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

Good day, and thank you for standing by. Welcome to the B&M Post-Close Trading Statement April 2024 Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Alex Russo. Please go ahead, sir.

Good morning, everybody. Thank you for joining us on time. And extra good morning. I know we have some of our investors from the U.S. at very early. So I appreciate your time and joining us so early. So thank you for that. Just a quick introduction before I kick off. I have Mike Schmidt, CFO, with us. And Mike will basically share the Q&As we go along. And I have a couple of colleagues that I have invited to join, both of them are upcoming talent in the business. One is James Kew. James is with us. James is the #2 at B&M U.K. retail. You will get the chance to meet James in the coming months when we're in person. And we also have Si Buckley, also 10 years extra in the business. And Si basically is a Director of Merchandising in the U.K. So James and Si are integral to all the work we have been doing in the last couple of years to basically draw excellence in the shops. And I think it's important. One, you hear from them. And two, that they basically hear your questions. So I'll keep it very short. Guys, I will touch on 5 key points that elaborate on some of the color in the business. You've already read the results. And then we'll go straight into Q&A that Mike and I will handle, okay? So the first point I would like to convey is that FY '24 has had across the 3 segments, a high quality of operational commercial execution. By that, I mean we have continued to step on that balance between buying, supply chain and retail excellence. So I am pleased how the business has executed consistently over the last 4 quarters. Shops are looking great. Availability is looking as strong as ever. No need at B&M, and we will continue to basically have that focus. We're a retail business. We're in the shops. Not just me, it's a team with me in this room, Mark, James and Si. So I'm very comfortable on the quality of the operational execution. By that, I mean the integration you've heard before, between dine, supply chain and shops. And we'll put in a very strong position heading into the new financial year, okay? So that's the first point, operations. The second point I want to highlight is the quality of our earnings. And I'm using -- starting that statement by quality. It is volume driven. It is volume, not just in terms of new base, but also in terms of like-for-like performance. And I want to highlight just as an example 3 departments, 3 in FMCG and 3 in general merchandise that are great examples on significant volume growth the business has delivered at B&M in terms of not just value, but actually significantly increasing units, okay? So we will start with FMCG, and this is just 3 highlights. It's not the exception, but it's one where the business is performing very well. Cleaning household has performing exceptionally well in FMCG through the year, and that means material increase on volume and units, okay? The second element in FMCG is basically pet, widely defined in the food. I think we have taken market share significantly in terms of the pet FMCG category, and we will build that momentum into the new year. And the third element, which is really pleasing for me,, is that we have seen units, particularly on seasonal grocery, perform exceptionally well. And actually, that's what drives the volume and the quality of those earnings. And if I were to pick the 3 departments again in units that have grown exceptionally well in general merchandising is home. And that's a broad definition, home takeouts, cook and dine. So the whole home department has performed exceptionally well and will enter the year with strong momentum. DIY is booming again. The volume is very, very strong. And basically, Christmas. Christmas performed exceptionally well on volume. And those are just 6 highlights where I am very confident the business will continue to make market share gains, volume and value heading into the new year, okay? So the first point I'd touch was quality of operation. In balance, that means the 3 business. Quality of earnings. You've seen the GBP 6 million to GBP 9 million on the top end of the range. That's volume driven, both LFL and new space. And that means basically in Q4, when you look at our LFL, we've had a very strong performance on both FMCG and general merchandise. The LFL has been positive on the 2 main sites of the business, continues to be in perfect balance, half FMCG, half general merch. And you can assume on Q4, as we have had throughout the year, roughly half of those LFL numbers are customer transaction numbers. That's the life of the business, we serve customers, and that means basically fill receipts and customers [indiscernible]. So we'll continue to drive those transaction numbers by keeping the business in balance and ensuring that those stores are really continue to serve customers well. So that's the third point, transaction numbers and the business in balance with positive LFL, both general and FMCG. Four is a given, price. The price position is rock solid. We've already -- we have virtually no inflation in those LFL numbers. In many categories, we have already passed all the supply chain benefits into the consumer. So our LFL is volume, and the volume is running fantastically well. So I'm very comfortable that the price position, both against the big grocers and the specialists on general merchandise is rock solid. And that we stay EDLP. That's what we do. We don't have complexity. The consumers basically vote with their feet and will keep measuring and driving those level transactions in the shops. And the fifth and final point I want to make is the quality of space. We've had a big opening program, as you know, in Q4. That will continue rapidly with momentum in Q1. And the quality of that space is fantastic. The Wilko shops that we have already converted. We renegotiated. We renegotiated every single lease. I'm telling you that the sales densities are absolutely motoring ahead. You can see that in the new space performance. Remember that the 20 or so stores we opened was highly compressing in Q4. The shops are looking good, and we'll continue to drive that volume with discipline. As you've seen on the [ RNS ], I maintained it. We'll open not less than 45 stores at B&M U.K. in the new financial year and the year after, and we'll continue to do so with a high degree of discipline and driving those standards in buying supply chain in the shops. So with that, I think we can open it up straightaway to questions.

[Operator Instructions] We are now going to proceed with our first question. And the question come from the line of Richard Chamberlain from RBC.

A couple questions for me, please, just to kick things off. Just first on labor costs. Can you just remind us how you're dealing with the minimum wage increase, whether you've passed all of that on? And how you think the competitive position of B&M has changed, if at all, as a result of the increase? And then second, just sort of interested in what you've learned from the recent opening program. I mean, clearly, it steps up quite markedly over the last quarter or 2. Appreciate the Wilko stores are a little smaller than average. But what have you learned about this preferred size of store now and what kind of locations are working the best? That's my 2 questions.

Thank you, Richard. So each in turn. We have enough momentum on headway to manage productivity in business. That includes logistics, transport and stores. I don't find any impact affecting the economics of the business in terms of minimum wage. B&M U.K. is a very stable returns business. You've heard it before, Richard, the range in which we manage B&M U.K. is 12% to 13% EBITDA margin. I think when we get -- if you extrapolate the numbers, you can work out rapidly the B&M U.K. improved EBITDA margin versus the previous financial year. I mean if you work out the math, it's probably going to be in the road of 12.6%. For the year, we have just finished despite all of that. So that means that productivity is in place. And fundamentally, what gives me the confidence that we can manage our productivity well is volume. I think you've heard me before in the past, Richard, you cannot leverage our retail business with inflation. You can only leverage it with volume, which is what we're doing. So I don't have any concerns about that. We always shoot for the top end of that range, and that is the same in the next few years. And I will give you just 1 qualitative bid, which is related to the culture of the business, which gives me the both pleasure and satisfaction. We have had, Richard, 2 consecutive years where labor turnover has plummeted to the tune of 5 to 6 percentage points per annum reduction, and that's 2 years in a row. And that tells me that the culture is very healthy. The teams on the ground are basically enjoying what we're doing. And fundamentally, that is reflected in the shops and the consumer can see through transactions. So having 2 consecutive years of reduction of labor turnover of not less than 500 bps per annum, I think it's a testament that the team is responding well. So no concerns on minimum wage. We'll continue to drive productivity in the right way. We will never compromise standards, and the business has all the headroom to do it appropriately. In terms of the new stores, I wouldn't necessarily assume that it will cost more. I think you can assume that some are bigger, some are smaller. But on average, they are not far away from the average. Clearly, they don't have a garden center, but we have all sorts. And I think what we have learned is that we can open very strong shops. We continue to tailor them, to the local catchment and competition. We enjoy being a nuisance retailer. So we always tweak EBITDA ranges depending who are we competing against next door. The business is agile on how we basically flex up and down that range. And I think that is reflected on those sales densities, which are accretive, yes. So the stores that we have had in FY '24 are accretive from a sales density point of view, and you can flow that all the way to the bottom line. I hope that answers the question, Richard.

We are now going to proceed with our next question. The question come from the line of Jonathan Pritchard from Peel Hunt.

Yes, just a couple on the owning program. Firstly, Obviously, the large majority, if not all of the stores that have opened in Q4, have been Wilkos. And I presume that's going to be obviously the case in Q1 and Q2 as well. But looking further out, is there a very decent sort of pipeline of -- I know there's the other ex-Homebase, is an ex-Gala Bingo you've opened recently. Is there a decent pipeline of former stores you can move into? Or are we probably looking at sort of brand-new builds, perhaps to the sort of late '25 and early '26 store earning program? And then just a quick refresher on where we are in terms of store numbers and openings for Heron and France, please.

All clear, Jonathan. So the answer to your question is yes. We are committed this new financial year not less than 45indiscernible] It's not Wilko. I think we can find the right quality sites. You heard it before. We will grow confidently, but never at the expense of the location is side-by-side. New builds are coming. The pipeline is building. So that underpins the volume potential and the opening program. So I think we are past the point probably of that stickiness in the real estate market maybe 3 years ago at the peak of the pandemic. And what I would say, Jonathan, is I think the quality of the covenant of B&M also gives us a very strong position to negotiate. Ultimately, many of these shops are not necessarily big landlords. Some of them are small, medium-sized landlords and the quality of the tenant is paramount. So I'm confident that we can open the right stores. A good example, we have opened a very big one in Plymouth just a couple of weeks ago. I mean exceptional performance, quite a larger store, nice garden center. So there is an interesting mix. In terms of Heron, we will continue to open not less than 20 per annum. Heron is performing very well. And in France, we've opened 11 in the last financial year. And I think for the new financial year, we will continue to open up gently, gradually, not less on last year. Let's see how many we open, but I think you can assume not less than 10 or 11 in the new financial year, okay?

And Jonathan, just so you've got it, Jonathan. In the footnotes about B&M at the bottom of the announcement, you do have the store numbers for each front from Heron, if you want to see the progress we've made in the year. So I'll just call that out.

Good point, Mike. Thank you very much.

We're now going to proceed with our next question. And the question come from the line of Matt Chadwick from Berenberg.

First one, just on your comments on noting there is a degree of market of outperformance relative to expectations for the Wilko stores that you've opened. Would you mind touching on what operational measures, if any, have been introduced in those stores? And if those same operational measures can be introduced into the store openings for the next financial year to deliver continued strong performance there? The second here, I have it in reference to pricing. You mentioned your pricing is rock solid. What I'm interested in is if you maintained a similar degree of discount to the larger competitors in your space. I think at the half year, you said you were around 20% cheaper than those names. Just wondering if that's still the case.

Yes. So yes, we continue to learn in each opening. It's not just stores, it's basically buying merchandising. So we continue to optimize that. I don't see any reason why our sales densities in our openings continue to be very strong and accretive. Now we are very disciplined on how we choose the location. And I think what I would say is that we're getting better and better is that it's just an integrated balanced view on how we range those new shops. It's a buying team. It's a merchandising team. Here, I have Mr. Buckley sitting next to me nodding. And it's the shops. So it's a robust internal process. We basically try to optimize them, and we continue to learn and adjust. In terms of pricing, look, big grocers after the loyalty cards. I can be always against the most expensive of the 4 in a week, 22%, 23% cheaper against the cheapest in a certain week and never below 15%. So basically, it's always a 15% to 20% cheaper against the big 4 after the loyalty schemes. We continue to monitor that very sharply. And on general merchandise, I'm very comfortable, whether it's DIY, whether it's home, I mean, we are rock-solid on the price. And I've said it before, I'm not going to let them move.

We are now going to proceed with our next question. And the questions come from the line of James Anstead from Barclays.

A couple of questions. So firstly, there's been lots of media discussion recently about reasons to be more optimistic about the health of the U.K. consumer. Are you seeing any change in spending patterns yet? And more widely, given you're a discounter that also sells a lot of discretionary goods. Is the U.K. consumer that's healthier good, bad or neutral for B&M? And the second one was just on the Wilko conversions, and I admit this is a glass half empty question. But is there any risk that the Wilko conversion doing so well will impact like-for-like at the core estate? Or have you essentially chosen those stores very carefully and the overlap is really pretty minimal?

Two good questions, James. I will answer the first one with a U.S. lens and then a U.K. lens and then your question on the new openings. What are the 2 preeminent discounters in the U.S., they are Walmart and Costco. They trade exceptionally well with discipline when the economy is good and is weak. We're exactly the same in the U.K. We will trade very well with EDLP and EDLC discipline. And whatever the consumer does, we're going to basically drive profitable growth. So I am agnostic, James, on what the consumer does. We will benefit on the 2 scenarios, and we're going to be with discipline. But I can tell you about the competition, and I'm not going. As you can mention, anything is -- you've heard me, I spend a lot of time out in the stores. James is sitting next to me. He probably does 50, 60 shops a week himself. What I can tell you confidently, James, is that the vast majority of competitors are decorating the store standards. If I were to highlight 1 competitor outside of B&M that is not doing that, which is actually doing what we are doing, is Marks & Spencers. I read what M&S is doing. The shops are improving very, very firmly. I walk into the shops, James, and I can see most of these businesses cutting hours, yes. James, this is your chance without naming any competitor. You've probably done how many stores a week, you've seen many competitors succinctly. What do you see?

Yes. So as Alex touched on, I personally visit at least 50 B&Ms a week, seen continuous progress of our standards, protecting hours in stores. But at the same time, I'll also see many competitors and sales. Not to name any, but I see a continuous decline in the standards of these stores. And noticeably less colleagues in the stores working the actual stock other than the M&S example that Alex gave.

Absolutely. Look, James has run, how many shops have you run in your career at B&M?

Eleven B&Ms.

This guy started as a young kid in this business over 10 years ago. He's run 11 shops. When he walks into a shop with me, we can tell what the competition is doing, James, they are cutting our standard on right. So look, we play our game. The volume is there. Our standards are absolutely in balance. Whatever the consumer does, we would protect the consumer. And what that means for us, James, is EDLP, EDLC, no gimmicks on pricing, consistency. And [ pleasantly ], the consumer loves it. And frankly, the colleagues respond to that. Who wants to work, James, in an unpleasant environment? So in an indirect way, I'm saying whatever the consumer does, we're going to be well positioned for that. And on your question on do I think our store openings will have impact on like-for-like? The answer is no. We will be selective. We can always drive existing space harder. We continue to do so, and this is not an opening like-for-like business. We drive LFL and space both. Thanks.

We are now going to proceed with our next question. And the question comes from the line of Adam Tomlinson from Liberum.

A few questions from me then. First one, please, just get it out of the way first. On the Red Sea, which still a question we get. There's obviously a lot of headlines out there. It doesn't seem to have impacted your year just gone, and it sounds like you're very confident going forward. So if you could just sort of give a refresh on your comments around potential Red Sea impact, that would be helpful.

If I can ask very quickly. I think it was with Warrick. Warrick, you're on the line. I think it was your conference a few months ago. I stood up, and I said it will have 0 impact, has 0 impact, will have no impact. Our supply chain is incredibly flexible and responsive. Why? Because we drive volume. So we're always first in the queue. I have Si Buckley in here. Si, what is your objective view on how our availability is today in the depots and the shops. Rock-solid, isn't it?

Yes. So to reiterate Alex's point, our availability is very strong across not just FMCG, but all departments. And that is based on our end-to-end supply chain being so robust, simple as that.

Look, we are all over -- look, you're hearing it, Adam, from the whole now. You can see it on the shelf. I see it on the shelf. There will be no impact. It's all volume underpinned. And we have a high-quality team that understand the business. Look, we have the relationships in China. You know that we don't do middlemen on this. So I'm very comfortable. And actually, the test, Adam, is on the shelf, I mean, 24-7 and 365, right? Can I add 1 final point, which is also pleasing, and you might have heard me before. Not only availability is outstanding at the moment, Adam. But actually, if you derive it from the cash position, our stock portion is rock solid. And it's clear. So that flexibility of the supply chain that Si mentioned allows us not only to have high availability, less markdown risk, and actually, we also have lower stock values. So you can see that on the cash metric. Sorry, your second question, Adam?

No, that's great. And sorry, just to finish off on that supply chain point. Obviously there's an availability point here. But the other question we get asked is around freight rates. Obviously, potentially those going up. It looks like they're not going up particularly high in the context of what we saw over the last couple of years. But anything you can say on perhaps when you enter renegotiations forward buying versus spot, anything just to give us some comfort around the cost element as well?

No impact for us. We negotiate in volume. We ship tens of thousands of containers from China. It's a volume relationship. And all those benefits that we get from our supply chain, all of them are already with the consumer. And that's what I mean we'll never allow the competition to move. I will always go quicker and faster than them. We never inflated at the speed of them, and we will always pass those benefits faster than them. So we will keep driving transactions, Mike, we continue to drive basically volume. That's the question. So on the round, B&M U.K., 12% to 13% EBITDA margin. I never shoot for the bottom end. Let's see.

Okay. Very helpful. Second question is just on -- just you mentioned, I think you gave the sort of 6 categories. Interesting in there. If I take, for example, you mentioned DIY performing well, pet food and pet care performing well. Other, I guess, when we look at the market leaders in those categories. We've seen some not so strong performances coming through from those categories. So I'm just interested, is there anything you're doing in those categories, be it sharper pricing? The range is the offer. I know you're continually looking at those. But have those had any particular revamps that's driving that improvement in performance? We used to just to get a bit of color around that.

I'll share a [indiscernible] internally, and Mike might laugh in here in the room. The team is forbidden to look at value, i.e., average selling price. We run the business on volume, and we run the business on transaction numbers, yes? So what underpins that is price, is the transparency of the price. We don't play a game of supplier rebates. We buy without complexity, Mike. And what drives that performance, I think it's fundamentally good ranging, the discipline we have. The whole business has 10,000 lines. Each SKU, as you know, has to earn its upkeep. We concentrate on best sellers. We don't give you organic [ orange ] use. You will give you gluten-intolerant stuff. It's all around volume, price and basically range discipline. So it's what B&M has always done. Ultimately, on FMCG, we operate with brands, what drives the business is price. And if you don't have it on the shelf, you cannot sell it. And that is the important point I would leave you with in terms of what drives that. If a competitor doesn't have it on the shelf, you cannot sell it. And when you see in a shop an empty shelf or an empty gondola or an empty aisle, James, you might want to expand that an empty aisle is never because that aisle has been sold in the preceding 12 hours, but give the guys an operational sense how long has that gondola or aisle largely been empty.

Yes. I think stores got a good level of feel, good depths, unless any of the business, including the big ones, it can take a number of weeks for this to fully empty out. So when we're seeing some of the -- they stay with empty shelves and empty gondolas Ganders, it's not a 24-hour impact. This could be a number of weeks, and it stems back to the hours reduction in the stores.

And you -- and I'm playing that back to the U.S. to finish. I mean you've always heard me. Now who do we rate? Who do we learn? It's Walmart, Costco and Home Depot. Those shelves are full 24-7-365. And that's what we call operational discipline, and that's why we will keep hammering, okay? .

Great. And then just final question is maybe just a little bit more color on France. So I think if I take the U.K., you've got another 10 years of rollout in the U.K., which is a great story by itself. But then France, you've spoken historically about over the long term, the opportunity to have a business there which is equal in size to the U.K. So a bit of an update on France, just how it's performing and whether there's any change in view to that long-term ambition?

I will give you 1 comment, and I will pass it to Mike. Look, I'm very comfortable how France is performing. Operationally, the team is stable. Commercially, it's all around transaction numbers. Those sales densities continue to converge in the right direction. We continue to grow FMCG. Look, it's a great potential in the business. But I've said it before. I want to be judged on France in 20 years time only in the next 3. So I'm going to do it at my pace. We're going to deal with a lot of discipline. We're going to embed the culture. I spent a lot of time in France, and France has had a very strong year. Directionally, if you assume that half of our LFL in B&M U.K., let's say, transaction numbers, you can probably assume that in France, most of that LFL is actually transaction numbers. Mike, any other color that I'm missing you might want to add on France from your perspective?

I think the other thing that we do emphasize, Alex, is that we're interested in profitable growth in this business. And this -- France is not a rollout story where we're interested in is just penetrating across the market to be the best. We're interested in growing the profits of that business sustainably over time, as Alex says. I think the pleasing mark of that in this year's results is the step-up in the French EBITDA margin. I think the underlying EBITDA margins are going to be up by more than 50 basis points year-on-year and is continuing to sort of narrow that gap towards the U.K. business. And so it's a meaningful step on in that sort of French performance as the sales growth is delivered, as we invest in new stores, as we carry on that rollout process. We're not having to invest ahead of that growth coming through.

As James and Si can tell you in the room, and they might be laughing, a spreadsheet can assume anything. No, James, working 300 shops on a small team a week. That's a lot of miles. So we do in a B&M way. We'll do it confidently, but it's all around the quality of operation and what the consumer sees. Yes. This is a long game. It's a disciplined game. It's all around, as Mike says, profitable growth, cash generating growth, never at the expense of a poor store. We're obsessive at B&M on that, both U.K. and France, okay?

We are now going to proceed with our next question. And the question come from the line of Izabel Dobreva from Morgan Stanley.

I have 3 questions. I hope that's okay. My first 1 is very simple. It's just in terms of the impacts from calendar in Easter. Could you give us a sense of what level of impact you had on your sales growth from the additional outsized week both in terms of sales, but also EBITDA? That's the first question.

I will -- Mike can answer it very quickly. You might want to explain that this 14 to 14 week. Mike?

Yes. So the like-for-like we quoted is about 14 weeks versus 14 weeks. So it's a limited impact on the 14 versus 14. Clearly, 53% versus 52% in terms of the total sales growth that we reported on the face of the announcement. It is an impact, but you can do the math to get to the sort of size of impact an extra week has versus a typical year having Q2.

Okay. But could you maybe give us a sense of what was the impact of the additional week given that it contained...

We are not going -- we are -- this is a post close. We're not going to disclose that. I'm sure by the time we get into June, it's not material in the year. Mike can expand that when we have the full year results. This is post close. It's a level of detail that we don't have to.

I mean you're right, Alex. I think, Izabel, you're right to say Easter is a bigger week for us. But likewise, there's other things in every year that affect the size of an individual week, be it weather, be it what's going on in terms of consumer distractions. There's always noise in the calendar. And I think it's more important to read the business over a longer-term period and look at the progress we're generating. So I think that's really we'd encourage the focus.

Okay. My other question. So firstly, I had a question regarding your comment around promotions in the traditional vouchers. We have seen the CPG fund a lot of those promotions. Can you help us understand, are you also receiving any additional vendor funding in your business in order to maintain those price gaps versus the traditional big 4? Or are you doing it out of your own margins?

We're an EDLP business. We don't play high low. And basically, 99% of what we buy from the big FMCG brands, it's all on cost price. So we don't play that game.

Okay. And then my final question, just on leverage. Could you give us an update on where the leverage would be, including the leases, so we can get a more complete picture of the impacts of the local stores on your balance sheet? And linked to that, is the ex-IFRS 16 numbers still the right number to look at when you assess your capital distribution? .

Mike?

Yes. So net debt-to-EBITDA IAS 17 basis is a little beneath 1.2x, as we've sort of said in the announcement. Post IFRS 16, it will be around 2.5x, roughly stating it. Ultimately, what we're really focused on as a business is the financial debt outstanding, and that's what determines our decisions around capital structure. Any retailer that spends too much time obsessing about the post-IFRS 16 metrics, I think, is making the mistake because you need shops to be able to generate revenues.

And in my layman -- thank you, Mike. And in my layman's terms, I think what Mike is also saying is that our stock position is very clean. We have driven group revenue up on the year by 10.1%. Our stock position has barely increased pounds year-on-year on the basis of 12 months ago, what was really a very clean position. That flows into working capital, that flows into cash. And the long-term investment on this call know that when the cash builds, Mike will be signing a check at the right time.

Well said, Alex.

Thank you. Probably we have time for a couple more questions.

[Operator Instructions] We have no further questions at this time. I will now hand back to Alex for closing remarks.

Thank you for your time. I appreciate the questions. Look, we are going to meet together again in early June. And Mike, when we basically get into a bit more detail, talk about the future. And I would just close by saying that the business is entering confidently the new financial year. It's early days, but the business will continue to do what it does, which is disciplined growth, profitable, keep a low-cost capital discipline and just continue to serve customers. The team is in pretty good shape. So we will connect, Mike, again with everybody in early June. That's all from us.

Thank you.

Thank you, everybody. All the best. See you. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect your lines.