Byggmax Group AB (publ) (BMAX) Earnings Call Transcript & Summary

Hello all, and a warm welcome to the Byggmax Group interim report for the second quarter of 2022. My name is Lydia, and I will be your operator today. [Operator Instructions] It's my pleasure to now hand you over to our host, Mattias Ankarberg, CEO of Byggmax. Please go ahead when you're ready.

Thank you, Lydia. Welcome, everybody, to this conference call. We will, as usual, talk through a presentation that will be on our website. I will go through a business update and the market side, and then Helena will go into financials. And after that, we'll move into Q&A. So overall, and speaking of Page 2 in our presentation, this is a good quarter, in line with our own expectations. We continue to perform at a level clearly above the level where we were before the pandemic. We are, as you may be aware, facing exceptional comparables in this quarter with not just one but two exceptional factors that also contributed to a so-called reverse profit warning in Q2 last year. So we'll come back to those comparables. But all in all, we are coming out of the second quarter with yet another quarter of market share growth with an operating profit almost double to what it was before the pandemic. And in this environment, very pleased to be a discounter. But looking at the summary financials on Page 2, net sales for the quarter decreased by 10% to just about SEK 2.5 billion. There are then again, exceptional comparables from the peak of the COVID-19 pandemic that we'll come back to and like-for-like decrease 17% on back of that. E-commerce continues to be a strength for us and accounted for just over 20%, 21% of sales for the group. And the focused or prioritized categories for us in our growth initiatives continue to perform really well and actually had several all-time high sales records in both categories and also in Byggmax branded e-commerce. And again, for -- as we indicated for many quarters now, we continue to take market share. We had a very strong gross margin. It is below last year's exceptional level, which we will come back to. But clearly, the second best gross margin we ever had, and we continue to be really focused on cost control, and we'll execute that also in this quarter. What is maybe slightly different from previous quarters is that the supply situation is now better. It's been for -- manageable for us before, but now it's good. It's also supported by a decision we made to operate with higher inventory during the high season, which you will see, of course, and is reflected in the numbers. We have the favorable situation not to sell perishable goods, so the inventory will, of course, normalize, and we expect it to do so by year-end, but that is a difference when you compare to previous quarters. All in all, EBITA of SEK 254 million compared to SEK 456 million last year, and EBITA margin of exactly 10%. And again, an EBITA that almost doubled before the quarters during the pandemic. On Page 4 -- sorry, 3 key events. This is a quarter for us, which is high season. So there's been a high operational focus. And we said in Q1 that we aim to be more ready than ever for this high season with more upgraded stores, well, better than before e-commerce and well stocked inventory, and we have executed on that. We have also done a couple of other things during the quarter. We opened 4 new stores, 3 in Sweden, 1 in Norway, and we've also relocated 4 stores during the quarter. And then for the last 12 months, we've been really active, record activity on store upgrades. And we now are 89% of that portfolio upgraded to our new Konzept-Store (sic) [ Store-Konzept ] 3.0, which makes a big difference compared to the 49% last year. And also, this is in July after the second quarter, we opened our first store in a more compact format where we take the broad Byggmax offering and put it into a much smaller physical space in the retail parks outside Örebro, which is one of the biggest retail parks in Sweden. On the next page, importantly, in this market environment, we are very pleased to be a discounter. It's, of course, a fundamental part of our business idea. And we have a very simple pricing strategy, to always offer the best price at every single product. And that's been a real strength for us, of course, also in this environment. And we also continue to be recognized for this by external service or independent service. So a big stronghold for us, which we continue to solidify in this market. And that also helped us to outperform the market. And if we dig into the numbers on the market side compared to our performance, we can see two trends that are continuing. The first one is that the market is clearly below the pandemic level, but clearly above the pre-pandemic level. So in numbers, it's a bit more sort of exceptional or wider ranges now in Q2 because we are now facing the peak of the COVID pandemic. So market is down by around 15% to 20%, which corresponds to a market increase of 6% to 8% versus 2019 for the period before. And then the second trend that's continued now since these public numbers for the market started arriving by January 2020 is that Byggmax has taken market share every single quarter, and will continue to do so now with a minus 10% reported compared to the minus 15% to 20% of the market. Digging in a little bit more to the market development and commenting on some specific factors, which is usually of interest. We could see that it is a continued good market. But of course, the consumer situation is different now with the inflationary environment we are in and macro uncertainty. We could see that the product connected to the home still, as an industry, performed better than before the pandemic. The market is still positively impacted by the role of the home and the higher prices, of course. April was a cold and wintery month throughout the Nordics, which meant a lower demand for or maybe we have to phrase that latest start of many outdoor projects. There is a negative weather effect in the quarter from the wintery April. There is a more hesitant and also more price-conscious consumer, and the latter part, of course, benefits us than previously. And we could see that particularly products connected to bigger investments for the home are declining compared to the very high peak for last year. So we're talking about products connected to projects, such as pool or greenhouse inventory, that is fixed figure investments typically for a consumer in terms of Swedish product business. So that is the market situation for Q2, basically continuing a market above the pre-pandemic, but not as the pandemic and Byggmax continues to take market share. Leaving the market and moving on to our initiatives and the reasons for the market share gains is on the next page. And our agenda for those of you who have followed us know that it's been fairly constant for 3 years now. We are executing clear growth initiatives, and we particularly fund the organic growth. So we have four growth initiatives that we've been running now for quite a while. The first one is the store upgrades, which I commented on earlier. We've come quite far on now. This is an initiative that adds 6% sales per store on average. And we're doing 2 things. We're adding -- introducing new categories and/or strengthening a lot of categories, but also a new store concept, which has a better customer experience and a better quality experience. Second part is e-commerce, where we worked a lot to extend our online exclusive assortment and make a number of improvements to the customer experience for e-commerce, which has also continued to go well. We do open new stores as commented, and then we have selectively done some add-on acquisitions that fit our discount model and our category and country focus. So those are constant. And on the next page, a couple of comments on how these initiatives are continuing to perform. And we are, of course, pleased with the performance also in Q2. If we take the store upgrades first, which is the big push we've done in the last year, moving to 89% now. We have seen clear positive effect from that. We do have all-time high sales in second quarter in several product categories, which are introduced or strengthened in the Store 3.0 assortment. So we call them smaller project categories that have less investments than the bigger ones. But for example, all time high sales in the quarter in garden, in paint, in flooring and in storage, so very pleased about that. E-commerce continues to perform well. It's an opportunity for us to continue to meet more customers and expand the offer, and we see that we continue to grow the Byggmax branded e-commerce in Sweden and Finland and Norway, not because it was impacted by foreclosures during COVID last year, but continued e-commerce growth despite very tough comparables in both Sweden and Finland, which we're very pleased about. Growth contributors are the extended online assortment, really helps. And then we as -- several quarters now see that the strongest effect come from combining online and stores. And for example, we see the fastest growth of all from collect at store or buy online, pick up in store. New stores, 4 new stores in the quarter, added about 3 percentage points of sales for the quarter. We continue to open stores in white box. We targeted to open 15 new stores for the year. And acquisitions also contribute. The less seasonal Right Price Tiles is the bigger one, and it impacts, therefore, a bit less during the high season for Byggmax than it does in Q4 and Q1, but still a 4 percentage point contribution from the acquisitions also in Q2. So good progress and good contributions from all our growth initiatives during the quarter. We also launched a new and quite ambitious climate agenda just recently in March this year. I wanted to provide a brief update on that before we move into the financials. So there are 2 components to our agenda, as a recap. The first one is to -- we have a very ambitious plan to minimize our emissions, our carbon emissions, both in our own operations, by 90% in 5 years, but also to work towards what's called the net zero value chain in 2040. That's the one half. The other half is that we believe there is a big customer demand and actually a big business opportunity for circular products and more climate-friendly products. And we have decided to participate in the development of those. So we have what we call Byggmax Green Ventures that actively supports and invest in companies that manufacture and develop these kind of products. In all, we hope that this agenda together can enable us to do more good than harm and combine a low-price offer with a high ambition climate agenda. And as a quick update on the first Byggmax Green venture on the next page, it's progressing according to plan. The first investment channel is in a Swedish start-up, run by 2 very experienced gentlemen in this industry, from various positions in various countries and roles. The aim is to produce timber beams, which is an important part for us, out of cross-laminated timber scrap that would otherwise be burned for heat. And the idea is to create new timber beams out of this scrap, avoid burning for heat and avoid a lot of greenhouse gas emissions and actually create products that have better technical capabilities than the existing products on the market. We expect to have the first product in stores and e-commerce this autumn during 2022 and are internally looking at more investments at the same time. So quite excited about actually bringing this to the market within, hopefully, the next quarter. And then before handing over to Helena to cover the financials for the quarter, I wanted to provide a brief sort of context for the quarter. As mentioned in the beginning, we have some pretty exceptional comparables and the so-called reverse profit warning last year, and I wanted just to walk you through what the history looks like. So step-by-step, we can say that we obviously had COVID-19 peak impact in Byggmax sales positively during both 2020 and 2021. And over 2 years, like-for-like sales increased 51%, 5-1 percent, that is like-for-like between 2021 and 2019, during this peak. And now that is followed in Q2 by a decrease of 17%. So sales is still 42% higher in total than it was in 2019. So that was one exceptional impact from the COVID-19 pandemic last year. The second impact came from -- on the gross margin. And last year, the prices for timber increased faster towards the consumer than the input costs prices increased throughout our inventory. So we had -- we commented last year that we had a positive effect on gross margin for -- of about 150 basis points from what we call front-loaded customer pricing. Looking beyond that, our gross margin continues to improve year-on-year, but it is clearly below last year's exceptional level. Summing up, EBITA is -- EBITA, sorry, is then clearly below last year, but still close to double compared to the period before the pandemic. And also the EBITA margin is below last year at 10%, but also clearly above the 7.4% before the pandemic year, 2019. So just a little bit of context before Helena is now digging in a bit more deeper into the financial outcome for the second quarter.

Yes. We are on Page 11 and moving into the details on the financials, starting on the sales development in the quarter. And as mentioned, we have a negative like-for-like in the quarter versus extreme comparables. Working in the other direction is the contribution from new stores, adding 2.6% to sales in the quarter. We have 4 new stores opened in this quarter, and we have 9 new stores contributing in the last 12-month period. We also have contribution from our M&A. We have the acquired Right Price Tiles and BygMax A/S, the e-comm business we acquired in the beginning of this year, and they add 3.9% to the sales, also a smaller positive currency impact of 0.8%. So in all, we see this sales quarter a new market situation with more cautious and price-conscious customers, but also some sales impact seen from the cold and delayed outdoor projects in April, although we still have good progress in the smaller projects and the decrease is mainly seen on the more obviously bigger projects part. Also looking into the store portfolio, it's quite an active quarter. We have 4 new stores, but a little bit more unusual is the high number of relocations. We have 4 store relocations in this quarter. We have now reached 89% of our store portfolio upgraded to our modern low-price concept, and we aim to have all our stores upgraded hand off high season 2023. If we continue on next slide, we have the P&L table for the quarter, where we have an EBITA margin of 10% and EBITA amounting to SEK 254 million. It's a clear shift down versus the extreme pandemic Q2 quarter, and performance is primarily decreased by the lower sales and lower gross margin. On the cost side, we have kept continuous focus on cost control. Efficiency in store portfolio remains, although not fully compensation for the macro increase on electricity and foreign exchange, and this in combination with some store relocation costs. We consider this a good quarter and a new more hesitant market. Moving on to cash flow on the next page 13. Cash flow from operating activities amounts to SEK 280 million for the quarter. This is down versus the same period last year, mainly due to working capital movements in combination with the lower performance. Inventory, as was mentioned, very high levels. We have inventory of SEK 1.881 billion. This is driven by new stores, acquisition, price effect, but also the strategic decision to mitigate delays. And this is based on the last year experiences. Inventory is forecasted to be reduced and reach more balanced levels within the next quarters. Looking at net debt, we have a net debt at SEK 891 million, a shift versus last year, but well within target. This is driven by the increased inventory levels again, but also investment in growth activities, higher contribution to shareholders and M&A activities in 2 cases.

Thank you, Helena. Summing up with 2 more pages from my side. Firstly, our position versus our financial targets on Page 14, and we continue to make very good progress towards the target. If we take them one by one, then we have a sales target to reach SEK 10 billion by 2025. We now are at the rolling 12 of SEK 7.5 billion. Again, now we have met the toughest sales peak from the COVID period, and we have very good performing sales growth initiatives that we are continuing to execute towards the SEK 10 billion. We have a target of having an EBITA margin of 7% to 8%. We are currently rolling 12 at 9%, which is then again down in the quarter compared to last year. But also continue to move towards that target in a way that we feel confident about. We have a leverage target to stay below 2.5x net debt to EBITDA. Excluding the IFRS 16 effect, we're currently at 1.1%, as Helena covered. Dividend target to pay out 50% of net income. We paid out 39% this quarter or SEK 4 per share. And have also done some buybacks during last autumn. And then again, we have some very ambitious climate target, carbon oxide target for our own operations and for the value chains, which are in line with the science-based target initiative targets and we are so far on track to move towards those. Last page and a few forward-looking comments. I mean there's a couple of things that are constant and the couple of things that are important. So overall, we can now see that the market, if we start there, continues to be at a level which is clearly above the pre-pandemic levels, but not at the pandemic level. We also clearly see that Byggmax continues to perform at a much higher level than before the pandemic, which we're very pleased about, and we also continue to see that we take market share in yet another quarter. Looking forward, we are very pleased to be a strong low-price player or a discount player in this high inflationary environment. We believe that, that gives us a position that is more relevant than ever in these times. Secondly, we have growth initiatives that we have executed for several years that are well performing and enabled us to set new sales records in some categories and in e-commerce, and we very much look forward to continue to execute those. And then thirdly, we are quite excited about the climate agenda. It is, of course, a very long-term theme, and something we are passionate about and believe will have good impact over time for our company and for our brands. So that is a situation from Byggmax. And with that, we hand over to operator to manage questions.

[Operator Instructions] Our first question today comes from Carl Deijenberg from Carnegie.

I actually just had 1 question, and that is on the planned store expansion here at the second half of 2022. You talked earlier about 4 new openings here in Q2. And I'm just curious if you could share what you're planning for Q3, Q4 also, if you could?

Yes. Absolutely. We have a target -- well, maybe as a backdrop, we could say that over the last 2 or 3 years, we have shifted from a large focus on store expansion to a large focus on store upgrades and e-commerce growth that has been quite different for us. We have a target to open 15 new stores this year. As the performance continues to be strong and as there are several towns or locations that do not have a low-price offer, we are still looking forward to open those. There are some landlord issues on specific spots because of their ability to secure supply to actually enable the construction, so potentially somewhat pushed in, in time over the calendar year. But we continue long term with opening stores in white box, but mainly focusing on the store upgrades and the e-commerce part.

[Operator Instructions] The next question today comes from Bertrand Faure of Pascal Investment Advisers.

Just 1 quick question for me also on the inventories. I think you mentioned twice in the presentation that your plan is to reduce inventories by year-end. If I'm not mistaken, you stand at approximately 25% of the last 12-month revenues. Can you give us a sense as to what is your internal target for year-end as the amount of inventories on balance sheet at that point in time?

Yes, sure. I can start and then Helena can add to it. And maybe just some context on that also if there is sort of new listeners in. I mean we operate within products that are not perishable goods, and we are a very seasonal company. And typically, we adapt inventory to certain level. But of course, as many companies, we have been impacted by supply chain challenges for the last 2 quarters. So this year, we took -- couple of years, sorry. So this quarter, we took a bit different approach as commented already in Q1 that we were going to run with higher inventory into the high season, which we are now and then decrease the inventory levels at the later stage. So that is an active decision we have done. And typically, you would see inventory levels go up towards the end of the year, but this year we will see them go down clearly from the level we are at now and probably approaching last year's level by end of the year.

Next, we have a question from Dennis Peterson, who is a private investor.

I have actually 2 questions. The first one is also an inventory question. As I can see from the P&L, the cost of sold goods hasn't decreased as much as the turnover. Is that due to inflation? Or is it that you have, as you mentioned, taken some cost for a higher inventory level? And can we then expect some costs to decrease during Q3? And the second question is regarding the store upgrades. How much do you expect costs to come down when you have updated all stores to 3.0?

Dennis, I will try to answer the first one, and then I'll ask Helena to answer the second one. Yes, you are right that COGS has different development and sales. I mean, the difference between the two is the gross margin. And as mentioned earlier, it's been a continued good gross margin development for several years for us. But last year, we had a very positive effect of timber prices increasing faster to the consumer than the cost. So that is the reason why you see those effects that you were mentioning. If you would account for that, you would continue to see an improved gross margin year-on-year. And then the second question regarding the cost of store upgrades, I will hand over to Helena.

Yes. We have only a few store upgrades left as you mentioned. I would say that the main difference will be on the CapEx side. There is some cost on the P&L, and we have both sort of personnel working with store upgrades and some other costs in the store upgrading. But the main focus will be the CapEx number going down after they're finalizing all the portfolio to upgraded modern stores.

[Operator Instructions] We have no further questions in the queue. So I'll hand the call back to Mattias for any closing remarks.

Thank you very much, Lydia, and everybody. Wish you a good summer, and look forward to speaking to you again at the Q3 call.

This concludes today's call. Thank you very much for joining. You may now disconnect your lines.