Earnings Call: Q1 2019

Apr 25, 2019

So good morning, everyone, and let me welcome you to Axfood's financial report for the Q1. My name is Klas Balkov and I'm the CEO of Axfood. And with me on this presentation, I also have Mr. Anders Lexmann, the CFO. Our agenda for today, we will cover the key ratios for the first quarter and then Mr. Lexmann will go through the financial position in the company. I will then come back and provide an update on our outlook as well as give an update on our strategic agenda that we have going forward. And then I would like to welcome Mr. Gustav Sandstrom from SEB, who will lead and moderate the Q and A session. But let me start by making a quick comment about Axwood and reminding you all about Axwood. We have a clear house of brand strategy where we have distinct concepts that is meeting various consumer needs with sourcing through DAGA. We are now getting closer and closer to €50,000,000,000 sales as of the turnover and we are meeting over 4,000,000 customers every week throughout our various brands. Before walking through the key ratios, I would like to bring up 3 areas that I think are the highlights of this report. First of all, we are in this report showing an exceptionally strong growth. And also this is the first time we are releasing our online numbers and I think it states when you see the numbers that we're also well positioned also in the segment. And we have exciting plans that we have reported about earlier in terms of going for this going into the future, particularly then developing completely new highly automated logistic center. But let's now move into the numbers for the Q1. And then starting with sales. In the Q1, we are reporting a group net sales growth of over 4% 4.2 percent to SEK11.9 billion. Overall, it's a strong growth across all the segment As I should remind you of that we have a negative calendar effect in this quarter due to the Eastern was in March last year and now is in April this year. We calculate that the calendar effect for us is approximately 1.5%. Now evidently, the growth that we are reporting becomes even stronger when we look at the store sales growth and I comparing that to the market. Our growth total growth in our stores including ecom is up 4.1%. And if I compare that to the market, that is up 0.9%. We are clearly gaining market share. And in this quarter we are outperforming the market. We're also growing faster on the online as we are reporting 35% growth in our online for Axwood to B2C compared to the market of 19%. As of 2019, we are reporting according to IFRS 16. That is a new standard that will have an impact on our ratios. Now we are transparent on this on group level, but also by segment. So looking into our operating profit, we are reporting SEK485 1,000,000 as an operating profit. Excluding the IFRS, we are reporting SEK442 1,000,000, an improvement excluding IFRS is still an improvement versus last year. Actually, it is a record profit for a Q1 for Axford. The level that we are achieving is coming from obviously a positive like for like sales, but it's also somewhat hampered by some of the actions and the investments we are doing. We are investing at the moment in a ramp up of our dog store, of our common dog store in Stockholm. As well as if you remember, we introduced a new ERP system with the fruit and vegetables and we are not still in fully efficiency in that area yet. So that's hampered a bit. And then Hemshoppe continue to invest in our customer meeting that is also short term hampering our margin. I will now go through segment by segment and starting with Willis, who is really making a strong quarter again as we are pleased to see that Villis really attracts more and more customers. We have a like for like in Villis of 4.8%. That is then despite the negative calendar effect due to the Eastern period or the Eastern effect. We also reports or report we also have a very positive online development within Villis, both in terms of the cities we are in today, but we're also rolling out online to more and more cities that is also giving a positive effect. Our operating profit has improved to SEK 279,000,000 excluding the IFRS effect. So in total, we are reporting SEK 295,000,000 including the EFR 60 effect. That's going to be a complicated one today. Moving then on to Hampshire. I must say that in this quarter, I'm happy to see that also Hampshire grows more than the market. The group owned stores are impacted by some changes in our store network, but totally and the group owned stores also growing more than the market on the like for like as it reports 1%. But the franchise part of Hemshupp is really showing a positive sales. So combined, we are showing a total growth of 1.7%. And as shared earlier, when it relates to Hampshire, we are in an investment phase regarding Hampshire where we are investing really in our customer meeting in terms of that we are investing in our store concepts. We're also investing in marketing and also investing in our employees to continue to strengthen Hampshire over time. That has this has some impact on our margins short term. In addition to Hampshire, as we are strengthening the concept, I am happy to that we could announce earlier on a few weeks ago that we have been able to attract the strong retailer Oostensons into the Hampshire franchise concept. SEK600 1,000,000. And the plan now is to transform Oostensson into Axford by September 1. We also continue to have a positive momentum in Snagros with a strong net sales of 8.3% and a like for like above 9%. We clearly continue to gain market share also in Snagros that is our way of meeting and the increased demand for cafe and restaurants. And the strong sales has also helped to improve our margin and strengthen our profit in this quarter. And finally, DAGA reports a growth of 4.6% that is supported by approximately 0.7% from Urban Delhi and Urban Delhi is now we've increased our ownership in we're reporting a stable profitability behind then strong sales from our various food concepts. But also as shared, it's somewhat hampered from the investment that we are doing with the dark stores. We have initial costs for that, the fruit and vegetables as I mentioned, but also that we are investing now in new areas like Ape ham and Urban Delhi that has an impact for this the financial position for Axford. Anders? Thank you, Lars. Let me first then go through the cash flow for the Q1. And as you see here, we have a strong operating cash flow this quarter, and that is mainly explained by the new lease standard, IFRS 16. Now we recognize lease payments as amortization of debt that you see further down in the statement here. And if we exclude that, we have an operating cash flow in line or a little bit higher than last year. We also had a negative effect on the working capital in the quarter, and that is mainly explained by we had a positive calendar effect in Q4, and now that is reversed in the Q1. And we also have some higher inventories in the end of March as Easter was in April. We also had net investing activities in line with last year. But this quarter, that includes positive payment from a sale of asset hold for sale with approximately SEK 90,000,000. And if we exclude that, we have higher investments this quarter compared to last year. I will come back to the investments on the next page. We also increased the net debt according to the dividend in the Q1, like we did last year as well, and the dividend was in line with last year. Then coming back to the investments, and here are the investments excluding the lease investments. This is the underlying investments according to the old GAAP. And the investments in the Q1 summed up to SEK 245,000,000, which is SEK 56,000,000 more than last quarter. And we see that we mainly increased our investments in our retail operation. We both have refurbishment and new establishment, which is a little bit higher this year compared to last year. We also had a little bit higher investment in our wholesale operation, and that is mainly due to our new automated warehouse in Johan Sjope. IT and others is in line with last year. Coming back then to the change in working capital. We also, this quarter, see a decrease in the working capital as a percentage of sales. And also here, we have effect of the new lease standard because now we are not recognized prepaid leases in the working capital. So here, we have a little bit positive effect on that. And if we exclude that, we are in line with December last year, minus 2.6% of net sales. If we then look into our net debt, you can see that we have a big effect on the new lease standard. We have a net debt of approximately SEK 6,000,000,000. But if we exclude the new lease standard, we are in line or a little bit lower than last year, SEK116 1,000,000 at the end of March. And you can also see that we have a big impact on the equity ratio, which go down from 30.6% to 18% this quarter. And the equity ratio due to the old GAAP is in line with last year. And we see the same effect on capital employed, a big increase here. And if we exclude the new standard, we are in line with last year, and we also have a decrease in the return on capital employed, as you can see in the picture. And also just to summarize the effects in the balance sheet. As you have noticed when we reported Q4, we have an effect on the assets with SEK 5,600,000,000 and we increased our lease liabilities with approximately SEK 6 billion, and we have a negative effect on our equity of SEK0.4 billion approximately. And finally, to summarize the effects on the key ratios according to IFRS 16. As you can as I mentioned, we have decreased the equity ratio, and we have increased net debt. We have also increased EBITDA with SEK 387,000,000 this quarter compared to last year, and we have also increased EBIT with SEK 43,000,000 like Klas said earlier. And ROCE, due to the old GAAP, was 50.7% compared to 30.6% now. We also have, as I mentioned, effect in the cash flow. We have a positive effect in the operating cash flow and a negative in the financing activities, and that's the sum of that is 0. So let's sum up my part of the presentation. Now, Claus. Thank you, Anders. I hope that sorted out the IFRS 16 changes. I'm sure we also will come back to that later on. Now let me now go through the strategic agenda that we have for Axford. And I hope that for you follow us that you are start to be familiar with our business plan structure where we have 6 clear strategic areas with also sustainability as a red threat throughout and integrated across all our areas that we are covering. Now I will not go through all the strategic areas at this time, but I will cover a few in my update. And I'll start with the customer offer. Well, we have 4 clear priorities. And first priority is to strengthening the assortment of good and sustainable food. And in this area, we have now in this time, we've added a new measure to have a new target of 25% sustainability certified goods of our sales. Now the base in 2018 was 20% and in this quarter we are now up at 20.5%. So we are on the right track also already in this quarter. But it is an important measure for us to drive more and more sustainability in our range, in our assortment to track this and to influence our customers to make more sustainable choices. Another key area in our customer offer and another prioritized area for us is meal solutions. It is a clear trend where customer want to have more ready made meal solutions and we have worked for some time to develop our way of solving this for the consumers. In this period, we have launched a wide range of new items, new articles to the consumers that they can easily select and pick and combine and make their own meal in an easy quick way. But we're also reviewing and adding with the range new format and particularly in Hampshire. And actually today, we are open up the new Hampshire we are open up the refurbished store in Molo, Scandinavia. That will clearly have an impact on meal solutions where we have our own kitchen with our own chefs and so forth. So we are really excited about this new step that we're taking within Hampshire. Moving then into our customer meeting also with 3 clear priorities where we're going to develop our customer program. As I mentioned, We are continuing as well to update our stores. We are continuing as well to update our stores where we are developing our stores. We also are refurbishing our stores and we have a clear program for that. And we are strengthening our digital customer meeting. And if I like to make a few comments regarding online as you are probably familiar with that online as a share of sales overall for the market is fairly small, around approximately 2%. But it is growing. And as I reported earlier, it grows this quarter's reports a growth of 19%. We, for us, want to be well positioned as well in this channel as we are in the physical stores. And even if we started somewhat late, I think we are now with this number report that we are also in a good position as well on the online channel. We are actually at this stage growing somewhat faster than the market and we are reporting SEK 334,000,000 to the consumer on the online. We also have to B2B, but this is also this is only the B2C part of our online. For us, it's clear that we have and we are taking a broad approach when it comes to online where we have various brands. We are working with 4 brands to the online. We also have various business models where we have various delivery options as well as different fee options. And obviously, for us, it is important now to learn and to see what works best for us and what the customers really want to have. As you know, this is a complex part where some consumers prefer to have a click and collect solution, some prefer to have it home delivered. And it's interesting for us to see also where we are developing the fee structure. As you know, it is a fairly costly model, where they have is really showing a very positive growth. That's also somewhat proof that fees is also working even on online for food. Finally, when it comes to the supply chain regarding our priorities, we also have 3 clear priorities. We have started now, which was linked into the online part to roll out our first common dark store in Stockholm where we are serving both Hemschepp, Villez and Matot, S. C. Customers through 1 dark store. We said we're going to roll it out this spring and we started and we also started to make our first deliveries from VILIS to Villisc customers in this period. But if I look at the supply part and the large part and the large steps we are taking is a clear step into the future via building a completely new logistics center. It is a fully automated logistics center that is and I want to be clear about that, that support both the stores and the online. So this is not only for online, but it's also for both. That will give us the flexibility depending on in terms of how large the share of sales will be on online. We have since we last time had this meeting, we have selected Vitros as the supplier for the automation and we also selected that we will locate the facility in Bolstad outside Stockholm. And I want to reiterate that the investments for the coming 4 years is approximately SEK 600,000,000 for the automation per year. It is a large investment, but it's also a very positive business case. As we when we look at it, the share of logistic cost that we will have in 2023 is in line with what we have at with current levels. And with this new facility, we are also increasing our capacity, which we need to do when we're looking at our growth moving forward. So with an increased capacity and then with increased volumes, we calculate with further efficiencies regarding to our logistic cost as a share of sales. The outlook for 2019, it is just coming back to the same outlook that we presented when we met in February. We have a CapEx plan of SEK1.5 billion to SEK1.6 billion, which includes then the SEK600 1,000,000 investment for the new logistic center. So excluding that, we are more or less in line with the investment that we had in 2018. So let me sum up this presentation before we go into the Q and A. We are looking at the first quarter, a positive start to the Q1, excluding we have a negative calendar effect through to the Eastern. Looking despite that, we are showing a really positive like to say like to say that we have really exciting plans moving on for the future. So with that, if I can welcome up Gustav Sandstrom from SEB to lead us through or walk us through or however you would like to call it the Q and A session. Excellent. Thank you so much for that run through. If I may start with a few questions and then perhaps we have a few questions from the audience here on the web. But starting with the food price inflation, which has obviously been very beneficial to your entire industry now for quite some years. And if anything, it seems as if it accelerates rather than decelerates now in the start of 2019. Are we starting to see any signs of price elasticity in the market or within your assortment? Or is the customer's large assortment is without any effects on volumes? I think if I look at it, our now we are having this Easter effect and so on, so it's somewhat difficult to find out the exact numbers for March and so on. But we are calculating with approximately 2% inflation rate at this stage. And for us, we are showing that we are seeing a positive growth and also volume related. Now the inflation is somewhat higher on fruit and vegetables, which is direct cost due to some part is the currency for the Swedish corona, but also some of the drought that we had last year that is reducing some of the supply that has an impact or drives and some part of that is inflation related. But in this stage in the cycle where you have a lot of support from inflation, does it make sense now to perhaps absorb a little bit of that of your own in your Willys brand to sort of further accelerate that market share gain? And I'm perhaps referencing it a little bit to one of your competitors that have been quite vocal on lowering prices in a fairly big share of their assortment. Well, as you probably expect, I will not comment on some of the colleagues out there in the market, what their action and so on. But we are obviously very keen on for us to make sure that we have our pricing position out there in the market. And for Villis, with the lowest price food bag ambition. For us, that is critical. We also clearly to see that the customer is also appreciating if that's what's relating to the village range and the village pricing. So obviously, we are happy to see that. And another question on volume. Your investment with this new facility sort of requires quite a hefty volume growth, perhaps especially when looking at volume growth in overall markets sort of below the population growth at the moment. Where do you see this growth stemming from that you're obviously planning on when going ahead with this investment? So where are the pockets where you see you can Well, what I'm stating is that with this facility, we are creating an opportunity of 40% more volume. So I'm not saying we're having 40% volume as of 2023, but we're getting the room for that. And we think that, I mean, these facilities will live for some time. Obviously, looking at the growth rate that we have now, we it's also even more important that we are increasing our capacity moving forward. So I don't think it's any drama in the growth that we are calculating. We are really seeing a benefit of moving into an automated logistics center. We're also taking the advantage that we need to do on online to automate that to make sure that we are reducing the handling costs for the year, which is fairly expensive today. And with this facility as well, with the combining online and physical stores, we are getting the flexibility within the facility as well. So to answer your question, I don't think there's any drama in terms of the volume forecast. We have with this facility, we're moving from 6 logistics center warehouses into 1. It's actually less square meter, but we are with technology and clearly increasing our capacity, which we think is needed for long term and for the future. And then the theme of Mr. Lexma's presentation today, I guess, was IFRS. And one question on my own then. You updated your financial targets in relation to IFRS 16, but you did not change your margin target, which stands at 4%, if I recall correctly, which implicitly is a lowering of that margin guidance given the boost you get from IFRS 16. So could you please elaborate a bit on the internal discussions? No, I think it's very it's not there is no magic behind that. We have a target of minimum 4%. Now we're getting support from IFRS. It's still minimum 4%. So we're not looking at it as we are changing or we are lowering any target. It's just that we're getting support from IFRS, and the target today margin target is minimum 4%. With that, maybe some questions from the audience. Daniel? Thank you. Donnie Schmitz from Danske. Two subjects. And of course, Willys is continuing to do well, but I think the opposite is probably true for Hemshoppe, at least when it comes to profitability. And you're saying that you are, of course, continuing to invest to improve the attractiveness of the concept. And this has been the case, of course, for some time. So I was just wondering what's your plans going forward? Where do you see sort of the benefits coming through from these investments? How should we model that? Well, if I start with that, I think it's it must be stated in this that we are now also reporting a stronger growth for Hemshupp versus the market. I said it for some time that we are in a stage or in a phase with Hemshoop that we want to invest in several areas. We want to invest in our employees in the customer meeting. We want to invest in the stores and refurbishing our stores. We're also taking some investments Hemshoppe and to show the customers the inspiring sustainable offer that we have. Happy to see that we start to see some growth numbers coming through on that. Now obviously, when it relates to profitability and margin, as we are sharing, we have a slow growth on our group owned, partly also we have transformed a couple of stores into villas. So when we have that slow growth on like for like, you're also getting a margin pressure. Moving forward, my expectation, of course, with the investments that we are doing is that we will get back to stronger growth on a like for like basis. And then I'm confident when you get the growth back, you also start to see margin improvement. But are you seeing anything now looking into sort of this quarter that we're in that you are sort of seeing any signs that we will get better profitability soon? Or is this more medium term? You will I think you will clearly see it depends on the like for like growth that we are reporting. Now we have 1% like for like. Of course, we have an Easter effect as well in this quarter. We need higher like for like, as you are well aware of when it comes to retail that we have our inflation costs in general. So we need higher like for like to see that you're getting an impact as well on margin. Would you say that there's a bigger transformational need when it comes to Hampshire and their positioning versus the transformational need in general for the market? I'm sort of maybe referring to the hollowing of the middle income in general, that phenomenon is sort of across Western Europe or the U. S. For that matter. Are you seeing that as a problem, sort of stuck in the middle? No, I think We've sort of transformed more thoroughly. Obviously, the trends are clear in many ways where you also have the low price growth or that channel or that segment is growing, but also the convenience part of the near where to shop where you live, where Hempshoppe is very well positioned. Now obviously, we need to make as I presented today, we see a larger and larger need for meal solutions, to have quicker solutions for them when they can go and grab something quick where they live. And that's why we're also developing this kind of structure also for Hampshire. So the convenience part or being located nearby is also a good segment to be in, but we also need to meet that demand from a range and from a store perspective, and that's the journey we are into. Shortly then on another subject, coming back to sort of the online growth, which was quite impressive and maybe from a little bit of a higher base than I expected. Could you split that out in terms of the concept? It sounds like you had an even higher growth in Villas, for instance. Well, as it's always, we have not this is the first time we are sharing the numbers. And then we decided to share it on an ax food level, So we will stick to that. But as I reported today, we are seeing good growth in all channels, particularly good growth in Velez. So that's a fair assumption. And would you share the base for 2018? Or will we get that gradually in 3 quarters? We have I'm fully aware of that we have not shared the 2018 or historical data. But as I think when you're calculating, if you're looking at the 35% growth that we have, I think it's fair to assume that 20 18 is in around SEK 1,000,000,000 number. I'm sure you already calculated that. Are there any more questions in the auditorium? Now I guess we turn to the telephone conference. Operator? Thank you. We will now begin the question and answer session. All right. No questions. So with that, I'll proceed if there are no more questions in the auditorium. Daniel, final one? Then we'll I'll leave it the floor to you, Claus, for some final remarks. Thank you, Gustav. And obviously, we are full aware it's a hectic day for you all. So again, thank you for calling in or joining in on the conference. Thanks for participating here in the Hampshire store. So and I'll just sum up that we have had a good start in Q1, and now we're looking forward to the remaining part of the year. So thank you. Thank you.