Byggmax Group AB

STO:BMAX

Earnings Call Transcript 2019-Q4

[Operator]

Hello, and welcome to the Byggmax Q4 report for 2019. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Mattias Ankarberg, the CEO; and Helena Nathhorst, the CFO. Please go ahead with your meeting.

[Mattias Ankarberg, President & CEO]

Thank you, operator, and welcome, everybody, to this Byggmax Q4 call. I am also happy to say that we are now joined by our new CFO, Helena, who will present some of the financial developments to you later. As usual, we talk from a presentation available on our website. And if we start on Page 2 with some highlights, we can see that the Q4 results were stable in terms of profit despite the early autumn that we had anticipated. As expected, the market developed negatively in the outdoor segment due to the early autumn, and net sales decreased by almost 5% and a development very much in line with other autumns with similar weather patterns. But despite that, we delivered a stable profit at EBITA minus SEK 6 million in line with last year. For the year 2019, it was clearly here in the right direction. We'll come back to it. But we have improved our customer offer and our customer metrics, and we have turned around Skånska Byggvaror into profitable growth. And we, overall, have good growth in profit. EBITA amounts to SEK 270 million for the year, SEK 252 million, excluding IFRS 16, compared to SEK 218 million last year. So good increase and also a good increase in EBITA margin, ending up at 5.1 percentage points for the year, which is 0.8 percentage points better than last year. We also have our Board of Directors recommend return to a dividend at 50% of net profit, which amounts to SEK 1.16 per share. So those are the overall highlights. And then some comments from my side on the quarter and also on the development of the group throughout the year. On Page 3, summarizing the financials for the quarter. Sales decreased in Q4 by 4.9% and like-for-like by 8.7%. As we communicated already in the Q3 report, autumn came very early, and we expected a negative development in the market, very much in line with other autumns in -- also in quite recent times in terms of sales development. We continue to see good performance of our non-comparable stores, adding sales growth. Gross margin increased to a very strong 33.3%, an increase of 2 percentage points, and it's primarily driven by purchasing improvements. And also now we start to see the good result of positive price/mix effect from our upgraded customer offer. And as usual, we are focused on cost control, and it was strong also in Q4 with a comparable costs, as we call it, but it's costs -- or OpEx, excluding the costs for new Byggmax stores. And comparable costs was largely flat in the quarter. And again, EBITA was stable around minus SEK 6 million for the quarter. And the previous measure that we used to present EBITDA, excluding IFRS 16, ended up at SEK 26 million compared to SEK 28 million in the same quarter last year.Turning to market development on Page 4. There is a few who follow us know, unfortunately, no good public data on the market, but we always share our view. And again, we had commented already in Q3 that we expected a negative development due to the early autumn, and it was also a very favorable autumn 2 years ago or in 2018. So as we know, weather has an impact on individual quarters, particularly for the outdoor categories, of course, or I should say that alone. And we expect -- we estimate a quite negative development in total market due to that of minus 5% to 8%, driven by the decrease in outdoor categories, while indoor categories were largely flat is our view in market. We also do track some more public data on market indicators, and I'll come back to longer trends. But overall, we see that the best consumer sentiment data we have intent to renovate has been low throughout 2019. And on the other hand, we see more structural, optimistic trends on the Swedish house market recovery, and I'll come back to both in a minute. Comparing our sales development on Page 5 to the market development. We should start by saying that we have changed the segment reporting a little bit to not anymore have an Other segment with the report, and Helena will come back to that change in a few minutes. But overall, the picture is the same. Byggmax represented over 90% of the group sales also in Q4 and sales development of minus 5.6% and a strong negative like-for-like effect of minus 10%. And again, similar to other autumns with similar weather effects, outdoor categories are decreasing, while indoor categories are performing much better. And we continue to see good improvement or good sales growth from our new stores, driving 5.1% sales plus from the non like-for-like. Skånska Byggvaror has been on a turnaround journey, and we are pleased to say that we see sales growth for the second half year continue to grow by almost 2% in Q4 and somewhat increased also in the order intake in the period. Overall, that amounts to the 4.9% negative sales development I've described earlier.So besides individual quarters being impacted by weather effect, if we look at the bigger picture of the market and Byggmax development, starting on Page 9 -- sorry, Page 6 with some market indicators, which I'll make a few comments around the external environment. First of all, we can see that the consumer sentiment metric intent to renovate has been low throughout 2019, graph on the left-hand side. Q4 data is not yet available but low for the first 3 quarters. We also see -- look -- keep an eye on, I should say, the more structural drivers of the market. We know that a key factor in driving renovation need is the house transactions as people typically renovate after they have bought a new house. And we remind our listeners that the metric that we look at is detached houses or freestanding houses, not apartments, as we sell to house owners primarily. And we also look at transaction volume rather than price development. And besides that, we can see that the volumes have obviously declined since the introduction of new mortgage regulations over the last 2 years. We can see that in 2019, house transactions was around flat for the first half of the year while started to increase for the second half of the year, which gives some cautious optimism regarding future renovation needs. It's too early to conclude that this is a new trend but at least somewhat positive development for the second half of 2019.That is the market and proving out a little bit and then proving out the full year on our development for Byggmax Group on Page 7. While we have been impacted with -- by the market and had a negative impact on sales, we can say that 2019, despite the fact was very much a year in the right direction with many positive developments for the group, we have stronger customer metrics. We have very high customer satisfaction and improved and also very pleased to see a very good and positive development in price perception, which is very important for Byggmax. We are also very happy that sales, we have now a "toolbox" with growth initiatives for Byggmax, where we have in place, and I'll come back to in a minute, the Store 3.0 delivering good results. We have Garden department working well. We have good progress on e-commerce, and we also have a functioning small format, which all in all is tools available to drive both like-for-like sales and total sales going forward. We have turned around Skånska Byggvaror, now having 6 consecutive quarters of increased profit. We have done a lot to improve our e-commerce, which now accounts in total for 19% of group sales with upgraded platforms and assortment and delivery options and I'll come back to that as well. We have an all-time high gross margin 2019, more than 1 percentage point above previous high. And we now see the effects of, of course, good purchasing improvements but also the upgraded sales mix that we've been driving for quite some time. We continue to work really hard on cost efficiency. We have decreased comparable costs over 2 years with over 5% and big push in 2018 and then around flat in 2019. And we also see that financials improve in 2019. I mean we have a good growth in operating profit. EBITA, excluding any accounting effects of IFRS 16, has grown by 16%, and we also return to dividend. So all in all, we feel that, clearly, we're in the right direction that makes us stronger moving into 2020.Give some more color on some of these items on the coming pages. On Page 8 is a view of our store portfolio. We opened 11 new stores in 2019, 9 in Sweden and 2 in Norway. And 2 of the new stores have Garden department, and 5 of them were of the new small format. We did not open any new stores in Q4. We closed 1 store in -- one Byggmax store in Q4 in Turku, Finland, where we had 2 stores previously; and 1 Skånska Byggvaror showroom in greater Stockholm region in Värmdö. And we also had 2 stores in the greater Stockholm region previously.Page 9, commenting on our Store 3.0 initiative for which we continue to see positive development and continue to convert stores to 3.0. Store 3.0 is an initiative where we upgrade our stores to be more complete for smaller and bigger projects for the customer. We had some assortments, for example, electrical installation, ventilation, grouting. We also added small garden department. We also changed the store layout and store communication quite a bit to be more clear for the customer. We started this initiative or kicked off with 2 pilot stores in autumn 2018, so a little bit more than a year ago. And we have now converted 24 existing stores to 3.0 and also opened 6 new stores with 3.0. So all in all, we have 30, of which we have converted 11 during the recent quarter. We have said previously that we expect 3% sales increase per store from this initiative, and we continue to see that initiative meet those expectations. And with low investment, that gives us a good and quick return on the investment. Positive for our ability to affect like-for-like sales going forward, of course.Page 10. You know that e-commerce is a big focus area for us as well. We've done a lot of upgrades during 2019. We have added assortment to our online range. We have shifted Byggmax to a new technical platform. We have -- and also then at the same time, redesigned our site to improve the customer experience. And we have launched several new delivery options for the customer, so both express delivery customers have ability to choose delivery day and what we call collect@store or click and collect for a large part of the online sales, which is very appreciated by our customers. All in all, on Page 11, we now feel that we have a toolbox of profitable growth drivers with store expansion, both the ability to get good results from new stores that we've seen this year but also the format for smaller towns, which continues to do really well. We have an upgraded position on e-commerce to continue to grow. We have Garden departments in place in over 20 stores. And we have Store 3.0, which is quick and easy conversion and giving good results for us. So better we feel equipped to move into 2020 with a good mix of initiatives available to us. One word of Skånska Byggvaror on Page 12. Briefly, we could say that the positive financial trends since the transformation work started has continued. As of Q4, we have now sixth consecutive quarters of profit improvement. EBITA in Q4 was about SEK 4.5 million negative versus SEK 8 million last year. We also see that for the Q3 and Q4 2019, we returned to sales growth. And all in all, the measures that we have taken to the business have created improvements, both on the efficiency side, but also we now see that the growth initiatives, which primarily are around the core assortment and digital sales and marketing efforts, they have started to give results during the second half of the year. So with that, I hand over to Helena to go through financials.

[Helena Nathhorst, Chief Financial Officer]

Helena Nathhorst, new CFO for Byggmax Group since December. I will comment on the financials for the fourth quarter and for the full year 2019. Before I start, I'll have 2 comments on accounting principles. This quarter -- the first comment is, on this quarter, we have updated our business segment to be in line with how we monitor the business. We have 3 segments: Byggmax, Skånska Byggvaror and Other. And Other has previously included Buildor and one of our fully owned distribution subsidiaries, Svea. And we have reallocated Buildor and Svea to be included in Byggmax. We have no changes for the business segment Skånska Byggvaror. This is all described in the year-end report, and the historical numbers are recalculated. So when looking at the segments, you will have comparability between the periods and years. The other comment is more of a recap. We are IFRS compliant. Since January 2019, we have IFRS 16 in leasing agreements, meaning that the lease agreements -- lease costs for primarily stores are not taken as OpEx on the P&L but recognized as asset and liability and depreciation and interest. This is not comparable numbers for 2018. So the way we present this is then having adjusted for IFRS 16 to be comparable.So that was a little bit -- making sure that we have the same background. If we look at the results, the development for the fourth quarter is net sales decrease of 4.9% year-on-year, as commented. It's driven by Byggmax and early and rainy autumn with negative effect on sales, clearly seen in outdoor category. We have an increase in Skånska Byggvaror. Gross margin increased driven by purchasing improvements and positive price/mix effect. So in summary, for the quarter, the decrease in sales has been balanced by improved growth contribution and further cost control. So the EBITA for the quarter is in line with last year. If we continue a little bit on sales for the full year, we have a sort of balancing on the fourth quarter sales. So looking into the full year, we have an increased sales of 3.3%. And when we look at the Byggmax segment, you can see that the like-for-like number is more balanced to be in line with market development and is a clear, good contribution from new stores. We also have continued growth and good intake in Skånska Byggvaror, primarily from the second half of the year. So from the sales for 2019, looking into little bit of the costs for 2019. We have for the full year all-time high on gross margin and continued good position, being stable also for long term and long-term activities done on both the categories in the mix during the store and the improved purchasing. Also continued strong focus on the costs, cost control. So in all, we get a result from the full year of 16% EBITA growth, and we compare those numbers, excluding IFRS 16, and as an increase on earnings per share for the year.Next page is more a table where we have the operating expenses, where you can see the cost for 2018 and the movement to 2019, both in the quarter and in the full year numbers. And then it's clear that you see the cost affected by new stores are the driver for the cost increase. And if you look into the increased cost for comparable stores, we are largely flat and below 1% increase. Next page, on Page 18, if we look on the profitability per segment, if we look on the full year 2018 and 2019, we can see that we have increased profitability from both our Skånska Byggvaror segment and Byggmax, both in terms of performance and margin coming from, again, the increased gross margin, obviously, and continuous cost control and the trend that we have and the transformation going in the right direction in Skånska Byggvaror. We have -- on Page 19, we have the cash flow. If we look on the cash flow for the fourth quarter, this varies a little bit from the historical pattern. Byggmax has good payment terms with suppliers, and we have historically used the possibility from time to time to negotiate payment terms for price discounts. And this autumn and largely this quarter, we have used the cash discount to a higher extent than previously, which is clearly seen in the working capital movement, and this has also impacted the full year cash flow. So we have increased cash flow from operating activities with an improved profitability, but then the movement in the lower accounts payables are seen and controlled inventory movement from new stores. Page 20. I think this is more of the details for elaborating on comparable for 2018 versus 2019, including and excluding the accounting of the lease agreement. But we can say that it varies on EBITA margin between 0.3% to 0.5% unit, depending on full year and quarter. And the full year impact on EBITA is plus SEK 17.7 million. The accounting principle has no impact on the cash flow for the year. It only movement within the cash flow statement. And it has negative impact on the bottom line of the income statement, where we are negatively affected by SEK 10.8 million.

[Mattias Ankarberg, President & CEO]

Very good. Thank you, Helena, and I will then have a few words around the outlook and summary, starting on Page 22 with the market outlook. As we have seen in 2019, we had a low intent to renovate in Sweden, and we also had a very recent negative weather effect in Q4. We do see cautiously optimistic, I should say, increasing signs of house market recovery, where transactions have started to increase towards the second half of 2019, remains to see whether that is a long-term trend, but at least a positive sign. Another important market factor for us is, of course, raw material prices, where there has been quite some shift in, particularly, timber raw material prices throughout the year. We see that they have declined during the autumn and are now, our view, on their way towards stabilizing. So that's outlook from an external perspective. On Page 23, our focus for 2020 is to continue driving the profitable growth that we have achieved in 2019. We win with a bigger toolbox available to us, increasingly shift our focus to upgrade existing stores and particularly focused on the good 3.0 initiative. All in all, we expect to convert 30 Byggmax stores to Store 3.0 with a couple of openings as well. That means that we expect around 40% of the store portfolio to be Store 3.0 at the end of 2020 compared to 19% at year-end '19. We will also add a few more Garden departments, around 3 to 5 throughout the year 2020. So that's the big topic on store upgrades. We will, of course, at point two, continue to drive growth in e-commerce, continue to improve the customer experience and increase assortment. Number three, we will also continue at a good basis for growth our store expansion, which we have been successful within 2019. We expect to add around 10 net new Byggmax stores, of which 5 are of a smaller format we developed in recent years. Skånska Byggvaror is now in a positive trend, and we continue to build for growth with initiatives that are in place or the type of initiatives in place, I should maybe say, which is core assortment development and further efforts within digital sales and marketing. And lastly, but absolutely not least, is that we will continue the cost efficiency improvements. We are a low-priced company and need to have low cost, and we have been successful over the last 2 years to trim costs continuously. And moving into 2020, we also have some new tools and technology in place that should help us to continue to contain costs in a good way. So increased focus on operating what we have but continue a balanced approach to drive profitable growth also in 2020.Summarizing on Page 24 the presentation. Three key points from our side. Despite the early autumn, we had a stable result in Q4. We had a year, 2019, which clearly is in the right direction. And the Board of Directors proposed a dividend of 50% of net profit, which is SEK 1.16 per share.With that, I hand over to the operator to take questions.

[Operator]

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

[Niklas Ekman]

A couple of questions from my end. First, I'd like to start with the weather. Maybe if you can elaborate a little bit more about the weather impact. Obviously, you talk about a very early start of the autumn. But at the same time, I imagine that the exceptionally mild weather we've seen in recent weeks should be quite favorable. So if you could elaborate a bit on the development for the different months and maybe also a comment on the current weather. I assume that this mild weather right now should be quite positive for the start of 2020. That's my first question.

[Mattias Ankarberg, President & CEO]

Thank you, Niklas. Happy to. You're completely right. And unfortunately, almost said, weather [indiscernible] as an outdoor category-focused retailer. But you're right, the October and November were hit by the very early autumn, cold and rainy, compared to also very mild last year, whereas December was more normal and much better also in terms of sales. And you are also right that this year's mild weather is positive for us. Now you should, of course, remember that January is very small month in terms of sales, also more or less in the quarter, but this is clearly a positive weather effect we're experiencing right now.

[Niklas Ekman]

Excellent. And the second question on the gross margin, which was obviously very strong here in Q4. Do you think the development now in recent quarters and in Q4 here, in particular, is that exceptional? Or do you see room for further improvement? And I know you mentioned the switch to 3.0. You mentioned timber prices here. What kind of magnitude are we talking about? Is there room for considerable further upside in your gross margin?

[Mattias Ankarberg, President & CEO]

Thank you. Well, we could start by saying that we have achieved somewhat of a new level for gross margin in 2019, where it is the best we've had but also by quite a lot with over 1 percentage point. And I think you point out the right drivers. I mean, of course, we now sort of washed out the negative effects of timber prices a bit more primarily last year. But we also see the continuous upgrades we have done to the assortment in all companies introducing more good, better, best products and working with 3.0 to add more sales in higher-margin categories. All that contributes, of course. And we do feel that we are at the new level from which we can operate, which is positive. There are several factors that, of course, point to a positive development, also going forward, the things we will continue to drive. But at the same time, always cautious to be too optimistic on gross margin as there are also external effects that can impact with -- we are a price leader and need competition and raw material prices and currency effects, et cetera. So pleased to see the good development in 2019 and pleased to sort of start the work to try to improve from here but careful to promise too much on further gross margin improvement.

[Niklas Ekman]

Excellent. And then thirdly, a more broader question. If you look at the like-for-like trend, you have 3 years now with declining like-for-like sales. Obviously, some of that related to the restructuring of Skånska Byggvaror. But in general, how much of this would you consider to be market related? And how much would you be -- attribute to own underperformance? And then what do you think is the likelihood that there are the chances of this reversing going into 2020?

[Mattias Ankarberg, President & CEO]

Good and important question. And I say it's good also to look at it at a little bit of a longer-time period. And I would say that I'll point out probably 3 factors to the negative like-for-like development. The first one is the conscious decision to reduce unprofitable sales in Skånska Byggvaror, which, over the last 2 years or so, it's significantly several percentage points impact, which, of course, impacts the total group number but positively. The second one is, I would say, a general market trend that we can see in statistics. So if you look at, for example, house market transactions, I mean, it's down by almost double digit in 3 years. If you look at starting point '16 into the starting point '19, both for summer houses and for permanent houses, so clearly, that impacts negatively. And then I think, lastly, the general consumer sentiment over the last year or maybe 1.5 years is less optimistic than we saw in 3 or 4 years ago or 2 years ago maybe even. And you can see it in some of the statistics, but I think in all macro environment and in retail, we can feel that this is up. So I think we feel that that's, of course, negative. We feel that we are very well positioned and even stronger in terms of market share in our core business and core categories, and we, of course, do internal consumer surveys and panels and hold our positions very well and take market share in that business. We should remember we are a little bit of a niche player or different player in that we are selling off the building materials, but we sell to consumers only. But in that segment, we feel very, very confident that we are improving. Then looking forward, I think there are 2 factors that we should consider. One is the market, and one is our ability to drive that like-for-like sales. And I think the market, I'm cautiously optimistic, but I don't want to sound overoptimistic. I mean, at least there are some positive developments in the housing market now that -- which we hope is at least not a negative drag for us going forward and maybe even a small contribution.And then secondly, I feel we internally are, and more importantly, much better equipped with sort of clear initiatives to drive like-for-like sales. Of course, all retailers, we continuously work with upgrading assortment and marketing and better increasing our customers in our stores, et cetera. But now we have initiatives in place. I'm thinking particularly about the Store 3.0 initiative that we feel we can allocate capital to and get clear measurable effects from. So it's been negative for several reasons, and we feel that we have at least better tools in our own hands and hopefully some contribution from the market as well going forward.

[Operator]

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

[Fredrik Ivarsson, Research Analyst]

A few questions from me as well. First, on cost control. Comparable costs, broadly flat in 2019. Do you have any initiatives in 2020 that could run a decline in your OpEx in comparable terms? Or do you need sort of leverage from like-for-like to drive margins going forward? That's my first question.

[Mattias Ankarberg, President & CEO]

Thank you, Fredrik. Yes. It's important to us to continue to drive cost containment and ideally decreases. And we have more initiatives in place to make that happen in 2020 than we had in 2019. It's less of a, sort of, single major initiative and more of a, sort of, set of actions, I think, also connected to the culture that we have. But to give you a few examples maybe to add some color to it, we have changed quite some of our tech platforms, including our e-commerce platform, which is now a little bit cheaper to operate than the previous one. We have better control of our deliveries and inventory management. So we can time deliveries to stores and their staff stores differently. We are developing self-scanning tools from our store colleagues to use. So instead of manual work to receive orders and add data into system, you can scan pallets also, of course, decreasing our spend in store. So we are improving marketing and moving more to digital, which is more measurable. And there, we can be also more specific and cost efficient. So I think as part of our culture, we have a big agenda always as a management team to drive this. And I would say we have somewhat more ambitious agenda than we have had but not a, sort of, single major initiatives but keeping up a good pace of continued OpEx management.

[Fredrik Ivarsson, Research Analyst]

Sounds reassuring. And another question on CapEx. It came down quite a bit in 2019. Do you have any guidance for us in 2020?

[Mattias Ankarberg, President & CEO]

Incorrect observation, and I think 2020 is somewhere in between '18 and '19.

[Operator]

[Operator Instructions] And there are no more questions at this time.

[Mattias Ankarberg, President & CEO]

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