Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2018-Q4

[Operator]

Hello, everyone, and welcome to the Byggmax Q4 report 2018. [Operator instructions] And just to remind you, this conference call is being recorded. Today, I am pleased to present Mattias Ankarberg, CEO; and Pernilla Walfridsson, CFO. Please begin your meeting.

[Mattias Ankarberg, President & CEO]

Thank you, and welcome, everybody, to this Byggmax Q4 conference call. As usual, myself, Mattias, will go through an overview of the quarter, followed by Pernilla going through some financials. And then we'll sum it up and take questions at the end. I will use the presentation as a guide for the call.Overall, it was a good quarter -- fourth quarter 2018 for us. Sales and profit increased. Net sales for the group was up 5%. And for the Byggmax segment, sales was up 10%. Profitability, which we measure as EBITDA excluding nonrecurring items, improved also to SEK 28 million in the quarter compared to SEK 22 million last year. We see that the results are positively driven by the things we have chosen to do, our strategic initiatives. And we also are happy to see that the previous quarter's negative external effects have now normalized during the fourth quarter. For 2019, we have a plan to drive their respective core business, and we will come back to that during the call.On Page 3 summarizing the financials. For the group, net sales increased 5.1%, as said. Byggmax segment drives that, whereas Skånska Byggvaror continues to decline due to active decisions and restructuring. We see that the growth initiatives are the driver of our sales growth, which is positive. Gross margin improved 0.2 percentage points in the quarter, and the effect in earlier quarters of negative pressure from high raw material prices for timber was still there in the beginning of the quarter but normalized during the quarter. So some negative impact in the beginning of the quarter. We continued to work hard on costs in this company, and the cost share of sales decreased slightly. And again, EBITDA improved to SEK 27.5 million versus SEK 22.1 million compared to last year. Going into each segment starting with Byggmax segment, which is the vast majority of the group. Net sales was up almost 10% year-on-year. We see the comparable stores improved sales -- increased sales. We have positive effect on the things we have chosen to do, particularly new stores drive the sales growth in the quarter. And we are also happy to see that the consumer market for home improvement project has returned to some growth now in the fourth quarter, which is also impacting us positively.Gross margin again has now improved, and we are happy to see that the earlier strong negative effect of timber prices has now normalized and it's back to where it should be by the end of quarter 4. EBITDA decreased a little bit in the Byggmax segment to SEK 27 million compared to SEK 35 million last year, which is impacted by the somewhat lower gross margin but also the cost of new stores, which we'll come back to. All in all, in line with our expectations as the higher expansion pace cost a bit of money in the first year. I'm happy to see the financial development of the Byggmax segment in the fourth quarter. We have kept a very high pace in our strategic initiatives in 2018. The goal for the year was, as we phrased it, build for profitable growth. We have a really strong and profitable business that we could grow and develop faster than previously. We have in the quarter -- in the year, sorry, opened 18 new stores, 6 of those stores have been of the new format for smaller towns. And we see that the new stores are contributing very well to the sales growth by the end of the year. We have launched our Garden concept, which we tested, piloted last year. Now we're launching 12 more stores, and we have continued to develop our e-commerce. So we have increased assortment during the year, introduced new delivery options, in all, strengthen the customer offer. We have also, as we always do at Byggmax, continued to reduce costs, which is very much in line with our culture. And for example, comparable costs, cost for comparable stores, decreased in absolute terms for the full year 2018. Store openings are detailed on Page 6. Again, we opened 18 stores for the year: 3 in the fourth quarter, 1 in Sweden and 2 in Norway. And we have already announced 12 store openings for 2019. Some other highlights in the quarter, Page 7. We have taken steps to modernize our visual identity. That is the new logo, updated marketing material, updated signage, et cetera. And we introduced it when we opened the number 100 store in Sweden in Stenungsund outside Gutenberg, very well received by our customers. We will introduce this gradually over the coming years in a Byggmax style and not make any major initiative or take any major costs to upgrade. But gradually, we'll roll this out as part of normal maintenance upkeep and changes over the coming years. We have also launched or tested a new initiative on Page 8, what we call Store 3.0 in 2 stores during autumn. 5 years ago, Byggmax kicked off an initiative called 2.0 where we upgraded the stores and added assortments. 3.0 has the goal of upgrading the offer in the stores that we already have, so the existing stores. We would like to be more complete for the customers for both small and big home improvement project and improve the shopping experience. And more specifically, what we do with Store 3.0 is that we add some selected assortments within -- particularly electrical installation, ventilation, grouting and also introduced a small garden department in Store 3.0 concept. We also organized the store a bit differently to have more clear department and better navigation and improving the customer experience.We had good effect of the Byggmax 2.0 program, and the first communicated numbers at that time was to have sales impact of 6% to 7%, good gross margins and conversions of about SEK 1.6 million per store. Store 3.0 is a smaller upgrade initiative. We expect to get half of the upside in sales and improvement as similarly improve margin, and we expect to invest less than half compared to 2.0 to upgrade a store between a third and a half. So it's more than 2.0, half on upside and less than half on the investment.We now have at the end of 2018, several growth options for how to develop Byggmax going forward, all connected to the profitable and strong core businesses we have. We can expand with new stores where we still have white space where Byggmax is not present, and we have our format for smaller towns to increase penetration further. We have the Garden department, which we have launched, which is a big complementary category to us and where we don't have a Nordic discounter today. We have the Store 3.0 initiative to upgrade existing stores. And in addition, we have a strong position within e-commerce where we have the complementary, much larger assortment available for the customer.How we have chosen to move forward from this is described on Page 10, where we have now concluded the year where we ramped up the expansion to build for future profitable growth. We will, for 2019, focus on a more balanced approach to drive profitable growth. We will continue to execute the same strategy and the same initiatives that we have already proven and adding the 3.0. So all in all, we are relying on 2 pillars: focused growth and efficiency. And for focused growth, we will continue to expand with new stores. We have a goal of opening 12 new stores into 2019, of which about 5 will be the format for smaller towns. We will increase the focus of upgrading the offer in the existing stores. We will add 8 new garden departments and upgrade 15 existing stores to Store 3.0. And we'll continue to drive growth in the e-commerce business with even further expanded assortment and more delivery options and other improvements.All in all, it's a different balance and a somewhat lower expansion pace than we had in 2018. This enables us to do conversions of 3.0 stores, but also to leave some flexibility during the year to be able to adopt and scale up initiatives as we see the year progress.On efficiency. We have 2 major focuses. One is to continue the turnaround of our business in Finland, where we have not made money. We have made progress in 2018 and moving in the right direction, but work still remains. And we will continue, as we do in our culture, to continuously trim costs and simplify the way we do things.For Skånska Byggvaror on Page 11. It's been a year of change. Quarter 4 was the end of the restructuring phase towards the more focused company within what we call Garden Living. This was the quarter where we decreased sales due to our decision to reduce unprofitable sales. Sales decreased by 23.5%, and our change of commercial model is now largely completed. We continue to see at the previous quarters gross margin improving also in quarter 4, and we are continuing to see the cost base is decreasing due to the restructure program that we have been driving during the year. EBITDA improved marginally in the quarter. And overall, we are happy about the development in the second half of Skånska Byggvaror. What we have done during the year is summarized on Page 12. It's been a transformation year, which we have executed according to the plan, focusing on becoming a more focused company and more modern within the Garden Living category. We will use our strength within conservatories and greenhouses as the base. We've had positive effects throughout the year. We have chosen to reduce lossmakers or unprofitable sales, not focusing on driving assortment and low price points and promotions, for example, thereby taking down sales. Gross margins are now back to the historically high level, and costs have come out according to the program that we launched in Q4 last year. All in all, we have the goal to end the year with a stronger and more profitable core business, and quarter 4 is very small. But looking at the second half to get an overview, we see that EBITDA now 5.5% for second half versus just over 0.5% last year. And we see the goal has been accomplished, and we can now move to the next phase, which we outline on Page 13. So the next phase, following largely completed restructuring of Skånska Byggvaror, is to build for growth and build for growth within the core business, the core category: conservatories, greenhouses and complementary products. So we have growth initiatives within assortments, sales and marketing. And these pictures are some examples of the initiatives within assortment. This is a new conservatory and an example of that, a complex product. And we're also introducing more add-on projects -- products, sorry. For example, the heater illustrated on the right-hand side of the page.We will, of course, continue to drive efficiency improvement in parallel, but not -- in Skånska Byggvaror. And we expect that the positive effect of the growth initiatives will come in the peak season, which is the second and third quarter in 2019. The market developed positively in quarter 4. We estimate the Nordic consumer market for home improvement projects for building materials will increase by 1% to 3% in the fourth quarter. And we are happy to see that the earlier negative weather effects will now turn to a positive impact. We had the mild autumn weather, which enables our consumers to do home improvement projects for a longer period in the autumn compared to last year. We do continue to see a somewhat passive consumer behavior in the fourth quarter, but we also, at the same time, see indications for a positive market development in 2019, particularly in Sweden. I will come back to that at the end.Dividend on Page 15. The Board of Directors are proposing not to pay any dividend for -- in 2019, and this is not due to any concerns or issues, quite the opposite. And maybe 3 points worth to mention on the dividend topic. First of all, 2018 has been a year with very tough external factors with raw material price increases and weather impacting the business. So that's now over. Results are improving in Q4. But overall, for the total year, the financial result is still weaker than last year. So less money, less to distribute in the company and shareholders. Secondly, we see that despite that, profitability in the Byggmax core business is very good, and we have a lot of business opportunities and several proven initiatives to drive profitable growth. And the Board of Directors have prioritized suggesting flexibility in scaling up initiatives and capturing opportunities rather than paying a dividend this year. And then lastly, it's important to say that the goal of dividend of 50% of net profit has not changed. So this is a temporary pause in the dividend rather than anything else. With that, I hand over to Pernilla to go through the financial situation.

[Pernilla Walfridsson, Chief Financial Officer]

Starting on Page 17. Sales increased 5% in the quarter and adjusted EBITDA increased to SEK 5.4 million. In the fourth quarter, sales purchasing factor for Byggmax has also resulted in higher profitability in our wholly owned distribution company, which included in the segment Other.If you turn to the result development for the full year, sales decreased 4%, negatively impacted by unfavorable weather during the first 3 quarters and also the decision to reduce unprofitable sales in Skånska Byggvaror. Gross margin decreased 0.2%, negatively impacted by higher raw material prices of timber. So profitability measured as adjusted EBITDA decreased to 6.8%. EBITDA for the Byggmax segment for the full year amounted to SEK 354 million, and the EBITDA margin was 7.9%. That accounts for the Byggmax segment for the full year affected by the tough external factors. EBITDA for the Skånska Byggvaror segment for the full year amounted to SEK 3.5 million, and the transformation of Skånska Byggvaror has generated positive effect. And we see that in the second half of 2018, the EBITDA margin, excluding nonrecurring items, was 5.5% compared with 0.6% last year.Sales in Q4 increased 5%. Sales for the Byggmax segment increased 9.7%. And the Byggmax growth initiative generated positive effect. Sales in comparable stores increased. Growth was mainly driven by new stores. And sales were also positively affected by the consumer markets' return to modest growth. The sales for the Skånska Byggvaror decreased almost 24%, negatively affected by the decision to decrease unprofitable sales. And net sales for comparable stores was down 3.9%. Comparable stores include comparable stores and e-commerce for both Byggmax and Skånska Byggvaror. And sales increased for comparable stores in the Byggmax segment. And the result of positive currency effect, 1.3% in the quarter, and the strongest sales month was December.During the quarter, the gross margin rose 0.2% and gross margin are negatively impacted by currency effect in Q4, positively in the terms of loss, negatively by the euro. Adjusted of the nonrecurring costs in Q4 2017, the expenses rose SEK 12.8 million. At the same half -- at the same time, cost increased by SEK 19.3 million due to new Byggmax stores. So in total, cost share of sales decreased slightly during the quarter. Cost efficiency improved for the full year in the Byggmax segment, comparable cost decreased. And also costs in Skånska Byggvaror decreased as an effect of restructuring program. If we turn to impact of IFRS 16. The IFRS 16 accounting standard will be implemented from 1st of January, and this will result in the majority of the company's finance leases being recognized in the balance sheet. And this will increase the liabilities of approximately SEK 1.4 billion, and it will have a positive impact on the EBITDA. And then we will increase depreciation, and we there's slightly positive effect of EBITA. And as a result of the IFRS 16, the profitability target will be updated from 2019. And we will change the profitability growth to be based on EBITA replacing EBITDA, and the new goal will be EBITA margin of 7.8% a year. And the historical difference between EBITA and EBITDA has been around 2.5%., and that will have a small positive effect due to IFRS 16. So overall, the target -- the new target corresponds to the previous EBITDA target, but it is formulated under this new accounting standard.So I hand over to Mattias.

[Mattias Ankarberg, President & CEO]

Thank you, Pernilla. Just closing off with 2 pages and outlook on Page 27. Some positive indications from our side. We are happy to see that the negative effect of increase in the prices has now normalized as we -- in the fourth quarter. We see some positive market indications for 2019, particularly regarding the Swedish consumers' intent to renovate. In the middle of the page, there is a graph from the Swedish National Institute of Economical Research measuring households' intent to renovate. And we can see that's up significantly compared to previous quarters, which is a positive indication. And for our internal perspective, our focus is on profitable growth in 2019. In Byggmax, we feel we have many alternatives to drive profitable growth in our profitable core business; and in Skånska Byggvaror, the restructuring is now completed, and now we are building for growth within the core categories.Summarizing the quarter on Page 28, 3 things. We see that the results improved. Sales and profit increased in quarter 4. Secondly, we see positive market indications going into 2019. And thirdly, we have initiative in place to drive profitable growth in our core business.With that, we open up for questions.

[Operator]

[Operator Instructions] First question is from the line of Niklas Ekman from Carnegie.

[Niklas Ekman]

Yes, a couple of questions. Maybe I can start with the last thing you said here about the consumer outlook here being a bit more positive from consumer surveys, indicating that consumers want to renovate more. I was curious if you recognize this pattern. Have you seen like sequential improvements throughout Q4? And generally, I was a little bit surprised that consumers are more positive given that interest rates have started to rise, that the housing market has come down a little bit, the macro is weakening. So I'm just curious how confident you are in that statistic and if there's anything to back it up.

[Mattias Ankarberg, President & CEO]

Thank you, Niklas. Well, of course, it's a consumer research, and it's an indication. So it's still to materialize in numbers. We do feel that the market is better in Q4, which we also see that the market is growing, although somewhat positively impacted by weather effect. But still, as we say, a bit passive in Q4. We feel that -- it should be seen as an indication and not anything else. We can see historically that these numbers make sense to us. For example, we have maybe the biggest market impact in Sweden when the government changed the tax reductions [indiscernible] in Q4 2015, where the market boomed. And that's also the point where this curve also historically is the lowest, so consumers had done a lot of renovation work, and therefore, it makes sense saying that they are not intending to do as much in the coming 12 months. And of course, macro is -- though many factors, and there are several signs that economy maybe not doing as well as earlier to your point with several factors influencing that. On the other hand, we also see that the renovation market is over time stable. This is a maintenance and upkeep need. And in addition, there has been challenging conditions for the consumer to do renovation work in 2018. So to us, the consumer research makes sense, but it's still to materialize into sales numbers.

[Niklas Ekman]

That's very clear. And my second question is regarding your EBIT margin outlook for 2019. How confident are you in -- that you're basically passed the crux now and that you can see margins expanding because I assume that there will be different drivers here where Skånska Byggvaror restructuring is complete, you have very easy comparisons in terms of weather and timber prices. But on the other hand, you are talking about continued strong store rollouts. I assume that the stores you rolled out in 2018, a lot of them are still hampering your profitability. So if you could elaborate a little bit there on the -- what you see as potential for margin expansion in 2019, would be very helpful.

[Mattias Ankarberg, President & CEO]

Also a good question with several aspects, and you caught a lot of them already. But we feel, overall, starting with the big picture that from our perspective, we have done a lot of good things, both on the efficiency side and on the sales driving side to be ready to deliver versus those target. I mean, we feel that the gross margin is back on track given that the raw material prices for timber is now normalized. We have trimmed the costs throughout the year. We have taken costs to open more stores in 2018. And you are right, that and the 2019 rollout will burden a little bit. And of course, we need to see growth, and therefore, profitability coming in Skånska Byggvaror also for this to materialize. Following this year, we have a lot of respect for short-term weather impact and how that can play out. So top line is, of course, short-term dependent on that. But we feel we have gross margins in place, we have good initiatives to drive sales, and we have better cost efficiency than we have ever had and the positive more normal outlook for driving profitable growth in a balanced way compared to the year of change in 2018. So we are optimistic that it's possible to deliver versus the target.

[Niklas Ekman]

Excellent. And finally, for me, also I'm curious about the like-for-like sales trend here in -- both in Q4 and in 2019 -- sorry, in 2018 in total, down 4%. And I'm curious if it's possible at all to break out how much of this is Skånska Byggvaror, how much of this is Byggmax, because I think you indicated that the core Byggmax format was actually positive in Q4, and I assume the same thing for the full year. Is that a fair assumption?

[Mattias Ankarberg, President & CEO]

Yes, let's expand on that. So that's an important number that maybe warrants a bit more illustration, so good question. In Q4, starting there, you are right, like-for-like in total includes both Byggmax and Skånska Byggvaror. And it was heavily weighed negatively that we are restructuring the Skånska Byggvaror commercial setup. So Byggmax comparable stores developed positively in Q4, not for the full year, given the challenging weather conditions in -- particularly -- well, in all the other quarters almost up until early autumn. So that's the case. If you want to think about this in a numbers way, I think you can almost assume that the vast majority of Skånska Byggvaror sales is comparable sales and then just some estimates on that, and we can also pull up separately. But in Q4, the trend has turned. Conditions are more normal. Byggmax comparable stores improved. Although the numbers weighed down by the last quarter of restructuring of Skånska Byggvaror.

[Operator]

Next question is from the line of [ Johan Cetera ] from Market Capital.

[Unknown Analyst]

Do you hear me?

[Mattias Ankarberg, President & CEO]

Yes.

[Unknown Analyst]

I'm curious. Because you're driving a lot of initiatives very successfully. And when you're doing those things, people are involved, of course, people are the ones doing the change. And I'm curious about what are -- would you say are your key success factors when it comes to the leadership of your managers? What are they really good at? And where would you probably see some opportunity in the future?

[Mattias Ankarberg, President & CEO]

A very good question. I think we can start by maybe underlining the strength of the Byggmax culture. I think we're a company that's just over 25 years old and still very entrepreneurial in our spirit. And our culture is very much characterized by taking ownership, teamwork, getting things done and speed, I would say. So I think that's the core to everybody that we recruit, including in the leadership team. And then I think there are a couple of things that Byggmax is fundamentally industry-excellent at. We are the discounter in the segment. We are very good at picking out the right assortment and getting very good prices for our customers. We have very good operating low-cost store formats. I mean, we have, by far, the lowest OpEx in the industry, and we have decreased comparable -- cost in comparable stores in absolute numbers. So that's a good teamwork. So I would point to those factors as the primary ones.

[Unknown Analyst]

And what would you say could be areas of development for your managers? I mean, they are always -- I hear that you have also a culture of being very aware of cost, clearly, and -- but there are obviously some areas that could be improved further on.

[Mattias Ankarberg, President & CEO]

Absolutely. And I think it maybe comes in 2 ways. I think, first of all, the consumer is more demanding these days. And competition is, of course, every day out there tougher. So our ability to drive things at low cost also needs to be complemented with a good customer care and a friendly attitude, and we are very good at that in a lot of situations. But that is something I think will be even more important, to have the customer mindset going forward. And then secondly, I think, all of retail is undergoing a lot of change, particularly due to digitalization and e-commerce. And I think a lot of retailer these days are thinking about how to best put their omnichannel model together, so to speak. And we have a very good position in e-commerce, but that is a big topic for us going forward, how to best meet the customer needs in total as a company.

[Operator]

[Operator Instructions] And there are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead.

[Mattias Ankarberg, President & CEO]

Thank you, everybody, for joining this conference call, and wish you good Friday and good weekend.

[Operator]

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