Earnings Call: Q2 2019

Jul 15, 2019

Hello, everyone, and welcome to the Ex Food AB Q2 2019. Today, I am pleased to present CEO, Klas Balkopf and CFO, Anders Stixmann. Speakers, please begin your meeting. Thank you, and good morning, everyone, and welcome to Axwood's financial report for our Q2. As you heard with me today, I have our CFO, Mr. Anders Leksman. And let's now move into the report and kindly then ask you to turn to Page number 2. Our agenda for today will follow our normal structure. We will go through our key ratios for the quarter as well as our financial position. This time, I will also be fairly brief in our strategic update, and we will, as always, end the conference with a Q and A session. Turn Page to number 3. Let me start with a quick overview of Axwood. Our house of brand structure is clear with a common logistics and sourcing that create economy of scale. Versus last time, you may see on the slide that the brand Direct then is not longer there. This is due to in the quarter, we have divested our shares. We had a 50 percent ownership to the franchisees. At the same time, we have prolonged our agreement to be their supplier for the coming years. Going to Page number 4. And before we get into the key ratios, I would like to highlight the essence of the report. With our growth of approximately 7%, we are clearly gaining market shares. We also report a solid profit as we even exclude in the IFRS 16 effect, we beat last year's record quarter. Our profit is also solid as our number includes several investments for the future. Kindly ask you to turn page to number 5. And let's now move into the key ratios for the Q2. So please go to next page. And then we are starting with our sales. For Axwood as a whole, we report the net sales growth of 6.7% to slightly above SEK 13,000,000,000. This then includes a positive Easter effect in our case of approximately plus 1.5 percentage points. And worth noting is that we are meeting high comps, not only from last year. Since 2016, we have performed a 20% growth over the 3 year period. And all our segments have contributed in this quarter. While it must be said that particularly Villiers and Axle Snap growth shows really strong like for like numbers. Turn Page to number 7. And if we look at our sales development in our stores and online, including the New Hampshire franchise, it shows a total growth of 7% compared to the market growth of 4.3%. Both numbers include then the positive calendar effect due to Easter. We are clearly continuing to gain market shares. Turn Page number 8. And Food Online in Sweden, if I base that on Svenska Daglwaramdal index, they noted a 25 24% growth for the 2nd quarter, while for us in Axwood, we report a 37% online growth. Please go to next Page 9. Moving then to our profit. Our operating profit came in at SEK 601 1,000,000, including IFRS 16,000,000 and SEK 557,000,000 excluding the IFRS effect. Last year, we noted a strong record quarter, so it's solid that we're able to slightly overperform even last year's number. And this is mainly driven by strong like for like growth and a balanced cost control, particularly in Villages and Snaglios. On the other side, hemp chip is still in its investment phase that has influenced our margins negatively. Also, we have in this quarter started our dark store in Stockholm, a project that we have several learnings from and initially drives additional costs. But I will come back to all of this later on in my presentation. So let's now go through all our segments, and I'll start with our largest one, Willys. So turn Page to number 10. And even if we for Villis and for all of us had a positive Easter effect, it must be said that Villis shows really strong like for like growth as comps are very high. Behind our refurbishment program, more customers and increased basket, Villis noted 8.9% growth and almost 8% like for like growth. Versus last year, we have 4 more stores in the network, and we continue to roll out our online offer to more stores. In the quarter, we've added 9 stores to total 70 stores with our online offer. And with the positive like for like, we also increased our profit to SEK368 1,000,000 or SEK 342 1,000,000 excluding the IFRS 16 effect versus last year's SEK 307 1,000,000. And with the latest year's development, we think it's well deserved that Villiers in May received Retail of the Year award among all retailers in Sweden. Please turn to Page number 11. Going then into Hemshupp. And Hemshupp as a whole came in with a 3.4% growth and 3% growth in like for like. Our franchise stores continued to outperform the market, while we had slower growth in our group owned stores. As you are all aware, we continue to invest in Hampshire. And even if I would have liked to or now see stronger effects out of these investments, we are confident that over time investments will pay off. Our profit came in at SEK52 1,000,000 or SEK42 1,000,000 excluding the IFRS 16 effect versus last year's SEK68 1,000,000. This is mainly due to slow like for like in our group owned stores, less favorable sales mix and market investments. Please turn to Page number 12. Going to Snagros segment. It is pleasing to see this quarter's growth in Snap Growth as we are also in Snap Growth meeting high comp last year. Our growth rate of 6.8% is driven by customers and higher average ticket. And behind the positive like for like and some lower campaign intensity, we are improving our profit to SEK 57 1,000,000 or SEK 55,000,000 excluding the IFRS 16 effect versus last year's SEK42 1,000,000. Turn to Page number 13. And our last segment, DOGAB, reports a stable quarter. Our positive sales growth of 6.7% is driven by strong sales in Billys, Snapgirls and Hemshrimp franchise. Profit came in at SEK179 1,000,000 or SEK173 1,000,000 excluding 16 effect compared to last year SEK 181,000,000. Our underlying operating profit is healthy, while in this quarter the profit has been impacted by future investments like the dark and investments in Urbandelli and Apohem. In addition, we have some negative currency effect in this quarter as well as increased fuel cost. With this, please turn to Page number 14, and I would like to hand over to our CFO, Mr. Anders Lexmann. Thank you, Claus. And then we are on Page 15. Let me then first summarize the development of the 1st 6 months. We see that Axford had a good growth. And as Klas mentioned earlier, especially from 2016, we had an average yearly growth of 5.6% during that period. Net sales for the 1st 6 months this year showed a growth of 5.5% compared to last year and our like for like sales within the Ekfo Group stores were healthy 5.2%, and we gained market share also in the first half of twenty nineteen. The operating profit summed in the 1st 6 months up to SEK 1086,000,000, which implies an operating margin well in line with our long term goal of 4%. IFRS 16 had a positive effect on operating profit with SEK 87,000,000 and on the operating margin with 0.3%. Then please Page turn to Page 16. Our total cash flow for the first half year is in line with last year, minus SEK 833,000,000 compared to minus SEK 863, 2018. As we had in the first quarter, we also in the second quarter had an IFRS 16 effect that affects both operating cash flow with plus SEK 760,000,000 for the 1st 6 months and amortization of debt with minus SEK 760,000,000, thus zero effect on the total cash flow in the period. The change in working capital was negative this first half year. But compared to the Q1, it was an increase with a little bit more than SEK100 1,000,000 in the 2nd quarter, mainly due to a positive calendar effect at the end of June, but also to improvements in the underlying net working capital, which I will come back to. We also had lower investments this year, but that is explained by a divestment of an asset hold for sale with approximately SEK 100,000,000 that we did in the Q1 this year. Share repurchase and dividend payout was in line with last year. Then turn to Page 17. Looking at our CapEx. We had investments of approximately SEK 500,000,000 during the 1st 6 months. This is well in line with the estimated CapEx for the full year. Therefore, we reiterate our guidance of a CapEx range between SEK 1,500,000,000 and SEK 1,600,000,000, including SEK 600,000,000 in automation in our new logistics center outside Stockholm. The difference compared to last year was mainly attributable to higher investments in our retail operation, higher pace in establishments, both in Willis and in Emshoek and also refurbishments. In the wholesale operation, DOGA had some lower investments, mainly due to the major investment in the warehouse in Johan Shopping last year. The new Johan Shopping warehouse is now fully up and running. IT Investments and others was in line with last year. The IT investments consist of IT projects, infrastructure in stores and licenses. Please turn to Page 18. Coming back to the development of net working capital. We saw further improvements in the second quarter, both in Swedish kroner and as net If we break this down to the most important items, we have a stable or improved share of net sales. Especially the development of accounts payable has a positive trend so far this year, explained both by better payment terms, but also the progress in our work with supply chain financing. Then turn to Page 19. This is a picture of the development of Axol's financial position. During the last 5 years, we have more often had a net debt receivable position than a net debt at the end of June. And so also this year if we exclude the effect of IFRS 16, as you can see at the right side of this slide. This year, we are back on the levels we saw in 2015 2016. If we then include IFRS 16, we increased our net debt with over SEK 5,800,000,000 at the end of June, and the equity ratio dropped to just below 20%. If we exclude IFRS 16 effect, the equity ratio was in line with last year. We continue to stand on a solid base with an equity ratio well in line with our long term goal of 20% at year end. Page 20. If we then take a look at the development of our capital employed, we see the same picture. If we exclude the IFRS effect, we had a capital employed level of SEK 4,200,000,000 and a ROCE of just above last year, approximately 49%. In other words, we continue to have a high capital efficiency with increased earnings but also a big effect of IFRS 16. Turn to Page 21. Then finally, let me just repeat the effects of IFRS 16 in a couple of key ratios. The equity ratio decreased with approximately 12 percentage points and net debt increased with SEK 5,800,000,000. In the P and L, EBITDA in the second quarter increased with SEK 389 9,000,000 to SEK 11.37 million and EBIT increased with SEK 44,000,000 to SEK 601,000,000 since the lease payments now are divided into partly depreciation and partly interest costs. ROCE decreased from 48.6 percent to 30.9 percent and the cash flow from operating activities increased with SEK362 1,000,000 to SEK 1085 1,000,000. And the cash flow from financing activities decreased with the same amount, and the total effect in the cash flow was therefore CRO. And with this, I hand over to Jorg again, Claus. Thank you, Anders. And I will now end up this part of the presentation through providing a quick and short update on our strategic agenda. So please turn to next page, Page 22, and we'll move on to number 23. As earlier informed, we have 6 strategic areas with some clear priorities. And I don't intend to go through all the 6 areas today. However, I would like to make some comments in 2 of them. So please turn to Page 24. And first, expansion. We have a target this year to open up 5 to 10 new stores. And with 5 store openings this quarter and 1 store in our Q1, we must say that we are well in line with our target of 5 to 10 new stores that we have set out for this year. In addition to new Groupon stores, I also can remind you of that as of end of Q3, we will welcome the retailer, Ostrandsons, with 9 stores as new franchise members in Hampshire. We will also continue to roll out our online offer to more stores. And finally, our online pharmacy store, Ape HEM, is now fully up and running. And with Apohem, we now continue to build the brand and reach out to more and more customers. Now turn to Page 25. And let me then provide some update regarding our supply chain. And let me start by sharing the news that we have, after the period after the period end signed the agreement with NREPP for them to provide the facility for our new logistics center in Bolstad, Northwest of Stockholm. The agreement is in line with the earlier announced letter of intent where we'll have a long term rental agreement with Enreb. Next step is now to finalize the agreement with the automation supplier, Vitron. We plan to give you more details around all of this when we have all of this in place, most likely already in the next quarter. Another priority within supply chain has been to implement common dark stores. So please turn to next Page 26. As we have, as communicated earlier, as of May, introduced our first common manual, dark store in Stockholm, for all our food online brands. We have many learnings from this introduction in terms of systems, range and routines. And the next step are now to capture all these learnings and to improve our efficiency before we implement this in Gothenburg, which we plan to do in 2020. Let's now go to Page 27. And I'm now going to give you an update on our outlook, so please turn to Page 28. And as Mr. Lexmann said, we are repeating our outlook for our planned CapEx. Plan is to spend SEK 1,500,000,000 to SEK 1,600,000,000, which then includes SEK 600,000,000 for the automation of the new logistical center. That is an investment that will happen this year. So go to next Page, number 29. And before we go into the Q and A session, let me then summarize this quarter. First, we report strong sales with all segments contributing. And based on this morning's market data from Stavros Veranda, it's clear that we continue to gain market shares. 2, we report solid profit, which also includes several investments for the future. Now we'll now go to the Q and A session. So I ask you to turn to next page. And with this, I hand over to the operator to moderate this session. Over to Adela. Thank you so much. The first question is from Nicolas Esman from Carnegie. Yes. First, I'd like to just ask a little bit about a hemp shop. If you can talk a little bit more about the reasons for the weak development and then also what restructuring efforts that have been made? If you could just elaborate a little bit on this topic, I think that would be very helpful. Niklas, well, as I stated, we have for some time now, we continue to refurbish stores. We continue to develop the concept. We have invested in somewhat more marketing activities. We're also investing in our staff. And we also have, in this quarter, opened up 2 more stores. We have looked into our store net work. We also closed 1 store. And the all of this is also bringing some additional cost versus last period. And so these are the kind of investments we are doing. And as I stated, I ordinarily now would have liked to see more effects out of these in terms of like for like growth, which we are sure will come. We have not seen it fully yet. So basically, that's kind of the elaboration. But there's no particular time line here where you are now in an investment phase and where kind of the payoff is expected within a defined number of quarters or anything like that. It's more a work in progress. That's correct. We are, for some time now, continue to drive the agenda for Hemshaft to further step up our stores to meet more customers and to drive that. And obviously, we want to see the effects out of that in terms of like for like as we move along. So it's a work in progress. Okay. And online sales now in the Stockholm area, you have shifted entirely to dark store. Is that correct? So you've stopped picking in stores. Were there any costs related to this or anything else? That's correct. For the home deliveries, all Stockholm area now goes from our dark store. And yes, it has been cost connected to this in DAGAP. As we when we do this, we have 3 or 4 brands with various range. And so it has been, as I said, some learnings where we have increased staff particularly to handle this in this initial period. So we are capturing now the learnings. We want to see more efficiency as we move along. But initially, we have added cost into it, particularly or mainly then more staff into the dark store as we're handling it. We're learning and we are seeing and we are getting more experience out of it. So the system there is there. We're pleased with that. And restructuring or the structure is there. But obviously, it's kind of a startup phase here. Okay. Excellent. And I'm also curious, when you talk about the market development in general, taking a step back, you're looking at the sales growth, 7% versus 4.3%. I mean, it's clear that Axwood is outgrowing and then Will is here in particular. It looks like ICA has been performing kind of in line with the market. So are we still mainly seeing that the Co Op is the one that is losing market share? Have you seen any changes there in the competitive environment in terms of the dynamics there? Well, I can only see, as you are seeing, the total market. So I can just conclude that from a total market perspective, we are gaining shares. And unfortunately, I don't see the other players in the market reporting their numbers. So I can only sum up that versus the market as a whole, we are growing faster. Okay. Great. And I've also noted there, of course, Lidlitz is ramping up significantly in 2019, opening some, I think, 23 stores this year. Have you seen any impact to kind of the closest Willys stores? Or is it too small to have a measurable impact? Well, if we look at Willys, particularly as you see from the report, we have a very healthy growth in Villis at the moment, both in terms of Villis Hema, our large Villis as well as Eurocash. So from that perspective, we are pleased with our development. Excellent. Thank you very much for taking my questions. I might come back later with some more thoughts on it. Okay. Next question is from Daniel from Banske Bank. Please go ahead. Your line is open. Yes. Good morning, Kjell and Anders. Good morning. Good morning. Just some more questions on dark out. They touched upon it when it came to the dog stores and some extra costs. And it sounded like you were saying that you are hoping to get better efficiency, but it will take some time. Does that is that a correct interpretation that we should see some extra cost also for Q3 and maybe for Q4? And could you also sort of add comments for fuel and FX as you enter Q3, if we start with that? No. I think you I mean, you captured right. We have started our basically, we are up and running fully for all stock on stores now as of May. And I expect to continue to have some higher costs even if I also have expectations that we will also be more efficient in this. But initially, we have higher costs out of that. So that will continue for some quarters. I expect that. Regarding the other comments you mentioned, so currency, we'll see how that turns out. We don't know, but in this as you follow the corona as well. So you see that, that has an impact. And then fuel cost is also somewhat higher, not so much but somewhat higher. And then just to remind you all of that pointed out as well in the report that we now have, for us, the change that we're looking into from a consumer perspective where we are now meeting more prepared food, a consumer who wants to more have more alternatives, We have Urban Deli that has been a we think it's a fantastic brand that we is now fully 90% ownership. It's in our books today. And we continue to invest in Urbandelli now with more sustainable alternatives. We also start to roll out some of their brands into Hemship. So we see that, that's part of the structure at this stage. And also Alpo Hem is up in a phase where it's building up its brand, and obviously, that also drives some costs. So we have some future investments in this report that we actually like to have. But obviously, it's something that we believe is right for the future. Yes. Yes. I hear you. Good. And then this online growth is, of course, impressive and much higher than the market. Is there any sort of anomaly that it's actually down sequentially, if I'm not mistaken, in terms of absolute numbers coming out of the online despite the fact that you are extending the number of stores that you're providing online from and that you had Easter in Q2 and not in Q1, if you see what I'm saying? Not sure. I mean if I think you're talking about 2022 versus 3, 3, 5 in Q1, I. E. Sequentially online is a bit lower in terms of absolute numbers. And I think you will have and you will see that as we move along some variances regarding online that differs somewhat from the physical stores. I think dark stream, Stockholm or anything like that? No, no, no, no. It's more related to various of the I mean, normally, you see a somewhat slowdown prior to when customers go into vacation period and they go to the travel or they summer houses and so on. So it's a different pattern, you can say. Yes. So and then just finally, Easter, 1.5%, there's no reason to believe that the earnings impact was any different than what you usually said when it comes to We have no margins is as we are meeting a sales mix last year, which I think you remember was very positive due to the warm period there. Eastern is somewhat lower. We can also mention that we have a somewhat slightly higher Eastern effect in Villers, and Helm Ship is not having that high eastern effect. Super. Thank you so much. Okay. Yes. Thanks. Next question is from Frederic Evart from Kepler Cheuvreux. Please go ahead. Your line is open. Thank you. Good morning, guys. Good morning. Short question here. Most have already been asked. The one on the supply chain financing program. Is there any chance you can sort of give us ballpark figure on the positive impact on net working capital there? And also some guidance on what to expect in the upcoming 2, 3 quarters? Yes. We see on a rolling 12 month base that we have a positive effect of approximately, I would say, SEK 150,000,000 in accounts payable. And regarding to what we see ahead, I think it's quite hard to give a figure there because it depends on how the progress will develop with the supplier section. So we will come back to that. But it's fair to assume they will be fairly positive in the upcoming quarters? We still work with it, of course, and we do what we can, but it's hard to give any guidance there. Okay. Thanks. That's all for me. And there are currently no further questions registered. So I'll hand back to the speakers. Please go ahead. Thank you. And I think it's summertime, and I would like to say thanks for listening, and I wish you a great summer. Thank you all. Thank you. This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.