Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, welcome to the Byggmax Q1 report. My name is Glenn, and I will be the coordinator for today's call. [Operator Instructions]. I will now hand you over to your host, Mattias Ankarberg, CEO of Byggmax. Mattias, please go ahead.

[Mattias Ankarberg, executive]

Thank you very much, and welcome, everybody, to this Q1 conference call. As usual, we'll be speaking to a presentation that's available on our IR website. And I will do also, as usual, a bit of a business update to start with before Helena, our CFO, will cover financials, and then I'll come back and summarize with the summary and the outlook.

But overall, I will start off on Page 2. Overall, Q1 is our smallest quarter seasonally in the year, and it's been a quarter which is very much in line with our expectations. For those of you who follow us, you may remember that in the Q4 report, we said that we expect it to be a tough market for at least another quarter. We also said we are focusing on making Byggmax stronger in terms of market share and competitiveness. And we also already then saw some more positive signs in terms of market recovery for the high season or spring summer season. And all of those 3 have materialized, and we'll go through them in more detail today.

But the headline financials are as follows: Q1 net sales decreased by 25% to just over SEK 950 million. A big decline in like-for-like sales of 27% versus very, very strong comparables that we will get back to. We continue to have a high share of e-commerce in the group, just over 20%. Again, the market continues to be tough, and in addition, it was not expected, we had the late arrival of spring in the Nordics, which impacts March. We continue to take market share very consistently as the last 2 years. And importantly, the internal metrics that we can work with all have turned out pretty well. We have a very strong gross margin, the second highest ever for the first quarter. We continue to have very strong cost control and have operating costs below last year despite the inflation pressures and the bigger store portfolio.

We continue to have a very solid control of our inventory and currently at the end of Q1 have a level that is just below last year. And the EBITA decreased in the typically loss-making first quarter to SEK 125 million negative million and the margin to 13.2%.

Now I'll move on to the business update. And on Page 3, we have highlighted me a couple of key trends. The first one is that the over 3-year long store program -- store upgrade program, excuse me, that we are running, is in practice complete. We now have 94% of our store portfolio upgraded to what we call Store 3.0. We've opened 2 new stores in the quarter, both at the very end of the quarter in Norway. We have appointed a new CEO of the group Karl Sandlund, which will start in July 1 this year. And myself have announced in February that I am leaving the company for a different company.

In these times, the Byggmax business model, which is based on low price, is perhaps more relevant than ever, that we see -- continue to see higher interest for discounters or low price operators across the retail industry in the last couple of quarters. So we are very happy, on Page 4, to have confirmed yet again that we have the leading discount position in the Nordics. We have now in March received awards from the best prices in the market with -- from independent service conducted both in the Swedish market and the Norwegian market, which we, of course, are very pleased about.

And on Page 5, I'll explain a little bit about the market situation and also our position or our share gains versus the market. And I'll pause a little bit on this because it's worth explaining. I mean, it is a tough market with also very strong comparables, underlying, which I think is the most important message, we continue to see a similar market situation which we did in the last quarter and actually last few quarters with very hesitant consumers, particularly for larger projects. And then on top of that, we have a negative weather effect from an unusually cold and wet March. And March is, by far, the biggest month for us in the quarter typically, which, of course, then had a additional negative effect in terms of market development.

Also, there are very strong comparables for actually 3 Q1s in a row during the COVID pandemic and also some of them very early spring. So very strong comparables, a tough underlying market and in addition a negative weather effects. There are some bright spots, however. We start with the external perspective, the consumer confidence indicator, which has been all-time low and lower and lower for a couple of quarters, have now, since September, October or so in the Nordic markets, flattened out and started to increase a little bit here in the beginning of the year. So that seems to have stabilized and turned slightly positive, although still at a very low level.

And the housing market transactions continue to be fine. We should remember also that against very high volumes at the start of the year last year and declining at a less steep pace. And then here, I'm talking about freestanding houses. So we will get back to that later, but we also see similar positive signs for the high season in our own sales as we have moved into Q2 instead of Q1. So tough market, strong comparables and bright spots for the coming period.

We have, as communicated earlier, expected this, and we also set our priorities to reflect this market expectation. And in Q4, we communicated that there will be 3 top priorities for us for the year of 2023. And on Page 6, I'll give you an update on the status versus these 3 top priorities. And the whole headline here is to be as ready as possible when the market picks up again. So the first priority for us is to continue to get market share and increase the competitiveness of our company. We feel we are making very good progress on this priority. We have, as mentioned, confirmed the lowest price position both in Sweden and in Norway in March. We continue to develop better than the market, i.e., take market share, which has been the case since we have received public data on the consumer market in 2020 every quarter, that's positive. And we have continued to drive efficiency in the company. We have lower operating costs than last year, and we have an inventory level that is a little bit below last year despite having more stores. So we continue to take share and increase the competitiveness of the company.

The second priority for us this year is to what we call tune in some new growth initiatives. This is not the year where we scale things up at fast pace, particularly not new things, but it is the year when we can prove new concepts. And we have 2. The first one we launched in the last quarter, which is called Byggmax Studio. It's a concept for indoor renovation, particularly focused on tiles and is based on the acquisition we did of Norwegian Right Price Tiles 1.5 years ago. That is up and running and we are continuing to optimize it and look forward to getting it ready to be scaled up by the end of the year.

The second new growth initiatives is something we communicated for the first time today, which I'll say a little bit more about soon. But it's a digital concept, an e-commerce concept for customer-specific small buildings or customized small buildings.

The third priority for us is to be opportunistic and capture opportunities which may not come in a typical market situation. So we continue to see interest for Byggmax in terms of store locations in areas we were probably not offered before, M&A, new brand of suppliers, et cetera. And we continue to evaluate these opportunities very actively. And the opportunity landscape continues to be higher than in the previous years. So that's an update on the top priorities.

And on Page 7, before we turn to the financials, I will share a little bit more about this second new initiative for the year, just to highlight what we are trying to do. It is a new initiative to sell and market customized complementary buildings at the best price. So we are offering the customer is to -- excuse me, complete small buildings. You get a complete package customized by the consumer, which is quick and easy to assemble at a very attractive price. And it works in an e-commerce setting. So it's -- a building is configured online using the tool that we have developed to design a personalized building, which is based on a set of readily available modules and options. The customer gets this home delivered. And it's done in a sort of flat pack version, which can be delivered to the customer's doorstep and assembled by 2 DIY-ers in 2 days and then the building is ready. It is also priced very attractively, particularly in the beginning with 20% to 40% below the existing offers in the market, which are not possible to standardize.

And it is also a concept that we believe can be made very profitable because of our strengths. We have designed this based on the modular construction setup, and we have the sourcing channel for logistics and IT to do this. The ambition this year is to tune it in and to see that it works with the consumers' appetite and we will start launching it under our Skånska Byggvaror brand as this is a very good match without the configurable buildings and capabilities and customer database, and then we'll expand this to Byggmax Group, more assortment in countries full time.

It's a fairly significant market. The complementary building margin in Nordic is SEK 4 billion. So getting this right is a pretty good opportunity for us. So that's a little bit of a more detailed comment on this new initiative. And with that, I will turn it over to Helena to go through the financials.

[Helena Nathhorst, executive]

Thank you. We are on Page 8, the sales development in the first quarter. And we have a sales decrease of 25.1% in the quarter. Even though there is a material decrease, it is, as we communicated, in line with expectations. We saw a very weak consumer market. We have very tough comparables versus last year. We had strong 6 months, and we see the second half [indiscernible] organically in addition, we had the late spring and the cold weather that wasn't foreseen to the same extent.

We have 2 new stores opened in the quarter both in Norway, and as Mattias said, very late in the quarter. In the last 12 months, we have a net of 12 new stores and they contributed with 2% to sales in the quarter. We have no impact from our M&A acquisitions since they are more than 12 years currently. We are active in the Nordics, Sweden the majority, and Norway, our second biggest country. The currency impact in the quarter is a small impact of minus 0.4%.

We have had a long period with a lot of focus on upgrading our stores, and we are now happy to see that the portfolio is more or less complete to high season as planned in 2023. We only have the under-renegotiation stores left, so 94% of the store portfolio is upgraded. We also have a stable performance of our e-commerce share of slightly above 20%, 21%.

Next page, we have the P&L. And it's, as usual, a small quarter in terms of sales. But this quarter also demonstrated strength within costs decreasing in this high inflation environment, and this in combination with historically high gross margin. If we start with the gross margin, it is a decrease to 34.4%. But again, compared to the historic numbers, it's a strong margin in the quarter. We have seen positive impacts combined with impact working the other way. We have lower input prices for raw material related -- to raw material related product categories, and we have improved product mix while working in the other direction is the increased campaign activity from competitors and, to some extent, some scale impact.

Strong, strong cost focus in the quarter, and total operating costs decreased by SEK 14 million. We have adjusted the cost base to meet both the inflation environment and the decrease of net sales. We have had efficiency projects on the electricity and we have taken actions. We have reduced staffing in stores, and we have a lower rate of the development projects ongoing. So in all, the quarter had lower sales but a controlled cost level and EBITA decreased to 100 and -- decreased to minus SEK 125 million.

Looking at cash flow on the next page. We have cash flow from operating activities amounted to minus SEK 98 million in the quarter. It's a decrease versus the same period last year, and this change is obviously driven by the performance, the lower EBIT, decreased accounts payable and earlier payment of taxes versus last year. Net debt amounted to SEK 1.421 billion, excluding IFRS. And there is a slight difference. We have a high seasonality in our cash flow and in our net debt position. And this is slightly different from the historical patterns between Q1 and Q4, affected by the late spring and sales development.

[Mattias Ankarberg, executive]

Thank you, Helena. Two more things from my side before we move to questions. Firstly, we have a new CEO announced. The Board of Directors announced on the 16th of April that Karl Sandlund will be the new President and CEO of the Byggmax Group. Karl is currently the COO of a company called AcadeMedia and has several years before that in leading management positions at SAS and also an experience from working with McKinsey. He will start his position on the 1st of July this year, which makes this the last quarterly call for myself for Byggmax.

To summarize and also provide an outlook, which is perhaps interesting on Page 12. A couple of points, 3 main headings. The first one is that, as we have seen, this is a small quarter which is a weak start to the year but in line with our expectations as mentioned. We did expect the continued tough consumer market for this quarter with low activity for other projects. And in addition, we've had an unusually cold and wet March, or as Helena said, a late spring which we, of course, did not foresee, but that has impacted the market.

We have very strong comparables for Q1. And again, as Helena said, it's a bit softer in Q2 but particularly a different situation when we come to the second half of the year. We continue to take market share, have very strong levels for gross margin costs and inventory.

So the question, I think, for ourselves and for others is where is the market going? And as we communicated in Q4, we did already then see more positive signs for the spring/summer season or the high season, and we continue to see that. And now in April, Easter is a pretty important sales period in the parts of the Nordics where spring typically has arrived. And if we look at Easter sales in our stores in Denmark and in Southern Sweden, where the weather conditions were more similar to last year, we can see that sales was at or above last year's level, which, of course, is a positive sign for us as we move into the second quarter and particularly in the second half of the year. There are also some bright spots in Q1 in terms of macro factors, as mentioned, that consumer confidence is stabilized and turning up, at least from a -- although, sorry, from a very low level.

We are ready for spring. We have more upgraded stores. We have a stronger e-commerce offer. We have the lowest prices confirmed, and we have employees ready, and we look forward to spring arriving and the market picking up in the coming weeks. We continue to focus on our 3 priorities to get us maximum ready for when the market picks up. So our priorities for the year is to take market share and increase our own competitiveness, to tune in these 2 new growth initiatives and to be opportunistic when it comes to new opportunities.

And with that, we conclude the presentation part of this conference call, and I turn to operator to open up for questions.

[Operator]

[Operator Instructions] We have our first question, comes from Benjamin Wahlstedt from ABG.

[Benjamin Wahlstedt, analyst]

So first of all, I was wondering if you could talk a bit about the campaign dynamic. You talked about some increased campaign intensity. Is this -- would you say this is related to customers seeking out better offers? Or do you see an effect internally and that you have to offer more and more attractive campaigns, so to speak?

[Mattias Ankarberg, executive]

Benjamin, I -- the gross margin, as you said, is positively impacted by several factors, but it's negatively impacted by higher campaign activity. I would venture to guess that this is driven by competition rather than consumers. We are in a sort of durables business, I mean, goods purchased more seldomly, so it's typically hard to trigger a lot of activity in the short term from a consumer point of view. But I do think some competitors are still having a bit excess inventory. That would be my guess. I think we've particularly seen campaign activity in Q1 on energy-related products. And I would guess that a lot of payers took in quite a lot of stock as electricity prices were assumed to be very high and energy-related products were supposed to sell very well and then the electricity prices didn't turn out that bad, which means there's quite a bit of overstock. So I would say that the most of it that we'll see, I would guess, is related to competition and stock levels.

[Benjamin Wahlstedt, analyst]

Perfect. And then if you could also comment the relatively weaker Nordics or stronger Sweden, whichever way you want to put it. Is there anything we need to know there?

[Mattias Ankarberg, executive]

You mean differences in market strength between the different countries?

[Benjamin Wahlstedt, analyst]

Yes, exactly. Or -- yes, yes, that's right.

[Mattias Ankarberg, executive]

Well, Denmark is a bit better. Both consumer confidence turned a little bit -- up a little bit earlier in Denmark and also, I mean, spring has been better. There's typically less snow in Denmark and so also this year. Norway has been the toughest, latest with the consumer confidence pick up and also a lot of snow and a lot of bad weather records according to statistics. And I think in Sweden and Finland, I would say that it's fairly similar. It's more to do with the geographic -- geographies, sorry, within these countries, particularly depending on spring arrival.

[Benjamin Wahlstedt, analyst]

All right. Perfect. And then if you could also comment on the, I guess, e-com retail split. It seems that the e-commerce trend has turned around and possibly looking a bit better or at least in line with the physical stores at least in LTM terms. Is that something you can confirm or comment on?

[Mattias Ankarberg, executive]

Yes. I would say that in terms of sales channels, it's fairly similar between stores and e-commerce. The difference is more related to different product categories which play out a little bit differently. But I would agree with you. There was, of course, a big e-com boom during the pandemic times and perhaps a little bit afterwards. And then that may have back lasted a bit. And now I will say there is a more, I don't know, normalized or stable development between the 2 channels.

[Benjamin Wahlstedt, analyst]

And then one final question. In terms of staffing, what are opportunities for continued personnel cutouts, please?

[Mattias Ankarberg, executive]

So we are -- I would say 2 points. First, we are already a sort of cost-efficient run company and we don't have extra hours or extra functions in a lot of areas. So I think from that perspective, the opportunities to go down is not big. However, point two, we are a very seasonal company, and we are very used to operating with a lot lower staff in the low season than we are in the high season. So in this situation, for example right now where spring is arriving later, last year, we had more people in our stores already by mid-March than we have now in a lot of the stores. So we can run the organization with on sort of a low season level for a much longer period if we want to. So that is the opportunity rather than a sort of a structural shift.

[Operator]

[Operator Instructions] Our next question comes from Carl Deijenberg from Carnegie.

[Carl Deijenberg, analyst]

So 2 questions from my side. Maybe first starting on -- you have this very nice graph on Slide #5 in the presentation on the market development. And I have 2 questions on that. Maybe first of all, you're talking about the Q1 development here in '23 being clearly below the equivalent quarter in pre-COVID in 2019. First question is, do you have any feeling of the magnitude there of the decline year-on-year versus '19? And my second question on that as well is if you have any good feeling of the development in the underlying market here in April versus last year, just, I guess, the comparison is quite much is here in April versus Q1 month in the overall market as well.

[Mattias Ankarberg, executive]

Yes. We do [indiscernible] on both those topics. And let's see, I'll look up the exact number, but I -- it's around a negative 15% market size in Q1 2023 versus Q1. 2019. From the top of my head, I think in Q4, we were negative 7%, 8% or so. And I would argue very clearly that the difference between those 2 is just the late arrival of spring in March, which is what it comes out to be. So we're at the same underlying level in Q1 now as we were in Q4, but a seasonality or a spring effect is putting down even further. So it's a pretty big decline for 4 years to be negative 15%. So that's where it is. The comparables -- well, sorry, we'll skip that.

The second point, yes, April will be a better market level than minus 30% is my view. I think it will vary dramatically between the geographies, as Benjamin asked earlier, where spring has started to come pretty far in. For example, Denmark and Southern Sweden, we will see better numbers. But in Norway and in sort of northern parts of Sweden, it will still be a huge decline. On an isolated sort of month level, particularly in these ramp-up periods, it will shift a lot, but it will not be as negative as minus 30% in April is my best guess.

[Carl Deijenberg, analyst]

Okay. Fair enough. My second question is on the planned store expansions here in 2023. Maybe if you could just sort of remind us of your thoughts here, the expansion plans for the full year. And second, also, that your plans on that topic has changed anything here given the market development that we've seen here in the start of the season.

[Mattias Ankarberg, executive]

Yes, we have around, I believe it is 7, 8 stores committed for 2023 or 6 to 8. Two are open -- 2 are opening on Friday and then we have a few more throughout the year. I mean, we see -- we take a bit more opportunistic approach to store expansion going forward. Clearly, we see that rent levels are for new locations are coming down. Clearly, we are being offered Grade A locations, I would say, to an extent that we have not been before. And clearly, with the weak -- I mean, although planned, we are in Q4, focusing on efficiency and keeping the CapEx and inventory, et cetera tighter this year. So we will be more selective and not take expansion opportunities for the sake of it. But the ones that are really attractive and rare to find would probably will find in the assignment, and those we will go for.

[Operator]

Our next question comes from [ Simon S. ] from DNB Markets.

[Unknown Analyst]

So I've only 1 question. I was wondering if you can give us some color on the mix set in Q1? And on so far in April, what kind of categories have been going well and what kind of categories have been going worse and the 30%?

[Mattias Ankarberg, executive]

Yes, happy to. So there is 1 sort of big continuing trend and then 1 a little bit of news. And it's -- so what has been constant now or consistent now for a couple of quarters is what we call bigger renovation projects is still very slow, so above, let's say, SEK 50,000 or NOK 50,000 kind of projects that was down a lot. And that started in Q2, but was very accentuated in Q3 and Q4 last year, and they continue also.

What has been going really well for us is a couple of categories related to smaller projects, and that's also an assortment that we have focused on as part of our particular store upgrades. So we sell still really well on things like flooring, storage, paint, things like that. And then the news, I guess, in Q1 is that we use -- we have had a very strong progress on garden-related for several years, but also throughout also last year. But with the late arrival of spring, we foresee a big decline in garden versus last year now this quarter.

[Operator]

We have our next question comes from a private investor, [ Thomas Backman].

[Unknown Attendee]

I've got a couple. First, a question pertaining to your balance sheet. I mean, your cash flows have been pretty weak for a couple of quarters now and your net debt has increased considerably whether or not you include decent debt. You talk about seizing opportunities in the marketplace, including continue to expand on your store footprint as well as potential M&A opportunities. But do you really have the financial flexibility to pursue that? That's my first question.

[Mattias Ankarberg, executive]

I had a little bit trouble here in the question, but I do believe it was related to do we have the financial strength to pursue opportunities given the current balance sheet. So that is what I've tried to answer. Otherwise, you'll have to come back. And we have a very seasonal business, and it is correct that the balance sheet is less great now than it was, particularly during the pandemic years. But -- and we do have the opportunities to selectively address opportunities. And this is, I think, the message that we've been trying to convey. And we do take a balanced approach. We focus a lot on efficiency. We have inventory and CapEx under control, and we expect to have a good cash flow as we move forward to the high season just as usual. But that's also why we have not made firm commitments on big expansion plans or other comments. So it is a balanced approach, but we do have the capacity to be opportunistic at the right opportunity.

[Unknown Attendee]

Okay. Because my next question also relates to the balance sheet. I mean, hopefully, your loan agreements have some loan covenants. And I was just wondering how much headroom you've got.

[Mattias Ankarberg, executive]

Again, the line was a bit weak. I do believe the question was related to our bank covenants. Yes, we have covenants. We have not communicated them publicly. We will not do so now either. We have -- we are now almost exactly at the net debt-to-EBITDA ratio, which is our target. And of course, we set the target to make sure we have headroom to the covenant. And this is at the sort of lowest net debt period or highest, I guess, period of the year. So that is probably an indication. Again, if I answered the wrong question or if the question was different, please restate. The line was quite hard to read.

[Unknown Attendee]

No, no, no. That answered the questions that I had. Now a third question, which is, to a certain extent, also related to ultimately to net debt and balance sheet, but perhaps more closer then to cash flows. Your inventory, your inventory now stands at around, I believe, SEK 1.7 billion, SEK 1.8 billion. And your core working capital is also above SEK 1 billion. When I say core working capital, [ I won't ] be referring to accounts receivable, accounts payable and inventory. And if you look at your core working capital in the quarter. It's more than 16%, 17% of rolling 12 months revenue. I may be wrong, but I think that's probably a record for your company.

Now I'm just wondering how we should think about the inventory level, the "normalized" inventory level going forward because it's increased quite considerably both in terms -- both in absolute numbers as well as relative to your revenue. So what's the -- and that's of course, part of the explanation for the weak cash flows over the last 3, 4 quarters. So my question is, how should we think about what the normal inventory level is going forward?

[Mattias Ankarberg, executive]

I think you should think about it that -- in the way that it requires quite a bit of specific understanding and analysis, which you seem to be on track of doing, which is good. Inventory levels are in line with last year or just below. If you look at it from a longer time period, you can see that inventory has been driven both by our own expansion and activities, but also, of course, clearly by price set in the market. And did not cover it at length at today's call, but as part of the comments in the Q report, you can see that price levels for particularly raw material-related product categories are coming down quite a bit. So that is, of course, also impacting inventory positively going forward.

And then secondly, of course, there are timing effects in these situations. We always build up inventory ahead of high season. And now we had also an unfortunately late spring. And that is sort of the driving factor in the working capital development over the last couple of quarters. And going through that exercise and having a view on that is probably the best way forward if you're interested to really dig into the details of the working capital situation. It is a quite complex topic. And if it's of high relevance to you, then we can set up something separately [ later ] this call.

[Unknown Attendee]

Yes, that might be useful because if I look at numbers going back 10 years, I mean, regardless of which quarter you look at, things have changed quite dramatically over the last couple of years. And I'm sure, prices of raw materials do affect, obviously, inventory levels because it affects your purchase prices, but it also affects your selling prices and your top line. My last question...

[Mattias Ankarberg, executive]

It does, but not with the same mechanism and the same timing. So I think it seems like we've done a lot of work and some of it is probably insightful, but maybe some of it needs to be further revised. But I would propose we do that in a separate call in the case.

[Unknown Attendee]

I'm always happy to be corrected if I'm wrong. My last question pertains to your cost base. Obviously, you've got a very high focus on making sure that you want an efficient business. But just looking again, and I know it's a slow season, but look, just in looking at the OpEx development. And again, in relation to your sales, again, I might be wrong, but I believe you've set a new record. I mean, if you look at OpEx, including your depreciation and amortization, it's almost 50% -- close to 50% of your revenue. And I'm just wondering if we -- obviously, we will see a seasonal pickup in sales, that goes without saying. But even if you look at this on a rolling 12-month basis, historically, your OpEx level is very, very high. What's your contingency plan if the remainder of the year does not -- if you don't see this apart from the seasonal pickup, if you don't see a general market lift off? I mean what...

[Mattias Ankarberg, executive]

Well, we appreciate your interest in coming into Byggmax, but I think this one needs to be looked at from a quite different angle. And I would not agree with several of the statements you made. But it's a more detailed discussion than that maybe. But to answer your question, what contingency we have, is that based to the question early -- so reflecting back to the question earlier by one of the analysts is that we do already run a cost-efficient business in terms of our operating levels, particularly during the low season of the year. But we do have an opportunity, of course, quite big one, to run the business in the high season quarters with where we sell a lot more than in low season quarters at the low season cost structure if we were to do so. So our flexibility across the seasons is high and has been high for a very long time, and that is something that we can continue to use.

[Operator]

[Operator Instructions] We have no more further questions on the line.

[Mattias Ankarberg, executive]

Thank you, everybody, for participating today. Thank you also for whole lot of interesting conference calls during the last couple of years. This is the last one for me. I will still be with the business for a few months, but the next one conference call in Q2 will be held by Helena, our CFO, and our new CEO, Karl Sandlund. Wish you all a good day.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.