Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2020-Q3

[Operator]

Hello and welcome to the Byggmax conference call. [Operator Instructions] 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 Q3 conference call. With me is also Helena Nathhorst, our CFO, who also will be presenting today. And as usual, we speak to a presentation, which is available on our website.Overall, it was another very strong quarter for Byggmax. We grow really well with a combination of good market growth and own initiatives. We are still in a pandemic and, obviously, health and safety has remained the top priority for us during this situation. We'll come back to that.In the quarter 3, net sales increased 21% and like-for-like was 20%. There is a clear negative currency effect also. We continue to see very good growth online, and Byggmax e-commerce grew 40%.As mentioned, the market grew well and the initiatives that we are driving within Byggmax Group had 10% sales growth.In Q2, we have very good scale effects from increased sales. We, in Q3, increased gross margin really well and continue to have solid cost control. Overall, that leads to an operating profit, which is up just over 50%, EBITA of SEK 335 million in the quarter and an EBITA margin of just over 15%. Also, we continue to be positive view on the market going forward.Key events on Page 3 are few typically during Q3 for us. It is our traditional peak season and, therefore, heavy operations focus, but a couple of things worth to mention, besides the COVID-19 situation, which obviously has colored the quarter in many ways. We opened 3 stores during the quarter. We continue to upgrade our store portfolio also. And as part of that, we have also opened the first Store 3.0 in Norway.The market on Page 4 was very good also in the third quarter, although not as exceptional as in the second quarter. We continue to see a clear stay home effect, as we call it, during the COVID-19 pandemic. People are more working from home and spending free time in their homes and around their homes. That was a clear effect remained during the summer and during the quarter, although not as strong as in particularly April and May.Weather effects always plays a role in the short term, and they were somewhat favorable this quarter compared to the same quarter last year. We also follow the housing transactions market carefully, as drive for renovation needs, and it has continued to increase in our main market in Sweden during the year, dipped during the early spring and then a good continued growth level leads to an increase year-to-date in detached houses.Overall, as those of you who follow us know that there is no, unfortunately, public data available on our market, but the market that we define the core market for us, consumer market for billing materials in the Nordics, we estimate increased very well, 10% to 15% in local currencies. And the market growth was strongest in July, weaker in August and then very strong again in September.A couple of more words on COVID-19 pandemic. And for those of you who were with us in Q2, you will see that we have continued to take the measures we took in Q2 with a couple of extra things. We are fortunate at Byggmax to have a more fortunate position than many others and that we have stores on free-standing properties, and we have a concept built on self-service and a lot of the shopping done at Byggmax has done outdoors. But even though we have taken many precautions to ensure health and safety, both for the staff in our stores, but also for our customers, and that includes many things like stricter hygiene routines, cleaning frequency, cash point covers, and cancellation of events, et cetera, et cetera.We continue to promote e-commerce and home delivery, and we are getting more customers using our pay-from-car service, which means you don't have to go into a physical store.Overall, in terms of financials, COVID-19 has had a positive effect on Byggmax Group financials, derived from the increased sales during the pandemic. We continue to see, of course, some disruptions to operations. But just like previously, they have been minor and very manageable.Turning to our own initiatives on Page 6. We continue to see very good effects of the things we have been driving for this year and also previous 2, 3 years. And again, you will recognize all items on the list, but we will give you an update of status as of Q3. First of all, store upgrades continue really well. We now have 30% of the store portfolio, as what we call Store 3.0. And having a full high season 2020 behind us, we can see that the store upgrades drive 6% extra sales per store compared to stores not upgraded. We also have had a continued very good performance of Garden departments.E-commerce continues very strong, 40% increase in sales for Byggmax e-commerce in Q3 and 50% for year-to-date. We continue to see good effects of the things we have been driving.Store expansion continues for Byggmax and is a good platform for growth. We have opened 9 stores year-to-date as of Q3 and 3 in the quarter. And after the quarter, we have opened another store in early October.Skånska Byggvaror continues the path to drive organic growth through focused initiatives, and we continue to invest in product development, which gives good results, but also the digital sales and market efforts that we are building up are continuing really well.And as mentioned, we are a low-priced player and the low-cost player, and we do get very good scale effects when sales increased. So on the efficiency improvements, we have an increase so far gross margin of 0.3 percentage points compared to last year's clearly all-time high level, very pleased with that. And we get very good leverage on our costs. So far this year, costs are up and our OpEx 9% compared to sales almost 13%. That means, of course, a very good scale effect for profit.All in all, combining the -- or adding up the different effects from the different initiatives, we see that the sales effect is about 10% of things we drive ourselves. And we do get good scale effects to the profit.I'd like now to take a few comments and pages on some of these initiatives to illustrate a little bit more of what we are driving, Page 7. We do see continued very good online growth, and e-commerce continues to be a top priority for us. We see that the things we are investing in ourselves are really giving good effects, which is particularly then increasingly large assortment, a better site and more delivery options. Clearly, we see that a lot of customers prefer the click-and-collect store, order online pickup in-store alternative. That option is growing about double the pace as home delivery. And of course, it's a very good strength for us and the natural strength as we have 169 Byggmax stores in the Nordics.But also more recent introductions had good growth. The recently introduced small parcel home delivery option is where customers order smaller products like tools and brushes and fasteners and screws, et cetera, is also growing really well and represented 4% of orders in Q3. So overall, good online growth, and e-commerce continues to be a big focus for also the group, and the total group has 20% of the total revenue as online for the last 12 months.On the store portfolio side, on Page 8, we continue with both expansion and upgrades. And we opened stores particularly during Q2 and Q3, and we upgraded stores during Q1 and Q4, not to interrupt the existing high -- existing stores, high season too much during Q2 and Q3.Store 3.0 is now 30% of the portfolio. We have opened 3 new stores in the quarters, 2 in Sweden and 1 in Norway. Maybe notably, our Notodden Norway store and Kiruna in Sweden. We closed 1 store in Norway in the quarter, which is a relocation. We opened a new store in same area in Q2. And we have upgraded 3 more stores to 3.0. And with the new one -- together with new one, sorry. Together means 51 Store 3.0 stores or 30%. We have not opened any Garden department in the quarter.On Page 9, some more information regarding the format development. We have, as you are aware, now for almost 2 years, upgraded stores to 3.0. But during the year, we have now also developed new versions of the other formats that we have in Byggmax, so we -- that means the small town format and the large format, including Garden. But now we have 3 formats, which are all upgraded. And the Store 3.0 upgrade, as mentioned, which has concerned the regular format so far, generates 6% sales increase per store, i.e., those stores outperformed peer stores by 6%.So I'd like also to mention a little bit more around particularly the large format, which is -- or sorry, the upgraded large format, which is the most ambitious format development we've done so far. It only exists in 2 stores so far, but something that we believe is the best customer offer we can provide as of now. So a little bit more information on that on Page 10. And this shows what we call the warm store, which is the shopping done inside, not outside on the yard. And when we have reworked the space -- same space to add more -- significantly more shelf space to be able to add more assortments and also rework the layout to provide wider aisles and clear navigations. And also as visible on Page 11, much more clear department.So with better layout, better departments, clear navigation, clear communication, that goes very well hand-in-hand with big upgrade on the assortments where we have reworked several areas, including paint, flooring, electrical installation, tools, ventilation, garden, storage, et cetera. Overall, a pretty major rework of the large format.We have also, as mentioned on Page 12, increased the convenience aspect for the customers in this new format. So there are several things that we can offer the customer. We offer paint tinting, i.e., mixing paint to the specific color of the customers' choice, both for branded products and for our own private label products. We offer machine rentals for equipment that the customers may not have or may not want to own. We have collected store pickup points. We have upgraded a very big flooring department where customers could either take flooring directly in the car and go home or bring samples home and evaluate, and then order to get delivered online.We also provide several checkout options, both self-checkout, the regular assisted checkout or the pay from car option. So that was some highlights on the format upgrades for the large format done this year, exists in 2 stores so far.Some words on Skånska Byggvaror also on Page 13. Continued very well. We continue the growth path that we have set out to drive with product development and digital sales and marketing. Good order intake in the quarter or very good order intake in the quarter, and we continue to see now a positive financial trend also in Q3 2020 with good sales momentum and continued profitability improvement.We are continuing the same path forward, i.e., driving growth initiatives within the core business and continuing to trim operations and get efficiency where we can.And with that, I turn over to Helena to go through some of the financials.

[Helena Nathhorst, Chief Financial Officer]

Yes. Page 14, our sales of SEK 2.2 billion development in the third quarter versus last year and how it's divided by segment.If we start with share of Byggmax sales. Byggmax represents 90.2% and Skånska Byggvaror 9.8%. This is in line with how it's been previous quarter. And looking at the growth in sales, the development in 2020 versus '21 -- 2019 is up, 21.4%. The like-for-like growth, meaning our comparable stores are up 20.4%. And we have a negative currency impact of 3%. We have 24% of our sales outside the Nordics, and it's mainly impacted by the Norwegian krona.Growth in Byggmax is up 20.4%, and new stores contributed with 3.8%. Skånska Byggvaror had a strong growth in the quarter, as mentioned, 31.2%. The market sales is driven by -- as mentioned by Mattias, by good market growth from transaction on Swedish housing market, Nordic consumer market for building materials up and also good weather conditions and pre-COVID-19. But not the least, our own initiatives add approximately 10% to growth, that is the new stores and upgrading and garden concept, and e-commerce contributing to the growth.If we continue to next stage, we have the P&L, a little bit more in detail for the quarter. Commenting on the net sales growth up to SEK 2.2 billion. Looking at gross margin, it improved to 33.1%. It has a positive impact by product mix from our upgrading stores, again, and scale effects on volumes.Comparable costs, i.e., personnel and other external costs, if you're excluding new stores, have increased by SEK 21 million. That is driven by higher personnel in the stores, COVID-19 cautions and increased market activities in the positive market situation.Costs are in -- for new stores are at SEK 15 million, in line with last year. In all, an increased EBITA to SEK 335 million, and an increased EBITA margin with 3 percentage points.Also, the organic growth converging well into increased profitability in both Byggmax and Skånska Byggvaror.Continue to next page and a comment on cash flow and net debt situation. In the quarter, cash flow from operating activities amounted to minus SEK 311 million for the quarter. And the movement is driven by strong earnings development and had a positive impact of SEK 122 million. And then working capital movements, where we have effect from the strong cash position in the quarter, enabling us to use the cash discount and reducing the accounts payables level.In all, a continuous strengthened balance sheet where we have net debt position with approximately SEK 450 million better than the same period for -- same position last year.

[Mattias Ankarberg, President & CEO]

Thank you, Helena. One more page before turning to future outlook, on Page 17, regarding dividend. With much of the financial year already behind us, Q4 is a small quarter. This year, the Board of Directors has decided to already now give the recommendation for dividend in 2020. And the Board recommends a dividend for SEK 2.75 per share to be paid out in 2021. That reflects an ambition to continue to increase the dividend over time and also to continue to strengthen now much improved balance sheet, as Helena went through on the previous page. Also worth to note that this also allows us more opportunities to step up expansion and upgrades, which we see are performing really well.Having said that, turning to outlook on both the market and our own agenda. So Page 18, firstly then on the market. We are positive to the market development going forward. We clearly see a demand for home improvement has been boosted during Q3 through the stay-at-home effect as commented. And we expect this effect to continue also in Q4.We also see a bit longer term that the house transactions in Sweden continue to increase year-to-date and now on a growth following the decline in 2 of the spring months. So that also speaks favorably for next year. And overall, we are positive to the market development in Q4, and we also believe that the market should be strong also next year, even if not to the same extent as in 2020.Our own agenda is outlined on Page 19, and the focus does not change. We continue to build for profitable growth. We drive the initiatives that we have proven and now give us good effects. Store upgrades is a big priority for us also in the short term. We will continue to upgrade now additional stores during the fourth quarter and expect to close the year with 40% of our Byggmax store portfolio has upgraded. And we will continue upgrades, of course, in 2021. We'll continue to drive growth in e-commerce through the actions mentioned. We will continue to expand also with new stores. We have already opened 1 more store in Q4, to total of 10 new.Skånska Byggvaror build-out continues and the efficiency improvement is always core to Byggmax and will continue as well. So we feel strongly and positive about the effects we're getting from this and continue to drive the same agenda going forward.And with that, we open up for questions, and I turn to operator.

[Operator]

[Operator Instructions] Our first question comes from Fredrik Ivarsson, ABG.

[Fredrik Ivarsson, Research Analyst]

Congrats on a good quarter. A few questions from my side. If we could start with the gross margin, that's up 20 basis points year-to-date. If we exclude the operational leverage you gained from the strong volumes seen during this year, would the gross margin still be positive versus last year? That's my first question.

[Mattias Ankarberg, President & CEO]

Thank you, Fredrik. So the gross margin is up in the quarter and also in the year due to a few effects. The biggest one is scale effects that we get from suppliers and partly around logistics. And the second effect is good product mix. And the third one is scale effect through sort of the balance sheet, so to speak, prepayments as Helena mentioned.Last year, we had an all-time high gross margin with a wide margin. I think it was more than a percentage point above any year we've ever done. So match that this year, we will be very pleased. And we think that we would have come close or around there, it would not have this massive scale effects, but obviously, they have helped us to increase the level even further.

[Fredrik Ivarsson, Research Analyst]

Perfect. That's very clear. Second question is on the marketing investments you've done in the quarter, I think you accelerated those. And I'm curious in what you've seen in terms of new Byggmax customers over the quarter. If you could speak a little bit about that?

[Mattias Ankarberg, President & CEO]

Sure. Very good. Well, I should say, we have -- compared to the Q2, had somewhat higher staffing to operate in the COVID-19 environment with a lot of high volume and also done a little bit more marketing. And obviously, when the market is great, there's a good opportunity to get new customers. And we've had been really fortunate to have a very good success with that. So we have seen a lot of new Byggmax -- a lot of returning customers, but a lot of new customers, particularly on e-commerce, but also in our stores. And at any retailer, that's always a great metric for the future when you have a lot of customers that are new.

[Fredrik Ivarsson, Research Analyst]

That's reassuring. And last one for me. If you could comment on the like-for-like development on the operational expenses?

[Mattias Ankarberg, President & CEO]

Sure. So there are -- besides the cost for new stores, and as you mentioned, Fredrik, there is an increase in OpEx also like-for-like. There are 2 main components to that besides some smaller things. The first one is that we have a bit higher staff levels than we had previous years. We are still getting operational leverage, so share of sales is decreasing, but we are a bit higher. We came into the quarter with a strong view of positive sales momentum. And also, obviously, there's a COVID-19 situation where we are really careful that people will not work when they are -- have symptoms to be sick and things like that. So we decided to have a slightly higher staffing level. That cost a little bit of money. That's the biggest thing. And then the second one is the marketing investments that you mentioned, Fredrik, to capture some of the good opportunity. We spent a few million extra there.

[Fredrik Ivarsson, Research Analyst]

So should we think low single-digit like-for-like wise?

[Mattias Ankarberg, President & CEO]

I can do the math, but probably OpEx like-for-like is a bit more than low single digits. It's probably double-digit around there, but not, of course, at all as high as like-for-like sales increase. We can get back to you on that, Fredrik, if you like.

[Operator]

Our next question comes from Niklas Ekman, Carnegie.

[Niklas Ekman]

Just a couple of questions. Firstly, maybe on sales. If you could elaborate a little bit more around the different months. You mentioned July and September being very strong. Can you quantify that? And also, maybe, say, if there were any big differences between the 3 Nordic markets where you have -- where you're present?

[Mattias Ankarberg, President & CEO]

Yes. So overall, sales was up 21.3% in the quarter, and there's about a 3% negative currency effect. So if we are in local currency, we are almost at 25%, 24% something. July was the strongest. And we -- a bit north of or around the total then 24%, 25%. But August was weaker. There was also a little bit of a heat spell in the middle and possibly other things. And then September was almost back to the July level again. So clear good growth also in September, almost in line with July.And between the markets, well, if you -- I think there's -- for Byggmax, which is probably a good reflection of generally of the market, but maybe not fully. But for us, Sweden is very good; Norway is even better; and Finland, which is a very small business for us still, is by far the best. I think in terms of market development, Norway is also better than Sweden, but Finland may be less strong.

[Niklas Ekman]

Okay. Excellent. And in terms of store openings or closures going forward, what's your view here? You've been expanding a bit, but a lot of other retailers are now closing stores. What's your view on expansion going forward?

[Mattias Ankarberg, President & CEO]

Well, we see opportunity to continue to expand. Both the stores stand-alone are still very good and very profitable businesses, particularly upgraded ones, of course. But also, we see an increased integration of online and store, which sort of materializes themselves in an online as well as Byggmax store. We have really good momentum in click and collect, as described. And stores are also, in a sense, warehouses for us to do home delivery. So having a store not only enables a good P&L for a new store but also an increased and efficient e-commerce operation.This year, we have opened 10 new stores, and we -- that is slightly lower than we have done in previous years because we have done a lot more on the store upgrades. And again, that's been really good for us. And next year, we will get back to the exact numbers, but we will continue to drive both new store expansion and upgrades, and probably a bit more on the new store expansion than we have done in 2020, and at least the same of store upgrades done in 2020.

[Niklas Ekman]

Can I follow up there? You mentioned stores used as warehouses for home deliveries. How big a factor is this? How many orders? Or how many -- how big part of your sales actually are home deliveries from your stores?

[Mattias Ankarberg, President & CEO]

So we have several different e-commerce supply flows, so to speak. But a significant share of it is directly from our warehouses or directly from suppliers, so-called drop ship, but -- and almost equal share of it is either picked up in store, click and collect or delivered from store.

[Niklas Ekman]

Okay. And curious if you could elaborate a little bit more on your view on 2021. You say that you have a positive view on the outlook. But obviously, you're going to face very tough comparisons and staycation might be a little bit less of a factor. So is this something you're concerned about at all? Or do you think that the overall trends we've seen this year are going to prevail into next year?

[Mattias Ankarberg, President & CEO]

I think there are 3 factors in play when looking at 2021. First of all, is the sort of stay-home effect in the market, as you mentioned, Niklas, which we believe will continue in 2021, although probably not to the same extent as in 2020, and I'm thinking particularly of the intense months of April and May in the Nordics. But we -- all consumer research that we see still points to consumers' planning to be more at home for next years, leisure homes is up. People are buying boats. Airline travel is down a lot. So I think we are clearly in the camp that the stay-home effect prevails in 2021, although maybe not to the full extent as it did in 2020. So that's number one.Number two is we see typically what we call the need-based renovation from house transaction. So when people move, they would like to renovate their new homes. And typically, house transactions drive Byggmax sales with about a year or so lag. And we see that transactions are up this year, particularly leisure homes. So that's also positive for next year.And then thirdly, we, of course, have our own agenda of things that we are driving. And with continued both upgrades and e-commerce investments and tour expansion that should also add for 2021. So I think the comparables for 2020 will be really tough. But I think that we will have a better market clearly than we had in 2019. And I think we will have, by then, also more good Byggmax actions implemented for 2021. So tough comparables, absolutely. And market probably not in line with this year, but still very good.

[Niklas Ekman]

That's very clear. And then just a final question on the dividend. You announced already now a dividend for the full year of SEK 2.75. This is a dividend that, of course, could have been a lot higher considering, first of all, that it's for 2 years and also you've had very, very strong earnings growth so far this year. So can you elaborate more on why this was capped to SEK 2.75 rather than a dividend that reflects the strong earnings growth?

[Mattias Ankarberg, President & CEO]

Yes, absolutely. And I think both the timing and the level Helena commented on. And typically, regarding timing, the proposal from the Board comes at the Q4 report. And this year, we felt that this -- there is a request for information and clarity on the topic and also much of the financial year is behind us. For Byggmax, Q4 is small. So the Board opted to send a clear message a little bit earlier than usual. That's why they came now.The level, as you say, Niklas, is below what would have been maybe 50% of expected net income. There are 3 factors in play. First of all, would like to have a continued increased dividend over time. And I think this level gives us a good opportunity to succeed with that also in the coming years after 2021.Secondly, we have, this year and also a bit earlier, particularly this year, strengthened the balance sheet a lot, which we think is very good. It gives us, of course, more flexibility and resilience, but it also gives us now opportunities to step up store upgrades and expansion opportunities that we see are coming up. So it's a combination of an ambition to continue to increase the dividend over time and also to strengthen the balance sheet to allow for expansion opportunities.

[Operator]

[Operator Instructions] We have no further questions. Speakers, back to you for the conclusion.

[Mattias Ankarberg, President & CEO]

Thank you so much, everybody, for joining this call and look forward to Q4.

[Helena Nathhorst, Chief Financial Officer]

Thank you.