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

Good morning, everyone, and welcome to Axfood's Third Quarter Results Presentation. It's good to have you with us. Let me briefly take you through what's coming up. Our CEO, Simone Margulies, will start with the key highlights of the quarter and developments in the market. Our CFO, Anders Lexmon, will take us through the business and financial performance. Simone will return to discuss our strategic agenda. After the presentations, we'll take your questions. And if you have several, please ask them one at a time. So with that, Simone, over to you.

Thank you, Alex, and good morning, everyone, and a warm welcome from me as well. In the third quarter, Axfood continued to grow and increase earnings. We did so in a dynamic market despite deflation and cost pressure. We also delivered on our ambition to reach profitability in City Gross. Value for money remains a key priority for consumers. At the same time, we're seeing some signs that quality and convenience are becoming more important. We have strong differentiated concepts, and we're investing to become more efficient and more competitive. And that puts us in a strong position to continue growing profitability. Before we get into the details of the quarter, I'd like to zoom out and look at the broader environment. In recent years, we navigated global uncertainty, geopolitical turbulence and climate changes. Digitalization and AI have also accelerated, bringing new opportunities and new demands for our business. Through all this, our market has continued to grow. It has changed, but conditions have been more stable than in most other industries. Discount has grown more than any other segment in recent years, largely at the expense of traditional grocery. Hypermarkets have also performed well, and we saw both trends last year, too. Axfood accounts for 25% of the Swedish food retail and our market share gains over time are a clear sign that our business model works. This year, the market has continued to grow. And in the third quarter, growth was 4%, but the drivers have changed. And like in recent years, growth is now coming from higher volume and changes in product mix and growth is more spread out across different store formats. Food price inflation turned negative earlier this year, both including and excluding VAT. And as a reminder, VAT on food was halved from 12% to 6% on April 1. Consumers have had more purchasing power for some time, helped by real wage growth and lower taxes. And we are seeing some signs that quality and convenience are becoming more important. And that might mean choosing a ready-made dinner when time is short or spending a little extra on something in the weekend. But price still matters. Our consumer surveys makes that clear. Households have different circumstances, including income and demographics. And keeping costs down and occasionally spending more can go hand-in-hand. Consumers watch prices closely while making room for different needs. Our broad range of concepts and offerings helps us meet different customer needs, while keeping a strong focus on value for money and other added values. And that combination is a strength in this market. Now let's turn to the third quarter, starting with the business highlights. Retail sales continued to grow in the third quarter, driven by higher volumes. At almost 3%, growth was stronger than in the second quarter. However, we're still somewhat behind the market. It is a demanding year-on-year comparison, and we're comparing with strong third quarter last year where City Gross had also begun to contribute to our sales. And looking at growth over a 2-year period gives a fuller picture. And over that period, we have clearly outperformed the market. Net sales grew by 2% in the third quarter, although growth varied across our chains. Deflation held back sales, and we report net sales, excluding VAT. And on that basis, consumer prices fell by almost 2% year-on-year in the third quarter, and that's according to Statistics Sweden. Our earnings increased in the third quarter, driven by higher sales volumes, a stable gross margin and also effective cost control. And we achieved this in the market with intense competition, deflation and cost headwinds. Higher fuel prices were one of those headwinds and the negative cost impact was in line with the second quarter. Group profitability remained stable and the margin was 4.9%, both on a reported and adjusted basis. And taken together, that is a resilient result under the market conditions we faced. Items affecting comparability amounted to SEK 1 million in the quarter compared with SEK 39 million a year ago. And we are revising our full year guidance here, and Anders will explain the change later in the presentation. That concludes the first part. I will return later to discuss our strategic agenda and outlook. But for now, I hand over to our CFO, Anders, for a closer look at our operating segments and financials. So by that, Anders, over to you.

Thank you, Simone. So let me start with Willys. Total sales grew by just over 2%. Like-for-like growth was also positive, though still modest. Deflation held back Willys sales. We're also comparing against strong figures from recent years. With the customer meeting as our main priority, we work to further increase growth with a focus on price, campaign, assortment and loyalty. During the third quarter, this work contributed to a more positive development than in the second quarter. Operating profit declined slightly as like-for-like growth remained modest. Gross margin was stable. Operating margin was also slightly lower at 4.7%. Hemkop delivered another strong quarter. Once again, the chain gained market share. Retail sales grew by 7%, broadly in line with the second quarter. Higher volumes drove that growth with customer traffic increasing. A higher average ticket also contributed. Deflation held back sales growth, but like-for-like growth remained very strong. Operating profit also increased strongly, and the operating margin rose to 5.8%. The main drivers were higher sales volumes, a stable gross margin and solid cost control. When we acquired City Gross, the ambition was to reach profitability at some point during the second half of 2026. We are now delivering on that ambition. Like-for-like sales growth in the third quarter was positive and improved from the second quarter. The chain also demonstrated profitability with a positive trend in both earnings and margin. The improvement was mainly driven by structural measures and work to make operations more efficient. As part of that work, City Gross closed its store in Helsingborg in mid-August, its fifth store closure so far. But the location will be converted to Willys this autumn. Closing underperforming stores helps build a stronger core of City Gross stores and lays the foundation for profitable growth. Snabbgross sales were unchanged from the same quarter last year, but overall, and on a like-for-like basis, deflation held back sales growth. The restaurant market grew during the quarter with Snabbgross sales unchanged. Its market share declined. Earnings were lower than last year. Market investments reduced the gross margin, and volume growth did not fully offset that impact. The operating margin was also lower at 5.1%. During the quarter, we appointed a new Managing Director for Snabbgross, Robert Stekovic will assume the role on the 1st of August next year at the latest. Dagab delivered resilient earnings in the third quarter. Net sales increased by approximately 2%. As in our retail chains, growth was driven by higher volumes, mainly to Dagab's food retail customers and particularly to Axfood's own concepts. Operating profit and margin were both unchanged year-on-year. Improved productivity and logistics support earnings. At the same time, deflation and market investments weighed on earnings as did the higher fuel costs mentioned earlier. So that concludes the review of our operating segments. Now let's turn to the financial development. Cash flow for the quarter was broadly in line with last year. For the year-to-date, however, cash flow was weaker, mainly due to weaker operating cash flow. And as a reminder, the VAT cut had a negative impact on cash flow through net working capital, mainly due to lower accounts payable. The cash outflow from investing activities was somewhat higher than last year, and I will come back to that in a moment. Loan replacements affected cash flow from financing activities in the third quarter. For the year-to-date, however, that effect was offset by new borrowing. At the end of the quarter, we utilized SEK 3 billion of our credit facilities. Utilization was somewhat higher than in the second quarter, partly because the second installment of the dividend was paid in September. Our strong financial position gives us flexibility to make the right long-term business decisions. Our gearing remains low, excluding the accounting effects of IFRS 16, net debt divided by EBITDA was 0.6 at the end of the third quarter, including IFRS 16, it was 2.1. Our target is an equity ratio of at least 20% at year end. The level at the end of the third quarter was well in line with that target, and we continue to invest in the future. As I mentioned, investments year-to-date were higher than last year, driven by automation for our new logistics center in Kungsbacka and investments in our store base. So far this year, we have established 8 new group-owned stores, slightly more than last year. Using capital efficiently and managing working capital are important parts of our business and financial strategy. As I mentioned, the VAT cut has had a negative impact this year. You can see that in the rolling 12 months figure. Even so, net working capital remains at a solid level at minus 2.7% of sales. Capital employed has increased in recent years, mainly due to the acquisition of Bergendahls Food and City Gross as well as investments in logistics. It increased somewhat in the third quarter, mainly due to the dividend payment. Return on capital employed was almost 16%, slightly higher than at year end, supported by the positive development in earnings. And let's then turn to the full year outlook. We are revising a few elements this quarter. We expect capital expenditure of SEK 2 billion to SEK 2.1 billion, somewhat below our previous outlook. There have been some delays in the detailed planning for our new logistics center in Kungsbacka. As a result, we are moving the remaining automation investment plan for this year into next year. We still expect operation and ramp-up at Kungsbacka to begin in 2030. At this stage, however, we cannot rule out some delay. We are also postponing some structural costs in City Gross that affect comparability. Our outlook for new store establishment is unchanged. Taken together, the revisions of our outlook mainly concern timing. Some planned investments and structural costs will come later. And then Simone, I hand over to you again.

Thank you, Anders. Let us now turn to the next part of the presentation in which I will be covering our strategic agenda. We have a clear house of brands strategy, and that sets us apart in the Swedish food retail. Our different concepts give us presence in every segment of the market. In each, our ambition is to deliver the best possible customer experience. And by putting customer experience first and continuing to expand our store network rapidly, we are working to accelerate growth further. Willys has a very strong market position and is the store chain most recommended by households. We are working to improve growth in the short-term. At the same time, we are keeping a long-term perspective and developing Willys for the future. We are upgrading existing stores to our latest concept, Willys 5.0, and these upgrades are making a clear contribution to both growth and profitability. We are also opening new stores at a rapid pace, giving more customers the opportunity to shop at Willys. And just a couple of weeks ago, we opened our most northern store yet in Kiruna, and the response has been fantastic. Willys continues to increase members in its Willys Plus loyalty program. So it clearly has a very wide reach, which we can build on. Hemkop has a strong momentum in the market. It is encouraging to see the results of the chain's long-term work to modernize stores and develop the assortment. Hemkop combines food inspiration with value for money. Ready meals and delicacies have performed particularly well, and that fits with the signs we are seeing that convenience and overall meal experience are becoming somewhat more important to consumers. More than 150 stores now offer store-made sandwiches, salads, or hot food buffets. Our sales volumes for these offerings are growing strongly with roughly 15,000 items sold every day, and that is a concrete example on how Hemkop brings food inspiration and convenience into the everyday shopping trip. In less than 2 years since the acquisition, we have taken City Gross from losses to profitability and looking at the third quarter development. And if you look at the latest 12-month period, we are now at breakeven. That reflects extensive work by many colleagues across both City Gross and the entire Axfood Group. And we have every reason to be pleased with that progress, and we are continuing to develop the chain now with focus on its customer offering and the customer experience. So the next step is to gradually increase the profitability and ensure that City Gross is a competitive player over the time. So Willys, Hemkop, and City Gross are our main banners. Each has a clear offering and position in the market. And to give them and all our other concepts the right conditions to succeed, we draw on the strengths of the group, and we focus on 6 strategic development areas. Collaboration and efficiency are central to our business model. So let me highlight a few recent developments in some of these areas. We will continue to develop our attractive store network in the years ahead, and that means opening new stores at a faster pace, while maintaining a high rate of modernization in our existing stores. This creates new opportunities for growth and helps our concepts to offer customers the best possible store experience. Our investments in the store network are paying off and faster than they have had in the past. So if we compare the stores based on when they were opened, over time, we've seen improving trends. More recently opened stores reached their forecast volumes and profitability levels sooner. And that shows that our investments in stores create values. Our structure is a clear strength in the current market environment. Through Dagab and Axfood IT, we can put resources and investments to work across all our retail chains. Our investments in technology, in AI, automation, and logistics, they are improving efficiency and making a clear contribution to our earnings. At our Balsta logistics center, productivity reached an all-time high during the quarter, following continuous work to improve processes and ways of working. Despite global uncertainty, we have continued to invest in recent years. We can see how those investments are strengthening our competitiveness. And the efficiency gains gives us a greater scope to develop our customer offerings and offer attractive prices, while we continue to make progress towards the group's profitability target. We aim to be a positive force in society, promoting a more sustainable food system and a better public health. We also work continuously to reduce the environmental footprint of food. One example is packaging. Garant's plastic meat trays are being replaced with thin flowpack film. This will reduce plastics use more than 300 tonnes a year, and that is our largest plastic reduction initiative to-date. Sales of sustainability labeled products developed positively during the quarter, and we continue to expand our sustainable assortment. Garant's entirety range, for example, is being Fairtrade-certified. Last year, we completed the transition into renewable fuels and electricity in both our own and procured transports, and electricity share, our fuel mix rose to almost 15% in the third quarter. These are just a few examples our sustainability work. Our ambition remains high, and we will keep pushing forward. So by that, let me conclude. In the third quarter, we continue to grow and increase earnings. For me, an important part of our mission is making affordable, good, and sustainable food available to more people. And to do that, we combine attractive customer offerings with efficient operations. And we can see that this work is delivering results. With strong and differentiated concepts and investments that improve our efficiency and competitiveness, we are well positioned for continued profitable growth. Thank you. And by that, Alex, over to you for questions.

Thank you, Simone, and thank you, Anders. Now, let's turn to your questions. [Operator Instructions] So with that, our first question comes from the line of Fredrik Ivarsson at ABG Sundal Collier.

First, if we back up to Q2, you talked about making tactical measures to improve the relative growth in Willys. Can you give some more color at this time? What were the main activities you've been doing and so forth?

Yes. Good morning, Fredrik, and thank you for your question. Yes, the tactical measures, it's about improving the customer offerings. It's about strengthening our price position and also improving the entire offering. We're also investing and upgrading our store to Willys 5.0, and that's also the aim is to reach more -- increase our growth pace by doing that. So I would say during the inflations -- year inflations, we had a boost in Willys. And of course, with the temporary now tax reduction and also the reduces of taxes on gasoline, we have seen an increased purchasing power by the consumers. And that maybe make a little bounce in the market, but we are really convinced that we will get the bounce back in Willys since we've seen we had a good growth for many years. So it's about calibrating, I would say, the customer offering towards a somewhat different customer behavior.

Yes. That is clear. And then maybe to follow-up on that. Through a couple of percentage points behind the market, did you see a positive trend through the quarter? Or was the relative performance fairly stable around those 2%? And maybe also do you feel like you have to do more to catch up with the market? Or is the trend good enough, you think?

If I understand your question right, I think it's about if you have seen changes within the quarter. Is that correctly?

Yes.

Yes. Yes. Yes. We communicate a quarter as a whole. And I would say that we are happy to see that we see a slightly more positive trend in Willys. And we will continue to do those measures. And we feel secure that they will give result, and we can see some results in the third quarter, and we will continue to improve and calibrate towards the market.

Okay. Good. And then moving to Dagab. You talk about margins being negatively impacted by the food price deflation and some market investments and also the higher fuel costs, which were, I think, SEK 40 million, if I recall correctly, in Q2. If you were to rank those 3 headwinds, is that the order with the current food CPI being the biggest headwind? Or how should we view that?

No, I do not really remember in what order you told them, but I would say in total, the food deflation and the cost headwinds are affecting, I would say, as much. I would say, together they are affecting.

Okay. Perfect. And last quick from my side before I jump back into the queue. On the government payroll taxes for the young employees, what was the approximate impact for -- from that in the quarter, please?

Anders?

It was approximately SEK 40 million this quarter.

SEK 40 million.

Yes.

The next question or next to ask question is Magnus Raman from SB1 Markets.

I'll start by continuing on the discussion of Willys' actions to improve top line growth. If you look at the pricing campaign investments that you made in Willys during this quarter and compare it to the sales outcome, which you grew 2 percentage points slower than the market. Do you deem if you choose here that, a, upping price and campaign activity further? Or b, meeting the increasing quality/convenience demand that you talk about, for example, by rolling out 5.0 concept and so on, is more important? Which of these 2 do you deem is more important strategically to improve Willys' top line momentum?

Thank you, Magnus. I would say the price position that Willys has to be Sweden's cheapest by a grocery is like a hygiene factor. That's something that we will never, how say, elaborate on that one. That's like the hygiene factor. So it's all about calibrating and keeping very close to the market in changes in behaviors. And I would say that we still have a very price-conscious consumer, so it's not about changing everything. We have a really strong position in Willys. We have had really strong growth over many years both in good economies and in bad economies. So it's about a little bit calibrating with the consumer since they now have a larger purchasing power. However, I would like to emphasize that we have a really strong position in Willys, so it's not about changing everything. It's about calibrating with the market. So it's about calibrating the entire offering, I would say. Small changes. It's not about changing what Willys are. So that's why for us it's really important to do these calibrations on the short-term, but also keep up the long-term strategic investments we're doing in accelerating the store expansion and also the modernization into Willys 5.0 that we wanted to show how well they are paying off, both in sales and in profitability.

Right. Clear. Lift the view and look at the overall Swedish food retail market. And if you look at the situation since the halving of the VAT where we have had consistently negative price development underlying, and in the backdrop of high fuel prices and raw material price increases and so on. Would you -- do you think that it is viable for the market as a whole, this situation to continue going?

Let's see if I understood the question right. I try, and then we will see. I mean, as you say, all the experts are pointing out that we will probably see a higher inflation and also increased costs. However, we don't do any forecasts on that. But of course, there is a risk that we will see that. And I would say that's actually what is also strength in our business model, where we have now concepts in all the market segments. Since we also, with the acquisition with City Gross, we are also present in the hypermarket segment, and then we have Hemkop in the traditional groceries. So for us, it is about taking and -- adopting to the market in all these parts. We are a low-margin industry. So as you say, of course, in a long-term, we have to recover also the costs.

Yes. It was in the backdrop of one of your major competitors also mentioning that they see a need to address sort of the situation through price to mitigate product margin erosion, so to speak. So that's the question. But I will just continue on Hemkop. I mean, Hemkop has been growing now faster than the market in the previous period, where consumers had a very intense focus on discount. And now in this current market where you elaborate on quality and convenience growing in importance, how would you explain this?

Hemkop have had a strong growth, as you say, for a pretty long time now, and we are really pleased to see. I think it's the result of a long-term work they have been doing by strengthening the concept as a whole, both really strong establishments, a strong new store concept, high pace in modernizing the store, and also a high focus in developing the assortment with specific focus on convenience that is really -- the consumers really like. So I think what we see is the result of a long-term job that they have been doing and keeping up a high pace in continuing to develop. So that's why also I think they have developed really well both -- for a pretty long time now, even during the years of inflation.

And Magnus, if I can add a little bit to that. Hemkop also has been strengthening its price value perception in recent years. So that has also been contributing to Hemkop really performing strongly right now and growing almost 2x the rate of the market in the third quarter. So that's also part of it.

Great. Just finally from me, you mentioned in the report here that productivity in Balsta was the best to-date in Q3. And we also saw in the presentation here a chart where you show a 25% increase in cases handled per hour in the recent almost 2 years. Based on the initial plans for this fulfillment center and sort of the technical capability or limits, do you see continued upside potential in productivity? Or should we more view it as you more or less have reached sort of peak efficiency in Balsta now?

Anders, would you like to take it?

Yes. I mean, when we grow the volume in Balsta, we are also managing to be more -- to raise the productivity as well, and it's a combination actually. So we are on a journey there, and we continue on that, we can say.

Yes.

So I take you as continued upside potential in cases handled per hour.

Yes.

Yes.

So we communicated a span of SEK 200 million to SEK 300 million in savings for the first period. And early we communicated we are in the lower part of the span. Now we are getting to the higher part of that span. And from the design year and going on forward, we would since we put on more volume in the facility, we will scale up even more in Balsta.

So next is Daniel Schmidt from Danske Bank.

Could you just try to put some numbers on Willys? What's going to drive that growth to be better in the coming quarters? We have talked a lot about .0 (sic) [ 5.0 ] concept. Could you give us any numbers in terms of how many stores that have the 5.0 concept now? Where were we at the start of the year, and where do you think we are going to be at the end of this year?

Yes. So by the end of the year, we will have 70 Willys upgraded to 5.0. So I think we make about 25 modernizations this year within Willys. And so the growth would come, of course, from modernizing stores. It's also about, I would say, developing the offering as we have talked about. But it's also we meet very strong comparison figures in Willys during this year.

And just on sort of other driver opening new stores, and I think you have opened 6 so far this year. You have said that you should open at least 10 in connection with the Capital Markets Day last year per year. Do you see that you are going to get there if you look at Q4 schedule?

Yes.

We are on the plan.

We are on the plan.

Okay.

Both for Willys and as a total in our 10 to 15 stores this year.

And when you look into 2027, when you look at Willys store opening schedule so far, is that looking promising? Or how is the market developing in terms of getting new locations?

Yes. It looks positive. So the 10 stores yearly, we feel pretty sure about.