Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2019-Q2

[Operator]

Hello and welcome to the Byggmax Q2 Report For 2019. [Operator Instructions] Just to remind you, this conference call is being recorded. And today, I'm pleased to present Mattias Ankarberg, CEO; and Pernilla Walfridsson, CFO. Please go ahead with your meeting.

[Mattias Ankarberg, President & CEO]

Thank you and welcome, everybody, to this Q2 conference call. We will use the presentation on our website as the basis for the conference call. Overall, as a heading for the Q2 is that most things developed really well except the market. In our business gross margin is up and as a unit, we continue to have very good cost control. We continue to see very good reception of new Byggmax stores, and we continue to increase profitability in Skånska Byggvaror. Overall, the earnings are about the same as last year with EBITA excluding non-recurring items down SEK 2 million, SEK 133 million versus SEK 135 million last year. And if we would have looked at the results the way did last year, i.e. excluding IFRS sub 16, it will also be approximately the same as the year before, down SEK 4 million. The market is more cautious in Q2. We feel that the consumers are a bit more passive and this is also evident in public information, particularly around the Swedish market. We continue to take a lot of market share particularly in the Byggmax segment and doing well also versus the market on the like-for-like basis. Going forward, we believe that there is a little bit of reason for optimism both on the market side in the shorter term and the longer term and also on the gross margin side. I will come back to that later in the presentation. On Page 3 in the presentation, we summarize the results for the quarter. Net sales in Q2 are up by 3.9% year-on-year. The Byggmax segment is the driver as with previous quarters and grew 5.6%. Like-for-like sales decreased by 1.8%. Gross margin increased by 0.5 percentage point compared to the same period last year and we see a positive effect of the price mix and negative of currency. Cost controls remains solid and almost all the cost increases in the quarter are explained by new Byggmax stores. And again, EBITA excluding non-recurring items are in line with the same period last year of SEK 132.9 million compared to SEK 135.3 million and about the same difference if we look at EBITDA excluding non-recurring items and not considering IFRS 16. Overall, the improvements in gross margin and the solid cost control almost offset the decline in like-for-like sales and relate to about the same result as last year. Or we could also say that for the first half year in total net sales is up almost 5%, 4.9% and EBITA excluding non-recurring items increased to SEK 55 million compared to SEK 38.5 million last year. Turning to Page 4 looking at the market. We -- excuse me, we see a more cautious consumer market in the second quarters. We estimated to have decreased by 2% to 4% in Q2. As you may remember, we had 2 quarters of growth behind us in Q4 and Q1 and this is now a shift to a weaker market at least in for this quarter. We feel that consumers are more cautious and the couple of data points around that. The National Institute of Economic Research for Sweden states that the Swedish households intent to renovate decreased in Q1 following improvements during the second half of last year. We also see data that lower shares of Swedish household plan to use the ROT tax deductions to renovate this year. And we continue, on our side, to see a more passive behavior on the larger and more expensive projects. Weather conditions were for the quarter in total about the same as last year. There are factors that suggest a more positive development going forward both in the very short term and the longer term and we will come back to that at the end of the presentation in the outlook part.Sales development in Q2 on Page 5, breaking that down to 3.9%, we see that the Byggmax continued to do really well with plus 5.6%. Like-for-like is down 1.8%, which is somewhat and we believe better than the market in total. We are supported in our Byggmax segment like-for-like by a very strong sales of Garden in the quarter. New stores continue to contribute really well with the increased in non-like-for-like stores of 7.1%, and we continue to take market share with the Byggmax segment. Skånska Byggvaror's sales is up by well almost flat up by 0.4%. The order intake in the quarter was somewhat below last year. We see good growth -- healthy good growth in the most of the core product categories in the quarter looking at the order intake but the decline in more expensive projects and some of the non-core categories as a result of their shift in commercial model conducted last year. And then we have a our little other segment which represent just a little bit north of a percentage point for the group sales. So very small, where there is a negative development in both the sales and the profitability specifically for Q2. And for the other segment, we have -- among few other things, we have our online-only company Buildor and our internal distribution company we use for logistic services for our group. And on the sales side, it's mainly Buildor, which had a quarterly worse development than last year, meeting good comparables and tougher market and weaker development. And on the profitability side its mainly a shift between quarters in the distribution company. So a small segment, but fluctuations between the quarters can be material. But overall sales development has continued strong market share gain for Byggmax, continued very good development on the non-like-for-like stores but the weaker like-for-like in line with the weaker market. Turning to our agenda on Page 6. For the Byggmax segment, we stick to our focus of driving what we believe is long-term profitable growth through focused growth and developing an even simpler and more efficient operating model. We will continue to drive on the growth side store expansion into white spots taking market share where there is no low price competitor, particularly we're communicated the target of 12 new stores this year and about 5 of those are the format for smaller towns. We continue to upgrade the offering of our existing stores and for this year plan to open 8 new Garden departments and to upgrade 15 existing stores to what we call Store 3.0, come back to that. And to continue to develop our e-commerce with a wider assortment, more delivery options particularly. On the simplicity and cost side, we continue our work to improve in Finland and then we continue this to trim our cost and simplify our business.Store openings on Page 7. As I just mentioned we plan to open 12 stores this year of which 10 in Sweden, 2 in Norway and 5 in Sweden of the smaller format. We have opened 8 so far of which 5 are the smaller format and 7 of those are in Sweden and 1 in Norway and as mentioned earlier, new stores contribute well to the sales increase for Byggmax. We continue to upgrade our stores and we would like to mention particularly 2 parts, the Garden Department and the Store 3.0. And the Garden is for those of you who followed us. Garden is, sort of, the Byggmax way with lowest prices and easy to shop with the drive-through solution or Garden product and projects. We have opened 6 Garden departments this year so far and now have 20 stores for the Garden department and we had a very strong development of garden sales during Q2. Store 3.0 is our initiative to upgrade the existing stores to be more complete also for smaller projects where we are historically very strong on the heavy building materials. We have added assortments in electrical installation, ventilation, grafting and smaller garden department. We have converted 13 existing stores to Store 3.0 so far and we continue to see positive indications on the sales for Store 3.0. We've also on Page 9, we are pleased to be recognized publicly for our customer offer. We see on the left-hand side several examples of external service or Byggmax citing as the #1 price leader in the Nordic region winning external surveys both in Sweden and in Norway, both in stores and for home delivery i.e., e-commerce. On the right-hand side, we are also pleased to be recognized for our product quality where recently there was a Swedish survey, independent survey in the paint category who awarded Byggmax the best in test for our own private labeled paint. On Skånska Byggvaror on Page 10. As mentioned, we continued to improve profitability in the quarter. Again for those of you who have followed us, you know that we had a large transformational Skånska Byggvaror at particularly during 2018, and we continue to see the positive effect of that work. We commented earlier on the order intake but the profitability for Skånska Byggvaror continues to improve now in Q2 driven by better order intake in the earlier period, higher gross margin and improved efficiency on the cost side. And we now have 4 quarters consecutively of improved earnings for Skånska Byggvaror. Focus is, as it was when we entered the year, to build for profitable growth and we continue to drive growth initiatives within our core assortments within sales and marketing and of course, simultaneously we continue to improve the efficiency of the business. With that, I turn to Pernilla to go through the financial overview

[Pernilla Walfridsson, Chief Financial Officer]

Yes, IFRS 16 accounting standard was implemented January 1. This had several implications on Byggmax through its profit and loss on balance sheet. I will not go through this in detail this time but on Page 13, there is a description of the impact on Byggmax Group's financials for Q2. Sales in the quarter increased 3.9%, gross margin increased 0.5 percentage points, cost control remained strong. The increase in cost for the quarter was largely attributed to new Byggmax stores. Profit for the quarter measured at EBITA excluding nonrecurring items was in line with last year. During the first half year, sales increased 4.9% for the group, gross margin increased 0.8 percentage points, cost control has been strong, adjusted EBITA increased SEK 17 million, just at -- is SEK 55 million for the first 6 months. Sales in the second quarter increased 3.9% driven by the Byggmax segment which grew 5.6%. New stores performed well and non-comparable stores drive 7% growth for the Byggmax segment. Sales for Skånska Byggvaror, fairly flat against previous year. Gross margin increased 0.8 percentage points. The gross margin was positively impacted by price mix effect and negatively impacted by currency effects. Excluding effects of IFRS 16, the cost of personnel and other external expenses increased by SEK 31 million. Compared to the year-earlier period expenses were negatively affected by new stores opened after second quarter 2018, SEK 23 million. Comparable costs, defined as cost excluding new stores and nonrecurring items increased SEK 7 million, but these costs decreased by SEK 5 million for the first 6 months.Regarding the Byggmax segment, a strong gross margin offset most of the effect of the decreased sales in comparable stores. New stores impacted EBITA negatively by approximately SEK 3 million. Adjusted EBITDA decreased to SEK 113 million. Adjusted EBITA for Skånska Byggvaror increased to SEK 21 million, improvement driven by higher order intake in the earlier period, improved gross margin and efficiency improvement. And then variation in the quarterly purchasing patterns for Byggmax resulted in reduced profitability in the fully owned distribution company that is then included in the Other segment. Negative development of SEK 6 million in net financial items. Net financial items for the quarter was negatively impacted by exchange rate effect. However, currency impact decreased compared to the same period last year. Net financial items was also negatively affected by IFRS 16 of SEK 8 million. Excluding the impact of IFRS 16 cash flow from operating activities increased by SEK 74 million in Q2. Excluding the impact of IFRS 16, cash flow from operating activities amounted to SEK 443 million for the rolling 12 months. Excluding effects of IFRS 16, net debt decreased SEK 288 million in Q2, strong cash generation in our existing business, cash generation strengthened by improved working capital. I'll then hand over to Mattias, again.

[Mattias Ankarberg, President & CEO]

Thank you, Pernilla. Well to close things off, 2 Pages in performance on first the outlook going forward. And again, we see in Q2 that most things develop really well except the market side, where we feel that consumers are more cautious in Q2. Consumer market decreased 2% to 4% and that was following 2 quarters of growth. We believe there are several factors that have -- indicate the reason we are optimistic going forward, both on the market side and on the margin side. We start with the market side. Last year summer was really hot and demand was softened by that. There is bigger needs and more work to be done during the important summer months for Byggmax this year. We also start to see signs of a stronger Swedish housing market and we know more transactions also are coupled with renovation work and long-term renovation needs are still big for many years to come. On the gross margin side, we see -- start to see a positive effect of the timber category in the quarter and the timber raw material prices are continuing to decline.Summarizing things on Page 25. The things we have -- that have developed really well except at the market have led to an increased sales and a stable profit for the quarter, again, more cautious market in Q2 following 2 quarters of growth and a bit more positive outlook going forward. And we are happy and pleased to see that the positive effects that we see in both Skånska Byggvaror and Byggmax are an effect of the initiatives that we are driving. We feel positive on the agenda going forward.With that, we hand over to operator to take your questions.

[Operator]

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

[Niklas Ekman]

Yes, a couple of questions, if I may. Firstly, if you could comment a little bit about the development during the quarter. I mean, based on your comments here about a weak overall market in Q2 and that you're optimistic on the outlook. Is that you've seen a weak start of the quarter and a strong branding and then some very strong current trading as well given the comps are quite easy from last year. If there's any more flavor you could add there, that would be helpful. That's my first question.

[Mattias Ankarberg, President & CEO]

Thank you. Well, when you come into individual months, of course then weather and calendar effect come into play. And overall, I mean, the quarter started strong in April, partly because weather was really bad in April last year, May was clearly slower and June was better. So good start, weak middle and a better end to the quarter when we look at sales trend.

[Niklas Ekman]

Okay. Excellent. Thank you. And then when you talk about large projects being affected the most, yes, we're seeing flat sales in Skånska and we're seeing negative like-for-like sales mainly in Byggmax, which I believe does not have as much exposure to large projects. So is there any other reason why Byggmax, in particular, is down in this quarter?

[Mattias Ankarberg, President & CEO]

Thank you, Niklas. And let me clarify that with the -- Skånska Byggvaror model works in the way that order intake is registered in the quarter and then the projects are delivered to the customers typically 1 to 2 months later with these complex projects that are assembled and delivered to customers with some lead time, therefore sales is recognized as the order intake. So if we look at the sort of underlying demand in the quarter. Byggmax like-for-like is down somewhat, 1.8%, and Skånska Byggvaror's order intake for the quarter is also down somewhat. Skånska Byggvaror is doing well on most of their core categories but for the order intake, for the larger, more expensive projects, it's down also in Q2.

[Niklas Ekman]

Okay. Thanks for clarifying that. And I believe you talked earlier, I mean previous quarters had been very much focused on cost reductions than in Skånska Byggvaror. Now I guess you've talked -- for a long time you've talked about how Q2 should be the quarter where you start to shift more towards sales growth, focusing on sales growth, and yet again you're seeing flat sales and a negative order intake. I guess maybe the magnitude of these sales-enhancing efforts is lower than we had anticipated and you have this tougher market, or is there anything else just to indicate what we can expect in terms of sales-enhancing efforts in the quarters ahead?

[Mattias Ankarberg, President & CEO]

Well, we have seen, just so you know, positive order intake, good growth in Skånska Byggvaror in Q1 and now it's somewhat below in Q2 and you are right, we have talked about positive expectations for positive sales development in Q2 and Q3. There is now a very small positive sales outcome in Q2, 0.4%. Most things are doing really well, the sales-driving initiatives are paying off and generating results. The negative effects we are seeing is on the more expensive projects, which are declining in order intake.So I think in terms of the development of the business, we continue to drive the sales-driving initiatives with good result but are facing a market which is tougher, particularly on those larger, more expensive projects.

[Niklas Ekman]

Okay. Excellent. And this 40% drop in other, which you say is mainly due to Buildor, I mean if you look at the other segment, that's been a quite weak development for a long time. Any particular reason or anything that particularly has gone wrong or is there a shift in your model, where you are moving away from loss-making transactions or what's behind that sharp contraction in an otherwise quite strong growing online market?

[Mattias Ankarberg, President & CEO]

Thank you the opportunity to clarify that. Well, Buildor is a small company and there has been a lot of changes. And we are facing -- overall, Buildor has developed well for the last couple of years and we have started to shift a few things. We are facing our good comparables for the quarter for Buildor specifically. And the effect of the changes -- sorry, the effect of the sales in Buildor is not as dramatic at all on the profit side, so there are other things that we are doing. Then there are also some things that we are clearly not happy about that could have done better in the quarter. So a small unit, which we are doing some changes to and we think quite comparables and also some things that we could have done better clearly.

[Niklas Ekman]

Okay. Fair enough. And also if you could say something about this 3.0 Store format. If you could say anything about how that has developed so far? If you see any tangible change to sales or earnings after converting to 3.0?

[Mattias Ankarberg, President & CEO]

So we are still -- we are optimistic on that. And we continue to see good indications and in our business case, we were talking about a few single percent sales increases that are expectations and with better gross margin on these products. And now we have converted 13 stores during this year, so we have basically a quarter, maybe 4 months for some of the stores to evaluate the outcome and it is in line with what we had hoped. So we will, of course, make a more thorough evaluation when we are through the high seas in hereafter somewhere, but so far positive.

[Operator]

[Operator Instructions] Okay, it looks like there are no more questions registered at this time. So I hand the call back to your, speakers, for your closing comments.

[Mattias Ankarberg, President & CEO]

Well, thank you, everybody, for listening in. And wish you a good summer and talk to you in Q3.

[Operator]

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