing to outperform the market quite strongly, which we're, of course, very happy about.

And this growth or this outperformance comes from the growth initiatives that we are executing. On Page 6 these are outlined. We are mainly focusing on organic growth and we have 3 clear growth initiatives to drive that, which we have been executing now for a few years -- all of them.

The first one is the store upgrades where we moved to what we call Store 3.0, a new concept with more product categories, more everyday DIY so-called product categories, and also a new store format which has a better quality experience.

The second part is e-commerce where we extend our online range quite a lot and provide new or better, more convenient shopping alternatives for the consumer.

Third one is new stores. There are still quite a lot of places in the Nordic countries that don't have a low price alternative, and we try to open in those places. And then lastly, we do add-on M&A when we find the suitable candidate, so to speak. We are looking for companies that fit our low price, low cost model in terms of -- and provide opportunities in terms of geographical or category growth.

And on Page 7 we can see that all these 4 initiatives continue to deliver for us and continue to contribute to our growth also in Q1 2022. The store upgrades we know add about 6% of sales per store. And we have, as mentioned in the beginning, moved very fast to upgrade stores this quarter. So we are now at 81% of the store portfolio upgraded. It was 46% a year ago. So that's providing good results for us.

E-commerce has been a good driver for us for several years. The e-commerce sales declined a little bit compared to the same quarter last year, but this is for natural comparables reasons. If you look at Byggmax branded e-commerce sales, which is the big part, it decreased by 10% on the back of plus 90% last year.

Then more maybe importantly and specifically, if you look at the countries where we had stores in lockdown last year, of course, the only consumer option was to shop through e-commerce. So in those countries, in our case, Denmark and Norway, e-commerce declined compared to last year, but it's still at the second highest level ever. And in the countries where stores were open in Q1 last year, Sweden and Finland, e-commerce continued to grow for us.

And we continue to see, as we've done now for several quarters, that the fastest growth is coming from combining stores and e-commerce and particularly collect@store, pick and collect as it's called in different -- by different companies. So overall good -- continued good progress from e-commerce, but a little bit strange comparables due to lockdowns in some countries last year.

Store expansion. In this case, referring to our organic store expansion, continues to be –- it's a good addition for us, plus 3 percentage points sales in the quarter, 2 new stores opened so far, planning 15 for the year, [ 4 ] new will come now during Q2.

And acquisitions do play a role. And now particularly the less seasonal, Right Price Tiles adds quite a good sales in Q1. And we also made another acquisition of a small Danish e-commerce player this quarter, announced in February, and included in the business as on 1st of Jan.

Right, on the next page I would introduce our latest acquisition briefly. It is a again the Danish e-commerce business operating with particularly 2 brand sites; one called BygMax similar to -- rather very similar to us, and another brand operating also particularly in Denmark, but much smaller site, e-bygstore.

It is the 20 year old company founded by 2 individuals with the idea to offer a wide range of DIY products at the best prices, and have grown basically from zero to DKK 93 million in these 20 years, organically, profitably and always with very high customer satisfaction, and have built a very wide range of 125,000 products available for selling through online particularly, which is quite wide range compared to players in our industry and compared to ourselves.

And we entered Denmark just over a year ago. This is, of course, a very nice addition to our Danish entry, as this gives very good opportunities to strengthen our position within e-commerce and in lot of assortment categories. And also, of course, that the brand is similar, makes integration easier going forward.

In terms of financials, DKK 93 million in sales last year at about 6% EBITDA. And the acquisition is structured based on enterprise value of max DKK 45 million, DKK 38 million upfront and then an additional maximum DKK 7 million based on an earnout performance in 2022. So those are the latest friends joining the Byggmax group.

And with that, I conclude the, sort of, business part of this Q1 presentation. I'd like to mention a few things about our new climate agenda before turning over to Helena and the financials.

So we held the investor update event just late March, on March 28, which is available in our website in terms of video and presentation, where we also announced our new agenda to try to contribute to tackling [indiscernible].

And just briefly on this, we attacked this through 2 main initiatives. Well, the first one is to do what we can to minimize emissions -- greenhouse gas emissions in our own operations and across the value chain, and we have some quite ambitious targets. I'll get back to them in a second.

And the second part, which is to maybe less usual, and I think interesting also from a business perspective is that we see opportunities in circular products. So we are launching something we call Byggmax Green Ventures, which is an initiative to develop and manufacture and sell circular products. Products that fits our offer and then that has a positive climate benefit, and also products that can generate sales and profits.

And in all, we hope and believe that these 2 initiatives together can sort of do more good than harm. So we see a potential to have what we call a positive climate impact, which means that the climate benefits from the circular products should exceed that remaining emissions. First -- as a first step, our own emissions in our own operations, and hopefully, secondly, the emissions from the entire value chain.

So a few comments or details on these 2 initiatives on the next 2 pages. Firstly, regarding the targets for emissions or -- and our actions to minimize emissions on Page 10. And I'd like to introduce that by just saying a few words about how we thought about setting these targets and taking these actions, because we selected a few principles that we think makes sense for us.

Firstly, we adhere to what we call, or what is called in the climate community, first things first approach, which means that all the mitigation hierarchies, which means that it's important to first focus on the emissions within your own operations, so called Scope 1 and 2, because that is your own responsibility. So we put extra focus on that.

We also would like to make sure that all actions we take impact our own value chain. We will not make any climate compensations. We will not buy any carbon credits and we will make no external offsets. And, of course, we would like to be data driven and validated, and we are using the Greenhouse Gas Protocol, the world's most established standard for GHG accounting, and we adhere to the methodology and target process set by the Science Based Targets initiative.

So we have set 3 targets. The first one regards our own emissions, so called Scope 1 and 2, where we have a very ambitious target to reduce emissions by 90% in just over 5 years -- 2027. That is a new target.

The second target regards our emissions from transportations, which is an existing target. So we maintain that, which is to reduce 70% by 2030. And the last one is the target to reduce emissions across the entire value chain where we have a net-zero target. To reach net-zero value chain emissions by 2040, which is also new.

And again, all of this is -- and we have already started taking actions on each, and more information and quantified metrics around this are available in the investor update on our website.

The second initiative is perhaps, again, a little bit more unusual or also maybe more interesting, where we tried to make a difference by investing in circular products, products that fit with our own offer, which we call Green Ventures.

And we've actually already made the first investment already in the company, a startup company called More Wood, which is 2 founders from the DIY and home improvement industry, which have an idea to produce timber beams out of scraps or scrapping from cross laminated timber constructions which is to be burned for heat.

And we act as a part owner and the first customer for the business with an option to become a majority owner if we like. It has an option -- sorry, it has a potential to avoid a lot of greenhouse gas emissions, if successful. And we expect the first products in our stores and e-commerce also this -- already this quarter.

We really look forward to this. It's a completely circular products which has better technical characteristics than the existing product today and will be retailed at the same price as the existing product today. So very interesting first step for us.

We are looking at 3 more investments already as we're currently evaluating during spring, and hope that we get back to further steps within this area within not too long. So that was a little bit extra on the climate agenda since that is very fresh and new to us.

And with that we hand over to Helena to take us through the financial part for the Q results.

[Helena Nathhorst, executive]

Thank you. Let's focus on the financials. And I start with the sales and the store portfolio development in the first quarter.

On sales, we continue to have a growth momentum in the quarter. And as mentioned, despite extreme comparables, we had a growth of 14.4% and like-for-like sales grew by nearly 1% or 0.8%.

It is strong contribution from the acquisitions. We have acquired Norwegian Right Price Tiles and BygMax, and they added 9.4% in the quarter. Also, we have contribution from our growth initiatives, new stores with that 2.8%.

If we look to the sales by geography, we can see that we have a strong sales outside Sweden, driven both by the M&A and also by organic strong growth. We have a currency impact of 1.7% in the quarter.

If we look to the right on the page, we have the store portfolio and the channel development. And in the first quarter we have opened 2 new stores in Sweden [indiscernible], and we have activities also going in the first week of April where we have continued relocations and opening, mainly one new store in Norway. It is also high activity in the store portfolio to improve our upgrading of stores to 3.0 -- to the high season. And as mentioned [Technical Difficulty] Hello? Can you hear?

[Operator]

Your line went silent there for a moment.

[Helena Nathhorst, executive]

Is it okay?

[Operator]

Yes. You're back now, Helena.

[Helena Nathhorst, executive]

Okay. So sorry about that. I think there was something with the line for a short moment. We were speaking about the store portfolio development in the first quarter. We have -- we had –- we spoke about the upgrading and the portfolio development and also [indiscernible] of the e-commerce has a stable and strong position where we had 21% of sales, and still have seen good positive impact from the combination of online and our stores offers. So, in all, our group initiatives, store upgrades, new stores, and e-comm including our add-on acquisition, have all contributed to the growth in the first quarter.

Moving on to Page 13 where we have the profit & loss statement. We have the strong net sales increase in small quarter amounting to SEK 1.271 billion. It is a strong gross margin increase to 35.5%.

Again, in a small quarter, the acquisition of Right Price Tiles has a positive impact on the gross margin in the period as they have a more stable sales curve.

Cost control continues and we see increased cost related to new stores, upgrades and acquisition, and the negative cost impact is driven by electricity costs and foreign exchange rates differences. Performance on EBITA. This decreased slightly to minus SEK 4 million, but is well above the year prior to the pandemic.

Moving on to Page 14, looking into cash flow and net debt. You have a strong cash flow from operating activities of SEK 257 million in the quarter. It's a slight decrease from previous years. It is the growth initiatives and the price increases that has made changes to inventory and to some accounts payable in the quarter.

We have a solid balance sheet and with a net debt position of SEK 792 million. And it's a quarter with high activity of investments in our growth initiatives and the acquisition in total SEK 157 million versus SEK 114 million the year before.

[Mattias Ankarberg, executive]

Thank you, Helena. I will conclude with just a few remarks on the trend versus targets and the outlook for 2022.

So on Page 15 we have our financial targets which were updated just over a year ago, March last year, and we can see now 1 year in that we are trending above the levels we have set out.

Starting with the sales, we have a target to reach SEK 10 billion in 2025, and we are making very good progress to get there, now at the rolling 12 sales of SEK 7.8 billion, up from SEK 7 billion 1 year ago. We have a target of an operating margin or an EBITA margin of 7% to 8%. We're currently at 11.3%, so clearly above there also.

And we have a leverage target of net debt, excluding IFRS 16, it's important to say, so excluding the leases, over EBITDA of being below 2.5x, and as Helena said, we have a strong balance sheet and are currently at 0.8x.

Dividend is targeted to be 50% of net income, and the Board's current proposal through its AGM is SEK 4 per share which would be equivalent of 39%.

We have updated the -- we also, since last year have or will have a CO2 target that we talk about, whenever we talk about financial targets. And we have now moved from one target to track as commented before. So we have updated this last part and we are on track to reach these targets so far. So that was the review of the quarter 1.

And then lastly the outlook for 2022. We are going full steam ahead. We have a positive market outlook in the sense that the DIY market will be larger post the pandemic than before, and which we now clearly see, several quarters in a row it's happening.

And we also now even more strongly see an accelerating shift to discount as we are in the higher price environment or an inflationary environment.

We, from our side, have -- never had this kind of high activity level for growth, so we're operating at a record high growth activity where we, again, upgraded store portfolios to faster extent than we've ever done. We are building out our e-commerce offer faster than before. We aim for 15 new stores this year, and we look for add-on acquisitions where it fits in, and we've started the year with adding the Danish e-commerce business, BygMax.

And then lastly, something we, I think personally feel is also important and a positive is, that we are now launched our updated agenda to tackle the climate challenge with executing already actions to reduce own emissions and hope to have the first own circular products in stores and e-commerce already this autumn 2022.

So that summarizes –- sorry, that concludes the presentation part of this conference call, and we now turn to operator to manage questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Carl Deijenberg of Carnegie.

[Carl Deijenberg, analyst]

So 2 questions from my side. The first one is on the comparison you're facing here in Q2 and maybe more detail on a like-for-like...

[Mattias Ankarberg, executive]

Hello?

[Operator]

It looks like Carl's line just dropped. I don't know if he had bad reception. But, yes, he is disconnected. [Operator Instructions] Okay, and we just had one further question coming through, that's from the line of Magnus [indiscernible].

[Unknown Analyst]

Two questions, if I may. Could you just explain why you haven't got any problem with the sourcing in the Right Price Tiles? Because I thought that that was coming from Ukraine. Am I correct?

[Mattias Ankarberg, executive]

Magnus, that is not -- Right Price Tiles is sourcing private label. But it's not coming from the Ukraine. It's coming from particularly Spain and Italy. There are some chemicals that go into some sort of paints and some sorts of tiles that sometimes come from the Ukraine. That's maybe what you have picked up on. But there are other ways to find those. And then the product supply is coming from Southern Europe.

[Unknown Analyst]

I got you. Just out of curiosity, regarding the latest acquisition BygMax, how are you to have this operational and integrated? Is this meant to be your online strategy to have those in Denmark or are they going to operate in parallel tracks to your presence? I mean is that we're seeing...

[Mattias Ankarberg, executive]

Yes. Exactly. Very convenient integration exercise, just add the letter. No. But in all seriousness, we will integrate this into the Byggmax business. But now there is first an earnout period this year. And then our plans with both the previous Danish acquisition, Lavpris Trae, but also this one, is to use them as entry points or sort of stepping stones into Denmark. As we know retail is detail, and Denmark is a country which, like any other, has its local preferences. So we think it is a really good way to start to acquire something which is already successful and growing. And we have been able to develop the previous acquisition quite nicely in the last year when we were the owner, given our strengths and combining with them. So we will let the earnout period pass and then we will integrate this into Byggmax.

If we have operator on the line, if you'd like to manage further questions, if there are any? Have we lost the operator? Seems like we have lost the operator.

So technical difficulties today, I guess. And since we are not managing the question from our side, I guess, it's difficult to take questions. If somebody can open the line, we will hang on the line here for another 30 seconds just to make sure.

All right. We thank everybody who was dialed in, and we conclude this conference call. And as usual, we are -- information is available on our website, and we try to be available for those investors and analysts who have questions throughout the day. So feel free to reach out if you have anything. Thank you. Bye-bye.