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

Hello, and welcome to the Byggmax Group Q3 2022 Interim Report. My name is Alex, and I will be coordinated in the call today. [Operator Instructions] I'll now hand over to your host, Mattias Ankarberg, CEO, to begin. Over to you, Mattias.

Thank you very much, and welcome, everybody, to this Q3 conference call. I am here with Helena, our CFO. And as usual, we'll be talking to a presentation that's available on our IR website. I will cover business aspect and then Helena will go through a bit more deeper on the financials before we sum up and open up for Q&A. So starting off on Page 2. Overall, Q3 2022 is a good quarter, sorry, for us despite what is reality a very tough consumer market at the moment, which we will come back to. Headline numbers. Our Q3 net sales decreased about 5% to just over SEK 2.2 billion or almost SEK 2.3 billion. We have a like-for-like negative of 11% in the quarter and e-commerce share of 21%. Just as in Q2, we continue to see a decline in larger tickets, the larger projects, but very strong performance in smaller projects, and we continue to take market share for yet another quarter. Moving down the P&L. We continue to see a strong gross margin, almost in line with last year's exceptional level and also a continued very strong cost control. We have now since 2, 3 quarters, a good supply situation overall and been able to manage inventory in a controlled way, which means in the quarter, reducing inventory levels of just over SEK 200 million in the quarter. All in all, an EBITDA which is clearly below last year's pandemic levels of SEK 406 million this year, SEK 288 million, but still has been the case now for many quarters, an operating profit which is well above the pre-pandemic levels. On key events, on Page 3. This is a high season for us, Q2, Q3. So the big point is a large operational focus and less sort of major news in terms of disturbing the operations. We have opened 3 new stores during the quarter. One, which is the first of its form and kind. It's a format for retail park, which is opened in one of Sweden's biggest retail park outside Orebro, and we'll also open the first Byggmax brand of store in Denmark at the end of July. We have continued during the year to upgrade our store portfolio to be called Store 3.0, and we're now at almost 90% -- 89% of the portfolio upgraded in the year so far versus just over 50% a year ago. I'd like to underline, particularly in this consumer environment on Page 4 that Byggmax discount position is really a core strength of the company, and we have never seen that be more relevant than during these times. We always bring this up. And of course, in these times where prices are high and costs are high for consumers, consumers turn sort of every corner to try to find best value for their money, and we clearly see this is benefiting us and others in this other discounters, I should say, in this retail climate. And moving therefore into the market situation on Page 5. We continue to see that we outperformed the market. I have gotten some questions this morning and recently around the market situation, but thought I'll expand on that a little bit more than maybe usual. Overall, we can see, as we stand now in Q3, that consumer confidence is at an all-time low in all Nordic countries, actually in most European countries, and particularly low in sort of intent to purchase capital goods or larger purchases, which we saw indications of already in Q2, but clearly decreased confidence levels in Q3. We also see naturally that housing market transactions are decreasing versus last year, although last year's Q3 was very high in historical context, it is still a bit down compared to historical levels. And as we have seen during the second quarter also, we see a more hesitant and more price-conscious consumer. Weather effects were not material in the quarter, in line with last year. But overall, these above effects means that we have a B2C market or consumer market for building materials, the DIY market, which is down by between 10% and 15% in the quarter in Q3, slightly less down than in Q2, but different comparable levels. So for the first time in almost 3 years, we now have a market which is just slightly below the level in 2019, i.e., the pre-pandemic level. And if we look a little bit closer into the market, which is not on the chart, but trying to answer some questions we got today earlier. We can see that we continue to see a decline in larger tickets or big ticket items, larger projects. We can see continued strong demand in the market, or good to strong demand, I would say, and solid maybe is the better word for smaller projects. And again, a clear share gain for discounters across retail sectors. In this market, we have continued, on Page 6, to execute our growth initiatives, and we have been doing this now for since 2019 or so for all of these growth initiatives and we have 3 main organic growth initiatives, which is our main focus and then we did some add-on M&A. We've continued to upgrade stores to our concept 3.0. We've continued to improve our e-commerce, both extend the online reach and improve the customer experience, and we have added stores, 3 in the quarter, as we talked about. We also continue to see impact of the acquisitions done last year, which Helena come back to. And I'd like to particularly point out on Page 7, this quarter, sort of the impact that our growth initiatives have on our sales mix. Given the market situation with sort of different behaviors in different segments, this is kind of an important note. And I think for those who have followed Byggmax for a long time, we have been -- our legacy comes from larger projects or larger renovation projects, whereas the growth initiatives that we've been driving now for a few years, which I explained on the previous page, both have done 2 things for us. Both improved the customer experience in stores and online, but also broaden the category footprint quite a bit, particularly into smaller projects or other categories. So what we see in the quarter is -- and this is looking at our sales is that sales for large projects, for example, decking, conservatories, pool-related, greenhouses, et cetera, is clearly down. So for Byggmax -- a lot of Byggmax sort of heavy building material legacy is still at a good level compared to history, but clearly down in the quarter versus last year, whereas we see a very strong performance on smaller projects such as garden-related, flooring, paint, storage, different types of installation, electricals and bathroom, for example, where several of these categories actually performed all-time high for us in the quarter. That means, above the pandemic levels, which we're very pleased about, of course. And then particularly on the right-hand side, projects, smaller projects related to energy savings are really strong performing in this climate, probably for obvious reasons with the energy cost around us. So heat pump, stoves, ceiling tapes, windows, isolation, et cetera is doing really well. So our journey or strategic shift initiated a few years ago of moving from building materials to home improvement, as we called it in previous presentations, have benefited us in the quarter and provide for a more resilient sales mix for us in this climate. So that was a bit of expansion on the impact of our growth initiatives for the sales specifically in this market environment. And now summing up the great growth initiatives that we're working on, on Page 8 and the impact of those initiatives. But I'll walk you through these 4. So, store upgrades, as I mentioned, we're almost at 90% of the portfolio at the moment, continue to see good sales effect of the store upgrades. And as mentioned in the previous page, you will also see all-time high performance of several of these smaller projects that we're strengthening with this new store concept. E-commerce is still a strength for us as a company with an e-commerce share of just over 21% -- 21% in the quarter. We see a decline in the Byggmax branded e-commerce of 9% in the quarter. And similarly to the general sales mix, a decline in products related to larger projects, whereas we see growth and all-time high numbers for e-commerce in smaller projects despite very strong comparables. We've also added quite a bit of assortment in our online exclusive range during the year and also specifically in the quarter, and that also contributes to growth for us. And as for the last 2, almost 3 years, we continue to see the fastest growth coming from Click & Collect store, buy online, pick up in store. We've opened 3 new stores in the quarter and already talked about that, and we opened 9 in the year so far. We expect 4 more here in the fourth quarter and to end the year with 13 store openings. And in terms of acquisitions, we acquired 2 companies a year ago. Helena will come back to the details, but the drives is about 3 percentage points of sales force. So with that, I'll hand over to Helena to cover some financial aspects in the quarter.

Page 9, the sales development in the third quarter. And this is considered a good quarter with the tough market and compared to pandemic, we have a sales decrease of 5.3%. Looking into the like-for-like part of the sales, we have a decrease of 11.4%. This is also considering the market and comparable figure. And as Mattias mentioned, we have managed to flip the bigger investments and increase sales on the smaller category. New stores contributed with 2.3%. We opened 3 stores in this quarter and we have 10 new stores in the last 12 months. Also looking at the acquisitions, we have in the last 12 months the acquisition of the Norwegian Right Price Tiles and the smaller e-comm business in Denmark. Together, they add 3% to the sales in the quarter. They also contribute to the growth outside the Nordics. And we have from euro and NOK a positive currency impact in this quarter. If we move on to next page and look at the P&L. We have a strong gross margin. The gross margin in the period is positively improved by product mix. Comparing to last year, we need to remember the exceptional situation and we had consumer market prices increasing ahead of raw material prices. And on the cost side, we continue with our strong focus on cost control, and we have mainly cost increase related to the new and acquired stores and the like-for-like increase is mainly driven by electricity cost and foreign exchange rate effect. The EBITDA for the period is SEK 288 million and the EBITDA margin is 12.7%. A good result in a tough market and a stronger performance than pre-pandemic. Moving on to Page 11. We have the net debt and the cash flow. A little bit different movement in this quarter versus our normal seasonality pattern. We have a positive cash flow from operating activities and a strong increase versus the same period last year. And this is despite the slightly lower performance and the positive change in the cash flow is attributable to the strategic decision to decrease the inventory, remembering that we had all-time high inventory levels at the end of June. We also continue to have a strong balance sheet, where we had net debt at SEK 904 million at the end of the period. The movement versus last year is driven by lower EBIT and a generous shareholder return and continuous M&A activity.

Thank you, Helena. I will summarize on 2 last pages before handing over to the operator for questions. So on Page 12, we see a continued solid performance versus our longer-term financial targets. Moving through them, sales we talked about, obviously, a bit negatively impacted by the pandemic comparables in the tougher markets versus that, but still we stand now at SEK 7.4 billion, [ rolling 12 ] aiming for SEK 10 billion in 2025. We have an EBITA margin, [ rolling 12 ] of 7.6%, which is pretty spot on where we targeted despite operating for -- in a quite tough consumer market for a significant part of those 12 months. We have a strong balance sheet with a leverage of 1.3x net debt to EBITDA after Q3, and we've paid out almost 40% of net income in terms of dividend during the year. We also earlier this year launched a new climate agenda of new targets, but in all, we're still on track. On Page 13, summing up and looking a little bit ahead, we can see that in this market environment we have probably the strongest position we have ever had. We have continued to perform financially well above the pre-pandemic levels. There is now a more price-conscious consumer, which favors discount players and price leaders like ourselves, and we continue to gain market share for yet another quarter. We also are in a lucky situation or favorable spot -- favorable spot, sorry, that we can have a strong financial position that enables us to work towards our long-term strategy. And as you may remember, the strategy is made up of a set of proven growth initiatives that we can allocate capital towards continued efficiency gains and also efforts to create a positive climate impact. But in this market, we also use our very, just a very -- strong experience of scaling up and down throughout seasons and quarters, and we were a seasonal company, and we will now increase our flexibility in the short-term in terms of both costs, investments and inventory in order also to be able to invest our resources in the most important areas when the market demand comes up. So we will work towards our long-term strategy, but we'll have a bit more focus on short-term flexibility in the coming quarters. We also think it's important and positive to note that in these times we see new and perhaps more opportunities than we've seen in a very long time. We have a higher interest in Byggmax than probably ever from -- in terms of being offered new store locations, acquisition opportunities and new suppliers and brands that would like to operate with Byggmax. And we have a mindset of using these tougher times to become even stronger and fully ready when the market returns to grow. That is the update from our side, and we turn over to our operator to manage questions.

[Operator Instructions] Our first question for today comes from Benjamin Wahlstedt from ABG.

Hello, guys. So a couple of questions. First of all, what do you expect in terms of inventory sell-through for the rest of the year? I believe in the Q2 report you stated the goal of approaching last year's level. And I was just wondering, like given the tougher macro outlook, is this still obtainable, is this still plan A?

Benjamin, yes, that is still the case. And as you may be aware, we built up the inventory level slightly different this year given the last 2 years disturbances in the supply chain. We're now on plan for what we wanted to achieve in Q3. And you are right, target we said last -- we confirmed also last quarter was that we would like to approach last year's level by year-end. Probably not get there fully, but close. And that is still the target, and we still see that as very feasible.

Another question. You touched upon this briefly, Helena. Last year, consumer prices for wood-related products were sort of ahead of the curve in terms of raw material cost inflation. What do you see now when the price trend is the opposite or a competitor is trying to sort of make a bet on a continuing trend into the winter and accepting a lower gross margin for now? Or how should we think about that?

We've seen a fairly sort of stable price environment overall in the quarter. I mean, in terms of -- I guess, 2 factors to narrow that down a little bit to be more specific, maybe. First of all, this industry has over several years sort of passed on raw material increases into consumer prices, and that has been the case during this quarter also. Some product categories actually do not see any price increase anymore and even small decreases versus other category price increases. And that has sort of passed on in a fairly steady impact with sort of 1 to 2 quarters like or so. The other [ one effect ] which is maybe important to the pricing side, as the market has become softer we saw quite a lot of promotional activity, particularly during the beginning of the quarter. While that stabilized into a more normal and maybe even less promotional intensity than normal from sort of August and forward. So those -- the first effect is sort of fairly neutral on the gross margin where the second is somewhat positive.

And if we sort of look forward into the winter, I mean, inventory levels are rather high in the market overall, what do you expect in terms of campaigning for Q4 and Q1?

I think where we are right now, we have a fairly stable price situation in our categories. And then there's always competitors in specific markets that are, may we have a little bit too much inventory and run campaigns now and then. But we don't see any sort of major change in terms of this stable price environment at the moment. I think it's also maybe important to note that Byggmax is maybe not in the most -- we're not -- we don't have a big presence in heavily promoted categories in that sense. So we are more in a durable business in that sense, which probably makes us less impacted by this.

Sure. I agree. And the final question. We see quite a big sequential improvement in external costs as part of sales. Could you sort of elaborate on why that is the case, please?

Helena, would like to cover that?

In terms of the areas where we control, we have had a lot of focus on FX or impact on them. Obviously, we have also -- that is impacted by the, as I said, currency and electricity costs, although we do a lot on those areas as well where we have initiatives to decrease the use of electricity in our stores, which is the main area where we have the increased costs.

All right. So the net effect of your energy efficiency initiatives is positive, like despite a higher electricity bill and...

No, it's not [indiscernible] positive, but we are compensating and also. So our focus on sort of our cost efficiency is in stock just because it's external factors impacting it. We are working on those areas as well, but we are monitoring it and controlling it and decreasing it as much as possible through activities in the stores and actions.

I think but you were [indiscernible] Benjamin is that the relation between external cost and sales is improving over time. And I think part of that is also a little bit of the acquisitions we have done have a slightly different P&L profile than for the traditional Byggmax business, and we can maybe get into that separately because I'll explain those effects.

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

So 2 questions from my side. First, on the -- you shared a bit of your plans on the store expansions here coming up in Q4. I just wonder if you could say anything what you're planning for '23 or give us a ballpark on that number? Is that a similar magnitude as in '22 or...

Yes, happy to answer that. So we have done 9 store openings in the year so far. We will do 4 more store openings in Q4. 2 -- all 4 in Sweden, actually, 2 of the sort of regular Byggmax [indiscernible] and we will also do 2 stores of a new format, which is we talked about this in previous quarters that the acquired Right Price Tiles concept in Norway. It's a very strong concept in Norway and would like to do a similar concept in Sweden. So this will be called Byggmax Studio, and we'll open 2 stores in Q4 focused on particularly tiles, but also a couple of other decorative categories, and those will open in Linkoping and Vasteras Westeros during the quarter. And for next year -- and that would put the total to 13 for the year. And for next year, we expect around those levels, maybe 10 to 15, I would say. And why I'm slightly vague on that is that on the one hand we are continuing to see good opportunities to open stores and are getting probably a bit more and better quality of locations offered to us than maybe ever before. But on the other hand, some of the real estate owners have a little bit lower processes or maybe less appetite to close deals given the environment around us. And we are also very much focused at the moment of taking, of course, the very best deals given the market opportunities. So we will end the year on 13 openings and you should probably expect 10 to 15 for next year.

Okay. And my second question is on the -- if you could share any assumption of what yourself expecting on the underlying market growth here for '22? I know that it's been a bit volatile here in line with the comparisons that you've been facing throughout the year. But if you could say anything what you're expecting here in Q4, is that a number of similar decline as you saw in Q3? Or what are yourselves, or your expectations of that?

Yes, that's a good question, Carl, a tricky one, but we do have a perspective on it actually. And as you're completely right about when thinking about the market, we need to take into account the comparables. So, one, we describe it versus last year, but the other one is sort of describe it versus historical levels. And if you look at the market right now, it declined less versus last year in Q3 than in Q2, but actually versus underlying or pre-pandemic, this is the first quarter in quite a while where we have a market price which is slightly lower than in 2019. And we expect that to continue to sort of operate with a market which is slightly lower than in 2019 for the coming quarter as well. And I'll have to relook at the numbers in terms of comparables for all those years, specifically for Q4. But top of my head, I would say that the current trend of 10% to 15% in Q4, negative 10% to 15% would convert to a market size in Q4, which is somewhat below '19. So the long answer to say best guess right now is around the same development for the coming quarter as well.

Our next question comes from Julien Batteau from Pascal Advisers.

Yes. Helena, Mattias, just 2 quick for me. One, the reduction in inventory was achieved through some promotional activities, which could have had an impact on the gross margin. That would be my first question. And second question is could you break down a little bit the like-for-like traffic, pricing, basket size? Do you see a reduced basket size, increased traffic with what you described as small projects.

Julien, you were breaking up a little bit, but we think we got the main part. So we'll try to answer and then please recheck with us if we didn't get everything. But on number one. No, there is no promotional activity. We are -- as you know, we don't have sort of -- we have very durable products in our portfolio to a large extent, and this was a planned inventory decrease already from start of the year actually to operate with higher inventory in Q2 and then reduce during Q3. So there is no negative effect other than the usual end of summer for some garden products, et cetera, but that's the same last year. So no promotional effect to that is meaningful on the gross margin in Q3, all controlled inventory reduction. And let's see, your second question was in breakdown on like-for-like. And -- we have a price effect in the quarter which is positive. It is less positive in total than the consumer price index at the moment as we operate and we are strong in some categories that actually start to see a little bit of a decline in price. And that obviously means that traffic or number of receipts is down more than the sales in that space. But I think the most interesting fact to be honest with you, Julien, in the quarter is to look at where the market demand is and not and I can just sort of underline that there is clearly now a decline in demand for larger projects and to expand a bit on that. And when we see that both as being very rational, consumers have left to spend, but also quite emotional. And we can see in our numbers that there is still a large interest to do activities in some of these categories, but the consumers have low visibility to when they will do it. So it's probably a timing factor, which could be come back -- that could pick up soon or in a very low time, nobody knows. But the clear decline in larger projects, but pretty strong demand for us, very strong demand in smaller projects still.

But I was thinking, do you hear me well now?

Better, yes. Yes.

On the first question, so that means that you have sort of stopped the reassortment ordering at your suppliers, right? You have been cautious into reordering?

Yes and no. So yes, of course, we have ordered less than we have sold, so to speak, to continue so we went down. But it's also a fact that we operated with a higher inventory than we usually do in Q2. So this is part of a plan for the year and sort of an agreement with suppliers for how to operate the inventory during the year.

Okay. That's quite positive I think because I see a lot of companies are being hard time to reduce some part of the inventory.

Maybe a personal reflection on that. But I think in these times, of course, we talk about P&L alone, but cash flow is also really important and inventory is a really big part of that. And I completely agree with you that managing that is really key. And we are, in some ways fortunate that we operate in certain categories, which have maybe less volatile market dynamics around them. But we've also -- I think the supply team has done a really, really good job of sort of building up well and reducing well and getting our suppliers on board with all that -- with that maneuver, which is quite different from last year. So we are very pleased with the development in our inventory situation.

[Operator Instructions] Our next question comes from Magnus Raman from Kepler Cheuvreux.

I have 2 questions. The first one is, yet again related to inventory. I mean, you have elaborated here on -- that you are reducing inventory according to plans that were set previously. But what is your view on inventory levels among your key competitors? And how do you think that could affect pricing in the market ahead?

Thank you, Magnus. I think some of our biggest competitors are private. So it's kind of hard to have a de facto view. But I think in general, we have 2 observations, so maybe 3. We can say that the public listed companies I think have higher inventory levels than previous years and some have publicly so that they think that they have a little bit too much inventory. So I think that is an indication of the market having, or the players in the market having bought more than what is needed, so to speak, for the current environment. And then secondly, we have seen some price activity, as I mentioned earlier, in the beginning of the summer, but that slowed down in terms of promotional intensity since sort of August and forward. So we don't see a big excess inventory sort of being pushed out into the market in our core categories at the moment. So that is nearly the second answer. So I think in general, we were to speculate in the broad spectrum of the home improvement, there is excessive inventory in the market. But we are fortunate not to see big promotional intensity in our core categories at the moment.

Great. And then the second question relates to the housing market where we see quite sharp decline in turnover recently, especially for leisure homes. Do you have a view on sort of the lag of which that might be visible to you? I mean, you have already -- appreciate you have already mentioned that you see sort of high ticket type of projects down, perhaps on consumers becoming more hesitant. But in terms of the connection to turnover rates in the housing market, do you have any opinion there?

Yes, it's a good observation, Magnus. And there has been a sort of historical correlation, but this is now sort of pre-pandemic when Byggmax was more focused on the sort of larger projects and maybe more renovation projects accounted for a higher share of sales. We saw a correlation between sort of Byggmax like-for-like and housing transactions with about 1 year lag. And I think that sort of makes logical sense. You do renovations sometimes when you're about to sell your home, but particularly after you have bought something and start doing projects sort of from the time you move in a year or 2 or so forward. So I think that made sense. Now I think we will probably see that effect again going forward. But I think there's also a lot of other effects that maybe have bigger impact at the moment. Our sort of shift in category position is one, pricing effect is another support. And then I think you are also right, just to comment on that, that housing transaction has declined, breaking for leisure homes, particularly now in Q3. And now we're going to be a little bit specific, maybe an early level here. But specifically Q3 last year was also very strong in transactions. So looking at the sort of longer history, I think the decline is sort of 10% or so versus both 2020 and 2021.

All right. So if one should be -- one should say that you are enjoying now the fruits of last year's build in the volumes and then we'll see the effect forward. But if I understood you correctly, you think that your sensitivity is lower now due to a shift in your mix.

Correct on both points.

Thank you. We have no further questions for today. So I'll hand back to Mattias Ankarberg for any further remarks.

Thank you very much, everybody, for joining this Q3 call. Wish you a great day, and hope to speak to you again at the Q4 call.

Thank you for joining today's call. You may now disconnect.