Hello, welcome to the Clas Ohlson Q3 2019, 2020 report. Throughout the call, all participants will be in listen only mode, and afterwards there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO Lotta Lyrå and CFO Pär Christiansen. Please go ahead with your meeting.
Thank you. Good morning everyone. This is Lotta Lyrå speaking. I will do this presentation regarding Q3 2019-2020 together with our CFO, Pär Christiansen. Turning to page 2. This is a quarter with improved profitability, all according to our plan and as a result of the action program we have been pursuing during the latest 18 months. During the quarter, we see organic growth, although fewer stores in our Nordic home market. We see improved underlying and reported profit margin. We continue to have high speed in both growth and cost saving initiatives, and we focus a lot on maximizing the synergies between our channels and different offerings. We see no material impact due to the coronavirus in our results. Turning to page 3. The agenda for this call is that I will take you through a business and Clas Ohlson 100+ update.
Pär will go through the financial development and the February sales, I will summarize, we will have a Q&A. Turning to page 4. Looking at Q3 2019-2020 in brief, Nordic sales were up 2%, the organic sales in the Nordics were also up 2%. Total sales were unchanged, impacted by the closure of stores in U.K. and Germany, like for like sales were up 1%. Online sales continued to grow during the quarter with 19%, the growth margin was more or less stable at 40.1%. As a consequence, the EBIT margin was strengthened during the quarter to 13% compared to 3.6% similar quarter last year. Looking at rolling 12, the EBIT margin increased to 5.8% compared to 3.2% a year ago.
This is due to an improved operating result, both reported and underlying, all in line with the guidance we have given. We see that we are well on our way to deliver on the guidance of an EBIT margin of 4%-6% for 2019-2020 that we have given. We will continue to have focus on lower costs when implementing our action program. Now turning to page 5. Christmas trade is an important part of this quarter. It started already in Black Week, and we saw during Black Week a strong demand for capital goods and a lot of Christmas presents being bought already at that time. Black Friday was the all-time sales, high sales day for us, both in stores and online. A slight change in pattern is that we see Christmas celebration now happening throughout December.
We see a lot of focus on socializing at home, leading to higher demand for consumables and also smaller gifts. We see that we had relevant offerings throughout the whole period, this together with an active approach to our inventory led to an improved inventory level. We also have a lot of valuable insights for the coming Christmas planning, especially in how to optimize trade in December. Turning to page six. We are in different ways impacted by the coronavirus. As we speak, we see no material impact, this is then taken into account, supply, production and sourcing, as well as the precautionary measures we have taken with care for our coworkers, as well as consumer behavior.
This is a development that we now follow hour by hour, day by day, and it's difficult to say at the moment exactly what will happen. What we do know is that the future developments will be steered by how the virus is spread in the Nordics, impacting customer behavior, as well as the pace of recovery of supply chains in China and the possible impact on sourcing in Europe. Also a weaker macroeconomy may slow down consumption. All of this is to come. We are continuously evaluating various scenarios to handle the consequences and will in the coming quarters come back on any impact that this will have on our results. Turning to page 7. The Clas Ohlson 100+ action program. Turning to page 8.
We have during the last 18 months pursued an action program called Clas Ohlson 100+. The purpose of this program is to create preconditions for us to deliver on our financial targets. That is to deliver an average annual organic growth of 5% during the current 5 year period, and to deliver an operating margin of 6%-8% from 2021 and onwards. This program includes both cost saving initiatives as well as growth initiatives. We have, during 2018-2019 and 2019-2020, invested 1%-2% of the underlying operating margin in these initiatives. Turning to page 9. An important part of the program is to ensure that we have a cost level and a cost structure that enables long-term profitable growth. Therefore, we have pursued initiatives totaling to SEK 200 million-SEK 250 million in savings.
We have worked in 3 main areas, a more efficient organization, a more optimized assortment, and a systematic approach to supply chain and indirect purchasing. Most of the activities within this part of the program have been done now, and the impact of it will be seen in the 2021 result. Turning to page 10. Another part of the program is the growth initiatives. These are to enable us to deliver 5% organic growth. We're working with initiatives in 3 areas. The first one, to increase sales per square meter, the second one to increase sales per customer, and the third one to double online sales every other year. Turning to page 11, we see some of the investments that we have made in this area to ensure future readiness.
One important change during the year has been the investment to modernize our e-com platform to enable future growth. A second one has been to continue to drive synergies between the different channels that Clas Ohlson is present in. This is to increase sales per customer. We see today that 1 out of 5 MatHem.se bags contains a Clas Ohlson product. We see that 1 out of 10 Kolonial bags in Norway contains a Clas Ohlson product. We are working on scaling up the Amazon project in the UK, as well as the Clas Fixade service in Sweden. We just this week launched a pilot together with Wolt in Finland, with a similar approach as with MatHem.se and Kolonial. We're also working hard to optimize and make sure to have a dynamic approach to our store network.
This is about providing customer experience. Also using the store as an important part of the logistic network. Turning to page 12. To optimize the store network is about ensuring that we have as profitable as possible square meters. This is about being in the right location with the relevant formats. We have during some time talked about the importance of fruitful dialogues together with the real estate owners. We see progress in this dialogue and things moving in the right direction. During 2019-2020, there have been a number of actions when it comes to ensuring a profitable store network. We have completed the closure of stores in U.K. and Germany, apart from 1 store in the U.K. that remains in Reading, serving as the logistic hub. In Finland, we have closed 3 stores, have 1 more to come.
We will open 1 new store and have an additional to come. In Sweden, we have opened 1 store and closed 1 store. In Norway, 1 store is to be opened. This dynamic way of working with the store network, we believe, is the road ahead. On the 11th of March, we have 229 stores. I will now hand over to Pär for the financial development.
Thank you, Lotta. I will now go through the financial development. Turning to page 14. Starting with the sales development in the quarter, the total sales was unchanged. Like-for-like sales was up 1%. Looking at the Nordics, we saw a growth of 2% and organic 2% growth. Online sales was up 19%, and we had a reduction of 8 stores in the quarter. Turning to page 15. Looking at the sales development for the first 9 months, we had the total sales was up 1%. Organic sales was up 1% and like-for-like sales up 2%. Looking at the sales in the Nordic region, we saw a growth of 4% and organic up 3%, and online sales was up 20%. Turning to page 16. The gross margin in the quarter was 40.1%.
It was mainly negatively impacted by the stronger purchasing currency dollar. We are constantly reviewing and reducing purchasing prices as part of the program to mitigate these type of factors. As well as reviewing the offerings and pricing on products. Turning to page 17. For the share of selling expenses in the quarter, we saw a decline. It was down to 25.2, down 2.2 percentage points. If we exclude the IFRS 16 effects, it was down 1.5 percentage point. The share of selling expenses was impacted by lower costs in U.K. and Germany, as well as the result of the Clas Ohlson 100+ program. Turning to page 18. The administrative expenses in the quarter was down 14.2 percentage points to SEK 54 million.
The trend is in line with our expectations and also implementing the Clas Ohlson 100+ activities. An objective going forward is, of course, to maintain and continuously improve this trend over time. Moving to page 19, the reported and underlying profit in the quarter. The operating profit improved to SEK 378 million compared to SEK 105 million last year. The underlying EBIT was SEK 368 million compared to SEK 363 million last year. This means that the EBIT margin was improved to 13% compared to 3.6% previous year, and we had 0.8 percentage point positive impact from IFRS 16. Earnings per share was SEK 4.47 compared to SEK 1.24 previous year. Moving to page 20.
Looking at the operating margin development, we see a continuously positive trend towards our operating margin target of 4%-6%. The EBIT margin, rolling 12 for the quarter was 5.8%. Excluding IFRS effects, it was 4.9%. Moving to page 21, the reported and underlying profit for the first 9 months. The operating profit improved to SEK 590 million compared to SEK 171 million previous year. We had a positive impact of IFRS 16 of SEK 75 million, and the underlying cost and non-recurring cost was SEK 97 million compared to previous year, SEK 378 million. This means that underlying EBIT increased by 11% to SEK 612 million compared to SEK 549 million the previous year.
The earnings per share for the first 9 months is SEK 6.68 compared to SEK 2.11 previous year. Turning to page 22, the investments for the first 9 months amounted to SEK 147 million compared to SEK 174 million previous year. The vast majority was into IT systems. Turning to page 23, cash flow and financial position. Cash flow from operating activities for the period was SEK 1.3 billion. If we exclude the IFRS effects, it was SEK 943 million. The inventory levels improved to SEK 1,821 million compared to SEK 1,983 million the end of the same period previous year.
Net debt to EBITDA was at -0.3 times, well in line with our framework. We have now approached credit facilities of SEK 850 million. Looking at events after re-reporting period, turning to page 25. The February sales development, total sales was up 5%, organic sales up 6%, and like-for-like sales up 8%. The sales in February were positively impacted by a calendar effect of approximately 4%. Online sales was up 16%. We have reduced by 9 stores compared to same period last year. Turning to page 26. Investment in MatHem. MatHem had a funding round of approximately SEK 500 million announced of 14th of February. The main purpose was to enable an environmentally certified warehouse in Insjön, in Stockholm area.
The main new shareholder will be pension fund AMF, which invested SEK 280 million. Clas Ohlson invested SEK 27 million to maintain its right, and we are the fifth largest owner at the moment. Handing back to Lotta.
Thank you. Now at page 27, summary and outlook forward. Turning to page 28. During the quarter, we see an improved profitability in line with the guidance we have given. We see a stable sales development in the Nordic market in all channels, and we continue to deliver on our Clas Ohlson 100+ program. We will in connection to the Q4 report, summarize this program, what we have done, and what the effects have been. We have a very strong financial position and a strong brand to build forward on, and we will continue to work hard on optimizing the synergies between stores, service offerings, and also the e-com platform, both our own and others that we are present on.
We will continue the coming quarter and the period after that to be forward-thinking, leaning in and really seizing the business opportunities that come up, and of course, secure best-in-class efficiency. Naturally, we need to monitor, evaluate, and adapt to corona effects coming or the macro development. That concludes the presentation, and we will then go to Q&A.
Thank you. Thank you. If you wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. You can ask how many questions as you wish, but please ask one at a time. There will be a brief pause while questions are being registered. Our first question comes from Niklas Ekman from Carnegie. Please go ahead.
Thank you. Yes, a couple of questions from my end. Firstly, if you could comment a bit more on the current trading, quite strong here, like, sales of 8%. Obviously, leap year here will contributed, that's roughly half, but it's still a lot stronger than what we've seen in the previous months. I'm just curious what you think were the drivers here. Any kind of impact from the coronavirus, either positive or negative, that you've seen in February?
Yes. Hi, Niklas. I can comment on that. We don't see any major impact, either positive or negative, from corona in February. We have, when looking into it a little bit more in detail, it's actually a very successful campaign, the first winter campaign that has resulted in this strong development.
Okay. Excellent. On the topic of the corona, you seem quite relaxed here about the impact being quite limited. I just imagine and from own experience, looking at shopping malls, et cetera, the traffic seems to be down quite significantly, and that's not something that you have seen yet or that you anticipate will have a major impact on your sales.
What we are saying is that as of today, we have not seen a major impact on our sales. Of course, the development here is happening hour by hour, day by day. What is true today when we talk might not be true tomorrow. That's a little bit the character of the situation we are in. I think it's important to emphasize that part of what we have built during the last 18 months is numerous ways for the consumers to be Clas Ohlson, meaning that you can shop in our stores, but you can also shop online with multiple delivery options, including home delivery, as well as the fact that we are present on both MatHem and Kolonial. I think this is an asset in a situation like this.
That's a good point. On the topic of supply, that's also, you know, you don't see any disruptions at the moment. Is that because you've managed to move production from some facilities to others, or you just haven't seen any impact in the facilities where you source? Is that a comment that reflects kind of the Q3 sourcing, or is that also for the coming quarters?
I think if I start with why we why we are where we are, I think it's of course, we have also had factories that have not been up and running. What we have seen is that the inventory level that we have had has enabled us to mitigate part of this effect, both what we have in our distribution center, but also in our stores. The other part is that we have a quite broad assortment. In a situation like this means that we can, of course, offer the customer options. So far, we have been able to mitigate the supply disruptions with that. That's the reason we don't see an effect yet.
I think we also, going forward, we have the possibility of adapting the commercial agenda to take into account disruptions that might come. We are working very actively in that. Having said that, of course, should there be now a slow recovery in China or the virus impacting supply chains in Europe, there could very well be effects, and that's what we are saying in the report. Here and now, we don't see an effect, and we are extremely forward-leaning in mitigating as much as possible of this.
That's very clear. Thank you for answering those questions. Also, I'm just curious on the cost savings. I know that you say here repeatedly that you will come back with more details in the Q4 statement. I'm still curious if you could give any kind of indication, given that you said here in the statement that most of the initiatives are now done, and I'm just curious how much of this we have already seen in the results. Earnings improving quite considerably in Q1 and Q2, less so in Q3. I'm just curious where you are in terms of these cost savings improvement.
I think, starting off with our target is that, of course, for this year, our target is to deliver 4%-6% EBIT level. For next year, we have a target of 6%-8%. I think for us, that is the framework. This cost-saving program is one part of achieving this step change. As you say, we have implemented activities during the period, which means that, of course, there are some things has already happened. We are not in the position where we comment it by calendar or timing. Which means that, we start with the framework and don't comment on the underlying component right now.
Looking at U.K., we announced the U.K. closures one year ago. Some of the stores were closed pretty quick, and I guess the last part was then closed here in October. We have a full effect of that. A lot of that effect came quite early, compared to the other parts from the Clas Ohlson 100+ program.
Excellent. Thanks. Also a follow-up there. I'm just curious, what is the base for these savings? If you look at your ongoing EBIT, it bottomed around SEK 500 million on a rolling 12-month basis, around SEK 600 million if you look post FY2016. If you take all these savings, SEK 200 million-SEK 250 million and add the SEK 75 million from UK and Germany, that would push your ongoing EBIT above SEK 900 million with the full savings. That would push the EBIT margin to more than 10% rather than 6%-8%. I'm just curious if I'm missing something, if the base is lower than the SEK 600 million.
No, I think what you should start in the target setting where we have a target of 6%-8%. In that frame, of course, we have this factor, but we also have other factors as salary and in-inflation and rental changes that are part of normal trading. Of course, there will be other fluctuations of things and also need to invest in things going forward. There are. Going from this year to next year, of course, there will be a bridge of factors which goes both ways.
You need to see the full picture to take this to not ending up at SEK 900 million, which is not at the current moment in our target framework with 6%-8% still.
Okay, excellent. Thank you. Those are my questions for now. I might come back later. Thank you.
Thank you. Your next question comes from Andreas Lundberg from SEB Equity Research. Please go ahead.
Thank you and good morning. If I start with the working capital and improve, inventory, you saw some improvements there. Could you talk a little bit more what's driving this? What is the status of the working capital and what to expect from here? That's my first question.
I mean, looking at the reported number, it's an improvement compared to previous year. As we write it's we're getting better in controlling and clearing the inventory levels, both in our stores and in DC. I guess that is a factor. It goes together with what Lotta Lyrå said, having successful campaigns, you know, little bit is being better at forecasting and increasing and reducing inventory levels as customer demand change. Going forward, of course, we will always have very strong interest in reducing inventory levels. Having said that, a corona situation like this, having a little bit more of things is apparently a good thing.
What, what is the correct level will probably be debated in a lot of companies going forward with changes in supply chain and the vulnerability in those. Right now, our aim is to, from a working capital perspective, reduce the inventory level over time.
Thank you. Another one is on currencies. What do we expect with the current spot rates, including your hedging contracts, how that will impact your gross margin in the coming quarters?
I guess forecasting currencies is not easy in the first place. Again, given the situation right now, it's probably even harder. I wouldn't comment on that. The latest changes in both US dollar and NOK has, you know, changed the positions quite differently from when we reported. The NOK has changed the most, which means that our hedging contract is worth more being buffer indeed. Let's see what's happening going forward.
Okay. A few maybe nitty-gritty. You had a paid tax of SEK 20 million in the quarter, you had a reported one of SEK 79 million. What's the difference there? How should we look upon this going forward?
I think you should look at the tax rate over time being in line with what we usually have. This is, yeah, not a recurring event and it should be even out over time.
Okay, thank you. What remains of your one-off costs? If any.
For the, for the fourth quarter, I mean, we have guided to stay in line with the 1%-2%. We stick to that. For the fourth quarter and, I think we have said that before, is that mainly costs related to people leaving and other one-offs might occur even in the fourth quarter. The 2nd quarter was cut quite thin in terms of one-off costs, but there might be some one-off costs occurring in the fourth quarter that is higher than the 2nd quarter. We will still remain in the framework of 1%-2%.
Okay. Lastly, if you could give us some more flavor on your rental negotiations, please.
Yeah. No, we're working very, very actively on that. I think it will be an important way of ensuring that we have profitable square meters. As I said in the presentation, I think we see a good tendency in the dialogues with the real estate owners now, that there is I would say a common interest in finding models suitable for the future. I'm very, very happy about that.
Anything that has been completed?
We have some good examples, of course, also building up this statement, but we don't communicate in detail what that means. The dialogues are improving, which is good.
Thank you so much.
Thank you. Our next question comes from Niklas Ekman from Carnegie. Please go ahead.
Thank you. A couple of follow-ups from me, if that's okay. Firstly, if you can talk a little bit about expansion plans over the next two quarters, what are you seeing in terms of store openings and store closures? It looks like, I mean, you're mainly closing larger stores and mainly opening smaller stores. Should we expect a general decline in square meters over the next few quarters?
Yeah. I mean, we have been quite clear on what the, what the direction is, that we take a very dynamic approach to the store network. It means, part of that is to be sort of able to act quickly when we see that, a store is not successful or a square meter is not profitable. There is a general change in how we negotiate contracts, you can say. The other change that we have communicated is that, as part of improving sales per square meter, we are reducing, in general, store sizes. I think this is what you will continue to see.
You have on page 25 in the report, the sort of official numbers around this, as well as the contracted coming openings. The direction is still the same. The 3 concrete stores to be opened, as well as closed, you have on page 25, 3 closings and 3 openings.
Okay. Excellent. Very clear. Thanks. On your online growth, in the last couple of months here have been well below your target. Can you elaborate a bit on this? I think there's been an transition from between different platforms. Is that completed? Do you expect that this number will increase over the coming months?
Yeah. We still have the same ambition level. The strategic goal remains of doubling every other year. At Euron too, we did the transition, basically moving from 2012 technology or code to 2019 code. We did that late autumn, and we have seen during Christmas trade that the platform has been very stable and so on. Now we need to continue to work on commercially optimizing, of course. We want to get back to the old level. There is no change in that ambition.
Okay. Excellent. Thank you.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question, please press zero one on your keypad. We have a question from Andreas Lundberg from SEB Equity Research. Please go ahead.
Yeah. Thank you. On your organic growth target or ambition of some 5%, given that now the store network is being reduced a little bit and then, maybe it's hard to see that store growth will have that much. I know you mentioned a few factors to drive your growth, but I guess most of those initiatives are rather small. Could you maybe give more color on how reasonable is it to reach this 5%? Thank you.
Yes, of course. I think there will be mainly, I mean, three main contributors to this. The first one is that e-com is starting to sort of become substantial, half a billion business and growing that with the ambition we have will also be an important contributor now to the organic growth number. The second one is that we are constantly working on the assortment and launching partly new assortment directed to new wallets. An example of that is the kids' assortment that was launched during the last couple of months. It's been very successful and partly attracting new customers and new wallets to Clas Ohlson. You will see similar things happening in other segments going forward, and this is another important contributor.
Then still, I think there are possibilities for us to also in a net sense add square meters that will support the organic growth. I think those are the three main buckets that we're working with to drive this development.
Could you please the last one on square meter? I didn't get it really.
Yeah. What I meant was that, as I said before, we are closing stores. We're relocating, but we are also opening new stores. If I take the net effect of that, it's still a positive contribution to the organic sales number.
Okay, I got it. Thank you.
Thank you. Your next question comes from the line of Nicklas Skogman from Handelsbanken Capital Markets. Please go ahead.
Yes, hello. You have guided for a net benefit of SEK 75 million from exiting the UK and Germany on a full year basis. I was thinking if you look at Q3 last year, did those two countries actually contribute positively to your earnings?
We have no comment on the segment level on earnings in that, on that level before, so I will not comment it today either.
I'm just thinking you deliver 1% underlying growth in earnings, despite all the cost savings that are going on. My thinking was that maybe actually in Q3, these countries that overall contributed negatively actually had a positive impact, which might explain the, what should we call it, slow earnings growth in the quarter. You don't wanna comment.
I think what, maybe not directly answering your question, but I think it's important movement is that you see compared, if you compare the report, this Q3 compared to last year's Q3, the underlying results and the reported results are coming very close together. While Q3 last year, there was a sort of, the underlying and the reported were more far away. So of course, I mean, that is, and that is a consequence of the things that we have done, generating what we have sort of planned, so to say. So, and that's been the thinking all along to for this action plan and also the closure of U.K., Germany, to contribute to taking us to position where we can deliver 6% to 8%.
We also said when we announced the closure of UK, Germany, that there would be a positive impact of SEK 75 million EBIT of that closure.
Yeah. No, I get that. Thank you. I was thinking on your supply chain. If factories sort of wouldn't restart as you may be planning for, at what point in time would you start seeing significant shortages of inventory? Are we talking about after the summer or later than that even?
We're doing scenario planning all the time on these questions. I think the good news is that we have good information that things are leaving the harbors, deliveries are coming into the harbors in China, and factories are sort of confirming deliveries. We see good signs here. Should there be further disturbances that will have a major impact on the result, we will update on that. Right now it's there are positive signs in that part of the development.
Okay, great. Thank you.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question, please press 01 on your keypad. As a reminder, ladies and gentlemen, if you wish to ask a question, please press 01 on your keypad. As a final reminder, ladies and gentlemen, if you wish to ask a question, please press 0 followed by 1 on your keypad now. As there are no further questions at this point, I would like to hand the conference back to the presenters. Please go ahead.
Thank you. Thank you all for participating, and have a good day. Bye-bye.
Thank you. Ladies and gentlemen, this concludes the conference call.