Investor Update

Mar 6, 2019

Thank you. And let me, of course, also welcome you to today's press conference. With me today, I have Nikolas Petterson, President of our purchase and logistics company, DOGA. And purpose of today's presentation is to give you some further details of the already earlier announced plans regarding our future logistics center. The purpose is also to give you the opportunity to ask questions for further clarity. And before we get into the Q and A session, let me and Niklas just start with a quick short presentation introduction. And I'll then move to next page, Page 2. In Akzo, we have outlined a clear agenda for future profitable growth. This agenda includes 6 strategic areas, each of them with some clear priorities. One of the areas that aims to mainly improve our efficiency is supply chain. Next page, Page 3. Our key priorities for the supply chain in the coming period are: 1, implement the common dock store for Village, Hemschepp and Motto, Dessi with a target to have the Stockholm Dock store up and running already this summer. Another priority is to, with a more data driven approach, take out costs from our system. And lastly, our 3rd priority, hence the topic of today, is to develop an automated logistics center for both store and online in one facility. Next page. So what does this mean? We have showed the slide that we have in front of you more than a year ago at the Capital Market Day when we presented the vision Axwood have for how to handle logistics in an omnichannel world. We will automate both the warehouse part as well as the picking. The new logistics center will support both stores and online, and our plan is to have our 1st automated logistics center up and running 2023. Next page, Page 5. So why are we doing this? Well, first of all, Axford has high growth ambitions, and we already today see a need to increase capacity in our logistics setup. And with an automated system, we also see clear gains in improved delivery quality as well as service levels. And by combining retail and consumer picking, we will not only reduce climate impact but also be more flexible, particularly when it comes to how large the share of sales in online will be in the future. And finally, this not only increase increasing our capacity, this will also significantly increase our efficiency. Moving then to next page, Page 6. Even if this is a project that will take some time to implement, we want to keep you informed about our progress. And I am pleased to present today the important steps, which are: 1, as supplier for the automation, we have signed a letter of intent with Vitron, a world leading supplier in this area 2, we've also signed a letter of intent with Enref, who will build the facility and be your landlord. And finally, 3, we are also announcing today that we will consolidate 6 of our current warehouses into the new logistics center. Let's now move into Page 7. And with this short intro, I will now hand over to Niklas Petterson, who will provide some further details regarding this topic. Niklas, over to you. Thank you, Klas. So what is new? What are Axford aiming for? Axford's goal is to create 1 of Europe's largest state of the art logistics center for omnichannel retailing. The automation will end at all temperatures sold, and the building itself will be more than 600 meters long and 200 meters wide with a ceiling height of 30 meters. Our new logistics center will provide 60% of Dargan's volumes, as shown on the map, by 'twenty three. Next slide, please. As shown on the map, our new logistics center will provide for 60% of Dorda's volumes. As shown on the maps, by 2023, we will consolidate volumes from 6 different warehouses into the new center in Volstmann. Why Volspan? To find a strategic place at the center, several center of gravity analysis were made. Every analysis used different factors as input such as estimate demand and assortment, geographical suitability and the environmental impact. The results show that the center should be located northwest of Stockholm Volstad. As you can see, the total square meter will decrease from 150,000 to 100,000. And yet, the facility will enable further increase in capacity by at least 40%. And as I mentioned before, it will provide for both store and online picking, and that's due to a high level of automation. We will work closely together with 2 partners in this project. Next page, please. When it comes to automation, as Claude said, Bitron will be the selective automation supplier. Bitron is an innovative market leader in dynamic warehousing and picking. Ituran has also extensive experience of large scale automation within food retail in Europe and in the Rest of the World. Vikram has also several relevant references with crude vent solutions, and we mentioned in the press release today that we have written an aligned with Bitron, and the next step now is to finalize the design and the contract negotiation. Next, please. When it comes to the selected real estate service provider, we have chosen NREK. We have also written an ally with NREK. NREP has extensive know how in retail logistics, very good in development of logistics operation and good and have good customer reference. Enref has a flexible property with possibility to expand, which also is strategically important for Axov and the future business of Aktug. When it comes to logistics center, it will be a long term lease, and of course, it will be environmentally certified. Next slide, please. And now with you, Klas. Thank you, Niklas. Now before we move into the Q and A session, let me end this part of the presentation with a few comments regarding the automation the automation would require an indicative CapEx of SEK400 1,000,000 to SEK600 1,000,000 per year for the coming 4 years. With now the solution with BitTorrent, we estimate that we will be in the higher range of this band. We have ongoing discussions with several banks as we plan to finance this by credit facilities. We have now entered a letter of intent with Victor, as Nicolas said, And we will now move into the planning phase as well as finalizing the contract. This phase will give us the final details, and if needed, we will provide with further information. The plan is to have the details on the contract signed in early fall 2019. However, I already today would like to share with you that the business case for this investment is very positive. We estimate that our share of cost for Logistics 2023 will be in line with current level. This then includes both lease and increased depreciation. Then as this is highly automated, we will get a positive economy of scale when our volume increases. So we estimate that shale costs for logistics the coming year after 2023 will be reduced as we continue to grow. I have to say, before you ask me with how much this will decrease, I want to state that this is something we will not be able to comment on today as it also depends on many variables, including example giving sales mix and channel growth. With this, we want to open up for questions. And you have questions to both myself and Nikolas. So I hand over to the operator who will coordinate your questions. Over to the operator. And our first question comes from the line of Niklas Ekman from Carnegie. Please go ahead. Thank you. Yes, first question here, I'm just curious because looking at pictures and looking at some YouTube videos here as well from Vitron, it looks like they have a very capable solution for fulfillment to stores. But I'm curious how you will adjust this for e commerce picking, so picking of individual orders. Is this something that Ditron has extensive experience of? And can you provide some more details on how these two will be linked together? I can take that question. Yes, I think Vitron has extensive experience of online picking. And when we are looking to the solution, we are very satisfied with the solution and there's still some work to do to finalize the solution on the inside, but we are confident that this will be a high-tech solution for the future, which will suit and customize for Axle's purpose and Axle's business. Okay. And second question, I'm curious, this EUR 400,000,000 to EUR 600,000,000 per year, what exactly does that cover? And will there be a kind of a revenue based fee or volume based fee going forward? Or will these investments in excess of SEK 2,000,000,000 here for the next few years, will that basically pay off the entire Yes. Nick, Klaus here. I'll try to respond on that. Yes. Nick, Klaus here. I'll try to respond on that. But even if I said details, well, I cannot go into that as we are still in the year. We have not signed the final contract. But the model is that this is an investment we do. It's not we have no revenue share or something like that afterwards. So and the as I said, we will be in the higher end of the scale, 400 to 600. That will cover the automation part. Just to be clear, so that will cover how we are structuring the bid on, and then we will then have the lease for the building facilities. And as well as I said, the lease and the depreciation that will be covered in this will be already 2023. We'll have these the share of cost for the logistics within line with what we have today. Okay. Excellent. And it sounds like construction of this will start in 2020 rather than 2019, but you've already indicated that CapEx, I think, would be some SEK 600,000,000 related to this project. Can you say something about what that CapEx relates to? Well, obviously, when you start, there will be some setups as to when you're starting the work. So you will have that, that will start. And we will get going as quick as we can now and get ourselves set for the project. But as you know, we have some initial costs as well when you start with working with it. As there are no further questions, I'll hand back to the speakers. Thank you. And I see that we have got one question coming in over the webcast. The first one, does it include some OpEx, I. E, not running at full capacity at the beginning? And secondly, how many SKUs will the logistics center cover? So I don't know if you need Klasik Jonas Arbog with SKUs. I can talk with SKUs. Our plan is to have a 23,000 SKUs in this building when it comes to a swap line. That's the plan of what the DC will cover. Yes. And then if I the question comes from Frederik Iverson. If I understand the first question, if it includes some OpEx, I am not running at full capacity at the beginning. As stated, what we have in the business case with the volume that we forecast today is that we will already be at par with what we are today with the share of cost in business operations. So now obviously, the more volume we then get as we have an automated solution, we will become more productive and more efficient, and that will reduce the cost. But already today, we are in line with what we have today. We also have got another question from Andreas Lundberg on the webcast. How does the depreciation scheme look like? And to not go into the details on that because that will be finalized when signing the contract, but as we have indicated before, we look at a 15 years average depreciation for this investment. I think the question continues to come in our webcast. How high is the expected yearly rent for the new logistics center? How long is the new lease? Nicolas, would you like to Yes. I mean, we are in the final negotiation with EnterpriseMaster. We haven't closed that deal yet. So we think we need to come back later on that issue. And the other question was, how long is the new lease? Yes, we are talking about 10 to 25 years, please. And the question, how does the new rent compare to rent for current premises? And as we are consolidating fixed into 1, even if we're not disclosing the rent levels, what we are stating again is that including the lease or the rent level and the increased depreciation, we will be at par with what we have today. So as much as we can release today. Operator, have you got any more questions? There are no questions on the phone. And I don't think we have any more from the webcast. With that, I no, we have one more. The question is then when will the 6 current warehouses close? Yes, Niklas here. Our plan is to have an ongoing business in these warehouses until 2022. And then the plan is to start the ramp up for this new logistics center. Yes. Okay. I don't think we have any more questions, and I would like to thank you all for listening and for tuning in on our press conference. So thanks, and have a nice evening. Thank you. This now concludes our conference call. Thank you