Axfood AB (publ) (AXFO) Earnings Call Transcript & Summary

Welcome to the Axfood Q4 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to speakers; CEO, Klas Balkow and CFO, Anders Lexmon. Please, go ahead.

Thank you, and good morning, everyone, and thank you for joining today's call. Now as you can see on the headline, we are continuing to take market share in this exceptional time and as you've heard, with me today I have our CFO, Anders Lexmon, and together we will go through this in more detail and present Axfood's year-end report for 2023. In the investor section of our website, you will find the presentation material for today's call and a recording will, as usual, also be made available after the presentation. So with that, I would like to get started and please turn to Page #2. And here you'll find today's agenda. First, a brief market overview and then I will give you a review of our fourth quarter performance. And after that Anders will take you through the financials and following on this part, I will talk about the progress we are making with some of our strategic initiatives and investments for the future. And also I will cover the outlook for 2024 and we are presenting today as well as the board's dividend proposal before we open up for the Q&A session. So we are now on Page #3, but let's get straight into Page #4 and we will take a look at the developments during the final quarter of this year. First of all, market growth amounted to 6% during the fourth quarter. This was the same level as the [Technical Difficulty] price inflation, which continued to decline on a sequential basis. In other words, market growth held up quite well. And actually, if you look at the end of the quarter, we saw volume growth for the first time in 2 years. While it's positive that volumes are growing again, we expect the market dynamics to continue to be impacted by price consciousness. Let's go to the next Slide #5. And then Axfood's retail sales grew 9% in the fourth quarter, which was significantly higher than the market. This performance should be seen in the light of significantly higher comparison figures for Axfood than the overall market. I therefore think it is meaningful to also analyze our figures on a 2-year stack where our growth amounted to a full 28%, doubling the rate of the market, which was 14%. Please go to next Page #6. And in e-commerce, our sales increased slightly more than 8%. Market growth turned positive for the first time in more than 2 years, but obviously we once again outperformed. Our share of consumer sales from e-commerce is slightly more than 5%, 1 percentage point higher than the penetration of the market. On a 2-year stack, Axfood's growth was 4%, also that better than the market. And if you go to Page #7, we've also included a slide on that shows our 10 years' performance in terms of market share gains over the last years. But let's go now into Page #8. Our consolidated net sales for Axfood grew by just over 5% during the fourth quarter, strong sales performance in Axfood's concept drove the overall growth. Dagab sales to external customers however came in softer which clearly held back the overall net sales growth. With the growth in the fourth quarter and consistently high growth over the course of the year, we actually passed SEK 80 billion in net sales for a full year for the first time ever. Please go to next page, Page #9. In total, group operating profit amounted to SEK 744 million and the operating margin was 3.6%, substantially increased versus year ago. But this development was largely due to easy comps with higher costs affecting comparability in the prior year period. The adjusted operating profit, which exclude items affecting comparability, amounted to SEK 815 million. The increase was mainly the result of strong growth and effective cost control. But higher rental levels and salary increases, however, had a negative impact on profits. And the adjusted operating margin was 3.9%. And if you then go into our various segments, then I would like you to turn to Page #10 and Willys. And I really want to emphasize Willys' unique concept in the market. In the fourth quarter, Willys once again gained market share through robust volume development. And the loyalty of existing customers remains strong. Our share sales from campaigns was still high; however, compared to prior year it was actually slightly lower. In all, total like-for-like growth in the segment amounted to 9% and 7% respectively. Willys' market share in the fourth quarter was approximately 15%, which compared to 13% 2 years ago. I think this is clearly a very strong development; however, we see continued great potential for Willys to take more share both in stores and online. Operating profit increased 10%, amounted to SEK 469 million corresponding to an unchanged operating margin of 4.1%. The strong growth like-for-like sales and effective cost control compensated for the cost associated with our higher rental levels and salary increases. With that, please go to Page 11 and look into Hemkop segment. Hemkop continued to strengthen its position in the traditional food segment and once again succeeded in outperforming market growth. For several years, Hemkop has worked now to consolidate its position with a high rate of store modernization, investment in price value, and important progress in the area of sustainability. This created the right condition, is now helping to further boost Hemkop's impressive performance, creating a solid base. Net sales increased 10%. Both in a like-for-like, retail sales growth was 8% and 7% respectively. Stores within Hemkop banner performed better than the Tempo stores. And similar to other countryside and smaller store formats in the market, Tempo is facing some challenges due to consumers' preference for price value over convenience. Our operating profit amounted to SEK 77 million and the operating margin was 3.9%. Positive effects from the growth and effective cost control were offset by negative effects from high rental and salary levels. Now let's move on to Snabbgross, Page 12. Snabbgross' market has shown a gradual deterioration during the year and many cafes and restaurants are facing some challenges. Snabbgross has, however, delivered a stable performance with higher sales and profits and flexibility and ability to adopt its offering. Sales during the quarter increased 6% in total and 5% on a like-for-like basis, an increase in the number of customers and sales to consumers through member-based Snabbgross Club contributed to this growth. Our operating profit amounted to SEK 58 million, corresponding to an operating margin of 4.6%. The increase in profit was primarily driven by the growth in like-for-like sales and effective cost control; however, negatively impacted by, again, higher staff and rent levels. Next, Page #13. Net sales for Dagab increased 4% in the quarter. And as I mentioned before, strong growth in sales to Axfood's own concept was somewhat offset by soft sales development to external customers, including smaller store formats and the service trade. Reporting operating profit amounted to SEK 248 million. This year we had SEK 71 million of costs related to our logistical restructuring compared to SEK 186 million last year. And also last year we had SEK 46 million integration cost for the Bergendahls Food acquisition. The adjusted operating profit amounted to SEK 390 million, and the adjusted operating margin was 1.7%. The increase in profit was primarily due to growth, synergy effects on Bergendahls Food and more neutral currency effects with the strengthening of the Swedish krona. Let's now turn to Page #14, and it's time for me to hand over to Anders to walk you through the financial development. So please go to next page, #15. And Anders, please, go ahead.

Thank you very much, Klas. For the full year, net sales for the group increased with 10% to SEK 81 million. Retail sales increased by 14.3%, which was clearly higher than the food retail market in total, where growth amounted to 7.5%. We also, for the full year, had a lower growth for Dagab's external customers. The operating profit, excluding items affecting comparability of SEK -249 million, increased by SEK 373 million to SEK 3.6 billion. The increase was mainly explained by the strong growth and effective cost control, partly offset by lower gross margins in the segments and increased costs related to, for example, rental levels and personnel costs. The operating margin, excluding items affecting comparability was unchanged at 4.4%. Items affecting comparability pertained entirely to parallel warehouse operation during the transition to the new logistics center in Balsta. And last year, items affecting comparability included a capital gain of SEK 221 million for the divestment of Mat.se, and structural costs of SEK 263 million connected to the restructuring of Dagab's logistic operations. Then turn to Page #16. For the full year, the cash flow compared with last year was SEK 304 million higher. The relatively weak cash flow from operating activities in Q1 due to negative net working capital was compensated in the second and fourth quarters by strong underlying operational performance. The cash flow from investment activities of SEK 2.2 billion was significantly [Technical Difficulty] than last year as we now have a lower pace in automation investments. Investments in our retail operation and joint group functions was in line with last year. At the end of the fourth quarter, we utilized approximately SEK 0.5 billion of our credit facilities, SEK 0.3 billion more than in Q4 last year. And then turn to Page #17. If we then look at the financial position, the net debt has decreased compared to previous quarters due to lower utilization of the credit facilities. This was also reflected in the lower net debt ratio, which amounted to 0 at year-end. The equity ratio at year-end has been very stable over the last couple of years, and the equity ratio in Q4 amounted to 23.9%, well above our target of 20%. And total investments, excluding leasehold for the year was SEK 647 million lower compared to last year. And again, we saw -- we see now a lower pace in investments related to the Logistics Center in Balsta. We have established 12 new Group-owned stores during 2023, which was 3 more than last year, and we will get back to the investment outlook for 2024 later in this presentation. And then let's turn to Page #18. Looking at the capital efficiency, we have a positive development in net working capital in absolute terms. However, in relation to sales, we saw a negative trend during the year due to the higher inventory levels related to the ongoing warehouse transition. The ratio is now -3.2%, a reversal of this effect is expected gradually in the coming quarters as the warehouse transition progresses. The capital employed has increased over the last years, mainly due to the recognition of leasehold debt in Balsta and in Landskrona and higher capital expenditures, which have had the diluting effect on the return on capital employed. However, the return on capital employed is now quite stable at little bit more than 20% looking back at the recent quarters. And that ends my part of the presentation, Klas, and I hand over to you again.

Thank you, Anders. And we are now on Page 19, but let's go directly into Page 20. Now 2023 was an eventful year, a year with continued strong operational development and also progress with our initiatives and investments for the future. So I would like to highlight a couple of areas where we made major strides during the year. Let's go to Page #21. First of all, something that has been pretty well covered already during this presentation, growth. In 2023, we had a very strong momentum in terms of sales with volume growth and large inflow of new customers to our stores. We saw a very strong demand for our concepts, and that is why we have been expanding our presence at a rapid rate throughout the country with new stores. In all, during the year, we established 9 group-owned Willys stores, 2 Hemkop stores, and 1 new Snabbgross store. Let's turn to Page #22. Digitalization, AI, and automation are rapidly evolving areas and are also crucial for creating a high level of efficiency and strong customer offerings. We have developed our business considerably over the years and our digital transformation is continuing. In all areas, we are continuing to develop a data-driven approach. In 2023, for example, we implemented a new system for campaign and assortment planning. And in 2024, we are upgrading our back-office system in order to simplify and streamline processes for our store employees. And logistics is, of course, also a big part of this. The implementation and ramp-up of our new highly automated logistical center in Balsta outside Stockholm was ongoing through 2023. And in 2024, the facility will be completed. In addition, the automation solution at our new fruit and vegetable warehouse in Landskrona was recently put into operation, and we are adding more capacity with our new high-bay warehouse in Gothenburg. And our combined logistical investments will result in significant efficiency improvements and cost savings starting in the second half of this year. And lastly, a couple of initiatives within the sustainability on Page 23. And here, our ambition is really to be at the forefront and to take the lead in promoting a sustainable food system. In particular, we are continuing to offer our customers a sustainable and healthy assortment of products in our stores and to guide them towards sustainable and healthy choices. But this is in a time when consumers have reprioritizing their purchasing decision due to the high inflation and to a lesser extent have been focusing on these matters. But I also would like to mention our new extensive solar power initiatives, including a large rooftop installation at our warehouse in Balsta and Landskrona and the construction of Sweden's largest onshore solar park in Hallstavik. And lastly, just recently to further reduce our greenhouse gas emission [ work ] initiated to accelerate the phase-out of fossil fuels by switching to using only renewable fuels in both our own and procured transports. With that, go to next Page 24. Now let's turn to the outlook for 2024, which we are issuing today. Investments are expected to amount to SEK 1.6 billion to SEK 1.7 billion, excluding acquisitions and right-of-use assets. The largest part of this is related to recurring investments in our operations, but it also covers expansion. And, however, SEK 300 million of the total amount is related to automation in our new logistical structure. And in terms of our presence, we will maintain a high pace of expansion with aim to adding 10 to 15 new stores to our store base, the majority of which will be Willys stores so that even more customers can benefit from our concept. Moving on then to dividend for 2023 on Page 25. Axfood has a strong financial position and the Board of Directors will propose at the Annual General Meeting an increased dividend of SEK 8.50 per store (sic) [ share ]. The dividend will be split into 2 payments, SEK 4.25 per share in March and SEK 4.25 per share in September. The dividend proposal corresponds to 78% of profit after tax, well in line with our dividend policy. Now let's turn to the final page of this presentation, Page 26. At an exceptional time of historically high inflation and changing consumer behavior, we are closing the books on a successful year in which we're strengthening our market position and took major steps to strengthening our competitiveness in the long term. We are entering the New Year with an even stronger position, which will provide us with favorable conditions to continue to attract new customers and strengthening the loyalty of our existing customers and to become even more efficient in our underlying operation as our new logistical initiatives will be put into full use. And with that, please turn to Page 27, and I would like to hand over to the operator to open up the line for questions. Thank you.

[Operator Instructions] The next question comes from Fredrik Ivarsson from ABG Sundal Collier.

Well done. I've got 3 questions. I'll take them one by one. So the first one on Willys' margin. So I guess, you've been talking about gross margin pressure for quite some time now, and you mentioned it today in the report as well, even though the margin was stable in Willys. So the question is, when do you see this gross margin pressure sort of turning and maybe even turn positive given that we've seen positive CPI, PPI gap for quite some time? That's the first question.

Yes. Well, I think, first of all, if you look at the -- from the supplier side and how that works, there is currently a lower cost pressure from the suppliers, which we think is positive. However, as you're all aware, there are many things that is now affecting our structure, and we are still at higher levels versus before the inflation started. There's a climate impact. There are also, overall, the whole market has cost inflation into the system. So I have to say, it's difficult to predict. What we have seen in terms of the market currently, we've seen a slightly lower campaign effects, which has obviously had a positive sign in terms of margins. But on the other hand, we are still on a significant lower margin. So we have not been able to compensate for the cost pressure from the supplier to that extent from that. And then, of course, it's a very competitive market. So we'll see how it goes.

And then on the store openings, if you can just remind us if you -- I guess, we talked about it on the Capital Markets Day, but if you can remind us if you have any planned closures or if that 10% to 15% is more or less a net figure?

There are no planned closures. So in that perspective, it's a net figure. And then obviously there's nothing that we are aware of today, I think.

And last question on 2024 cash flow and the working capital. We talked about, I think, SEK 200 million to SEK 300 million cash flow or working capital release as you close down the overlapping warehouses. 1Is that figure still relevant?

Yes. I do think it's very relevant to assume that.

The next question comes from Niklas Ekman from Carnegie.

Yes, a couple of questions from my end. Coming back to the margin discussion here, maybe not for Willys, but for the group. You've had 2 years now with a stable or declining margin. And this is the first quarter where we see a clear year-over-year increase. Can you elaborate a little bit on the factors behind this? Have prices now started to finally catch up with costs? And is this something you think could continue? Or are there more one-off factors that are boosting the profitability in Q4 here?

Well, obviously, as you look at the one-offs, and I think you've seen that clearly. So they -- but I don't think that's what you're related to.

No, no, the underlying.

Yes, I understand that. So -- and then we -- as you're all aware, when you get positive like-for-like and you get that dynamics. And now as you've seen and heard that we are not seeing a shrinking gross margin at the same extent that we saw last year. So obviously, from that pace, we could continue to drive that growth, we can offset the cost that we have in our structure. We also have cost structure, as you know, of rent and staff cost as I commented several times in the report. So we continue to work to make sure that we get customers into our stores, and we can drive our like-for-like. That is the way for us to drive it further unless and let's see what happens in the overall market and in terms of price pressure and all of that. It's a clearly competitive market. We've seen that the full year, and we continue to make sure that we keep our price per [Technical Difficulty] in the market which is crucial for us.

And on Hemkop, I'm just curious about the strong momentum of Hemkop in this quarter and in previous quarters, you point that price value. And that seems to be where ICA and Coop have really been struggling, and they're kind of acting in the same segment or if you can talk about the supermarket segment. Why is Hemkop really standing out in this market? And what is to prevent your major peers from doing the same?

No, I'm glad you're lifting it up. Obviously, I think it's a fifth quarter that we are not only, in our view, at least, assumption, we are clearly beating our traditional segment because as Hemkop is also beating the overall market growth, including the full low-price segment as well. So -- but I think it's been -- we have been very clear in terms of, we have worked with our price value, as you know, and we have communicated that for now a long time even before this started in terms of we have really, some of our range is put into the best offer in that perspective. But then in addition, I think we've had a journey now, as you're all aware, that we are modernizing our stores. We are upgrading our stores. We are developing the brand. We also -- and I'm pleased to see that we put a lot of effort in the sustainability progress in Hemkop, they still have the double points when you're buying sustainable products, et cetera. We still -- I think we still have the highest share of ecological for organic products in the market in Hemkop. So hopefully, that we are also getting rewarded for that from our customers. But it's a journey, and we're pleased to see that we are, for the last 5 quarters, taking positive steps on that journey.

And turning to Balsta, the new distribution center. You've started now with refrigeration. Have there been any hiccups along the way here, similar to what we've seen before or just an update on the progress here? Is it following in your plans?

Yes. Now we are following the plan right now. I think that as we have commented several times and many of you have now seen the facility, it's a large facility. We'll have daily things that we are trimming and that we're working on. But overall, the dry range is now set, and we are now rolling out the chills and that goes according to plan. We have daily things we need to fix, but there is -- we are very -- in a good pace and significantly compared to what you referred to. So we have nothing like that in the ramp-up at all.

And can you update us also on the closure of the warehouses, that it will be replacing? How is that progressing? And what can we expect? When will you close the last of these 6 fulfillment centers?

Well, as you've heard in terms of, we are gradually now phasing out. We also start to leave parts of the facility in Jordbro, we have rented out some of that as well. So that will take gradually over the year. And then you know, and I think we've talked about that, we also have service trade. We continue to have service trade in Orebro that -- and we will not make any other decisions on that yet. We'll see how that is developed because, of course, we see that how we are now ramping up. We make sure we make a controlled ramp-up base of our business. So we have to come back to you on that part. But that facility runs as a separate with the service trade.

And any update on one-off items in 2024? I think you've indicated the one-off cost of around SEK 20 million. Is that still valid?

Yes.

The next question comes from Simen Aas from DNB Markets.

Congratulations on a very strong finish to the year. Just -- could you just give us an update on your outlook for feed prices in 2024? So now we have seen, obviously, in '23 on a sequential basis, prices were basically flat throughout the year. Should we expect a return to a normal inflation now, 1% to 2%? Or how do you guys reflect on that? That's my first question.

Understand, and good morning, Simen. I think this is the kind of the questions I get daily now in terms of how will it look going forward? And as I can only comment on what we actually see right now. And then it's -- as you've seen and you looked at the inflation rate is going down, so it's less cost pressure from that perspective. But I have to just say that -- that going forward, there are so many areas right now that is affecting the overall food supply chain and the whole -- in terms of, we have climate concerns that is affecting harvest. We have -- as you -- I'm sure you follow that, we have something around Yemen. We have -- so there are many factors that could impact this, and in Sweden, also the currency. So I have to be vague on that response in terms of what we're seeing right now, and we are pleased to see that, that we are not seeing any strong inflation pressure at the moment. But how it will turn out going for the rest of the year, I don't want to give you a forecast on that.

I get that. It's hard to predict. But just -- I know you don't comment on current trading, but had anything changed from what you saw in Q4 now into '24 in terms of Willys and everything?

That's a good question, but I'll follow that up in April when we talk about the first quarter. So I'll only comment on the fourth quarter right now. Yes.

And then just one final one for me. Last year, especially during the first part of '23, the industry volume was very, very weak. And given that you guys were growing volumes, I guess that it was ICA and Coop that was the main losers to that. So now that you're sort of entering the first half there, and I guess that those guys want to grow volumes to return -- to restore margins. Should we expect if volumes are returning now for them? Should that be a healthy sign for the industry as a whole? And could this potentially result in less competition?

Yes. I don't -- I'm not going to comment to competitors' activities. But I think, overall, of course, we've seen -- as I started to say, we've seen an exceptional time where there's been a lot of price pressure, cost pressure for the power industry for suppliers, for us, but also for households, which has put some pressure, of course, in terms of food bill. And therefore, you've seen that reflected as well in the overall market with a negative volume development. I think in any market you are in, and I think that as well, it's positive that we now start to see. In the end of last year, volume is picking up again. And I think that's just a healthy sign.

The next question comes from Anna Schumacher from BNP Paribas Exane.

Congratulations on the great results. So I have 2 questions, if that's okay. The first one is, across all of the banners you talk about effective cost control, would you be able to talk further on how you've been able to do this, especially given rental and salary costs have increased?

Yes, of course, it's kind of part of our DNA to be -- to make sure that we drive as efficient operation as we possibly can. And as I pointed out, it's been an exceptional year, which have changed in consumer patterns and in terms of differences in campaign, et cetera. And I think the staff and the store managers and the whole operation has been able to navigate and try to adopt and adjust as good as they can in this environment. And that's what I'm relating to that we'll be able to handle and to manage an efficient operation. Yes, we have higher fixed cost in terms of -- or fixed, but in terms of rental and also some salary cost that it goes up. And of course, it's up to us to make sure that we can be as efficient as we can. We're also investing a lot, as I pointed out in the end of my presentation in terms of our IT systems and IT platforms that should support and guide our store operation and our logistical operations also to be more efficient through data and through digitization and through a data-driven approach. So that's how it refers to.

And then my last question is, in Q3 you had a chart showing the addition of new Willys Plus members. I was just wondering how that has evolved since?

Very healthy. We are positive to see that we are still on a significant higher inflow of new customers in our loyalty program. We have continued to see a higher inflow. So we are pleased to see that, as I also comment on the report that we've got many new customers coming into both the stores, but also adding up to our loyalty program.

The next question comes from Gustav Hagéus from SEB.

I was a bit late into the call. So apologies if you already answered these, but 2 questions. Just first one on the margins then. Is there a notable impact from bonuses or kickbacks from suppliers in terms of volume targets being reached that have been paid out in Q4 affecting your gross margin year-over-year?

No, I will not say that, Gustav. That is an ongoing. So no, I wouldn't say that.

And then secondly, since you have customer data on both Hemkop and Willys and they do represent quite 2 polar opposites in the market, I guess, have you been able to sort of follow any customers that have migrated from Hemkop to Willys and migrated back, so to speak, in this quarter? Do you see any of those flows going back since Hemkop now outperformed Willys for the first time in like-for-like for quite some time?

No, I wouldn't say, there's nothing significant on when we see that. But I want to comment on what you're saying there is -- which is also valid for the market, somewhat also valued for Hemkop when you're comparing Willys' percent. If you look at Willys growth last year, it continued to grow on a very high comp figures and have volume growth on a very high comp figure. So it's not that -- and Hemkop had obviously somewhat lower comp figures as the rest of the market. So I don't think you really can make that conclusion.

And then final one for me, online was obviously better than the market. Could you remind us of the margin profile for online versus your traditional stores fully loaded?

Well, margin on online is lower. There's nothing has dramatically changed on that. So -- and obviously we are pleased to see that the largest growth, as you know, is Willys and Willys has a very solid model, also transparent in their pricing. And -- but it's volume that -- and as you're also aware that we are about to take our steps as well into -- in the back end of optimizing to improve our margins. But margins is significantly lower in online, yes.

The next question comes from Daniel Schmidt from Danske.

Just I think one question from me, coming back to pricing in the market, and I think you said that price campaign intensity has actually eased a little bit. If you look at sort of your biggest competitor, ICA, they continue to indicate that they have closed or gradually are closing the price gap between ICA, Maxi, and Willys and that it's gone from basically 5% to 2.5% over the past year. What's your sort of reflection on that? What does your sort of statistics tell you? Where is the price gap? And has it moved at all? Or is it standing still? Where are we in that?

No, there's a lot of discussions and a lot of comments from various competitors of doing a lot of activities. For us, we are really focusing on to make sure that we keep our price position in the market, and we'll continue to drive that. I think you're mentioning some actors, I'm not sure they have one price. I think they have many prices out there, if I understood right. So for us, it's really that we are driving our agenda. We are making sure that we keep our work on price decision. With that said, it is, and I think we said at the full year, it's a very competitive market. There's a lot of PR and activities and campaigns out there, and we want to make sure that we continue our steadily positioning to make sure that what we offer to the consumers is something they can trust. And we see that on various service out in the market, how Willys come out very well in the service in terms of price and their position.

So basically, your conclusion is that the gap has not really moved over the past year, if you look at your data?

No, I'm not going to comment in terms of specific. As I pointed out that there's -- there are various players out there. There are various stores out there that is driving their position, et cetera. And I think that's what basically also relates to. But yes, it's a very competitive position out there.

But do you feel that, that competitiveness is more elevated than a year ago.

I think the competitiveness has increased, yes.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Well, thank you for listening, and thank you for all your questions, and thanks for today. And I wish you a good day. Thank you.