Earnings Call: Q1 2018

Apr 24, 2018

Morning, everyone, and warm welcome to the presentation of X Foods' First Quarter 2018. The result will be presented by Axfood's President and CEO, Klaus Balkov, together with the CFO, Anders Lexmann. And after the presentation, there will be time for questions either from the web, from our people in the conference call or from the audience here in the room, of course. And with that, I hand over to the first speaker, Klas Balko. Thank you, Cecilia. And of course, let me also say good morning and welcome you all to this presentation of our Q1 in 2018. And I think it's fair to say, as it says on the headline here, that we have noted a good start of this New Year. But before we come into some of the numbers that I will obviously cover, let me just quickly go through our agenda. I will cover the key ratios for the Q1. We'll Anders Leksman will go through the financial situation in the company, the position that we have. And then I will come back and walk you through some of the elements in our strategic agenda and the strategic plans. And then Cecilia will come back to lead the Q and A session. But before we start, let's take off by providing a quick overview of Ax Food as it is today. We have a clear house of brand strategy with several strong brands that supports the consumers in various needs and some of the consumer various platforms that we see out in the market. We create scale and efficiency through our common sourcing and logistic company DAGAB. We serve over 4,000,000 customers today per week. And we do that through we have over 300 group owned stores. We have over 100 franchise stores in the hemp chip chain. But we also have a large cooperation with the convenience sector in Sweden. So in total, we are serving over 1100 stores in the Swedish market. If I now go into the quarter, let me just give you my highlights of the quarter as I see it. Again, we've had a positive start. We have a strong sales growth in the quarter. Yes, it's supported by the Eastern effect and in that a very good March, which was also supported by that we had a salary week and just a salary payout day just before the Easter period started. We also have a very positive momentum in all our online channels that we provide today within Axford. And finally, behind the strong growth, both online but also offline, We are reporting record quarter 1 profit and an increased somewhat increased margin in terms of EBIT margin. In this quarter, I also would like to give you an update and remind you of that we now have our new structure in place. Tempo is now included into Hemshopp. Snubgroze is now reported as an owned channel in an owned segment. And our business to business with the convenience sector is now part of DAGAB and DAGAB's external customers. And these changes, together with the internal cost structure changes we've done are all now reflected in the pro form a figures that we have now provided in the report for a fair analysis of our numbers and of our performance. Let's now move into the quarter and our key ratios for the first quarter and I'll start with the sales numbers. Overall sales is up 7.6%, supported then again by the Easter effect, but also supported by Eurocash acquisition that we did 1st April last year. So this is then the last quarter that we get this full effect of Eurocash and then it will be analyzed. We have an Eastern effect that this year is in March. That is positive for Axford as a whole. We estimate the effect to be approximately between 1 point 5% to 2% on group level on based on our sales performance. It was also then again, Eastern effect was somewhat larger than we expected due to the salary weekend that we had just prior to Easter. By segment, Villis stands out not only due to the Eurocash acquisition, but also clearly behind a very strong underlying like for like sales. And Hemschepp is also reporting a solid growth with a very strong like for like for our franchise operation or a positive like for like for our franchise operation. And snub goes is reporting somewhat weaker numbers, which is related to a seasonally weak quarter, but also very much relates to a soft market that I will come back to a little bit later on in the report. Now if we relate these numbers into the overall market and if we relate our store sales, I. E, our own sales and including the hemp shop franchise, we are growing with almost 10%, 9.7% growth. And even if we're now lacking the total market number for the full quarter, I think we are clear and we can be confident to say that we continue to gain market shares even in this quarter. So moving then into the profit numbers. Our profit at SEK 4 35,000,000 is up to 9 point is up 9.6 percent mainly then due to the strong like for like sales that we have reported, but also supported by lower acquisition cost and somewhat lower project cost versus last year. And as we've seen in the previous quarters, online is still hampering our earnings in the quarter. Margins in this quarter is slightly up and by segment we report healthy and stable margins in each of our segments. And let me now walk you through some of the numbers and comments segment by segment. And I'll start then with the largest segment and have to say the star in this period, Velis. We're reporting a very strong growth. We already talked about the Easter effect, but still excluding that a very solid like for like, which is very much driven by more customers and an increased average ticket value. We also have noted a very positive online development and we continue to drive online in the Village Change where we now have added 3 more cities and we continue to roll out and to currently we now have 22 stores with the omnichannel offer within 22 cities with the omnichannel offers within Villis. And including the positive online development, but obviously very much dependent on the positive like for like, we're able to maintain and report the margin in line with last year and positive profit development. Moving then into Hampshire, also reporting a good growth close to 4% for total Hampshire and a 3.2% like for like. Hempship is a little less impacted by Eastern. Village is somewhat larger impact on these large weekends or holiday weekends. And compared to last year, if I look at our group owned stores that have a somewhat slower growth rate has also been impacted by somewhat lower campaign levels for campaign activities in this period, something that we are now planning to adjust. It's not something that is planned to be ongoing, but that's something we will adjust the coming quarter. We continue to refurbish the hemp shop chain and the refurbished stores. We have refurbished 5 stores in the period. And we're also pleased to see that also in Hampshire the online development is very integrated in the business. We have now 166 Tempo stores that is included in Tempo. It's a franchise store, but it's also now taking we are capitalizing or using the resources that we have for the franchising resources to drive the Tempo chain. And we already added more stores within the Tempo and we continue to develop the brand, the Tempo brand. We're also in Hampshire reporting stable earnings behind the positive like for like and also behind somewhat lower than campaign activities that we have. Moving then to snub goals. We are reporting a moderate growth, and it's the first time we are reporting snub goes. And of course, one could have wished for a somewhat better start now when we are releasing the numbers. But again, seasonally, it's a very small quarter and the moderate growth that we have is still if I look at the perspective of the total market, we are impacted the cafe and restaurant business in this quarter. Earnings more or less in line with last year, which is as you can see the seasonal seasonally impacted and it's a small numbers for this quarter. Finally, DAGAB reporting also good growth at 3.8%, which is behind the positive growth from our retail chains in the group And it's also somewhat supported by Maat. SE, which is having 1 month extra versus last year. But it's hampered the growth is also hampered by the fact that MatHem is not a customer in DAGA any longer, which it was last year. We're reporting stable earnings in Daghab. The even if it also currently reflects the losses from the Mato Tse business that we have that is included in the Daghav numbers. So with that, I have covered some of the key ratios and I will hand over to our CFO, Anders Lexmann to cover our financial situation in the company. Anders? Thank you, Claus. Let me first give you a picture of the pro form a effects of the reorganization of NERLYFS and the price adjustments in Daghav from the 1st January. The business, Tempo, have been transferred to Hemshoppe and the other businesses in Nelifts have been transferred to DOGA. And in connection with that, DOGA carried out an internal price adjustment based on its updated cost structure. So both these effects is from the 1st January this year. And in the left chart, you can see the effects in Q1. And please note that we have a small seasonal effect in Nelis and DOGAB. So we have a smaller pro form a effect in Q1 if you compare to the full year. The cash flow in the quarter is better than the last quarter and that is mainly explained of the acquisitions that we made last year. We acquired both Matodesi and Eurocash in the Q1 that impacted our investing activities and also the working capital last year. And this year, we have a calendar effect in the working capital, a minor effect capital, a minor effect due to that Easter Eve, close March. So here we have a little effect. We have also, according to the AGM decision, a higher dividend this year from NOK 6 to NOK 7 per share. And we have also used our credit facilities with approximately $170,000,000 this quarter compared to $500,000,000 last year. Looking at our investments in the quarter. If we exclude acquisitions, we have a little bit higher investment this quarter. It ended up with $189,000,000 compared to $166,000,000 last quarter. And we have increased our infrastructure. And we have we can also see higher investments in our wholesale operation and that is mainly due to our new store in Johan Shopping. And also we have a little bit less investment in Hampshire this quarter compared to last year. If we then take a look at the development of our net working capital on a rolling 12 month base, You can see that we have improved our net working capital both in Kvaerner and if you compare to sales. And as I mentioned before, we have a calendar effect in Q1. But as you maybe remember, we also had a calendar effect in December last year. So this both these calendar effects boost our net working capital on a rolling base. And we can see improvements both in accounts payable and accounts receivable actually. Our net debt position is back to a little bit lower levels compared especially to last year and that is also explained by our acquisitions. We have a solid equity ratio even in the payout quarter, the Q1. We have about 35% in equity ratio. And if we take a look finally at our capital employed, we have a solid level of capital employed even though we grow our businesses. And that compared with our growing earnings, we have a ROACE of approximately 50%. And with that Claus, I hand over to you again. Thank you. Thank you, Anders. And let me now remind you of our strategic agenda to take leadership in good and sustainable food at great value. You've seen this slide before and I will not go through all our plans and all our elements in this, but let me just cover some of the progress we've done in the quarter and some of the progress we are working on at the moment. And if I start with the customer offer, we continue to strengthening our private labels. We've added more a larger range in this area and we are now share at 28.7 percent, an improvement versus last year. We've also started to move more into strategic relationship and strategic work with a few suppliers to take cost out of the system and to increase customer value. And we're also driving and continue to drive what we call a range of good and sustainable food. One small example of this is the launch of bread beer, which is where we are using old bread and provide and or using that to brew beer. Obviously, it's a very positive effect as we are using we are reducing bread waste and at the same time providing a very beer. But good and sustainable food also includes packaging. And we are working with this alone, but also we are working this with the industry. One example of that is to work to reduce plastic. Small example of what we've done recently is to use the cleaning and skincare range that we have under the name Soklarart and we used the container there with Bioplastics. So we are reducing the plastic waste in the environment. Moving on then to the customer meeting, which for us is a very much a constant development. And we as I've reported in the report, we continue to refurbish our stores. We have adjusted our loyalty programs now into the new GDPR system or the new GDPR regulation. And as of the coming quarter, we will now offer our customers in Villis and Hemshopper digital recipe receipt. And we'll continue to roll out the digital opportunities with self checkout and self scanning in Hemship and Villis where we are now up at 40% of the stores has that in Hemship and almost 60% of the stores in Villis. And we continue to develop our omnichannel experience for our customers in Villis and Hampshire where we are now up at 40 stores for Villis and 18 for Hampshire. And as you know, 18 in Hemshoop is reflecting almost onethree of all the Groupon stores in Hemshoop. So it's the highest share than in Villis and we'll continue to ramp up the Villis now to lead into by the end of the year we plan to have a third of our stores in Villis also including an omnichannel experience. And when it comes to expansion, we've just opened up the 5th Urban Deli store here in Stockholm at Centralen. But I have to also report that we've seen some of the planned stores for 2018 be moved into 2019. So the current best estimate is that we'll be at the lower range of the 4 to 8 stores this coming year. So we'll be lower number of new stores in 2018 versus what we've seen last year. And we expect that to ramp up somewhat in 2019. And our startup, the online pharmacy ApoHEM, as announced earlier, we plan to open up this channel for our customers soon and we plan to do this before the summer as we have already announced. And finally, we put a lot of energy into how we can work and capitalize on all of the new possibilities that the digital world is now providing. Few example of this is that we are now working more with the data based analytics to provide more relevant offers in our customer program. We are looking into how we can and we are building a program on how we can use data analytics to be better and relevant in terms of how we are developing our range, but also how we are developing our campaigns. And another area, which is important for a retailer is staff planning. Looking at analytics and more big data in terms of how we can be better at planning for the staff into when they're going to be in the stores, so we can become more efficient, but also of course provide even better customer value when we're meeting the customer. So we are in an early phase on this, but we see a very much of or we see a very great potential I would say in this program as we have a very strong base and foundation due to we have a solid ERP system that we believe that we can capitalize on in terms of data gathering. Finally, with the positive start of the year, we are well in line with our long term financial targets and we also repeat our previous guidance in terms of investing SEK 900,000,000,000 to SEK 1,000,000,000 into CapEx this year behind some of the programs that I've just presented. So if I sum up my part of the presentation, It's a positive start of the year, positive sales start supported by Eastern, while still a strong underlying like for like sales. We are improving our profit and actually also improving somewhat our EBIT margin. And I would say that we have a clear agenda for future profitable growth. With that, Cecilia, over to you to hand over to you. Yes. With the summary and now we open up for questions. And we start here with Niklas Ekman for Carnegie. Niklas here from Carnegie. A couple of questions. First, you talked about the Easter several times. Is it possible to quantify the effect on EBIT as well? Because I think on gross profit, if I calculate correctly, it's about €30,000,000 boost if you talk about 1.5% to 2% on sales. But I assume you've also had slightly higher costs. But is it fair to assume at least €20,000,000 in positive EBIT effect? I think you're a little bit on the high end, but it's not that far. You're right. When we're going into Eastern, we also have somewhat lower margin and also somewhat higher cost. Okay. And you talk about a positive online development. Is it possible to quantify either the online share of sales or what kind of growth rates you're seeing? And I know that IKEA for instance are giving some numbers talking about 50% growth and roughly 1% of their store sales. And I assume that you would have a slightly higher number than that boosted by your acquisition of Marzepot SE. We have a very positive growth. I think I was trying to express that without providing the number to you. If the market is reporting a 20% growth 2017, we'll see where I think we are very clear to say that we are significantly outperforming the market so we're coming from somewhat lower levels, but we're now really catching up in a good way. Okay. And you mentioned that DOG AB you have changed the internal pricing from what to what or what kind of impact? It's not that complicated or complicated, it's complicated, but it's not that big of a drama. Last time we made a price adjustment was I think 2,008 or 2009. And we have we are doing an ABC cost structure within DAGA where we're looking into how we are driving cost. And as you've seen the impact has been somewhat more positive to Villiers, which relates to that they are buying more efficiently in terms of larger packaging and so forth. So we're just reflecting more of the cost system that we have. Okay. And can you say a little bit about competition? I mean, you are clearly here gaining market share. ICA is also doing quite well. Are you seeing any changes? I mean, we've heard co op seems to have lost quite a bit in 2017, but seem to have indicated a momentum at the start of 2018. Are you seeing anything of that? Same thing, Lidl seem to be ramping up their store rollout. Are you seeing anything of that? Well, the only thing we can say is that there's a very competitive market. And as I said also, we don't have the full market view yet. So we have not seen the effects of the full market yet. So I think it's somewhat difficult to say where it ends up. I think it's fair to say with almost a 10% growth that I don't expect the market to grow that. So we are gaining. Who is not gaining is difficult to predict at this stage in my view. But you're not seeing any dramatic changes in the competitive environment? No. Not more than it's as you're what you are pointing out as well. We see some competitor that is a little bit more aggressive in terms of rolling out stores. Okay. And finally, food inflation, a prediction or comment on what you're seeing? Prediction is I mean, what Roy has stated is somewhat in line what we see as well is around 2%, and we'll see where it ends up. It's difficult to say, of course, as you know, but of course the currency impact will be there. So we don't have any other point of view than Ruiy at this stage. Okay. Thank you very much. Thank you, Niklas. And let us take a question from the telephone conference. Operator, do you have a question? Our next question comes from Stefan Hell from Nordea. I wanted to come back to the question on DOGAP here and the margin contraction there. To what extent was that due to lower internal pricing and online? And also to the extent that online is pressuring, how why is that given that you had Motto SC consolidated for most of the part of Q1 last year? Hi, Stellan. Maybe you have to repeat your question. Let me just take the first part where at least I think I understood in terms of the DOGA, how much that is related to the margin decline as we are reporting pro form a numbers. We are related very much to the online part of the business as well as we have the calendar effect is positive for the retail sales, but it's somewhat negative for Dagap. Very well. But I was on that note, and I think MTSE was in your numbers already last year. So I'm just wondering to why you're seeing margins down. Okay. But it was partly it was partly part of last year. It was not fully part of last year. So that is the reason? Yes. And Mott. S is developing. Okay. Could you add any give any quantification EBITDA is affected by your online initiatives? And also if you can also share how much of your sales is online? No, we are not sharing that at this stage. In terms of share of online, we keep that this as a whole at this stage. And in terms of how much is impacted, it's also not something we are disclosing at this stage. Okay. And can you say anything on how you expect that to develop going forward? Will you see No, that's I doubt it. If I I mean, if I elaborate a little bit on it, I think we pointed that out that when we started online, we also had fairly high investments in the beginning with systems that we started to depreciate and so forth. And we're now getting more and more volume. Of course, that is supporting us. So it's a volume based that the more volume we get, it will help and it will support. And going forward, we are working on to see how we can work with the back end to become even more efficient where we are today having our own dark stores with Malpotesi. We started to work together with the transports across the chain, so we can provide the last miles together. We started to work with started to work with the same transport. But obviously, the next step is to see how we can work with a common dark store for all the change and that will improve the profitability for the online segment. And I would like to remind as well for us particularly in Villas but Hemshirp, the omnichannel structure is where the channel works together. So I think we well, I know we talked and discussed that when we had some of the other session in terms of how online with Ville is having a fairly high click and collect share that is supporting the store and as well that the customer that becomes online is also becoming even a larger share of customer for us as a whole. So from a total perspective, we also see it as positive. All right. Just being a bit on the nitty gritty side here maybe, but how to understand this really? Because I think you said that with increased volumes, you will see better profits in online. On the other hand, you said that margins are down in Dager due to Mototeci's development. And I would think that Mototeci has had a positive sales volume development. Shouldn't that improve profits then? When we're getting these together, it's right that we're also investing. And we have if you have seen some of the investments we've done in Mato Tse in the market, we also increased market spend, etcetera, during the Q1 in Mato Tess that has impacted the investments, so to speak, in Mato Tess. Okay. Good. Thanks. We can take another question from the telephone conference. Our next question comes from Christoph Sandd, I guess that's me, Gustaf Sandstrom, SEB. Coming back to online sales. Is it still true that no Hampshire French lessee sell online as of yet? That's correct. And in the light of that, you mentioned strong growth online. Still your own hemp shop stores, which comprise all of their online sales within that category, have now reported extended period of subpar or submarket growth despite recent refurbishments. Should we interpret this as the development in your portfolio on physical stores in Hampshire, starting increasingly tough to grow top line? I must admit I have somewhat difficult to hear your question. But if I think what you asked about is in terms of how Hemship is developing and compared to the Hemship is doing good online, while the Groupon stores, which are the one that has online, is reporting somewhat softer like for like than the franchise, which very much also relates to some of the phases we are in when we have refurbished some of the stores that has impacted when we are refurbishing them. We have 5 stores that we're refurbishing and that has an impact on the like for like. We obviously expect and hope to get a better push for get an embedded effect of these refurbishment as we are coming through the refurbishment program. We start to see that in a few stores. I think I mentioned we talked last year about Hemshab City that has had a fairly large impact on like for like last year. We now in this quarter have seen a very positive development. We are now back on track and even better than last year on Hampshire City. So we are taking steps. Okay. Great. So we should expect positive like for like for the physical stores, which you own yourself in Hampshire going forward all is equal? That's at least my expectation. And given that onethree of the year has now come to an end, I guess you're starting to get an idea of the investments for next year, obviously this year, a very high CapEx year of some €900,000,000 guided for. Should we expect CapEx to come down materially going forward? Or what's your feeling here? Thanks. Well, regarding to next year 'nineteen and forward, we are coming back to that. We're not there yet to Great. But perhaps you could give us some sense on how much is sort of one off related and how much is the maintenance out of these 900,000,000 guided? For this year. For this year? Yes. No, I mean, this is an increase this year and it's in all our segments and in line with our activities. So And just to remind you also that we are continuing also to work with the warehouse investment that we have in Johan Sjoping that will plan to be rolled out fully in operation earlier 2019, but to be starting started in the end of this year. Okay. Finally from me, your biggest competitor is arguably accelerating their online effort sets of a few months now within a few months now with their combined logistics center in Stockholm area. Do you foresee increased competitive environment within online sales from this? Or can you get some color on this? No. As we said in terms of it's a very competitive market and my expectation is that every one of us who's working with online in food is working on the back end in terms of becoming more efficient. And a natural step in that is to work with dark stores. We have one for Malpotese. Our plan is, as I said, is to work where we're combining all our channel all our retailer or chains in the same dark stores. So but from a competitive reason ICA is out there which relates to their out there offering online they are now providing or working internally to improve their back end system. Okay. Thank you. Okay. We have some further questions here in the audience. Daniel, please go ahead. Thank you. Daniel Schmidt from Danske Bank. Just wanted to ask you on one of the smaller segments, snub gross, and which, of course, was impacted by unfavorable weather conditions and so on. But do you see any risk at all that there is a chance that the Swedish restaurant and cafe market is getting saturated? Or do you is this just a blip? Or is it sort of back end of the season? Well, we don't at this stage, don't see that. At least and in terms of saturation of the market, we are warehouse to them. So of course, it depends on how the total market is developing. We've seen a weak total market in the Q1. We expect and hope that that will bounce back in the coming quarters. Now so no. Do you see a change to that in sort of the start of this quarter Or is it too early or I will let you know in July. All right. Thank you. So we have more questions here. But before that, maybe operator, you can repeat how to ask questions from the conference call. Thank you. Thank you. Question on private label in Villas in particular. I think the level and correct me if I'm wrong, I think it was level versus last year at 30% or so. Do you see this as a good level? Or will you try to stride up further, increase that level? I think we have a positive, a good level across the group. I've been very clear on that. We need the mix of own labels as well as other labels. And I think the better we are at developing and innovating own labels, If the customer reward us for that, that's very positive. So that's the kind of work we are working on. And that will gradually move over time. And I think we still have a program for that. So we are at the positive level. Can it be increased? Yes, I think it can. But it very much depends on how successful we are in terms of developing our range. Thanks. And one maybe more detailed question. Can you quantify the effect of not having MatHem in the numbers for Dagheb? I can, but since MatHem is another actor in the market, I don't see any reason why we should release their numbers. Thanks. Okay. We have no questions from those of you who are participating over the web. You know that you can also send in questions there. Operator, do we have any questions from the conference call? No, we don't. Would you like another reminder? No. I think if we don't have any more questions here, then we will thank you all for coming here today and listening in and wish you a good day. Thank you.