B&M European Value Retail plc (BME) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for coming. I think we have a big audience also on audio, and we'll be taking questions via Dave, basically, on the call as well. We're going to be very short today. I want to give as much time as we can to questions. So hopefully, the whole presentation is going to be 20, 25 minutes, and then we go straight into Q&A. First of all, I want to make a few introductions. You are going to see more of this every time we meet. So if you remember in our half 1 results, you met Gareth Bilton, who was -- is the B&M U.K. Retail Director. He's not here. We are going to see him again in half 1. And you met Tony Dobbs, who runs Heron Foods. So I'm going to quickly introduce you briefly. [ Ian Pratt ], U.K. Property Director; Anthony Giron, France MD; Jon Parry, U.K. Logistics Director. Mike Schmidt, I think we all know, Mike. We have James Ollerton and Pete Waterhouse and Dave in the room, you know. And not least importantly, you have Bobby Arora sitting on the side. Is this the first time you've...

Yes, first. Maybe last time...

I think the last time he came was on IPO. And I want to say 2 things about Bobby. I think it's a given that he is an extraordinary Trading Director. But more importantly, he's incredibly good fun to work with. And I mean that generally not because he's here. I think he keeps me on my toes, and I certainly keep him on his toes. So thank you for coming, Bobby, and try not to catch him at the end with tricky questions, please, okay? So I'll keep it short and sharp. First slide, let's concentrate on 3 key numbers. You've already seen this at the RNS, and then I'll go straight to the bullet point. Total revenue growth for the group, 6.6% for the year. EBITDA, GBP 573 million, at the top end of the half of the range I guided. Operating cash, GBP 866 million for the year. Don't underestimate how clean the stock is to deliver GBP 896 million. We have a clean stock position, and I'll come back to margin in the next 10 months. We concentrate on the last 2 bullet points. Very pleased with B&M U.K. in the first 9 weeks, plus 8.3% LFL, highly driven by customer count and transaction numbers. You can assume that at least half of that LFL are customers on the till. And I'll keep coming back to standards and transaction numbers. Every month since June last summer, LFL transactions at B&M U.K. are positive and healthy. That number, at least half of that LFL are till receipts, customer numbers, and that means trade down into us. FY '24, EBITDA is going to go up. Before you ask me the question, on a 52-, 53- or 54-week basis, FY '24 EBITDA is going to go up, I'll come back in a bit of detail how and why. Not least importantly, GBP 347 million of shareholder returns, including the special dividend that we announced a few months back. I think you already know this chart. If you look at the orange, that bar is going to grow. And I'm very confident the way we've started the season that you can assume FY '23, we're totally normalized. We are back to compounding profitable growth with discipline across the 3 businesses: France, B&M U.K. and Heron. LFL matters to me immensely. I'll speak on store standards and why it's so important in terms of driving profitable growth. Pipeline is improving. Ian is going to present you what we're doing. I'm very confident that, actually, the opening plan is ticking in the right direction. France, you're going to hear from Anthony. And Heron, I will close with 1 slide, performing incredibly well, okay? Mike, to you.

Thank you, Alex. Okay. So let's start on Slide 8 with an overview of our financial figures. If you look over the last 3 years, the group has made very significant strides that you can see on the slide. Revenues have now reached GBP 5 billion, so that's a very substantial 30% increase compared to the 2020 financial year. We've achieved GBP 573 million of adjusted EBITDA, which is a remarkable 67% increase compared to the pre-pandemic period. And as we exit 2023, critically, we see that 2023 year as a clean baseline from which we're going to grow earnings. It is worth noting the comparison versus FY '22. Adjusted EBITDA and also adjusted profit before tax are lower than the '22 comparative, but that's due to the noncomparability of that 2022 year that benefited from lockdown period. But even when making that comparison year-on-year, I particularly note that we have seen growth in trading profit in the second half of the year year-on-year. The positive momentum that we're building is evident across all 3 segments, B&M U.K., B&M France and Heron. And as Alex has mentioned, that trend has very much carried over into the first quarter of the 2024 financial year. So let's dive into the figures in more detail, Slide 9, focusing on group revenue. We've achieved a group compound annual growth rate of 9.3% over the past 3 years. The growth has been very much driven across all 3 segments of the business. Critically, the U.K., which just due to relative scale is absolutely core to the group, delivered 9% 3-year CAGR. But there is a truly exceptional performance also to note from B&M France. And the 3-year CAGR that you can see there, that just gives the evidence as to how well the B&M proposition is resonating in a new market. Across the group, the progress has been underpinned by the healthy mix of transaction volume growth, basket value growth and expansion of our selling space that we intend to continue. And our development, therefore, is very much driven by the sustainable acquisition of new customers. So moving on to Slide 10, looking at the underlying drivers of the U.K. growth in a bit more detail. Start off on the right-hand side of the slide, evidencing the point I was making previously, you can see the growth is being driven by the impact of the new space that we've delivered, but also the like-for-like sales performance. On the left-hand side, you can see the increasing momentum in the U.K. business, particularly as we look at the first quarter of this year and the 8.3% like-for-like trading growth we delivered over the first 9 weeks. And so that momentum, our progress is clearly building in the business. Moving on to group gross margin, splitting it down between the halves. As previously mentioned, we talked about back in November the first half of the financial year, we did see a significant impact from increased clearance activities in garden categories. However, our second half margin performance, which was a decline year-on-year of 92 basis points, very much aligned with our internal plans and incorporated a normal level of clearance activities and a balanced category mix. So within our categories, we've achieved healthy trading margins in the second half, strong performance in general merchandise, in particular, that helped in part by reduced freight rates. And this positive trend is very much carried over into the first 9 weeks of this new financial year. We're on track. We're confident that we're going to conclude the garden season with solid trading margins and a clean stock position. France and Heron have also demonstrated resilient gross margin performance as part of this mix overall. Turning to Slide 12, EBITDA. We feel it's appropriate to look at the performance over a 3-year period, considering the effects of COVID lockdowns on the 2 intervening financial years. Each of our 3 group businesses have made significant strides forward. We're confident that B&M U.K.'s margin is well underpinned at 12.4%, consistent with historical levels and within our 12% to 13% through the cycle guidance range, despite inflationary cost pressures that we're managing. France has made remarkable progress in recent years. We anticipate further gains when sales densities progress. And Heron's EBITDA margin, we feel, compares favorably to any other sector peers you would choose. And we're going to balance price competitiveness in setting our targeted margins. Slide 13 shows the operating cost base of each segment. France again has been the standout performer, showing the impact of driving the sales densities and scale of our business. But actually, across the group, as with all retailers, inflation has, of course, posed a challenge to our cost base affecting wages, in particular, energy costs and supplier prices. The impact of this has been very much managed in minute detail in the business. You can't operate the EDLP, the value retail model that we do without backing that up with very low costs, and we drill that into the teams every day. We are and we have been driving productivity to mitigate inflation impact. And overall, as we look forward, we see the shape of our P&L remaining consistent, despite inflationary pressure. And our forward commitment to key cost lines across the operating cost structure mean that as we look at the next 12 months, we've got confidence in that outcome that we're going to keep that shape of the P&L consistent. Looking at last year, the increase in costs largely reflects reinvestment in our businesses, actually, particularly in B&M U.K., where we've targeted spending to improve store and distribution standards that, we believe, is underpinning the like-for-like growth that you can see coming through. So lastly, let's just conclude with a focus on the cash and the balance sheet on Slide 14. We generated operating cash of GBP 550 million before the effect of IFRS 16 during the year. This is driven by our inherently cash generative model, the favorable working capital inflow that we saw, underpinned by the movement in our stock position and the clean stock position we exited the year with. And then thirdly, of course, the disciplined capital investment that we will always maintain. As we look ahead, working capital requirements will remain consistent with revenue growth, and our capital expenditure approach is going to remain unchanged and going to carry on being disciplined. We've strengthened our long-term capital structure by extending bank facilities at effectively unchanged rates. So they now sit there with a potential maturity of 2030, assuming we exercise our 2 1-year extension options. And our financial profile is now -- financial debt profile is now split across 2025 to 2028 and 2030. And so this all gives us confidence that as we grow our profits next year and beyond, we'll continue to generate excess cash flow that we will deploy through our capital allocation policy. For this year, that's meant that we've declared a final dividend of 9.6p, resulting in total ordinary dividends across the year of GBP 147 million, which is equivalent to 40% of our earnings, in line with our policy. Additionally, we're, of course, pleased to reward shareholders with another special dividend announced back in January of GBP 200 million. And as we move forward, we very much remain committed to returning excess cash to shareholders at the appropriate times. So finally, let me sum up what I see as the key takeaways from a financial perspective. Firstly, last year's numbers serve as the baseline. They reflect the increased scale of the group that we now have, the strong margins and the excellent cash generation. We've entered this year strongly. We've traded well over the first 9 weeks. We're on track to trade out of the garden season -- the current garden season with solid margins and a clean stock position. And finally, as we look ahead, we expect the financial shape of our business to remain consistent. And as we deliver revenue growth, we're very much confident of driving substantial value for shareholders. So I'm now going to hand back to Alex and the team to delve into some of the operating activity.

Thanks, Mike. Thank you. Grocery and non-grocery, keep it very simple, guys. Availability is world class. I'm doing myself not less than 25 shops a week. That's excluding the competition. I see it, this guy see it. Bobby sees them. Entrepreneurial business in the detail without any bureaucracy. Grocery is performing very well. Price position, rock solid, not an inch of degrading price position against any competitor. And I would say FMCG availability on the shelves is probably the best the business has had in the last 5 years. I put my neck on the line on that. General merchandise, performing incredibly well. You saw Q3 statement. You can imply that from the first 9 weeks, home, DIY, garden, general merchandise is performing very, very strongly. Margin is very, very good. And availability, again, is world-class. Bobby and I were in Hong Kong 1.5 months ago. Phenomenal setup on multilines. Team is engaged, incredibly professional office. The buyers back into the factories post COVID, Mainland momentum. The product is looking fantastic. It's on the shelves, and the price is rock solid. That's all what I'm going to say. If you ask any of the team what excites me is the shop. Bobby gets excited on the product, on the price. I love the shops. That's where I spend most of my time. And I think we would have not had the Q3 golden quarter performance of this momentum without the systematic improvement we have on store standards, shop by shop, one by one, manager by manager. Let me be clear, that doesn't change my cost to sales. It's self-funding. Get the right manager, get the stock on the shelves, the sales come. I personally prefer to spend my time in the shops than talking to these guys in the head office, and they probably enjoy it as well. This is the way we're going to do business every single day. I do 25 shops a week. The senior team above retail teams, we do 200 shops a week unannounced, 200. That's just B&M U.K. That excludes France, excludes Heron. If you add those 2 businesses, we're probably doing 300 shops, the MD, myself, Gareth Bilton. 10 out of 10. That's not a doctor picture. That's what I mean by availability. Stock on the shop 24/7. Jon Parry, you have 2.5 minutes.

Thank you.

It was 3 originally.

It was. Good morning. As Alex said, Jon Parry. I'm the U.K. B&M Supply Chain Director. I joined 9 months ago. 28 years in retail, logistics, supply chains, laterally in Asda, Walmart running their logistics network for them. I just want to spend a few minutes just talking about the U.K. supply chain, what we're doing, how we're focusing on things here. First and foremost, just to talk about our core purpose of serving our customers better than anyone else. What does that really mean? Well, it means 2 or 3 things. First, it means very much about the shops. It means making sure that we are flowing goods effectively and efficiently at pace into the stores. Absolutely about driving, as Alex talked to it, best-in-class availability on the shelf, a real big focus for us. The other point there in terms of our customers is about Bobby and the trading team and making sure that we are providing efficient capacity for the trading teams to accelerate their growth across their departments and their categories, really important. And the balancing factor to that is always about operating at the lowest possible cost. So driving everyday low-cost initiatives sustainably that offer value back to the business, so that we can continue to reinvest in price and get that flywheel turning in the right way. How do we do that? Well, we do that through a number of building blocks, I'll focus on a few right at the bottom. It is absolutely about continuously improving our processes. It's about driving brilliant basics. It's about making sure that we execute those processes brilliantly always, really key for all the teams across transport distribution and imports. Also it's about making sure that we drive leverage. So we sweat the assets that we've got, our distribution network, our transport fleet and making sure that we really do sweat the capacity and the solution through them, not adding space where we don't need it, of course. Very much then about operational excellence. So an evolving operating model, driving excellence at the heart of how we do things. And all measured across the 5 Cs, which you can see there: compliance, customer, cost, capacity and culture. Compliance is a given, safe and legal in everything that we do. Customer, incredibly important, to really being thoughtful about the end-to-end processes from origin all the way through the network, through the ports, into the stores. Again, no apologies for saying it, driving absolute best-in-class availability in our stores at the shelf edge on every product, whether that be grocery or non-grocery, particularly through seasonal entrance and exit. Very, very important indeed for us. And then in terms of costs, so I've referenced that before, driving an EDLC program, really focusing hard on productivity, whether that be in transport productivity, fewer miles on the road, always knowing where to save GBP 1 pound, or indeed EUR 1, through our distribution network, getting our colleagues more productive through the network that we've got. Really critical for us. Capacity, as mentioned, very much about utilizing the capacity that we've got across the assets that we've got. Reengineering accordingly to get more and more products through more efficiently. And then finally, culturally, about diversity engagement, but most importantly, it is about a performance management culture. Absolutely getting the best of our colleagues from rewarding and recognizing accordingly. So back to where I started firstly about our core purpose, it is about 2 or 3 things. It's absolutely about providing the stores with the right products at the right time to drive best-in-class availability, providing Bobby and his team with the capacity to grow their business through the current network by sweating our assets and doing all of that at the lowest possible cost, absolutely driving the EDLC agenda through initiatives, so we can create value and reinvest back into the business through price and get that flywheel turning. And that's me. I'm going to hand over to you, Ian.

Thank you, Jon. Ian, 2.5 minutes.

Thank you. Good morning, everyone. I'm [ Ian Pratt ], the Property Director at B&M, and I've been with the business for 8 years. The main points that I'd like you to take away this morning in respect to the B&M U.K. pipeline. Number one, FY '24 gross new store pipeline is in a strong and improving position. For FY '23, the gross new stores that we opened have performed well across the board. And number three, the long-term target of 950 B&M U.K. stores is well underpinned. In a bit more detail on the FY '24 store pipeline for B&M, we expect to open approximately 30 gross new stores, including relocations, many with new Garden Centers. The focus is always on new space in good quality retail locations for B&M. It's illustrated by several deals that we have under contract for FY '24 delivery, and they're in principle out-of-town retail shopping parks and destinations across the North and the Midlands. Some good stores coming through that, very good stores coming through that pipeline. As far as FY '23 is concerned, we opened 21 gross new stores that included 5 relocations, and 12 of those 21 stores had Garden Centers. All of the new stores have performed well, with the quality of the stores being strong and the estate at the end of the year is enhanced as a result of that. Turning to the relocations specifically and some analysis on those. The 5 relocations in FY '23 achieved 193% additional sales space via those 5 stores. And in tandem, those relocation stores are all in better locations than the smaller stores that we closed, in turn. The closure of the small former stores in favor of larger, better located modern stores gives us a progressive improvement to our estate. And finally, as far as the long-term target is concerned, 950 B&M U.K. stores remains a conservative target. We're continually seeking good quality new space. And where we're unrepresented at the moment, plus good quality relocations, to enhance the existing estate that we've got. Thank you.

Thank you, Ian. Anthony, you have 4 minutes, instead of 5 now.

Thank you. So I'm Anthony Giron. I'm the MD for France, like Alex said. I've been with the business for 3 years. So I will present to you the progress of France and where we stand. So yes, you see on this first slide, we have 3 planks I will describe rapidly today in 4 minutes. The first plank is really on the customer proposition. What you see here is the evolution of the customer proposition we did in the last 3 years. There has been a dramatic turnover in terms of category proposition. You see the big decline and the exit from textile and a big increase in 2 areas: one is FMCG; and the other one is home/seasonal goods, okay? These are extremely important categories in which we grow very much. And as a result, I must say that there is an extremely strong response from the customer, the French customer, to the proposition we provide to the point that we've been elected for the second year in a row best retailer in France for nonfood discount and best retailer in France for home decoration, okay? This is a very big achievement for a brand that has been on the market just for 3 years effectively. So this is, for us, extremely key, this first plank on the value proposition. The second plank is the operational excellence. So we exactly put ourselves in the footstep of the U.K. when it comes to the store excellence. The quality of operation, this is a key focus for us, extremely key. We want to replicate the highest level of quality for the customer experience as it is in the U.K. To do that, we have incorporated inside our team some of the key skills coming from the U.K. Some of the key managers are helping us in France to replicate the methodologies, the tools, the management processes that are in action in the U.K. We also have a very -- now a very experienced team of managers in France, the management team. But also, I would say, the top 10, top 20 guys in the French business are really very experienced guys coming from different horizons. So this is very, very, very reassuring for the future. And yes, this is the key part of the operation. And another key part is also the transport and distribution in which we are also implementing, more or less, what the U.K. is doing best there, okay, when it comes to FMCG, but as well nongrocery. And the last plank, of course, is footprint growth, okay? So you saw that in 2023, FY '23, we opened 7 stores. All of them are contributing on par or above the company average EBITDA, so that's very good. All of them were very successful, successful openings. All of them have a space of 20,000 square feet, except one -- except for one, which is smaller than that. When you're looking at FY '24, we're looking at opening 10 stores this year, so a bit increased versus last year. It's exactly like what Ian said, the focus is every store must be a success. So no risk, best locations, need to be seen as a brand that is looking for the best locations, the best profile possible. So we want to -- we prefer to open less stores, but excellent stores. Thank you.

Thank you, Anthony. And Anthony, we welcome you guys in June in Lille for the ones who are coming to the day we have lined up. So that's an important point where we can see all of this in life. Heron Foods, I'm going to skip it. It's booming. I'm really pleased with Heron. Don't meddle with it. It's working fine, peak. Last slide, I think you can read the key points, but I will just close with 3 points. We have 3 businesses of different sizes, different cultures, but all of them work together as 1 team. I only have 2 meetings in a week: one is a property one, which is expansion; and the other one is the one that Bobby and I chair at 8:00 on a Monday with the 3 businesses, the top 15 people. That's where we try, test and learn, cross-fertilize 3 equal businesses. Entry in FY '24 is very strong. That 8.3%, I'm just going to say, at least half of that is positive LFL transactions. That's customer count. That's trading down happening. LFL transactions at B&M U.K. have grown positively every month since June last year, 12 months in a row, space growth, quality and in good shape. I'm going to choose my words carefully for the year ahead. EBITDA is going to grow on a 52-, 53- or 54-week basis. B&M U.K. is trading very well. And I would say that spring/summer season is in the bag. I'm going to repeat that. Spring/summer season is in the bag. You can extrapolate what that means for gross margin percentage. I'm not going to spell it out. Spring/summer season is in the bag. Stock is clean, and it's best-in-class. You can extrapolate what that means for margin in the second half. The quality of the leadership team, not only at B&M U.K., but France and Heron is very strong and settled. Anthony will allow me to say this, hopefully. France is being run by a French team, but a very international French team. It's not just MD. It's a buying Director. He is a buyer, his operational piece. It's an international French team. I'll open straightaway to questions.

Can you just talk a bit more about your -- sorry, Simon Irwin, Credit Suisse. Can you just talk about your expectations around inflation and what you're seeing, particularly in the nonfood side of the business as we go forward over the next year or so? And is there a challenge you see going forward as inflation rolls off, but wage inflation in particular remains stubbornly high?

It's a very good question. In terms of inflation generally on general merchandise, I think we have certainly passed the peak. So I expect it to start moderating. We play to the game. We stick to which is best sellers, high-volume edited range. The negotiation is strong and hard and focused. So we passed the peak. In terms of the cost structure of the base, as Mike said, B&M U.K. cost to sale, unchanged to last year.

Great. And just a follow-up. Within B&M and that gross margin movement last year, was there any mix shift between food and the nonfood side of the business? Or is it all principally down to individual product and particularly that clearance in the first half?

Yes. The vast majority was the first half. I think the balance between FMCG and general merchandise is pretty good. I'm happy where it is. It's well above pre-pandemic levels, and that is supportive now. Thank you.

David Hughes from Stifel. Just on B&M France, just looking at the sales versus the square footage, it looks like the trading intensity is quite a lot low than the U.K. Is that product mix margin just evolution over time? And where do you see that getting to?

Absolutely, it's evolution. That's where a lot of the upside is. The trajectory is to converge over time to the U.K. As Anthony mentioned, as you start getting FMCG closer to weather propositions in the U.K., you can see the footfall coming in. And I expect those sales density to start converging to basically what the U.K. is. That's absolutely the transition the business is in. So all else equal, you see the performance on an LFL basis is very strong, and I expect it to continue to be strong.

And in terms of your property rollout plans, are you still finding that there's plenty of sites that are just as attractive? Or is there any challenges you're finding as you get kind of more and more stores, both in the U.K. and France?

Yes. I think, as Ian and Anthony mentioned, we're happy with the opening plan. I think the objective in B&M U.K. is getting to the usual forte. I think we're working hard without compromising quality. It's all around discipline. France is going from 6%. But I've said it before, we are not in a race. This is a long-term hold, and the objectives that Anthony and I have is to create a successful, profitable, best-in-class French business for the next 50 years and not for next week. Thank you. David?

David Roux from Bank of America. Just to follow up with some questions on France. You mentioned sales densities may converge with what you see in the U.K. How about -- how should we think about the longer-term margin opportunity there...

I knew you were going to ask me that question.

Versus the 12% to 13%. And then the other point is just on the ultimate sort of store potential in France, how should we think about that?

So EBITDA margins, look, it's a growing business. I'm going to give France the oxygen to learn, test and optimize the business with the French consumer in the medium term, whether it's at 2 to 3 years. I'm very happy with the 10% EBITDA margin. Do I need to get France to the 12% to 13% view that actually is sustainable in the U.K.? Not in the short term. I'm very happy with 10%. In terms of long-term potential, it could be hundreds. Whether it's 200 or 400 is irrelevant in the short term for me. It's all around disciplined growth and, as Anthony says, returning high-quality sites. In the near term, we're probably going to set up Anthony, France, 10 to 15 openings per annum. If the right add-on cluster of stores come, of course, we're going to look into it. But it's consistent, confident growth. Okay? Richard?

Richard Chamberlain, RBC. A couple from me, please. Just on the U.K., just over the next year, what are you guys expecting for U.K. store relocations and closures? And are you expecting any sort of packages of sites to come up on the market later this year?

As soon as they come, I'll grab it. The cash is there. That's why we keep it flexible. I keep coming back to the same decision-making in the U.K. All stores are highly profitable and cash generative. So 9 out of 10 times, I would only close one because I have the opportunity to open an adjacent one, which is bigger that can display the offer. So look, Ian and I are committing to 30 openings this year. I'm confident we're going to get the pipeline to the 40 or so per annum. But those 30 and the 40 will be with high level of return discipline. And I cannot emphasize, Richard, that more strongly. It's all around the quality of the asset, yes? But there are competitors out there, and I'm not going to name them. They are obsess about market share. I'm not. This is around profitable compounding growth.

Yes. Okay. That's very clear. And the second one is I was in a Dollarama store fairly recently, and I saw they were using self-scan checkout. And I wondered if that's something that you guys have considered or any point-of-sale efficiencies because they're [ tracking their ] frustrations sometimes.

We're trying -- good question. We're trialing a couple of them in France. I'm a bit skeptical about it.

Is that because of shrink or because of...