Earnings Call: Q3 2018

Oct 24, 2018

Good morning, everyone, and warm welcome to the presentation of Ax Food's Third Quarter. The result will be presented by Ax Food's President and CEO, Claus Balko, together with the CFO, Anders Lexma. As usual, there will be questions and answers after the presentation from the audience and also from the conference call. And those of you who are watching us on the webcast, you can write questions and we will then address the questions in the call. And after these practicalities, I will hand over to the 1st speaker, Klas Falco. Thank you, Cecilia. And of course, let me also then welcome you to our financial presentation of the Q3 for Axford. And the agenda for today, we will cover the ratios for the quarter, obviously. We'll also cover the ratios for the quarter, obviously. We'll also cover the financial position for the 1st 9 months as well as I would like to give you an update on some of our strategic initiatives we are now currently working on. And then I'm sure we will have a productive Q and A session. Let me then just start with reminding ourselves with the what I think the great business model we have in Ax Food, where we have unique strong concepts that is meeting various consumer needs out in the market, while at the same time, we work with a common logistics, a common sourcing. At the moment, it is about SEK 47,000,000,000 and we continue to see that is growing as we move along. And moving into part of the presentation, but before coming into the numbers, I think today is a bit chilly outside and I just want to take ourselves back into what we noted this summer. It was a special summer. It was a summer that was some of it was very warm. We had some weather conditions that was particularly fairly special versus what we used to see. Some of this had positive effects, some short term effects that was positive in terms of sales mix for us, but it also had some short term negative effects in terms of our logistics. And I will come back to that obviously later on. But we also look at it a bit from a more of a longer perspective and where we see some long term effects in terms of how we would be able to have sourcing from Swedish food production in general and we see some lack of supply in certain areas. And of course, we need to work and address this accordingly. So I'll also address this later on in my presentation. Going then into the presentation of today and the highlights that I view profit for a quarter in Axo's history. And in this time, it's especially driven by the very strong performance that we've seen in Belize. But I'm also going to address some of the challenges that we've seen in the logistics due to what I've just addressed, the summer weather that we've seen a large part of in terms of this quarter. And then have to say, we'll come into that we're also starting to build our future logistic operation and we're starting to see that those plan come into reality for us in terms of DOGA, which is very for us very exciting. We are early on, but we want to share this with you and I'll come back to that as well. So these are the three areas that I would like to address as highlights in the presentation. Moving then into the key ratios for the quarter. Looking at sales, we have a positive net sales growth of over 4%, 4.1% in the quarter, where we have a like for like growth of over 3% in total for the group. And as you can see on the slide behind me, all segments are conscious when we are supporting from a snub growth perspective. And as you can see, we have almost a double digit growth from a like for like perspective and is growing over 11% in the quarter. How are we then performing in the market? Well, in terms of performance versus what we see as the overall market development, it's clear for us that we continue to gain market share with a 4% store sales growth in the quarter. So even if we only have data for July August, that is official data, but even looking at that and what we believe from the market point of view even for September, we are fairly confident that we continue to gain market share with our 4% growth. Going then into our profit, we came in, as I stated initially in the highlights, with a record profit. It's the highest profit we've seen in the quarter in our history. Also seeing a positive sales mix in the quarter. And it's included these numbers, of course, the negative effects that we've seen in our logistics. So despite the drop that we have seen in the margins for DAGA, our logistical company, you can note and see that we're almost maintaining our operating margin in the quarter at 5.1%. Let me now go through segment by segment in terms of how we're performing for Villis. We are clearly gaining more customers. We are growing our online business with Villis and we have a very solid operation. Now it's fair to say that in this quarter, our profit margin has been supported by the positively sales mix effect that we've noted, integrated into Villis. And Eurocash has a positive season for this quarter due to the structure that we have with the border. We are aligned with the market in this quarter. And we also have positive sales development in certain areas, but we also have seen that the summer weather has also been slightly negative as many of our larger Hampshire store is city located. And with the summer, the continuing our refurbishment program, we are at this moment, we are refurbishing our largest store in Gothenburg and Norstag. We've just refurbished Lennarstad. And we also closed one store in the quarter, Marihaland, just south here in Stockholm that we closed due to as we have now reallocated or moved that to a villa store that actually just opened last week. Our profit is in line with last year, affected then by customers and with our staff, obviously. So that has hampered a little bit. And we are taking also further steps within Hampshire to drive our commercial agenda, but we're now also strengthening our strengthen our commercial team with a new operational manager as well as a new marketing manager within Hampshire. The summer has been favorable for the cafe and restaurant business. They've also been favorable for us as we've been good to capture that business operate. We are not seeing the full profit development from that positive like for like sales due to slightly negative sales mix actually for Snab Gross, but that's also very much driven to somewhat lower gross margin due to the higher promotion effects as well as we have one more store that is not fully ramped up and we've had to close one store temporarily that is now open again due to some construction issues. Obviously, a positive development, while margin then is down to 1.6% versus last year too. The growth is very much driven by the positive performance from Axwood Stores, also that we have a very positive drive in the online business as well as our convenience sector that Daghav is support it. Clear that last year's comparable number included the business we had for MatHem that we don't have any longer. And actually this is the last quarter that we now have that as comp numbers. Again, we are somewhat down and very much relates that to that we have worked hard in the summer with large variations between the product segment and we worked hard to maintain our service levels to our customers. That has had an impact on particularly that we needed to have more transports, we needed to have more trucks and particularly trucks with chilled items that has driven up our cost and also somewhat driven down our product. Final comment, which is on the lower side, but also profit has been somewhat impacted by that we have invested in this quarter significantly. And over to our CEO, CFO, Mr. Anders Lexmann to go through our financials. 4%. Looking then into our cash flow for the Q3 isolated figures for last year. We also last year paid back a short term loan of SEK 124 1,000,000 and that we did. The 4th quarter this year will be more intensive when it comes to investments. If you compare to previous quarter. They are investments both in our wholesale operation and in IT. Coming back then to as a percent of net sales. We had a little dip last year and that was due to our acquisitions, but now we are back on track and we had accounts payable and accounts receivable. This chart shows our financial position strong and last year also affected of some short term loans that means that we have a little bit lower goal of 25%. And finally, capital employed. We have a return on capital employed of just over 40%, which is very stable. And that, of course, was my last bit. Our strategic priorities very much relates to our ambition to be a leader in good and sustainable food. And you've seen this slide and of course we have one key area for our people. I will not go through all of them, but give you a few highlights or a few comments on some of them. The value proposition for Ax Foods retailer. And we're also working with our meal solutions to offer more prepared meal to our customers. We got it from a little bit what's going on and happening as we move along from that. We are clear that we see some effects out of the summer due to some stress in terms of some of the assortment that we need to bring in. That is also not only impacting Sweden, but also northern part of Europe. There's also an inflation pressure in general, even if I have to state and say that I think it's too early to say where this will end up. At this stage, we are around 2% food inflation to our best adjustment or understanding, while we see obviously some categories that we take responsibility for this as we'll try to work as much as we can with the industry and with the farmers to secure that we will have Swedish food and food production from the Swedish food production in our shelves even the coming period. We need to work very closely with this so we secure that we handle it from the right perspective in terms of promotion campaigns and so on to make sure that we have a steady flow of these products also in the coming period. Going then into the customer meeting where we have 3 clear priorities. We work on refurbishing our stores. We're also working on developing channel experience with the new ecom that is growing in the market. And I'm not going to go through what we've done so far in terms of very much on the online, but just focus on the refurbishing in the stores. And we have talked and mentioned a lot in terms of what we're doing with Hemshaft that we are rebuilding the stores and taking the next step. This time, I just want to make a comment on Villis. As we have, as you've seen, a very positive momentum in Villis, and we want to continue that momentum, but we're also taking the next step in terms of how we look at Villis stores. And we've already improved the communication that you've seen, I think, out in the market. But we also reached off premade meals, ready made salads and an improved general merchandising. So exciting times where we're now evaluating and seeing how this is received out in the market. Going then into expansion, we had 3 areas also here in terms of acquisition, but also expanding our offer to the online consumer. And if I make a comment there on expanding our Sinclair that we are will be on the really on the low side. We have 2 completely new stores, but we have then converted a Potempo into hemp ship as well as some franchising stores. And then we have made some conversion within the group. But it's clear that we are on the low end of new stores in 2018 that we will see be ramped up in 2019 as some of the planned stores that we've seen that we thought we're going to open up in 2018 has been report I think or comment is I think we're coming with some interesting news here. As we've already stated, the clear priorities for us and a large of our opportunities lies in optimization. We have taken steps in our optimization process with we've developed a new warehouse, so a link in the optimization part out of that warehouse. We're also working with dark store. We are about to launch the common dark store for Ville's, Hemshoppe and Mato Tessie as of early next year. As well as for us within the online, we need to develop the last mile, which is, as you know, a costly part where we now start to coordinate our transport within our various brands. Now a year ago, we addressed at the Capital Market Day our vision in terms of how we see the future logistics. Now we worked on this for over a year. And therefore, we are even if we are early days, we have not made the final contract. But we are so getting closer and closer and we also now are more clear about the timeline as well as we're also clear about the CapEx need for these investments. So we thought it is a good time to go out and share our plans with you here today. Building that will not only handle the stores picking, it would also handle the ecom. So this is a warehouse that combined them both, which of course creates a lot of opportunities for us. And plan is to start to make some of the investments out of that of this in next year 2019. And then this will be fully up and running by 2023. So why are we doing this? Well, logistics for us is one of our core strengths and one of our core competence. And at least now when we see the new technology available out there in the market, we see of course some large opportunities. We will be able to improve our service levels. We will be able to improve our impact on sustainability. We will be able to improve our processes. And of course, we see this that it will be have some significant improvement on our productivity. Now, as I said, we have a timeline and we also have a clear indication of our CapEx need for this optimization process or the optimization building part of that. That will be between SEK400 1,000,000 to SEK600 1,000,000 in a 4 year period starting early 2019. So where are we right now? Well, we are in the final discussions with our suppliers and landlords and we expect to confirm some of these plans early 2019 or 1st part of 2019 and obviously we will come back with more details as we do that. So, that sums up our numbers for the 3rd quarter both in terms of the quarter 3 as well as the financial position we have in the company. And I hope you also see an update now in terms of some of the areas we're working on in our strategic agenda where we have a lot of energy for. So we are leaving behind us a strong quarter, a record quarter actually, with particularly Villas and a lot of energy for the future. Thanks a lot. Thank you, Klas. And with that, we open up for questions. And we start here in the audience. But before I hand over to Niklas Ekman, Pukarnegy, I just want to give the voice over to the operator so you can state how the conference caller participant can ask their questions. Please, operator? Okay. And then Niklas, please go ahead. Niklas Hittmann here from Carnegie. I want to start with a couple of questions on this automated fulfillment center. Firstly, this will be launched in Stockholm. What kind of range are you looking at? How far can this distribution center service? How big range in Sweden? And do you need additional fulfillment centers going forward? We need more warehouses or fulfillment centers to serve the whole country. But it will cover a large part of it. We have today Stockholm, the full program out of it and then we'll outline it then. And €400,000,000 to €600,000,000 you say that's on top of your normal CapEx. And I'm wondering what is your normal CapEx? We had somewhat higher this year. Anders commented on that as well. What we are addressing now is what we see as extra additional for the optimization part and so forth. So that will be on a year to year guiding when we come into closer to year by year. This still means that your total cash flow is likely to be lower than the dividend payments that you've done in the past. But at the same time, you have a very strong balance sheet. So I was curious when you've had discussions about this with the board, if there's any change in the view on the dividend. Will there be a likely dividend cut in the short term? Or do you think can sustain the dividend? No. I think we don't think that. I mean, obviously, dividend can influence by many areas and many things going forward. But for this isolated, we have a strong, as you pointed out, financial position. I don't know if you want to comment on it in terms of discussions we have for the financials. No. It's like Claus said, what we see now is that it will not have any impact on the dividend. But as you mentioned, it's at the end of the day, it's a call for the board and for the owners. Okay. Also have a question on the drought, which you point out as a big challenge. In the past, when you see inflation, normally you're very good at passing that on and it can actually end up being positive. Is this different? Is this severe enough to impact volumes do you think? Or are you confident that you will be able to manage this without having a severe impact on profitability? Obviously, we believe that we'll be able to manage this. But also, as I'm stating, I think we're a bit early to see how this will sort out. We thought that we're going to have some more meat issues an issue than we actually had. So it's so we need to follow this closely and need to work closely with the industry. We see some large flotations today in certain with a lot of the products we used to see. Due to the shortage, we want to make sure that we handle that. I think we will be able to do that, but we need to follow it and work closely with it. Also a question on online sales. Can you say something about the share of online sales for the group right now? You have 65 stores and you have Marta Tessie. So I assume that's at least €500,000,000 in sales or around at least 1%. As you know, we are not sharing that, but I can confirm so far that we have a very positive growth to our knowledge in terms of what we see versus the market. We are growing faster than the market. So we have a positive development. Okay. But you're not quantifying the growth either? No, we're not doing that yet. Okay. Thanks. I'll pause there. Thank you, Niklas. The next question on the line comes from the line of Gustav Sandstrom of SEB. Please go ahead. Your line is open. Thank you, operator. Good morning, everyone. Thanks for taking my questions. If I can revert back to the investment in the warehouse, Could you please specify a little bit about these EUR 400,000,000 to EUR 600,000,000? What are the main costs associated with this project? Is it robots or truck fleet or the actual building? Or what is the input costs in this calculation that you have? And secondly, is there an element to this investment that is more of a centralized function that can be used cross country? Or is it more of a distribution network that has its limits in terms of geography? Thank you. Hi, Gustav. If I start and see if Anders can if you want to fill up or fill in with something. But majority of this investment very much relates as I stated, it's a high-tech building. It's a high-tech fulfillment center, which will majority of this is due to the optimization process or the optimization within the building. You may have seen and there is nothing similar to this in Sweden, but you may have seen some of it you'll find in other countries. So it's very much linked into how we are building an authorization that is very efficient to handle this kind of structure, this kind of operation that we have. What is also fair or important to point out that this will also include both to the stores as well as ecom. That gives us more efficient operation, but also flexibility in terms of how far the or how large the ecom business will be since we're handling this in the same we can in the same building, so to speak. Gusta, remind me again, your second question was? In terms of the actual investment, this mainly refers to the actual distribution capabilities in the surrounding area or are there elements of this that are sort of And when we are outlining this as we had the earlier question here, we'll come back with in terms of how far and how big this will reach out. But obviously, we are aiming Okay. And when you talk about the investments being sort of high-tech, is it fair to assume that the depreciation for this investment will be lower than perhaps the normal 10 years? What we see is that we will have a longer depreciation time with this type of investment compared to what is normal for us. Even though you referred this as being a it is this still reasonable to depreciate such an investment over longer than 10 years? We believe so. And when we say high technology, obviously, it's a lot of software in it, obviously, but it's a significant amount of hard construction as well. Thank you, Gustaf. And we go over to Danske Bank and Daniel Schmidt, please. Thank you. Thank you. Could I just ask you a different question on the operations during Q3 and the weakness in DALGAAP's EBIT? €38,000,000 I think it was year on year. Is there any chance that you can sort of shed some more light on how much of that was related to increased fuel costs, how much of that was related to volatility in deliveries and so on And how much of that So that was the fuel prices, but it also relates to that we had to so there it's a combination of that we also needed to have increased our transports. As I pointed out, we had to increase transport due to the capacity for the trucks due to the heat. So we couldn't ship as much as we normally do in 1 truck. We needed to add trucks. So it's kind of a combination of more trucks and higher fuel costs impacted this part. Also coming back to the subject the topic of today, it seems like Can you, in any way, sort of try to compare what you announced today in terms of the automation investment with what Ika did in terms of the Ocado deal, and you're spending almost twice as much. But I assume that includes the entire group, What you're right about in terms of digitizing No, I think you're actually glad you're addressing that question because of again, I'm going in with a lot of energy out of this investment because it's a fantastic opportunity, but it's not to compare with an online optimization process. We are taking an optimization for the current business that we have that is still the majority of our business today to fulfill the stores. As you know, when you look at the structure today, it's fairly manual warehouses that we have even if we have techniques in it, but it's very and this will create a great opportunity for us, which of course creates also great opportunities. So but this is for the whole business for us. It's not only part of the online. The beauty is that we can combine this. We're not building a separate optimized online. We combine this in one fulfillment center, which as I pointed out, gives us the flexibility in terms of where online how big that market will be, but it also us the productivity benefits we also see needed for the online part. And is it should we assume that you already have single out a supplier for this, but sort of the We still have not made the final selection or contracts in these discussions. But we are getting so clear about the timeline and also getting so clear about in terms of investment needs. So therefore, we thought it's a valid time to go out and inform the market. So we're also keeping the structure right in terms of how our the need for information. And is this also sort of in any way boosting your sort of internal cost base? Is part of this project, is that going to be sort of developed in house? Or is it a mix where you need to staff up as well? Well, it is obviously part of it is a mix. But of course, we are working with partners with this since it's not our core business to build optimized fulfillment centers. So and it will not be for the future either. So but of course, we're also building up our own competence to handle this. But yes. Thank you. Thank you, Daniel. And I had no idea. Please go ahead. Your line is now open. Just a question on the organization or logistics then. And if you can say anything about what type of savings you expect from this big investment? And also if there will be any costs apart from the investments that you put in the balance sheet doing this? All the plans for it. So what we'll do is we'll come back later on when we have this confirmed fully on. But right now, it's very clear in terms of timeline and it's clear in terms of CapEx need. We see some great potential in terms of productivity related to this as we are starting it by 2023. We'll come back to some of that later on when we have a firm plan. And this will be a meaningful additional return on investment, you think? Or is it more of being able to cope with maybe a higher cost level in the online setup. I think it's a clear meaningful Maybe adverse weather conditions in this quarter. But relative to your franchise stores, the owned ham shop stores have been showing quite weak type of base somehow? I think you're right in that, and we've seen somewhat slower performance on our group owned stores over a few quarters. We are some of that is related to the refurbishment program that we have worked intensively with. And as you know, you're not even if you're refurbishing a store, you're not getting fully up in speed. It takes some time versus when we're looking at the stores we have refurbished, we are seeing that it's a very positive effect on a going basis, particularly year 2. But we are working with the whole group now and particularly with the group in hand. Okay. Just finally also, you mentioned here that you have better results from online contributing to both VIRLS and Hampshire. And just wondering how you see that development going forward. Should we expect this also in the coming quarters? I think it relates very much in terms of how we'll be able to grow for us as we move along as of 2019. Then a clear area for this as well is that we are able to drive and collect offer that is particularly positive within Villis that has over 50% Pick and Collect rate at this stage. Yes. Thank you. Our next question comes from the line of Andreas Lundberg of ABG. Sorry, can you take that again? No. What's your maintenance CapEx for 2018? Maintenance. Maintenance is for winter. Okay. And the remaining CapEx for this year, what do you include in that? Is it normal growth for this year? Yes, it's normal growth in Or is there anything that is shorter? Well, as we see it now, it will look into that in more details when we come closer to the investment. Okay. And will you start to take these front ends? I mean, how much would you say is so weather related, it comes to profitability improvements? I think in general, asset growth of customers, we have a positive sales development. So slightly on the mix effect, so slightly which is positive then on the gross margin. Sales mix, as you've seen, we had a positive sales mix from this summer. We've also been able to be a bit more productive specifically. And your cash did improve a lot versus last year, is that correct? Your cash had a very strong performance in this quarter. Edric Iversen of Kepler Cheuvreux. Please go ahead. Your line is now open. Thank you. Good morning, guys. Thanks for taking the question. Potentially, one last on back end loaded when it comes to CapEx. Can you give some color on that fact, please? Well, when I said in the range between Going into Q4 when it comes to CapEx. Just curious on why that is. That is some of the other quarters in for the year. So but also in wholesale, we will increase a little bit. On a 12 month trailing basis, you're at 4.4%, which is slightly above your 4% target for Villis and expect to reinvest this increased margin in the offering? Or should we expect it to stay at these sort of higher levels as you Our value proposition to the consumers and keep track on that. That is the most important part. Then obviously, we're getting positive effects in terms of scale when we don't yes. That's very clear. Thank you. That's all for me. Thanks. Thank you. Thank you. Thank you.