Earnings Call: Q4 2019

Feb 6, 2020

Thank you. And it's 9 o'clock, and I would like to welcome you to the presentation of Ax Food's Year End Report 2019. My name is Klas Palkov. I'm the CEO of Ax Food, and I will guide you through this presentation. However, with me today, I also have our CFO, Mr. Anders Lexmann, who will present the financials as well as be part of the Q and A session. The agenda that we will cover today, we will go through obviously the key ratios for the Q4 and we will sum up the fiscal year 2019 and go through our financials. I would also like to give you an update on our strategic agenda as well as guide you in terms of our outlook for 2020 and comment as well on the proposal regarding our dividend. And then we will end up this session with a Q and A. Now before we go into the key ratios for the quarter, just a quick reminder of our House of Brands strategy. We have as you know several strong brands that is well positioned in each individual segment with a common logistics and sourcing. We have now in this fiscal year reached another and go through our Q4 and the key ratios, and we'll start with sales. And I'm obviously pleased to report that we once again report a solid growth, which is across all segments. Villis continues to outperform the market, but we also see a more positive trend in this quarter in Hampshire. All in all, our net sales increased by 5.4 percentage points to over SEK13 1,000,000,000 for the quarter. If we then look into our sales that we see in our stores, we conclude that we continue to gain market shares. We have grown with 6.2% in the quarter. And if we compare that to the overall market growth, we once again significantly outperformed the market, both I would say for the quarter as well as for the full fiscal year. Now looking as well into the online part of our business, we noted 31% growth for Ax Food, which we can compare then to the overall market growth of 17%. So also here we have a faster growth than the overall market. Moving then from sales in to our operating profit and including the new IFRS standard, we are clearly improving our operating profit. However, also excluding the IFRS effect, we report a higher profit and stable margin. This is then driven by strong like for like, but also somewhat offset by the investments for our future growth such as common dark stores and investments in Apo Hem, Martin Tessier and Urban Delhi. But all in all, profit came in at SEK4 87 million or SEK442 1,000,000 excluding the IFRS effect, which is a clear improvement versus last year. Moving then further and looking into how we see it by segment and starting then with our largest segment, Villis, which also then includes Villis Hemma as well as Eurocash. Clearly, another strong quarter with very strong like for like sales with plus 5.1 percent versus last year, we now have 5 more stores and 22 more stores now offering e commerce. The strong like for like and the good cost control led to SEK285 1,000,000 in terms of profit and excluding the IFRS effect, which is plus 8% versus last year. Outside the numbers, if I go into VILI and continue with VILI, I would like just to highlight that not only the larger Villis units are doing or having a good progress, but we also see very good and healthy progress in Villas Hema as well as Eurocash. And also in our online, our progress with the transparent fee system that we offer in Villas goes really well. And I would like to highlight that we not only had a positive Christmas sales, but we also increased our donations for Christmas food to relief organizations in this quarter. Moving then on to Hemschep and a general comment is a step in the right direction. Total sales for Hemschep increased by 5.7%, also that clearly above the market growth, but it's also supported by the new 9 stores from Oostensons in our franchise system. Our group owned stores like for like has improved versus previous quarters to 1.7 percent. And our operating profit came in at SEK65 1,000,000 or SEK52 1,000,000 if I exclude the IFRS standard. And even if we're then facing some softer comparable numbers, it is a positive move clearly, as I said in the beginning, in the right direction. And looking at Hampshire's highlight, we continue with high activities to strengthening Hampshire. And highlights for this quarter has been that we now have since February 1, a new marketing or new managing director in place in Simon Margolis. We have started also the expansion of e commerce then in Click and Collect to our franchise stores. And we start to see positive signs from our new marketing and communication platform. Moving to Axosnabios. We are also and I would say, on the other hand, compared to Hampshire, we're also meeting high comps in Akzo Snabrios. But hence then pleased to see that we also again in this quarter report strong sales with very positive like for like at plus 6.2%. A solid operation and good growth resulted in improved operating margin and improved profit to SEK34 1,000,000 for the quarter. And finally, DAGAB, who also report a solid net sales growth of 5.3 percent. And our operating profit at SEK152 1,000,000 versus last year SEK170 1,000,000. And even if last year was a strong quarter, I want to point out that our underlying operation with purchase and logistics shows a very robust performance in the year and also as well in the quarter. And the reason for the margin drop are due to our investments for the future. We are implementing, as you all know, a common dark store in Stockholm that continue to drive some cost for us. Secondly, we also continue to invest in our new brands as I mentioned earlier in Urbandelli, Oppoheim and Motto, Pessi. Looking at the highlights for Daghavim this quarter and I'm then coming back to the dark store as I would say that we are now making good progress with our dark store and we are gaining a lot of learnings for the operation how we can increase our productivity in that area and learnings that we now are taking as we are now planning to move into to do a common dog store as well in Gothenburg later on the coming months. We're also making good progress regarding our sustainability as now 50% of our truck fleet is now ready for fossil free, which also is part of driving a more sustainable general operation. And finally, within Daghab, as shared with many of you at our Capital Market Day in December, we now have all our key components in place for our new automated logistics center to be opened up in 2023. So with this, I covered the ratios for the quarter and I would like to hand over to our CFO, Mr. Anders Mann, to go through our financial position. Thank you, Claus. And let me then first sum up the full year. And the net sales increased with 5.5 percent to SEK 50,700,000,000 for the full year. And the market, the Swedish market, at the same time, grow with 3.1%. So we clearly gained market share even for the full year. And it's mainly wheelies that contributed to good growth, but also the other segments have had good growth, Hemschep and Snaglios. And consequently, even DAGAB, of course, had good growth. The operating profit for the full year summed up to SEK 2.88 billion, an increase with 13%, and that include an IFRS 16 effect with SEK 174,000,000. So excluding IFRS 16, the operating profit increased with 4.4 percent to EUR 2.114 billion. We had a good growth in like for like, which boosted both profit in SEK and margin, and we also saw improved gross margins in our concepts. On the other hand, we had, as Kars mentioned, higher cost to implementation of the Comandark store and even investments in Apohem, Urbandiel and Dot S that hampered DAGABS profit for the year. The operating margin increased with 0.3% to 4.5%. Excluding IFRS 16, we have an unchanged operating margin of 4 point 2%. Looking then at our cash flow for the year. As I mentioned earlier, quarters, we have a huge effect of IFRS 16 at the row of amortization of debt of SEK 1,400,000,000 is fully an IFRS 16 effect, and we see the opposite positive effect in the operating cash flow. So that's a 0 effect on the total cash flow. We have a higher investing activity this year, but that's mainly explained by the investment in the automation facility in Bolstad, a payment we did in the Q4 of SEK 510,000,000. So that's affected in net investing activities. We also see a negative effect in the working capital, as I mentioned earlier quarters as well. Last year, we have a positive calendar effect and that this year, we have a reverse effect that which is mainly explained the change in working capital. I will come back to the working capital. Otherwise, we have small changes in the cash flow. Share repurchases and dividend payout is approximately the same this year compared to last year. If we then look at our capital expenditures, we sum up to SEK 1.4 81,000,000,000 and that's also include this automation investment of SEK 510,000,000. So excluding that, the investments are up to SEK 971,000,000 this year compared to SEK 905,000,000 last year if we exclude acquisitions. So we have a little bit higher underlying capital expenditure this year. We increased our investments in our retail operation, which is the dark blue color here in the figure, with approximately SEK100 1,000,000 more, and that's due to more store openings and also higher pace in our refurbishment programs in our stores. And we also see a little bit higher investments in IT for the full year. Coming then back to the development of our working capital. We still see that we managed to decrease our working capital even in the Q4. And for the full year, we now reach minus 3.0 percent of net sales, And we continue to it's mainly accounts payable that we made improvements in, but also in the inventory. And inventory turnover ratio is decreasing as well. And if we look at the development on net debt, we even this year had a net receivables position at year end of SEK377 1,000,000 and that's also, of course, impacted of the payment we did to return in the Q4 of SEK 510,000,000. The equity ratio was just above 25 percent, which is well above our long term goal of 25%. And finally, the development of our capital employed and return on capital employed, we see that we have a huge effect of IFRS 16 of approximately SEK 5,500,000,000 at year end. So if we exclude that, we are in line with previous years and also the return on capital deployed is above 40% if we exclude the IFRS 16 effect. So to sum up, we have still have a strong financial position, and we are well equipped for further investments. With that, Claus, I hand over to you again. Thank you, Anders. Now I must say, we have now ended 2019 and with energy moving into a new decade and a new year. We have outlined a solid business plan for the year ahead, and I would now like to give you and provide you with a quick update regarding the key elements and our priorities the year ahead to come, which is included in our plan. Now first, let me remind you of that our mission or purpose for our business is also very clear that we want to enable a better day for everyone to enjoy affordable and good and sustainable food. I think food and sustainability has never been more relevant and I'm sure the relevance will continue even further to increase as we move along. Now as most of you know, we have divided our business plan into 6 strategic areas, 6 strategic focus areas. And across all areas, go below and goes across everything is and our core values. But also across we have sustainability that is clearly an integrated part in all our strategic areas and should for us and for all of us seen as what we call it a green thread across all parts of our business. And if I just look at as we are focusing a lot on this, a few recent highlights in this area as we see as an example in the Q4 launched at Mato Tse where we will enter up with a food carbon footprint labeling in more than 3,000 SKUs to help and support, to guide the consumers to make more conscious choices when they select their food and when they are shopping. We also made positive progress in reducing plastic and as well we continue to make good progress in the important area of reducing food waste. If I then move into our strategic areas and like then to point out the key priorities for the coming year. And I'll start with our customer offer. And for us, it's clear that we will continue to secure and strengthening our price position. This is critical for us and important for the future in a very competitive market. Further, we will drive our sustainable range to attract this and to add this to the consumers in a more way as we've done And also to add more ready made meal solutions as part of the trend for what we see in the consumer market today. Looking at the customer meeting, we will continue to strengthening the digital customer offer that we have today. We will optimize our store network and continue also to refurbish our stores that you have seen in the coming last year in Villas and Hampshire, we'll continue that program. And also take further steps to even be more relevant when it comes to our loyalty program and how we will invest in that with a lot of data and how we can address that to consumers in an even further better way. Looking then at expansion, we plan to expand our store network with 5 to 10 new stores the coming year or this 2020. We also will roll out our online offer to further cities and to further stores as well in Villis, but also as I pointed out earlier, as we've now started also this with Hemshaft franchise operation. And we see a potential to also put even further emphasize of expanding our Villis Hema store network in the market. Now for supply chain, as I'm sure you expect, we will continue to focus on building our new logistical center in Bolsta, even if we are not this would be ready by 2023. But obviously it will be a part of key priorities the coming years also included in 2020. But also focus to improve the efficiencies in our manual common dark stores. As I mentioned, we have really good learnings and we also see large potentials to improve our productivity as well as identify new business models for the last mile as in this area, there is a fast development and there is a lot of innovation going on at the moment. Regarding work approach, the key topic for us is to capitalize on the large amount of data to secure we become even more relevant to our consumers and more data driven in our analysis and decisions as well as use that to improve our efficiencies internally. And finally, we will continue to invest in our most important asset, our people, in several key areas regarding investing in competence and leadership development, etcetera. That was a quick introduction to the key priorities. If I now end up the presentation or part of the presentation with some comments regarding our outlook and our dividend proposal. And starting with the outlook, for 2020, we plan to invest SEK900,000,000 to SEK1 1,000,000,000 in our CapEx. And as I also shared in the presentation earlier, we're also guiding that we plan to open up 5 to 10 more stores in our store network the coming year. Now moving on, the Board of Directors will propose to the AGM now in March to increase our dividend to SEK7.25 per share. The dividend will be split into 2 payments, March September in line with the revised dividend policy. And the proposal then corresponds to 92% of profit after tax, which is well in line with our dividend policy. So let me sum up. We are closing a successful 2019 with a strong Q4. We have strong growth. We have clearly increased our market shares in this period. We've also improved our profit. We also report a stable margin even excluding the IFRS effect. And as Mr. Leksman pointed out, we have a strong financial position and I would say that we also have strong plans for investing and moving further with our plans for the future. So with that, Alexander, will you like to join me and guide us through or help us guide us through the Q and A session? Thank you, Claus. We will now start the Q and A session of the presentation today. So we would just like to start with the telephone conference. And so operator, please do we have any questions? Our first question comes from the line of Daniel Schmidt from Danske Bank. Please go ahead. Yes, good morning, Claus and Anders and Alexander. Just a couple of questions from me and maybe starting with an odd one. I saw that you're writing in the report that you're closing the warehouse when it comes to Mart. SC in Malmo, south of Sweden, due to low volumes and you're sort of offering consumers to shop online through Villas and Hammshoop instead, which is pick in store solutions. Could you expand on that? Is there sort of any change in terms of competition? Or what is happening in the south of Sweden basically when it comes to your offering? Thanks, Daniel. No, it's a good question. And now there's no drama at all in We Malmo was the area that Mototese entered the last in and we had seen not the volume that we want to have cover up or to handle a common dark store. So we then take the decision at this stage that we will now only go from our stores in that region as for now with the volume development that we see. Now that doesn't mean that we will not come back, but at this stage, we'll find that more efficient in that area. So okay. So you might be sort of setting up some sort of centralized facility in the future. Do you see any change or is there any difference in the growth? You have around 20% growth in online groceries in Sweden for the nation. Is there a slower growth in the south of Sweden? Or is there sort of any specifics that you've been surprised by given that you're changing or you're making this change? No, I don't think that you should. As I said, we've seen a very strong growth across the nation in particular Villis, which is nationwide. However, when we have the pure player, Mato Tesser, has seen a very positive growth in Stockholm as well as in Gothenburg, particularly also with the launch now, as I mentioned, of the new carbon footprint labeling, it's a positive effect. However, when we looked at the area and we looked at the volume that we have in the Mallemy region for handling a common dark store, we find it not as efficient that we would like to see, so we've taken these decisions. So but as you'd point out, the market growth in total for us, we are growing more than 30%. We are still coming from low volumes and the market is somewhat slower than that at this stage. But I think we follow this very closely as it could change fast. Okay. Okay. And then sort of maybe a follow-up on that one then relating to DOGAB and sort of the extra cost that you've incurred during the latter half of twenty nineteen when it comes to the centralization in Stockholm. And you also said that you've learned a lot of things and that you will apply those learnings when it comes to the Gothenburg centralization, which I assume is going to happen now in Q1. And would you say that sort of the learnings that you've gathered when it comes to the Stockholm centralization will mean that you won't incur nowhere near as much in terms of extra costs when you're opening up in Grafenberg or how should we sort of model that? Well, I can't guide you in exact modeling, but obviously, I think the statement that we are doing that we are confident that we have now reached so much learning so we can move on to open up the next common dark store in Gothenburg. But we admit as we have said earlier in the earlier quarters, it's been a longer journey than we expected to get all the systems in place because for us, obviously, we are combining 3 brands into the same area. That has put some challenge in terms of how we are picking and how we're handling the picking to become efficient in that picking part. I still think we have area for improvement in the Stockholm part, but now we have so much learnings and we now start to work on that and see some progress already. And we are confident that, that will not we will not have the same learning or it will not be the same time journey in Gothenburg. We will come faster up to it, so to speak. All right. Okay. Okay, good. And then a final. It's been quite clear when it comes to sort of IGA as of late or gradually through 2019 became more aggressive when it came to price initiatives? And looking into 2020 Or is it do you concur with that? First of all, have you seen that? And secondly, looking into 2020 and given there was a slight slowing of food price inflation in Q4 versus Q3, what do you expect in terms of food price inflation for 2020? Well, regarding the last question, I we have no other forecast than the forecast that is out there in the market from the JOVY around 2.5%, so 2%, 2.5%. So no other expectations from that part. Now when it comes to the overall market, I think we have a very competitive market. 1 of our, as you all know, key ratios that we are clearly tracking and following that is our price position towards the competitors. And we are keeping that and we are monitoring that on a day to day basis. So it is a competitive market and we will continue to have a strong price value proposition in the market. Thank you. And the next question comes from the line of Radek Iversen from ABG. Please go ahead. Thank you. Hi, guys. A few questions from me as well. Firstly, on the improved campaign efficiency in Hampshire, the margin was up close to 1 percentage point. Curious to hear, did you sort of do any big changes in Q4 versus Q3? Or is this more a result of things you've been working on for some time now? And also maybe if you expect further tailwinds from a better campaign margin going forward in Hampshire? Hi. No, I mean, we have as I shared, we worked intensively with Hampshire and these could change us from month to month and so forth. But I can conclude that in the Q4, we've seen improved efficiencies in campaign activities. We've been better to making the proper activities and to make the better campaigns in this quarter. And obviously, part of that is learnings that we've gathered during the year in terms of what works and what does not work as well as good. So you're pointing it out, of course, that's part of the learning and how we are driving our Hampshire forward. So and how we would look the coming quarters, I think will follow, but I'm clear that we are continuing to investing in Hampshire. We are continuing to drive operations to improve the efficiencies as well and to invest as well in our stores. So it's a journey that we are on, and I'm pleased to see that we've seen a step in the right direction in the Q4. And the second one on Dargab, a follow-up there. Profitability was burdened by the dark store, obviously, but also as well as the investments in the new brands. Curious to hear which one of those two factors that you mentioned weighed the most. Are they sort of equally heavy? Or is one of them significantly higher than the other? No, even if we are not splitting it up, but and obviously, as you're seeing the and I also want to mention last year, we had a very we are meeting high comps in Daghav. So the effect is around SEK 18,000,000 on the full quarter of SEK 150,000,000 to SEK 170,000,000. So it's not that large, if I say, when you start to split it up. But we are clear about it that obviously we are now also in an investment phase with some of our new brands. As you know, we now have Urban Deli fully in our books and 4th quarter and first quarter in that part of the business is so much lower than the summer period. So that is a bit more burden than we see on the overall year. And of course, now we have the full effect in our books. Fair enough. Thanks. Our next question comes from the line of Niklas Ekman from Carnegie. Please go ahead. Thank you. I want to follow-up a bit on Willys here and the we've seen a couple of quarters here with exceptionally strong like for like growth and this obviously narrowed quite a bit relative to the market in Q4. And I just want to hear your take on this, anything particularly except tough comparisons, obviously. And also a little bit how you see this going forward, if you think we should expect this outperformance of previous quarters. Do you think that this could return or if the comparisons basically make this more or less impossible? Just your general view here. Hi, Niklas. Well, I think when you're looking at Villis, now we can compare to many in many other ways, but obviously with a like for like of over 5%, as you know, in the food retail and it's on a year, on a year, on a year, this affects. We are not really meeting any easy comps in Villas. We are really meeting high comps. And it's very impressive, I think, to see that their performance continue to be on this high level. So I think that's enough as a comment on that part. Yes. Fair enough and agree, very impressive performance. Turning to the store rollout. You talked about 5 to 10 net sorry, is that a net number in store rollout? And can you talk a bit about by format here as well? You mentioned Wilis Hema that, that was a priority. Can you give us some more flavor here? Well, the guidance is on new stores, but we don't have any closures We will look at a broad range We will look at a broad range in terms of and see opportunities. We have some stores in pipeline both for Hemshoppe and Villis while the majority there is in Willys. And I'm pointing out when in terms of priorities that we see opportunities to further accelerate Willys Hema that could not only be part of in this year, it could also be years to come in terms of how we are looking at that part of our business. Okay. Thank you. And also, I just wanted to ask about the dividend as well, the reason behind the dividend hike given that you're facing now a couple of years here with significantly elevated investment. I'm just curious if you could elaborate a bit more on here what the board has, how they've been reasoning and why they decided to raise a dividend? Well, I think it's as you all you make, you look at the plans ahead and you look at your financial position in total and the board has made the decision and the view of that we have the opportunity to increase the dividend by 3% to 4%. So I think it's a common view in terms of how our we have a very strong financial position. And as you know, in terms of our investment in our logistical center moving the year ahead, we also have secured financials for that. So I think we're in a good place. Excellent. And then finally, a question on sustainability. I'm curious here, we have a lot of initiatives ongoing. And I'm curious if you take the net effect of this on your in terms of profitability. Obviously, a lot of initiatives here that will imply higher cost, But at the same time, you're doing a lot to reduce plastic, reduce food waste, etcetera, which should be, I guess, positive from a profitability perspective. If you look at it from that perspective, have you done a calculation what this actually does to your profitability? I mean, I think there is no choice in this in terms of to gain the consumers' trust, we need to make sure we have a really sustainable operation. And I'm also confident that this goes hand in hand both with growth and profitability over time. So I think obviously the efforts we are making is are needed, but also part of and the critical part as I pointed out, we also need to attract and to make sure that we get the consumers with us on this journey to make more sustainable choices. Then within our operations, there are areas that, of course, some of it will cost, but also several of the sustainability initiatives we are doing is also good for reducing cost in our own system as well. So I think there is no conflict in this. Okay. But net net, you don't see any dramatic impact to profitability? No. Excellent. Okay, thank you very much. And as there are no further questions, I'll hand it back to the speakers. Thank you. So I will now just turn to the audience here who are present at the store. Do we have any questions from the audience? No? So if we have no further questions, I will now turn the floor over to you, Claus, for final remarks. Thank you. And let me then close this session by thanking you for listening and also hope you've seen, if you move a step ahead there or aside, Alexander, that as I said, we are now moving with energy into a new year. Actually, the year Axwood turns 20 years. So it's going to be an interesting and fun year for the whole Axwood family. Thanks a lot for listening.