Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2018-Q3

[Operator]

Hello, and welcome to the Byggmax Q3 Report 2018. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Mattias Ankarberg, the CEO; and Pernilla Walfridsson, the CFO. Please go ahead with your meeting.

[Mattias Ankarberg, President & CEO]

Thank you, operator. And welcome, everybody, to this Byggmax Q3 call. Mattias here. We'll go through summary highlights, and then Pernilla will go through financials. And we will use the presentation on our website as a basis for the conference call. Overall, it's a quarter with weaker financial results than last year, but with some positive news. So we continue to make good progress in our strategic plan, but the external factors were challenging also in this quarter. We had a hot summer and continue to see higher raw material prices for timber, affecting gross margins negatively. In all, net sales decreased by 5.5%, and EBITDA decreased to SEK 218 million compared to SEK 260 million last year. We see now positive outcome of the growth initiatives we're running at the Byggmax segment. They contribute well and increasingly to the sales. And we see that in September when we are past the summer heat wave and have more normal market conditions, sales in the Byggmax segment increased by 8%, which is good. We continue to have a high pace in transformation of Skånska Byggvaror, our second segment. And we are happy to see that the negative profitability trend has turned, and we increased profitability in the quarter. EBITDA is up by SEK 11 million compared to last year.Summarizing the financials, next page. Sales ended up at SEK 1.7 billion; gross margin at SEK 30.7 million. And repeating myself a bit, negative effects on sales from the extraordinary warm summer, a significant effect also on the choice to reduce unprofitable sales of Skånska Byggvaror. We'll get back to that. And a positive effect on sales from the Byggmax Group initiative. Gross margin decreased versus last year by 0.9 percentage points. And the driver of -- the negative driver of that is the increased raw material prices for timber, which is Byggmax by far biggest product category. EBITDA again decreased to SEK 218 million. On the Byggmax segment. Sales also decreased but to much lesser extent, decreased by 1.6% compared to the same quarter last year. We see clear negative weather effects of the heat wave in July, where sales decreased considerably, which turned during the second half of the quarter, mid-August, to sales growth. And also again, positively impacted by the initiatives we're running. Gross margin affected by the timber prices, as mentioned. We continue to be very prudent on cost and have really strong cost control, and we have yet another quarter where we have decreased costs for comparable stores in Byggmax. But all in all, given the negative sales and gross margin development, EBITDA decreased by just over SEK 50 million, SEK 51 million to SEK 204.5 million in the third quarter.And beyond the financials, wanted to give an update on the strategic initiatives for Byggmax, talking of Page 5. And the goal for the year was to say we have had a 2017 with a very good profitability in the Byggmax segment, highest in many years, and the focus was to increasingly build for profitable growth during the year. It's something that will give effect over time, but this was a goal for the year. So far, we are happy to see positive effects and good execution of the initiatives and wanted to update -- give an update on that. So far, we have opened 15 new stores this year, 3 in the third quarter. We will end up with 18 new stores in the segment this year in total, so 3 more are planned. We had originally planned for opening 20, and we have moved to high season to enter '19 to optimize financials. As part of that, we have launched 6 new stores of the smaller format for smaller towns, and we see that the new stores start to contribute significantly to the sales by the end of this quarter. We have launched our garden concept, which we introduced or tested in the market last year, last summer, in more stores this year. We now have 13 stores with garden concept included, of which 11 have been opened this year. And we have concluded that both the small format and the garden concept are giving positive effect and will be part of our business going forward. We have also in the quarter continued to develop our e-commerce and continued to add assortment to our online exclusive segment. And we have also during summer introduced new delivery options for selected geographies to provide a better customer offer, in particular in Sweden. All in all, we see that we get positive results from the initiatives. And again, in September, when we had more warmer conditions, sales increased by 8%. And I'd like to spend the following few minutes on pages giving you a bit more detail on some of these initiatives. So on Page 6, we have the store openings for the year. We opened 3 in the quarter, all Byggmax stores, in Malung, Ronneby and Södertälje, all well received. We have plans to open 3 more in Q4, 1 in Sweden and 2 in Norway. All in all, we will end up with 18 new stores or 151 stores in the Byggmax segment, which means we will celebrate 150 stores for the segment, also 100 stores for Sweden during the year. We have moved 1 store, and Skånska Byggvaror closed 1 showroom store in Uppsala at the very end of the quarter. The smaller format for smaller towns is a format we introduced, tested in summer last year. It's important to always remind everybody that this is the same Byggmax experience, same Byggmax brand, same lowest-price offer, but it is an extra cost-efficient Byggmax store. We have now opened 8 of those formats, 6 this year, all of them in Sweden. And we see financial effects in line with our business case positive and that we will continue to open stores of this format as part of our future offer. We also at the same time summer last year introduced a garden department, and this is garden concept the Byggmax way, a focused, narrow assortment, lowest prices and easy to shop with a drive-through solution. It's also -- I want to make clear that it's a concept which is integrated into the Byggmax regular store concept, so it's a department and not a stand-alone store. We launched 2 stores last year. We so far have 13 stores -- 13 garden departments up until now, and launched 11 of those this year. We are happy to see that the first 2 stores, only 2 but still have positive second year effects, and we see that customers are finding us and liking us and coming back for the garden offer. And all in all, we see positive financial effects for the garden and will also include garden in our offer going forward. And on the topic of commercial offer. We are pleased and a bit proud to see that Byggmax was awarded best in test in quite extensive survey in Norway in the third quarter. The Norwegian Consumer Council made a survey of the best DIY stores, measuring customer offer, and Byggmax came out as #1. I'm very pleased to see that on this slide. Summarizing this on Page 10. We are now a bit more than 1 year into our new or updated strategy, and we can now conclude that we have several growth options available for the Byggmax segment, and also all of them are connected to the core business that we have. Today, we have 148 stores and e-commerce in 3 countries with a very clear business idea of having a focused assortment, lowest prices and quick and easy shopping. And we now see that we have the tools and concepts available to ramp up store expansion. Whitespace still remains. We have a new format to address more of the markets, smaller towns. We have garden department, which is a big category where we can complement our existing business. And we continue to expand our online exclusive assortment to complement our store offer. Turning to our second segment, Skånska Byggvaror, starting with the financials. Sales decreased by over 33% in the third quarter, driven both by our active choice to reduce unprofitable sales and negatively affected by external factors. Gross margin has increased back to the high levels we have seen historically. Costs have decreased quite a bit in the quarter due to 2 factors: one is the restructuring program that was announced at the beginning of the year, and the second one is lower marketing cost in the quarter as a consequence of the choice to decrease unprofitable sales. All in all, despite much lower sales, we turned the profitability trend -- the negative trend into a positive development this quarter, and EBITDA increased by just over SEK 11 million versus last year. Margin up to 11.5% compared to 3% last year.Also updating you on the strategic plan for Skånska Byggvaror on Page 12. We continue to execute this transformation according to the plan that we have set out. The goal for the year was to have a transformation year and end up with a business that is focused on Garden Living, complex building products for the garden, so to speak, and a stronger and more profitable core business. So a more focused company and with a more profitable core business. And we continue to execute this according to plan. We have reduced unprofitable sales. We have good gross margins, and we've taken out costs. And again, pleased to see that we turned the negative profitability trend in the quarter. Going forward, we have more work to do. We continue to execute the transformation plan to continue to trim costs, and we also now add some growth initiatives to increase sales during the coming years. Commenting also on the market, before we turn to the financials in more detail. We see that there's been a decreasing Nordic consumer market in the third quarter. We continue to have -- to lack good external market data for the consumer DIY segment, and we continue then to reflect Byggmax's proprietary consumer data and the external market forces that are available. All in all, looking at the consumer market for do-it-yourself product or consumer market for building materials, we estimate that it decreased 4% to 6% in the third quarter, primarily driven by the hot summer. We had a particular negative impact due to weather in the first half of the quarter, in particular for outdoor product -- [ or ] projects, sorry. We see that the Swedish market is also somewhat softened by a bit more passive consumer behavior, which we feel is in line with market data that we see. Norwegian market is more mixed, slightly positive. And the Finnish market, apart from the negative weather effects, is on a positive underlying trend. We also see that the weather effects are normalized and neutralized by September, which we feel were in line with last year.By that -- sorry, with that, I hand over to Pernilla for the financial overview.

[Pernilla Walfridsson, Chief Financial Officer]

Thank you. Profitability, measured as EBITDA, decreased to SEK 218 million. As Mattias already mentioned, the cost was affected by challenging external factors of summer and higher raw material prices of timber, which affected gross margin negatively. Sales in the third quarter decreased by 5.5%. Sales for the Byggmax segment decreased 1.6%, highly affected by the warm summer. In the first half of the quarter, sales decreased. Sales increased during the second half of the quarter. The 15 new stores opened this year now generate a significant contribution to overall sales. Sales for the Skånska Byggvaror segment decreased 33%, negatively affected by the choice to decrease unprofitable sales but also impacted by the hot summer. Net sales for comparable stores were down 12.6% in local currency. Comparable stores include e-commerce Skånska Byggvaror, which affected by the choice to decrease unprofitable sales. Noncomparable stores increased 5.7%, and the strategy to increase the pace of establishing stores shows positive results than in sales growth from noncomparables.The weaker -- the weakest sales month of the quarter was July, which also is the largest sales month in the quarter. The gross margin decreased 0.9 percentage points compared to the same quarter last year. The gross margin for the Byggmax segment was negatively affected by significant higher raw material prices for timber. And for other product categories in total, the gross margin increased compared to last year. The gross margin in Skånska Byggvaror increased significantly in Q3 and are now back on historical high level. The gross margin for the group was impacted positively by currency effect, positively by the NOK and negative by the euro. Other external expenses decreased were SEK 2.7 million in the third quarter. We have continued to trim cost in the Byggmax segment. Cost for comparable stores continue to decrease also this quarter. We have now managed to cap comparable costs for 6 out of the last 7 quarters. We also significantly decreased costs in Skånska Byggvaror, both as a consequence of restructuring, but also decreasing marketing cost a lot this quarter due to reduced unprofitable sales. Operating expenses were negatively affected by new stores, and this amounted then to SEK 23 million. The net financial items were SEK 1.6 million lower than in the same period 2017, and that is due to the exchange rate effect. And the third quarter generated a cash flow from operating activities in line with previous seasonal patterns. I'll then hand over to Mattias again.

[Mattias Ankarberg, President & CEO]

Thank you, Pernilla. Well quickly, an outlook and a summary. We see that there were some challenging conditions in the third quarter but that the markets are starting to normalize at the end of the quarter. September was more normal with the weather, and the raw material prices on the timber category are as historically increasingly reflected in the consumer prices, and there is a smaller or a less negative effect by the end of the quarter compared to going into the quarter. We do see that the Swedish market is somewhat softened by what we perceive to be a more passive consumer behavior. And we think it's important also to note that we feel that Byggmax segment is very well positioned with a strong low-price concept, typically benefiting even in a somewhat more modest market development, with a good position for stores and for e-commerce.Summary, overall, on Page 23. Challenging conditions normalizing by the end of the quarter, positive effect of the growth initiative for Byggmax and a turnaround of the negative profitability trend for Skånska Byggvaror. Those 3 statements, we end the presentation and open up for questions.

[Operator]

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

[Niklas Ekman]

Yes. I'd like to start if you could just elaborate a bit on the sales development here during the quarter. You talked about a like-for-like sales decline of 12.6%, and I'm assuming that around 5 percentage points of that decline comes from Skånska Byggvaror, meaning that the core Byggmax format was down by around 7%, which you can compare to the overall market, which was down 4% to 6% during the same period, according to your statement. Is that a correct assumption? Or am I missing something?

[Mattias Ankarberg, President & CEO]

Thank you, Niklas. Good question. And in total, you are roughly right. It's true that like-for-like numbers include pretty much all of Skånska Byggvaror's business at its stores and e-commerce, and your estimate for Byggmax like-for-like is reasonable. And it's largely in line with market development for like-for-like, you could say. We feel that we hold like-for-like sales versus market well in Sweden, where we are clear #1, and we take significant market share due to our store expansion. In Norway, where we are #2, we -- and it's more fragmented, we are not sure we're taking market share on a like-for-like basis. However, with the store expansion, we feel we could also take market share in Norway. And in Finland, where we have both closed a few stores and also changed strategy a bit to increase profitability, we probably don't take -- well, we, obviously, we do not take market share.

[Niklas Ekman]

Okay. And if you look at the statistics from Byggmaterialhandlarna, it's been quite positive during the summer. But I guess, this is the figure that is significantly boosted by newbuilds. Is that the main reason for the discrepancy between the kind of the business-to-consumer and business-to-business market?

[Mattias Ankarberg, President & CEO]

Yes, I think that's absolutely right. And I think you see also that when you look at the total numbers in that market versus ours, where the smaller [ number ] compared to where profit is bigger. So absolutely right. Continue to be driven, as we state, by professional segment and newbuilds.

[Niklas Ekman]

Okay. And then just on the same theme, you're looking at September, when you talk about 8% growth for the core Byggmax format, if you strip out the expansion that means you are seeing a modest like-for-like growth of 1% to 2%. Is that a correct assumption?

[Mattias Ankarberg, President & CEO]

Yes, I don't want to comment on specific month like-for-like in a specific segment, but you're completely right that it's not a huge factor either way for like-for-like for the Byggmax segment in September. That's correct.

[Niklas Ekman]

Okay. And turning to the gross margin. You mentioned timber prices which are up by nearly 15% year-over-year. I think in this quarter you've had still limited ability to forward this to customers, but can you say anything about the expected impact going forward? Is this something that you will have fully forwarded here by the start of Q4? Or what's the time line for this?

[Mattias Ankarberg, President & CEO]

It's a great and important question, and your statement about the huge risk is absolutely correct. And not fully by start of Q4 is the answer. We hope that it will sort of neutralize by end of Q4. It is important to say that we feel that we need to follow our pricing strategy. We have a low-price concept, and we promise the customer to have the lowest and the best price. So if the market as such increases prices, we will follow. We do see that, that has happened to some extent during Q3. And we do see that raw material increases which have continued until at least half of Q3 are not that as frequent. And we do see that the margin pressure is decreasing month by month in Q3, but still somewhat negative effect going into Q4, although less negative than in Q3.

[Niklas Ekman]

Excellent. And you've been clear that this has been a year of transition, where we've seen a very negative sales development for Skånska Byggvaror. And this started to some extent in Q4 of last year. Does that mean that this effect is now essentially behind and we should see, I guess, at least less decline in Q4 and maybe even improved sales development in 2019? Is that a fair assumption for Skånska Byggvaror?

[Mattias Ankarberg, President & CEO]

For 2019, we hope and plan that you are correct. We -- for what this report in Skånska Byggvaror sales for Q4 is to a large extent what the customer has bought or demand in Q3 given the lag between orders and deliveries in the business model. So -- and we start with the initiatives to reduce unprofitable sales, et cetera, during Q4 last year. So I think as of Q1, you should think about us meeting sort of comparable numbers in terms of strategy.

[Niklas Ekman]

Okay. And then what is a reasonable assumption going forward for Skånska Byggvaror, maybe not for 2019 but at least for 2020? I mean, you look at your EBITDA in 2016, it was at SEK 55 million for Skånska Byggvaror. Is that a reasonable assumption that you could get back to those levels, even though your sales level for the group is now -- for Skånska Byggvaror is now considerably lower? Is that a reasonable assumption that you can get back to those SEK 55 million?

[Mattias Ankarberg, President & CEO]

That's, of course, a great question, and obviously, I can't answer on the exact numbers. But I mean in terms of business concept, we see that Skånska Byggvaror has a fantastic core business with complex products, buildings for the garden with conservatories and green houses and some sheds, et cetera. Well, there's been a lot of other things added which did not generate profits, and the cost added. So we see that by going back to the core and investing in the core and developing the core, we should be able to make as much money out of that part of the business as we did with the previous -- previously. So we can maybe get back to you once we are done with the transformation year and describe our future plans a bit for Skånska Byggvaror to help you make financial estimates, but that's the business concepts we are trying to build here, at least the same profits as we did before in the core business.

[Operator]

[Operator Instructions] And we'll go back to the next question from Niklas Ekman of Carnegie.

[Niklas Ekman]

Okay, I keep -- I'll keep asking questions. Looking at the financial targets that you repeat here in the result statement, you're talking about organic growth of 10% to 15%. Obviously, we've seen a fairly sharp decline in 2018. EBITDA margins of 9% to 10%; you're at 7% on a rolling 12-month basis. But you do say that your aim is to get to these targets in 2019. Is that a realistic target? Or isn't it going to take longer to get to that kind of sales and margin developments?

[Mattias Ankarberg, President & CEO]

Another good question. I think you're completely right that we did set those targets, and we did try to be very clear also that we were aiming to be ready to deliver on them by 2019 and that 2018 would be a transformation year, as we called it. So we do feel that the initiatives we have launched are giving the effect that could take us to that level, both in terms of growth and profitability in 2019. So we feel in that sense on track to deliver those kind of financials. We're obviously, given the year, have respect for what external circumstances can do to the financials, both short-term things like weather and unparalleled raw material price increases in our biggest product category. And then of course, we don't know where the overall sort of market will head for the next 1 to 2 years. But from an internal perspective and what we're doing with the business, we feel we are meeting up to the goals we have set out.

[Niklas Ekman]

Okay. And then finally, from my end at least. Your dividend, is there anything you can say about the earnings development year-to-date being down 30%? Your net debt to EBITDA has moved up a little bit. I guess, the issue of Skånska Byggvaror and the goodwill associated to that business is still lingering a little bit. Is there any risk that you see at this stage that the dividend might need to be lowered given the earnings development this year?

[Mattias Ankarberg, President & CEO]

It's a good question, Niklas. And I think we will have to summarize that by the end of the quarter and get back to you on that. But obviously, we need to consider the financial development for the year when we -- when the board proposes a dividend for 2019. It's a vague answer, and we'll have to get back to you.

[Operator]

[Operator Instructions] And it seems we have no further questions. So if I could hand the call back to you, Mattias and Pernilla, for closing comments.

[Mattias Ankarberg, President & CEO]

Thank you, everybody, for joining. And thank you, Niklas and operator. Look forward to talking to you again in Q4.

[Operator]

That concludes our call. Thank you for attending. Participants, you may disconnect your lines.