Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2020-Q2

[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. Please go ahead with your meeting.

[Mattias Ankarberg, President & CEO]

Thank you, and welcome, everybody, to this Byggmax Q2 conference call. We will, as usual, speak to a presentation that's available on our website. I will start, and then hand over to Helena for the financials. And we can start with a summary on Page 3. The second quarter this year is the best quarter we've ever had by quite a margin. And obviously, since we are still in a COVID-19 pandemic, health and safety has been the top priority for us also in this quarter. On financials, net sales was up 39% to almost SEK 2.5 billion. Like-for-like was the same, given the negative currency effects. There is an exceptional market growth in the quarter due to the stay-home effect during the pandemic, and we will get back to more on that, of course. But we also see a very good effect from the own growth initiatives that we are executing, and that's about 10 percentage points in growth, including Byggmax e-commerce that increased 62% in the quarter. We have a better gross margin and still a very strong cost control. And in all, that means a very strong conversion from sales into additional profit or massive scale effects. And EBITA increased to SEK 357 million in the quarter, and the EBITA margin about doubled to 14.3%, bringing the rolling 12 margin to 8.5%. And when we come back to at the end, we also are positive on the market going forward. Key events on Page 4. Like in Q1, we have continued to take a lot of precautions to operate in a responsible way during the COVID-19 pandemic. We have, among other things, launched what we call "pay from car" service, which gives consumers more ways to do safe shopping. We have opened 6 new stores in the quarter and communicated a further 4 for the remaining of the year, including the first store of the format for small towns in Norway. And we also were awarded the lowest price position by the Norwegian newspaper, Verdens Gang, in their annual price survey. Turning to the market view on Page 5. It was an exceptional growth in the quarter with a clear effect and strong effect from the COVID-19 pandemic. In essence, people have been more home and spent more money on home improvement, both for sort of work and leisure purposes, and that has led to very strong market growth. And then other factors also added to market growth. Weather always plays a role in the short term and in this quarter, there was an early spring which added to the market growth this year. Longer term, there is also a needs-based DIY demand coming from housing market transactions. Transaction increased during the second half of last year following a couple of negative developments, continued to increase during Q1, obviously, had a decrease during the spring, in the middle of the pandemic, but clear signs of recovery already in June and back to growth for the first half year in Sweden, in terms of house transactions. So also developing positively. Overall, with basically all drivers pointing in a positive direction for the home improvement market, there was a really strong growth, and we estimate that the Nordic consumer market for building materials increased about 20% to 30% in the quarter. The market growth was strongest in April, followed by May and then lower, but still at a very good level in June. On the COVID-19 pandemic, we have basically continued to take the actions in Q2 that we did already in Q1, with a couple of additions. We are in a fortunate position compared to many others in that our stores are located on freestanding properties and not in shopping centers, and we have a concept built on self-service and a lot of the shopping is also done outdoors. But even so, we have taken many precautions to ensure the health and safety of both our staff and, of course, a safe environment for our customers with hygiene routines and cleaning frequency increased and cash point covers, avoiding events, promoting home delivery and washing stations for customers, et cetera, et cetera. And we also, as quickly mentioned before, launched "pay from car" service in May 2020 to give more ways to do safe shopping for customers. It is difficult to use, still, to use the word positive and COVID-19 in the same sentence, but it's clearly a positive financial impact for Byggmax Group from the pandemic in the sense that there's been a positive demand for home improvement, and the disruptions to our business has so far been minor and manageable. So that's on the market. And then on Page 7, an update on our own initiatives, and we get very good effects from our growth initiatives in the quarter. We can go through them quickly, but the store upgrades to -- particularly Store 3.0, continue to exceed our own expectations, which were 3% additional growth per store. E-commerce growth very strongly with Byggmax e-commerce up 62% in quarter, driven by the actions we have taken. Store expansion continues to be on track and continues to deliver good effect. Skånska Byggvaror is on track, and the growth initiatives are kicking in really well. And then our further efficiency improvements are also continuing really well with somewhat increased gross margin compared to last year's very high level and continuous, very strong cost control. So in summary, all our initiatives are performing either at or above our expectations and are adding about 10% sales growth, and a good leverage for profitability. On the following pages, we will give some more details on some of these initiatives. So Page 8, an update on our store portfolio. We keep both expanding and upgrading. We have a focus on new stores, opening new stores in Q2, Q3, which is our high season and upgrading existing stores in Q4, Q1. And the reason is that we don't want to interrupt the operations in our existing stores during the high season. So therefore, this has been a quarter with store openings rather than upgrades. We opened 6 new stores in the quarter, of which 4 in Sweden, and 2 in Norway. We opened the first store of the -- in Sweden successful format for smaller towns. We opened the first store in Norway, in Grimstad. Three of the new stores were 3.0, and 2 of the stores had Garden departments. And 3 of the stores were of the small town format. In all, we are now on 46 stores at 3.0, and that is 28% of the Byggmax store portfolio. E-commerce on Page 9 continues to be a priority for us. And we have, as you may know, if you've been following us, made big efforts over the last 18 months or so that we now see clearly are paying off really well. The Byggmax e-com sales was up 62% in the quarter. There are the same drivers as we usually talk about, that we continue to focus on with a bigger assortment, a better site that we upgraded last year and more delivery options, which we also did a big job on extending last year. And we also now see clearly that the sort of order online, pick up in store or collect at store as it's sometimes called, option is really emerging as a preferred consumer alternative also in our retail category. Byggmax collect@store service, as we call it in our business, represented 14% of e-commerce orders in the quarter compared to 4% in the same quarter last year. And of course, that is a strength for us that has 167 Byggmax stores throughout the Nordics. All in all, for the group, we have 20% of our sales as online sales during the last 12 months. We also, on Page 10, continue to invest in our sort of core strengths. And low price is still the #1 customer criteria when choosing DIY store, and we have a really strong position in all countries where we are, and we have continued to sharpen that. Also in Norway, we were top-ranked and test winner when Verdens Gang or VG did the annual survey on the terrace project, both in terms of lowest price and good quality. Page 11. Our other segment, Skånska Byggvaror is continuing to develop very well, also in Q2, and is on a good path since the turnaround made. The growth initiatives we are driving are kicking in really well, giving very good effects on the increased digital sales and marketing capabilities and programs and also product development in our core categories is contributing nicely to growth. Order intake was up strongly in the quarter, and the financial trend was also positive with a continued positive sales momentum and the profitability improvement for many quarters in a row now. And we maintain the strategy and the focus that we have set out for Skånska Byggvaror to drive these growth initiatives forward while we continue to trim efficiency where we can. With that, I hand over to Helena for the financial update.

[Helena Nathhorst, Chief Financial Officer]

Yes, and we start on Page 11 with the sales development. A very strong quarter, as mentioned, the best quarter in history. We achieved net sales of SEK 2.5 billion for the group, an increase of 38.9% year-on-year. Like-for-like sales for the group at 39.2%. Approximately 25% of sales in the quarter is outside of Sweden, and there is a negative currency impact on sales of minus 3.7% from mainly the movements in the NOK.If we look into the sales by segment, and we start with Byggmax, which represents 90.2% of our sales. Byggmax achieved a net sales increase of 41.2%. Like-for-like sales development in Byggmax at 40.8%, and new stores increased by 4.8%. Skånska Byggvaror increased it sales by 21.3% and like-for-like at 26.3%. The exceptional sales drivers -- the exceptional market, as driven by sales, obviously, from stay-home effect during COVID-19, but we also see the own incentives, as mentioned, adding approximately 10% to sales from initiatives as store upgrades, offering a larger product range, improved e-commerce with a further delivery options and the implemented garden concept. Growth is also -- sales growth has also benefited from our price leader position, our store locations and our strong online presence. If we move to next page and look further on the P&L development, we see the gross margin for the first quarter improved from last year's high level to 31.1%. Product mix improvement, largely from our further store upgrades and Garden product, offset the negative currency impact from the NOK movement. And in all, we have a very strong conversion of increased sales and gross profit. Our comparable costs were stable. Efficiency initiatives, mainly in personnel costs, compensated for cost increase, driven by volume and COVID-19 precautions. And we see the decrease of SEK 7 million of comparable costs, mainly attributable to currency effects.In terms of our increased net sales of SEK 700 million in the second quarter versus last year, improved our operating profit by SEK 224 million and raised the EBITDA margin to 14.3%. The strong conversion of the increased gross profit is realized also in the both segments, where Byggmax increased EBITDA of SEK 206 million; and Skånska increased EBITDA with SEK 80 million. If we move to next page, we have the cash flow and the net debt development. And the strong quarter is reflected in the cash flow as well. We have a very strong cash flow from operating activities in the quarter amounting to SEK 1.254 billion. And the movement is driven by the net sales and earnings development, and to some extent, by increased accounts payable. Our balance sheet is strengthened from the strong performance and CapEx in line with last year. End of June, we have a net position of SEK 47 million compared to a net debt of SEK 563 million in June 2019.

[Mattias Ankarberg, President & CEO]

Thank you. Couple of -- just 2 concluding slides from my end, starting with the positive market outlook on Page 14. As mentioned, there's been a really strong boost of the home improvement market during Q2, driven by consumers working from home, consumers spending time and money on staycation instead of traveling and also other factors, particularly maybe the early spring. Our view is that staycation station will continue also in Q3 and continue to boost home improvement demand. On longer-term drivers, we see that the housing market is also developing positively and back to growth already at the end of Q2 2020. And we also have the view that at least some of this shift in behavior towards staycation should continue also beyond this year. And to conclude on Page 15, our own agenda. Maybe stepping back for those of you who have followed us, we set out a new strategy in 2017 to fix some problems and build out strength and develop organic growth drivers. And in 2018, we turned around Skånska Byggvaror and improved the small town format and Garden concept. And in 2019, we developed Store 3.0 to upgrade stores, and we invested a lot in our e-commerce infrastructure with site delivery options. And now we see really good effects of these initiatives, and we are in a situation where we have a good portfolio of initiatives that we can use to continue drive profitable growth and all the initiatives with more to give. And specifically, for the remaining of 2020, we will continue execute the plan as basically -- as laid out. We will do another 15 to 20 store upgrades during the rest of 2020. That means Store 3.0 will come close to 40% of Byggmax store portfolio by year-end. We will continue to focus on driving growth in e-commerce. We'll open 4 new stores in -- Byggmax stores in Q3, Q4 and continue the growth initiatives, both in Skånska Byggvaror and the efficiency improvements that we have been working on. That summarizes the presentation, and I hand over to operator to take questions.

[Operator]

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

[Niklas Ekman]

Yes, a couple of questions. First, of course, I'm curious about the cost control, which was exceptionally good in this quarter. If I read the numbers correctly, it seems you have basically no OpEx growth in existing stores despite 40% sales growth. Firstly, can you confirm this? And then can you give an indication how sustainable this trend will be for coming quarters?

[Mattias Ankarberg, President & CEO]

Thank you, Niklas. Yes, we can confirm that is the case. We have to break down the OpEx development in the quarter. There is -- just for everybody's clarity, there is some growth in the total OpEx, and that is due to new stores. Looking at what we call comparable costs, which is excluding new stores, it is down in the quarter. But we also are a little bit helped from currency movement in converting in NOK. So excluding the currency effects, we are flat in the quarter. And then with the currency effects, we're down to minus SEK 7 million, I believe, reported. And yes, it's been a really strong performance by the team on the cost control side. I think the initiatives that we have been running to improve our cost position has offset sort of the additional costs needed to operate with a higher volume. And we have been running initiatives to improve efficiency, particularly as Helena said, in personnel staffing, but also a bit in marketing where the digital landscape is providing new opportunities. We confirmed that it was flat comparable cost in the quarter, Niklas, and we believe that we will continue to run an efficient operations at this level going forward.

[Niklas Ekman]

Okay. Excellent. And speaking of own initiatives, you mentioned that as a main driver of sales as well besides the very strong underlying market. You talked about a 10% boost from own initiatives. Can you elaborate a bit more on which were the key drivers of these own initiatives?

[Mattias Ankarberg, President & CEO]

Absolutely. And those are back to the sort of 3 main growth initiatives that we are running. And when store -- new stores was about 5% growth in the quarter addition. E-commerce was really strong, up 62% in Byggmax, and that is a double-digit share of the total business. And then maybe half of it is market, but still, that adds around 3 or maybe a little bit more percentage points. And then we have -- well, almost 1/3 of our store portfolio now is 3.0, and that contributes an additional -- well, more than 3%. So there's another unit or 2 from that. And then we had a really, really strong performance also on Garden in the quarter. So all in all, that's -- and Skånska Byggvaror, I should also mention with very good initiatives kicking in. So all in all, that's around 10%, back to sort of the e-commerce store upgrades and store expansion drivers.

[Niklas Ekman]

Excellent. And can I ask you about the sequential trend here as well? You've mentioned that the sales were the strongest in April, faded somewhat in May, and they were still good in June. But basically, a declining trend. So I assume growth rates towards the end of June were more in the range of 30% rather than the close to 40% for the full quarter. Is that the case? And is that kind of the run rate we should expect going into Q3 as well, a 30% rather than 40%?

[Mattias Ankarberg, President & CEO]

Yes. And so let me answer that in 2 points. Yes, the sort of step-wise development you're describing is correct. I think our performance is probably reasonably similar throughout the quarter, but we had -- we should remember that there was a good growth in this year already in Q1, already before the pandemic. It was good housing market, and we had an early spring, and that probably kicked a bit more for April, and maybe also May than in June. So that development is right, and about 30% for June is also right. And then I think personally that we will not see a positive weather effect for the summer, which helped during Q2, and maybe there's slightly less sort of stay home when at least some travel is allowed, et cetera. So if the market growth, instead of 20% to 30%, will end at 10% or 15% or 5% for Q3, I think remains to be seen. But very likely, still very good and very likely lower than in Q2.

[Niklas Ekman]

Excellent. And also curious about the dividend. You made the decision earlier this year to cancel the dividend. Given that the outlook has become much better than you assume at that point, has there been any change in your view? And are you considering a dividend later this year or maybe an extra dividend next year?

[Mattias Ankarberg, President & CEO]

Well, there are no discussions currently to make sort of an extra dividend for this year, but instead, the discussions are focusing on, of course, next year.

[Operator]

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

[Fredrik Ivarsson, Research Analyst]

Guys, congrats on a good quarter. A couple of questions from me. You stated in the report that you expect the sort of shift in behavior to persist beyond 2020. Can you elaborate a little bit on that statement, please?

[Mattias Ankarberg, President & CEO]

Yes, of course. And we see -- well, in -- if we summarize what happened during Q2 with 2 things, people have spent more time at home during sort of their everyday life and had more -- shifted their spend toward some improvement, but also spend more time in and around their homes on their sort of their free time or leisure time, sort of staycation, if you like. And that has led to people buying more pools and playhouses for their kids, greenhouses and patios and things like this, which is, of course, good for our business. And we believe that this staycation trend will, to some extent, continue also beyond this year. And I guess some indications that we are looking at is, for example -- well, leisure homes are in incredible demand at the moment, with prices up a lot and the transactions in Sweden first half year are up 12%. That points to more people wanting to spend more time in and around their homes. Airlines are flagging that they expect sort of the demand in 2019 not to be seen again until sort of 2023 or maybe 2022. That also points to less travels and less foreign sort of vacations and more domestic. So those are some indications that we see that point to staycation and therefore, a better home improvement market also in 2021. Now we should be clear that when we say better, we are comparing to 2019. Probably not better in Q2 than this exceptional quarter in 2020.

[Fredrik Ivarsson, Research Analyst]

That's very clear. Second and last question for me. On the gross margin, it's up almost 8 percentage points. Is that all owing to operational leverage? Or do you see any other drivers like mix or raw mats?

[Mattias Ankarberg, President & CEO]

Yes. Gross margin is up, and we were really pleased because it was pretty good last year already or very good. And we had a couple of effects. Timber prices is huge for us, and it's been pretty flat. So no real movements there. There is a negative effect from the NOK. There are a couple of things that point positively, some specifically for the quarter and some that may continue. The biggest one is sort of product mix where we -- really, as the 3.0 categories we are adding are better gross margin, but we also have some other good developments. So Garden was a really good development that helped us to mix up. Paint was a really good performance that helped us to mix up. And then also, due to the NOK -- the price levels in Norway have, as usually happens in this industry, increased a bit to compensate for that, and that happened maybe slightly faster than we had anticipated. So all in all, positive mix effects, product mix effects, more than offset negative currency effects.

[Operator]

[Operator Instructions] And as there are no further questions, I'll hand it back to the speakers.

[Mattias Ankarberg, President & CEO]

Well, thank you, everybody, for joining this call. Wish you a good day and a good summer, and talk to you again in Q3.

[Operator]

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