Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the Byggmax Q3 Report 2019. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Mattias Ankarberg, CEO; and Karl Lindström, CFO. Please go ahead with your meeting.

[Mattias Ankarberg, President & CEO]

Thank you, operator, and welcome, everybody, to this Byggmax Q3 conference call. I have, as the operator mentioned, our interim CFO, Karl, with me as well, and I'll go through the presentation and then we'll take questions. We will use, as a basis for the conference call, the presentation available on our Investor Relations website. And we can start overall on Page 2. The third quarter is -- captures the peak season for Byggmax and it's the largest by sales, and we do a good result in Q3. Net sales increased and profit increased. Net sales is up almost 6%. We have a strong gross margin development and we continue to have solid cost control. Operating profit -- adjusted EBITA increased to SEK 220 million and -- compared to SEK 186 million last year. EBITA year-to-date, we are now up to SEK 275 million compared to SEK 224 million. On the business side, 2 highlights worth mentioning is that Byggmax has now more initiatives than we consider to be prudent, and therefore, we are increasingly well positioned to drive profitable growth going forward; and Skånska Byggvaror continues the positive trend on improved profit development, now for the fifth consecutive quarter, and also returned to sales growth this Q3.Summarizing the financials on the Page 3. As mentioned, sales is up almost 6% year-on-year. We see that both Byggmax and Skånska Byggvaror grow well. Like-for-like sales is up modestly, 0.6%. Gross margin increased really well to 1.5 percentage point better than Q3 last year to a strong level of 32.2%. Both the positive effect of reversing last year's negative impact of timber prices, but also now seeing the positive effect of the purchasing improvements and price/mix effect that we've been working with for quite some time. Cost control is still solid and the cost increases are still mainly due to new Byggmax stores. And again, EBITA up in the quarter and the margin up 1.4 percentage points to 12.2% compared to last year's 10.8%. There is, as we are aware now, impact of IFRS 16 in the profit and loss as well as in the balance sheet. And excluding IFRS 16, EBITA was up to SEK 251 million compared to SEK 218 million last year.Before going into more details about the business, a quick comment on the market development, starting on Page 4. And we estimate that you probably are aware, on the conference call, there is no public data on the consumer side of the building material sector in the Nordics. We estimate it to be flat or somewhat lower than last year, so 0% to minus 2%, and we characterize the consumer market as still cautious. There is clearly a positive weather effect. Those of you who have followed us, remember probably the hot summer last year in July and a lot of August that softened the demand. And that was a more normal summer this year. So on the positive side, there was a positive weather effect. However, on the negative side, we see continued negative development in the consumer intent to renovate and also a negative trend in the housing market in Sweden. And to add some color to that this time, we added a second page on the market development in Sweden, specifically our biggest market, on Page 5. And we can see that intent to renovate is declining somewhat further from the short decline in Q1, and we now have 3 quarters with softening intent, according to the consumers. And this -- on the right-hand side, we included some data on the Swedish housing market. And it's worth to highlight that there has been, of course, comment in the media that the housing market is improving and that seems to be the case for the apartment side as well as starting to see, on the price development side, for freestanding houses. But looking at house transactions, it's still declining also in the beginning of 2019. And as you are probably aware, Byggmax's core business of renovation project is, of course, tied more to freestanding houses and to transactions rather than apartments or prices.So all in all, we continue to see a bit softer market development but boosted positively by weather effects. There are also signs of some improvement in the market going forward over the medium term, but we'll get back to that at the end of the presentation.So with that market context, some details on the sales side for the group on Page 6. Byggmax increased sales 6.1%, flat on like-for-like. And new stores or nonlike-for-like stores contributed well to the sales growth. And we continue the lead to take market share given that we open stores in white space opportunities. Skånska Byggvaror grew 8.8% and now returned to growth following a flat Q2, so we're pleased with that. And we also saw that order intake increased during the third quarter, driven by the core categories, which is largely conservatories and greenhouses and related products.In -- the Other segment declined, mainly driven by our small e-commerce company, Buildor, which had a tough start to the quarter for some conscious and some mistakes done but developed well towards the end of the quarter. Total sales then is plus 5.9% with some positive like-for-like.Looking at the 2 segments, of which Byggmax, as seen on the previous page, is almost 90% of the group also in Q3. We had planned to drive profitable growth into 2019. Byggmax's focus is outlined on Page 7, where we maintain our strategic direction of growth and efficiency and try to focus growth on core drivers that also should benefit the core business. We have worked with store expansion, as mentioned, and increasing the share of the new stores is the new reformat for smaller towns. We are increasingly focusing on upgrading the offer in the existing stores, particularly with Garden apartment and 3.0, and I'll get back to the effects on that in a minute. And we continue to improve our e-commerce offer, where we also got good progress during the year. We continue to push on costs on all kinds and to continue the turnaround of the Finnish business, which is improving quarter by quarter.Store openings on Page 8. We have so far opened 11 new stores in 2019, mainly in Sweden, 9 of them; 2 also in Norway, the Eastern part of Norway. And 5 of these stores in Sweden are of a small format. We opened 3 stores in quarter 3 in Lund in the South, in Kumla in the middle and a store in the Oslo area.We have also continued to work, on Page 9, with our prioritized initiative Store 3.0. We tested 2 stores during the last autumn and converted 13 more stores during the year so far. And opened also that format in the southern new stores. Store 3.0 is an initiative to be more relevant and more complete for the new customer. So we are today very strong on the bigger renovation projects, but with 3.0, we would also like to be more relevant for smaller projects. Mainly we added assortments around electrical installation, ventilation, grouting and a small garden department. And we also organized the store in a more attractive way for the customer with easier to navigate and clear departments. We can now see that following the high season that the Store 3.0 initiative gives the effect that we had hoped for. So we can see that at the store level, we see a sales increase of around 3 percentage points per store. And since this is a low-investment opportunity for us, we see a quick return on investment. And we're, of course, pleased to see that we have another initiative that we consider proven to drive profitable growth going forward. We have continued to work on our e-commerce offer also in Q3. It continues to be a prioritized area for us and we have worked with the core drivers in a systematic way. We have our new website up since Q2. And now we have continued to add assortment and improve the experience on the site. We also, this year, focused a lot on improving delivery options with launching new options throughout the year for evening deliveries, next-day express deliveries, and quite a focus on launching what we call collect@store, click and collect offers in all markets recently during Q3. We continue to see that we're well positioned on online, and online sales also increased during Q3 2019 compared to the same period last year.Importantly for us, we maintain our strong price position also this year. It's, of course, a core aspect of the Byggmax business, and we are pleased to see that in several external service in the Nordic countries this year we come out as the winner. And we will continue to be on the customer side and drive a low-price offer. All in all, on Page 12, for the Byggmax segment, we now have more proven options to continue to drive profitable growth. And all options connected to the core business that we already have. We will continue and can continue to work on opening new stores. There is still white space. And we have a format for smaller towns to be able to go into those kinds of locations.We will probably, however, increasing the focus on upgrading what we have and the digital efforts. And today, we now have the Garden department works and add sales to the business, to the existing stores. We have it so far in 21 stores, 13% of the portfolio. And we can now also see that Store 3.0 is an initiative that works. And we have that so far in 19 stores or 12% of the store portfolio. We will, of course, continue to work on the e-commerce offer and increase our digital position by continuing to add assortment and improve the customer offer.On the Skånska Byggvaror segment, little bit less than 10% of the group in the quarter, we continue to see improved profitability. We did a lot of changes to the business in 2018. For those of you who follow us remember that, and that we can see is now clearly paying off. We see that in Q3, profit improved for the fifth consecutive quarter. And we also see that sales growth started to come with Q3 2019 return to sales growth. EBITA increased to SEK 19 million compared to just below SEK 16 million last year. Sales increased around 9% or 8.8%. And order intake increased, as commented on earlier. Going forward, our focus is the same as it's been for the year for Skånska Byggvaror, continue to build for profitable growth. We drive growth initiatives in the core assortment with product development and sales efforts and as well as marketing efforts. In parallel, we will, as we do with all companies, our group continue to trim costs and improve efficiency.As a separate update, but then an important one and as communicated earlier, we have appointed a new CFO for the Byggmax Group, her name is Helena Nathhorst. She will join the company in mid-January at the latest. She used to be the CFO for Addnode Group, another mid-cap company in Stockholm, and she has further experience as CFO for Teracom Group and a long career with KPMG. We welcome her for the next quarter earnings call. We will go through the financial overview quite quickly and then we open up -- and then we will take summary outlook. And then we'll open up for questions. We included 2 pages here regarding the introduction of IFRS 16. We'll not go through them in detail. But as for the previous quarters, it has obviously impacts the balance sheet, increased through capitalization of leases or store ops by SEK 1.4 billion and impacts P&L with a somewhat positive effect on EBITA, 0.3 percentage points to margin and a negative impact on net income. Results development on Page 18. We can just restate that net sales increased 6%., gross margin improved really well to 32.2%, clearly above last year by 1.5 percentage points, and continued solid cost control. We'll get back into these points now a bit more going forward. EBITA up SEK 35 million to SEK 220 million this year.Year-to-date, before going some more into each line item, net sales is up 5.3% year-on-year. Gross margin is up 1.1 percentage points and we continue to work strongly on cost control. And the net addition of costs is almost entirely, for the year, due to new Byggmax stores. EBITA for the year so far is up SEK 51 million to SEK 275 million for the first 9 months. Sales development on Page 20, we touched on in more detail, but as described earlier, the main driver is the new stores for the Byggmax segment which drove 6% for Byggmax sales, and therefore, most of the group sales. But also Skånska Byggvaror increased. Worth to point out that of the 5.3% sales growth year to date, the Byggmax segment is the driver, increasing 6.6%.Gross margin on Page 21. It's worth to comment a bit more on. As already mentioned, it was improved really well into Q3 -- in Q3, sorry. And there are 2 types of effect worth to mention. Firstly, last year's Q3 had a clear negative effect of timber prices or raw material prices for timber which impacted last year's gross margin negatively. And in addition, secondly, the gross margin this year was now further strengthened by the continuous purchasing improvements we have made and the price/mix effect that we have been driving with, for example, good, better, best assortment in an increasing degree in our stores and online.We see a somewhat negative effect of exchange rate development on gross margin, and we can also state the gross margin improved for both Byggmax and Skånska Byggvaror in the quarter.Operating expenses continues to be mainly driven by new Byggmax stores. OpEx improved -- increased, sorry, SEK 24.4 million in the third quarter, and SEK 15 million of those were attributed to new Byggmax stores. Comparable costs, i.e. costs excluding new-built stores then is up SEK 9 million, SEK 9.4 million. And we continue to work really hard on improving operational efficiency in all our companies.Per segment on Page 23, a few comments on each segment, although both Byggmax and Skånska Byggvaror is developing positively. Byggmax, again sales growth driven by new stores. We see a clear improved and gross margin. Costs driven by mainly new stores. And in this third quarter, new stores positively contributed to EBITA by SEK 4 million. Obviously, negatively contributes to the margin in percentage points but positive in absolute numbers. And the EBITA increased to SEK 209 million compared to SEK 175 million in Q3 last year. Year-to-date is up SEK 271 million compared to SEK 237 million. Skånska Byggvaror improved profit for the fifth consecutive quarter and returned to sales growth. And EBITA up to SEK 19 million compared to SEK 16 million last year.The Other segment is largely in line with last year, it's SEK 2 million less in EBITA, which is impacted by some currency impacts in our fully owned distribution company driving this effort, largely in line with last year. Quickly on from other points, net financial items were negative, including IFRS 16; but positive excluding IFRS 16 development, improved SEK 0.5 million. Cash flow is worth to comment on Page 25 as cash flow from operating activities was minus SEK 155 million in the quarter; but also excluding the IFRS 16 effects, decreased by SEK 243 million compared to same period last year, which of course looks like a lot. And that -- most of the explanation for that is related to a reduction in account payables, where we have increased share this year compared to last year, prepaid account payables compared to last year. We have positive effects with our suppliers when we pay early and we have used that to a larger extent this year. There are also other effects on that, for example, inventory is SEK 60 million higher due to new stores and there is also always a variation between the quarters. For example, in Q2, we saw a positive development of cash flow despite the pretty flat earnings improvement. So main driver this year is earlier prepayment of account payables. It evens out over time.Quickly on outlook and summary. On Page 27, we comment on outlook both on the consumer market side and our view of the raw materials side. We can clearly see that we have still a cautious market in the third quarter in 2019. Moving into the very short term, Q4, was positive market development last year, mainly due to weather effect that was mild and long autumn, and we see the opposite at the start of this. So in the very short term, the weather effect will be negative in the Q4 and we expect a negative development for the market development in Q4. There are some factors suggesting a more positive trend should be possible in the medium and long term. The housing market, we know transactions in houses generates renovation needs. And so far, the Swedish apartment market is increasing in volume. The Swedish freestanding house market has started to see price increases, but until Q2 not an increased volume. There are, of course, media comment that, that is now happening during summer and fall, and that will of course, in that case, benefit also the renovation market in the medium term. But that remains to be seen. And longer term, as we have said many times before, we have homeowners and house owners, the primary customers, renovation needs are substantial for many years to come.On the raw materials side, I can quickly say that the timber raw material prices are, depending on product, either flat or declining, which should give us opportunities to still maintain good gross margins going forward.Summarizing the third quarter on Page 28. We see clearly an increased sales and while increased profit. We -- our view is that we have more proven initiatives for Byggmax and, therefore, increasingly well positioned to drive profitable growth with own actions. And we are pleased to see that Skånska Byggvaror continues the positive trend of profit improvement now for the fifth quarter in a row. And also return to sales growth in Q3 2019.That would be it as the presentation. We turn to operator to take questions.

[Operator]

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

[Niklas Ekman]

Yes. Can I start asking about the market? You say that the market is quite weak now. Do you have any strong theories why this is the case? I mean given that we are in a market with record low interest rates, you can argue that we are kind of near the peak of the cycle. What is the best explanation why the renovation market is quite weak at the moment?

[Mattias Ankarberg, President & CEO]

Thank you, Niklas. I think there are 2 factors worth to point out. One is general consumer sentiment where we see that there's more hesitation or cautiousness despite that actually the economic situation seems quite okay for a lot of consumers. We feel that, that seems to be the case in other categories also, particularly maybe in durables. But we feel that there is hesitation or cautiousness, which is probably more psychological than rationale. That's one. And then on the second part, we can of course see that the house transaction market is -- the volumes are clearly down. I mean quite the opposite of the peak years, but they're also now for several quarters in a row. And with the new regulations that came in regarding mortgage amortizations, it seems that most press that we need and contact that we have considered that to be a softening effect on the transaction volumes. We will, of course, see that effect sort of -- is neutralized or evens out, that the market now seems to -- buyers and sellers seem to find each other at least on the price level. And indications are that volumes are picking up. But so far, that doesn't seem to be the case. And regulations probably have dampened the transaction volume.

[Niklas Ekman]

Okay. That makes sense. When you talk about the start of Q4 here, you talk about the tough comparisons with the weather. How worried should we be about this? Obviously, Q4 is a small quarter. But have you seen a dramatic slowdown in Q4 given that like-for-like sales were kind of flat in Q3 on very easy comparisons and very favorable weather? Is there any -- can you provide some magnitude here how concerned we should be over Q4?

[Mattias Ankarberg, President & CEO]

Good question, and let's not make it too dramatic. I think if we look at other autumns, which has also been rainy and cold at the start, this is somewhat in line with that. We feel that there is a little bit of a market sentiment in general, as we touched on. But on top of that, it's been negative due to weather effect that were clearly positive last year. So on individual weeks it, of course, has a big impact, but it's still way too early to say if that's going to be a dramatic effect in Q4. I think the point is that in a small quarter like Q4 and being focused on outdoor projects, a couple of weeks of good weather or bad weather makes a difference. This is more in line with the quarter historically where we've had bad weather.

[Niklas Ekman]

Okay. And turning to store expansion. You seem to indicate here a bit of a slowdown in store openings. Can you give some kind of flavor here? Obviously, you opened 16 stores last year, you've opened 11 stores year-to-date. What kind of a slowdown are we talking about roughly?

[Mattias Ankarberg, President & CEO]

Oh, it's good, but we will probably -- can we come back with more clear guidance on that in Q4. We typically do it ahead of the coming year. But you're right, we now feel that we have more options that we can drive for creating better sales and profits. And the Store 3.0 is a welcomed one for example. There are still a lot of locations out there and towns that we feel are clearly prone to have a Byggmax store and there is no low price competition basically. So we will continue with store expansion. But it will not sort of bounce back towards the 18 new stores that we had in 2018, probably more in line with this year or somewhere up and down from there and then shift to upgrade our existing scores to a higher extent.

[Niklas Ekman]

Okay. That sounds fair. And the 3.0 rollout, can you comment a little bit on what the time line is there for converting? Are you looking at converting all your stores? Or could this be directed at certain types of stores? Or what kind of time line do you see?

[Mattias Ankarberg, President & CEO]

Also good, and we will come back with more info on that. But it's going to be -- well, we believe we can touch most stores that we have in the portfolio with this over time. It's not going to be a sort of a 1 year effort. It's going to be rolled out over a couple of years. But we obviously start with the stores that are best suited for an upgrade, given shape and size and opportunity. So consider it an effort that could go on for the next few years, and we'll -- hopefully with ambition to target most of the stores we have in the portfolio.

[Niklas Ekman]

Okay. And turning to your gross margin. I think this is the strongest gross margin you have ever recorded in a Q3. What would -- do you see further upside here with the efforts you're doing on price/mix and purchasing? Or is this as good at it gets? Where do you see the gross margin going, going forward?

[Mattias Ankarberg, President & CEO]

You are right, it's the strongest one ever in the Q3. And then due to mix effect, it's been a bit better in the low season quarters once or twice. But it's really at the good level. And we continue to drive efforts that should improve the gross margin, so that's on the positive side, with, for example, Store 3.0 rollout and other assortment improvements we are doing in the normal ongoing business and, of course, purchasing improvement. Having said that, of course, we are also a low price competitor and we follow the market closely. So we will not steal from our price position if need be. But if I -- right now, where we take our view of the market both on where the price is on the consumer side and on the raw material side, we feel that we should be able to continue to drive a solid and strong gross margin for the coming period. If there is further upside, I think it's still to be seen. But at the moment, we hope to be able to continue to maintain a good level, which we are -- or a strong level, which we are at to date.

[Niklas Ekman]

Excellent. And finally, a question on online sales. You talked about strong online sales development here and how you've had several initiatives online. I seem to remember when you acquired Buildor and then Skånska Byggvaror, I think that added -- that brought online sales to roughly 20% of group sales. Can you give an update? Where are you today roughly? Are you much higher than 20%? Or are you still around those levels in terms of sales [indiscernible]?

[Mattias Ankarberg, President & CEO]

Very big picture, we are still around those levels. And the reason is because we have, as you may remember, reduced sales in Skånska Byggvaror in order to improve profitability, reduced unprofitable sales, so to speak. So while that has reduced, other things have improved. So we are largely around the same level.

[Niklas Ekman]

Okay. So when you talk about online growth, you are talking about the Byggmax format predominantly?

[Mattias Ankarberg, President & CEO]

Yes. I did and talked about -- when I mentioned it earlier today in the presentation I talked about it in the Byggmax format. But of course, also Skånska Byggvaror develop well when it's mainly online, where that's also, of course, positive for us. But the comment was for the Byggmax.

[Operator]

And the next question comes from the line of Markus Heiberg from Kepler Cheuvreux.

[Markus Borge Heiberg, Equity Research Analyst]

I want to dig further into your like-for-like in the market because underlying is 0.6% like-for-like in the quarter. I think it's quite weak. Comparable costs grew by 3%. And of course your market estimate is about 0%. But some competitors have reported healthy like-for-like. For instance, Tesco reported, I think, 4% like-for-like in your segment in the quarter. And online is up 3.0 -- is up by 3%, so that means that most stores have been declining sales growth and costs obviously growing. So what are you doing to address this? What are you doing in particular to kind of improve your like-for-like? Because it has to if profitability is going to be sustained.

[Mattias Ankarberg, President & CEO]

You're breaking up a little bit. But I think the question to be largely what are we doing to drive like-for-like sales going forward, correct?

[Markus Borge Heiberg, Equity Research Analyst]

Yes. That's the main issue.

[Mattias Ankarberg, President & CEO]

Okay. Thank you. So you are absolutely right, we would like to see a better like-for-like development. We think we hold up fairly well given the market. But of course, we would've hoped for more, no question about that. Well, we feel -- obviously we are doing the usual things that we do as retailers to improve the offer in every store and with every customer meeting and continuous marketing and assortment improvements. But we also feel we are in the position now where we can invest in initiatives that drive like-for-like. And Store 3.0 is maybe the most recent and best example because it's targeting many stores where we so far see an upside in 3% of sales for each store that we converted. So that's a clear example. The Garden department that we add to existing stores is, of course, another one to bring out big points. And then again, back to the first comment, it's of course ongoing work to improve things every day. We will complement the ongoing work by these bigger initiatives that we now will invest a bit more behind to upgrade what we have and therefore, drive like-for-like going forward.

[Operator]

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

[Fredrik Ivarsson, Research Analyst]

Most questions already asked, but one short one from me as well. You've been rolling out these smaller store concepts for quite a while, and I suspect that the major part of the future openings will be the smaller store concept as well. My question is, what do you see in terms of like-for-like in these smaller stores?

[Mattias Ankarberg, President & CEO]

Well, thank you, Fredrik, for that question. And you are right, that's going to be an important driver for new stores going forward. The first ones we tested were in summer of 2017, so that's about 2 years ago. So I think it's still a bit early to talk about like-for-like. But we can say that the business case for the small format stores is that we should be able to make the same profit in percent, operating profit in percent, based on a much, much lower turnover because the catchment there is lower. So we work with even more trimmed costs and narrowing things down. And we can see that so far, we are performing above the business case and we can see that the sales is -- typically new Byggmax stores have a time to maturity or sales maturity of 3 years, and that seems to be a bit quicker for the small format stores. So there are positive indications that the customers find these stores and we reach the business case a bit quicker than we had planned. But it's too early to say the effect of the like-for-like number for the company.

[Fredrik Ivarsson, Research Analyst]

That's clear. And can you just remind us how large are these stores in terms of maybe sales per store in contrast to the average size?

[Mattias Ankarberg, President & CEO]

Yes. So the average Byggmax store is, total for the group, around SEK 33 million, SEK 35 million per year. And the business case is, for these small format stores, to have half of that turnover and still reach the same profit in EBIT percent so to speak.

[Operator]

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

[Mattias Ankarberg, President & CEO]

Thank you very much for joining this call, and have a good day.

[Operator]

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