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

Good morning, and welcome to the Byggmax Investor Update. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I would now like to hand you over to your host, Karl Sandlund, CEO of Byggmax. To begin, Karl, please go ahead.

Thank you, and hi, everyone, and a warm welcome to this conference call. I'm Karl Sandlund, as you heard, the CEO of Byggmax and with me is Helena Nathhorst, our CFO. And we are very delighted to have you with us today because we have 3 messages that we want to share. Messages that underscore our commitment to growth and future value creation. First, as you have seen, we are updating our financial targets, confirming our ambition to secure profitable growth and deliver significant value to our shareholders. Second, looking ahead, Byggmax has immense potential, and we have a clear and actionable road map that we will go through during this call. And the road map is built on 3 main pillars. First, we are a discount retailer, and we recognize the potential in simplicity. By refining our assortment, boasting efficiency and eliminating complexity we will continue to streamline our operations for better results. Second, our commercial investments that we have made over the past year have significantly amplified our revenue potential. And going forward, we will make sure to fully capitalize on these investments. And finally, we will continue to enhance our product offerings and optimize our store portfolio to meet and exceed the market demands. Our third message is a big message really fit for growth. We have strong discount position, a very dedicated organization and the industry's lowest cost. We have also improved our efficiency, enabling us to handle substantially increased volumes going forward. When the market rebounds, we are well positioned to grow profitably. The presentation that we will go through is available as usual on our website, and you will hear about these 3 teams. We expect the presentation to be somewhere 35, 40 minutes. And after the presentation, we will open up the floor and are ready to address your questions. So let's start. And if we flip to Slide 3 in the presentation that you find on the website, as Byggmax, we truly believe everybody has the right to a fantastic home. For those who may not know us that well, Byggmax was founded in 1993 as a challenger in the B2B-focused sector. Today, we have grown to over 210 stores across 4 markets, establishing ourselves as the leading discount player in the Nordic region. We are offering high-quality products at the lowest possible prices primarily to consumers. The Nordic region has a strong DIY tradition. Our buildings are often made from timber, a large portion of the population has access to multiple homes. And the home serves as a social focal point. And this together makes our market particularly attractive. Our Byggmax foundation is built on a strong assortment for home renovation and maintenance. We offer building materials, paint, tiles and flooring and in addition, with some garden houses and conservatories. Our carefully selected in-store assortment is complemented by broader online range, allowing our customers to find the products that they need for their projects. And we are really a true discount retailer and offering the best prices requires maintaining the lowest cost. Our unique store design not only keeps operational costs down, but also ensures an efficient shopping experience, which our customers highly appreciate. On Slide 4, you see an overview of our journey, and it has really been a journey of efficiency and growth. As mentioned, we were founded more than 30 years ago. And since then, Byggmax has to grow every year, except for during the exceptional past 2 years. And at the same time, we have remained profitable. One key reason for this success is staying committed to our efficient business model over the years. This, combined with a highly committed and engaged organization has been crucial for us during our journey. We started in Sweden and entered Norway and Finland more than 15 years ago and to Denmark in 2021. Last year, as you have seen, we achieved sales slightly above SEK 6 million with an EBITA margin just below 3%. And we began online sales more than 15 years ago, and now 18% of our sales come from online, and we experienced a very fruitful combination of in-store and online sales. Our online sales in an area get a boost when we open a new store in the neighborhood. So it's a true omni experience. On Page 5, we show some characteristics of our sector. And the building materials sector differs from other retail industries in a couple of key dimensions. One, it has a low level of trends in the assortment, leading to very low [indiscernible] and a stable product range. Two, most suppliers are located in the markets where we operate, making logistics efficient and reducing our lead times. And the share of non-European suppliers is very low. And three, omnichannel presence is really crucial. Along with groceries, building materials have the lowest expected online share in retail, making access to attractive locations key to being successful. And with that said, we believe that you really need the combination of online and stores. And as you heard, we have a successful mixture of the two. So it's retail, but with some key differences. If there were some differences, there are also similarities between our sector and other retail, as you see on Page 6. And one similarity is the real super trend toward discount shopping. You have seen it across -- in many different retail sectors. Discount retail has experienced higher growth rates than general retail, with twice the annual growth over a long period of time. And while many [indiscernible] are shrinking, discount retailers are expanding the number of stores. Additionally, discount players are achieving higher profitability than general retail and are less sensitive to economic sites. And we believe that there are a couple of reasons for these trials. One, it is easy for customers to compare prices and [indiscernible] understand that and also discount shopping has evolved. It's no longer associated with low quality, but rather with the smart shopping. So what does this mean for Byggmax on Page 7. Well, the combination of the building material sectors unique characteristics and the general trend towards keeping [indiscernible] Byggmax position very appealing. And as you all know, price is about perception. And as you can see, we have a very strong position. We announced which supplier offer the best prices as 2/3 of the respondents in Sweden, say Byggmax. And this is a significant reason why we have been able to grow stronger compared to the general market, both in good times and also during market downturns. And then in times like these, the ones that we have had the last 2 years, I think the Byggmax business model becomes more relevant than ever. We see more customers seeking the best prices, comparing options before purchasing and also opting to do work themselves instead of hiring others. But it is not only about hardware as you see on Page 8. It's also about culture and values. We deeply care about people, society and environment. And our commitment to responsibility, development and change is deeply rooted in our DNA. And our strong values are reflecting in our outstanding employee engagement index, which is much higher than the industry average. This dedication and engagement, it really helps us to drive change and adapt to different market conditions. We have a very, very strong accountability at every level of our organization and our commitment to improvement and taking responsibility, is really a major strength of the company. Moreover, we have been on the customer side for more than 30 years. And our fantastic staff makes our customers really appreciate us. Last year, over 600,000 customers provided feedback in our stores with 94% of them giving the highest rating. I think this really demonstrates the exceptional commitment among our staff. On the right-hand side, sustainability is crucial for Byggmax, not only for it because it's the right thing to do, but also because it's good for business. In our operations, reducing emissions, optionalized with lowering cost, allow our customer surveys, they indicate that sustainability is becoming more important to our customers. Let's have a look at our growth levers on Page 9, because in recent years, we have made significant investments in our stores, in our product assortment and our brand. We have completed our upgrade program for existing stores, the stores to what we call 3.0, featuring a broader assortment, better customer flow and improved product presentation. We have also enhanced our online offering, providing a wider assortment and allowing customers to customize their products. For example, we now offer, ay auction, to buy paint, mix to the exact color and have it delivered and our customers can configure windows, doors to their specification and even design their own garden houses. Additionally, we have opened many new stores in the last 5 years, and we have also acquired companies that enhance our offerings in new categories and markets such as, [indiscernible] Norway and [indiscernible] In Denmark. And in total, these investments have substantially increased our revenue potential by strengthening our brand, ensuring relevance in more projects and expanding our reach to new segments and markets. At the same time, we have secured operational excellence [indiscernible] channel because, as mentioned, we are a true discounter and to offer the best prices, we need to maintain the lowest cost. And that's why we always strive for increased efficiency. This has lately been done through new ways of working and the use of technology, both in our stores and also in our central functions. The handheld computer is, apart from the forklift, the most important tool for our store employees. It allows them to process payments and access product information. And over the past years, we have added functionality that significantly reduces the time to receive deliveries and analyze inventory start. This is some example of how we have improved efficiency in store operations. In our central functions, we have reviewed interfaces, identified synergies, resulting in the reduction of administration by 20% compared to before. And these improvements together, they have a significant impact. Despite increasing the number of stores and facing high inflation, our operational cost decreased by 10% last year. And this reduction comes from an already low level. This means that our cost per store is now on par with the one that we had before the pandemic, despite inflation in the last couple of years. Another focus area is seen on Page 11, and that it has been to strengthen our balance sheet and reduce our risk level. One key to this has been adjusting our inventory to a lower sales volume, and we ended 2023 with an inventory value, 20% lower than the previous year. In addition to a general risk rating in purchasing, this reduction is due to new more sophisticated procurement and inventory management methods. We have implemented new tools and reviewed our assortment category by category to ensure the right inventory levels and also which products to discontinue. This has freed up our capital and combined with a lower investment level, allowed us to reduce our net debt and strengthen our balance sheet. And while our total inventory level has decreased, we have at the same time, improved our in-store product availability. And our new more detailed inventory forecasting ensures that we don't roll out of popular products, while at the same time, enable lower inventory levels on less frequent purchase items. So this approach results both in less tied-up capital and opportunities for improved sales. So that was a summary of where we are now, which is the foundation for our next steps of our journey. And now I'm really happy to share with you our new road map for continuing delivering profitable growth and value creation also in the future. Because looking ahead, Byggmax has an immense potential, and we have very high ambitions. So without further ado, please move to Slide 13. And as you have heard, as we're trying to explain, we have made commercial investments, growing our revenue potential by improving relevance in more projects and markets. We have also substantially increased our efficiency, both when it comes to operating cost and capacity, but also when it comes to inventory management. In the next phase of our journey, we aim to maximize the potential of our discount position, our committed organization and the improvements we have made. Byggmax has always prioritized simplicity. And moving forward, we will secure profitability under the guiding principle of simplify to amplify with emphasis on organic growth. Our journey had -- consists of 3 overlapping phases. The first is to simplify and improve profitability. Secondly, we will amplify by realizing the full potential of the commercial investments made. And finally, we will elevate by expanding our footprint. We are confident that this road map will enable us to continue delivering strong financial performance and creating substantial value for all stakeholders. To give some more flavor on what we will prioritize going forward. Please turn to Slide 14 for a little bit more details on this plan. Firstly, we will focus on simplicity and having the most efficient operations. With smart self-service solutions and an organization empowered by engagement and technology, we will continue to secure the industry's lowest operating cost while maintaining high-end customer satisfaction. So that is really operating excellence. Lately, we have, as mentioned, seen a positive effect from optimizing our assortment and inventory, and this will continue. One prioritized activity going forward is to refine our online assortment to make sure that it's relevant and complements our stores. It will still be wide, but it should always be relevant. In addition, we see potential further optimized logistics, both for our stores and online deliveries. So we'll strive to eliminate unnecessary complexity, wherever we find it. Secondly, we will amplify sales by realizing the full potential of the commercial investments we have made over the last few years. Our upgraded store network has strong potential. Efficiency improvements and better operational performance than before have enabled us to handle significantly more volume. And this is something that should fully be leveraged. With an improved sales focus, new sales tools and better customer insight, we aim to grow beyond the market. And finally, we will elevate and capture new sales potential by developing our offerings in selecting new categories, attracting both current but also new customers. It could, for example, be more consumables or products and categories related to our [indiscernible] assortment. It will also be more customized products through our online channels, products that are hard to have in stock in stores. And additionally, we will continue to optimize our store portfolio with better location and also expanding our geographical footprint. In all, by selling our core operations and focusing on the customers' needs, we will continue to Byggmax successful development, also in the future. If you look at Slide 15, you will find our updated financial targets. And this plan, just highlighted, is designed to reach our ambitious targets. Our strong discount position, coupled with full commercial leverage will drive sales growth. Our target is to grow beyond the market, which implies at least 5% annual growth over business cycle. Our profitability target is to deliver an EBITA margin above 7% per year. And the part from current level to our target includes improved efficiency, scale and optimized assortment and leveraging our commercial improvements. Last year, I think we proved our ability to strengthen our balance sheet despite a weak market. While maintaining a strong cost focus, adapting our investment level and optimizing inventory, we reduced net debt by 20% last year. And further strengthening our balance sheet and reducing debt is a key priority also moving forward. And our target is to maintain a net debt over EBITDA ratio below 2.5x. Additionally, we have an efficient business model with high cash generation. And this enables us to invest in the development of the company while also providing dividends to our shareholders. Our dividend policy remains unchanged. The company shall distribute 50% on net profit, considering the financial position. As we have outlined, our strategy is built on a robust foundation of simplicity, leveraging our position in commercial investments and further enhancing our product and store portfolio. These pillars are designed not only to navigate current market conditions, but also to position us for sustainable, profitable growth in the future. Now to give a deeper understanding of how these strategic initiatives are translating into financial performance. I'd like to turn the call over to our Chief Financial Officer. Helena will walk us through the financial consequences of these strategic actions. So Helena, over to you.

Thank you very much. And before going in to more detail of the financial aspect of the new road map, I just want to give some context to the current market situation. The market has not structurally changed. But the first few years have been challenging for Nordic consumers. The economic pressure has resulted in cautious consumer behavior and a reduced number of house transactions and lower intention on the [indiscernible] Ready to renovation project. Hence the tough economic situation has had a profound impact on our market. . [indiscernible] sector has grown slightly above GDP for many years before the pandemic while during the pandemic, it experienced a surge in demand. However, since the second half of 2022, we have witnessed a significant decline in market activity. Despite the [indiscernible] market -- our business model and discount position maintains to attract consumers. They continue to turn to us for the smallest [indiscernible] need indicating continued trust in our brand and products. Currently, there is stabilization of microeconomic factors, leading to rise in number of cost transactions like the number of house transactions have historically triggered an increase in number of renovation projects. As consumer confidence we build, we are optimistic that both house transactions and renovation projects will rebound driving growth in all sectors, once again. So this new indication that the market has structurally changed, since then it is expected to return to the levels and growth rates we observed before the pandemic. I will move on to our sales growth on Page 18. We're aiming to grow sales beyond the market. As you saw on our first slide, Byggmax was founded 30 years ago, we have demonstrated stable growth within a few expectations. Our strong position within discount segment, which is growing faster than the general market, is key to our success. In recent years, we have made significant commercial investments that have substantial revenue potential. These investments include expanding our store network, upgrading our store portfolio with stronger assortment and better product space, improving our online functionality and acquiring subsidiaries. By fully leveraging these investments, we will secure additional revenue. We are also committed to exploring new categories and optimizing our store portfolio to enhance our growth. With these drivers, we have potential to continue to grow sales beyond the market. Our profitability target though on Page 19. Over the past few years, we have improved efficiency, combined with strong operational performance this enabled us to handle substantially higher volume and ensure a high conversion from Phase 2 result. Our plan is designed to secure all profitability targets. The cost from current 2.9% EBITA margin to over 7%, include effect from improved efficiency, an optimized assortment and leveraging commercial investment as the market returns. We anticipate that improved [indiscernible] cost reduction and scaling in store operations will improve our margin by 1 to 2 percentage points. We expect a similar level of improvement from refining our online assortment and launching more customized products, enhanced way of working to ensure product availability at the right time will also support its improvement. And finally, by fully leveraging our commercial investment, has the potential to improve our margin by further 2 to 3 percentage points. This includes improved merchandising and sales focus to unlock the true potential of our existing store portfolio, leveraging the store upgrade program and the maturing of the new stores. In total, several actions to secure an EBITA margin of above 7%. On Page 20, we have our strong cash generation. Byggmax business model is efficient due to high cash generation, enabling both investments in the company and dividends to our shareholders. This slide illustrates the cumulative earnings over the last 5 years. In total, we have achieved an EBITDA of SEK 3.3 billion. During these years, our net working capital has increased by approximately SEK 500 million, driven mainly by increased inventory due to more stores and higher prices. We can say there are normalizing [indiscernible] during these 5 years to be somewhere between SEK 500 million to SEK 600 million. This covers maintenance improvement, IT development, and opening of between 4 to 6 new stores per year. Additionally, in this period, we have made substantial strategic investments to improve our revenue potential. This investment includes the acquisition of Right Price Tiles, [indiscernible] and Byggmax [indiscernible] store opening, store upgrade program and investment to improve e-commerce functionality. With a period of significantly lower commercial investments going forward, our high cash conversion enable us to secure funds to grow and reduce net debt while also providing dividends to our shareholders. On Page 21, our primarily focus is to continue strengthening the balance sheet. Like many other retail companies, our net debt has increased over the last 2 years. This increase has been driven by weak market, inventory levels and the commercial investment we have made. During '23, we demonstrated our ability to increase [indiscernible] despite market headwinds. By the end of '23 on net debt, excluding IFRS 16 effect was 20% lower than the same time a year earlier. Further strengthening our balance sheet and reducing debt is a key priority moving forward. With a restrained investment level, optimized inventory and increasing profitability, we will further reduce our leverage. Our target is to maintain a net debt-to-EBITDA ratio of then below 2.5x. And finally, before handing over back to Karl, I will summarize the financial perspective. [indiscernible] is to continue, as mentioned, strengthening our balance sheet. Key to this effort is the adopted investment level, a strong focus on cost management and optimization of inventory, and we did, last year, demonstrate our ability to deliver on these objectives. There is revenue retention with substantial scale effect and high conversion from scale results when market minimalizes. We have a strong discount model and having a commercial investment the last year that we will secure the leverage from. And finally, our ambition is to continue to grow profitable beyond the market. We have an efficient business model with strong cash generation. This enables both growth and dividends to shareholders. Thank you.

Thank you very much, Helena. And please move to Slide 25. Just to summarize our presentation. Here are our key messages again. First, as you've seen, we are updating our targets to confirm our ambition to secure strong profitable growth and deliver significant value to our shareholders. Second, Byggmax has immense potential and we have a clear road map to achieve our targets. We've built on 3 main pillars: One, we see potential in simplicity and eliminating complexity. Two, the commercial investments made over the past years have significantly increased our revenue potential. And going forward, we will secure to fully capitalize on these investments; and three, we will continue to enhance our product offerings and optimize our store portfolio. And our third message is that the Byggmax Group has used the past year more wisely. While the market rebounds, Byggmax is fit for growth. We have a strong discount position and improved efficiency, which enables us to handle substantially increased volumes going forward. And our ambition is to continue growing profitably above the market, providing opportunities for both dividends to shareholders and investments in further growth. So to sum it all up, Byggmax is really ready for the future. And with that, we thank you for your attention when it comes to the presentation part. And we are now happy to take your questions. Helena and I will -- are here to provide any additional information that you may need. So let's open up the floor for your questions.

[Operator Instructions] And our first question comes from Niklas Ekman from Carnegie.

Yes, a couple of questions from my end. Firstly, when you talk, you say that you are ready for turnaround. Can you say anything about any signs that you're seeing in this respect? You're talking about macro here in the housing market, et cetera, but are you seeing customers coming back as well? And I'm asking this well aware that the decline here really started in Q2 of '22. So you're kind of twice annualized this -- the sharp decline. So what is your -- how optimistic are you for the peak season of '24?

Well, thank you, Niklas. And I think when it comes to the current performance, we need to come back to that in -- during our Q2 report. But overall, as also you mentioned, right, we cannot say that we see more macro factors that have [indiscernible] stabilize, decrease in inflation and a first interest rate cut in 8 years, mean that consumer confidence is turning upwards from low levels. And as the consumer confidence recovers, we are optimistic that both housing transactions and renovation projects will recover, which in turn will once again drive growth in our sector. Exactly when this happens and what pace remains to be seen, but overall level, we see no signs that the market has changed structurally, instead is expected to return to the level and growth rate that we saw before the pandemic. And I know I don't really answer your question, but also when it comes to current performance, so let's come back to the Q2 report. But I think that the important part is that we don't see any structural signs of the market having been changed.

Fair enough. And I realize there was a long shot given that you haven't reported Q2 yet. So fair enough. Second question, can you say something about the time get to 7% margin? And I note here also when looking at your Slide 19, you seem to attribute a fairly small part of this to a better market. And it looks like you're attributing it mostly to own initiatives. Is this -- is this a correct assumption? Because I would assume that to get to 7%, you would need a market normalization for sure, and that, that would be the main driver. But can you elaborate a little bit on those 2 issues? .

Yes, I will try and then Helena, please fill in. We have developed a plan that we really believe that will increase our profitability and leverage the good investments that we have made over the last couple of years. So we have tried to take our destiny in our own hands to make sure that we have a robust plan. The market alone will not help us reach our target. But without the market, it will take longer time to reach the targets in that way. We don't guide exactly the year or so, right, but over time, but we really believe in our model and having the best in our own hands when it comes to improving the profitability.

Sorry, but can you say something? Do you think this could be in the next 2 years? Or is it more like a 5-year target or anything at that? Or is it entirely dependent on the market?

we don't give any forecast, but we have a percentage, we have a plan to reach the target. And it's mainly built on leveraging on taking investments. And as you say, that leveraging needs a little bit of the market. So to go to -- in any sort of not a long-term perspective, we will need the market to go to the target. We have activities to do that.

Very good, very good. A third question, if I may. I'm curious about your SKU count today in your physical stores. And the reason I'm asking is because at the IPO almost 15 years ago, I believe your SKU card was 1,300 so very, very limited. And then you have, of course, made a lot of efforts now to widen this in recent years. And I know this has been good for sales. It's been good for customers, et cetera. But it also means, of course, that you get -- when you widen the assortment, you also get much lower volumes per SKU. So I'm curious, first of all, if you have an update, what is the typical SKU count in a Byggmax store today? And how do you match that with being a hard discounter and getting really high volumes on each SKU against getting the customers what they want in terms of the breadth of your assortment?

It's a good question, Niklas. And it's also one thing that we have merged in [indiscernible] with the last year or so. Because as you said, we started with a very narrow assortment, really just the heavy building materials maybe primarily also for renovation and outdoor projects, which we have over the time. This also has involved to make sure that we are relevant in more projects. And that has made both an overall revenue retention increase, but also have been able to sell more also during the winter season. . Let me come back to the exact SKU number. But you know you should think of twice the number that you said when it comes to our stores right now. What we've done in the last year is really to go into detail, product by product, to see what kind of inventory level should we have for this kind of product. And it's also resulted in the discontinue with some products where we saw that we had complementary products or we have too low sales to motivate to have this in stock and instead being able to operate on our online channels, so you can order it for home delivery. So that has been -- we said that we have been able to reduce our inventory levels by 20% in the year, it's not only reducing the overall purchasing that could be -- that should be the easy part of it, right? But it's really to analyze the stock levels and make sure that we have a very relevant and good assortment going forward. Because at the same time that we have reduced our stock, we have actually increased the in-store availability of products, making sure that the right products are in the stores in inventory when you want to buy because after the hard discounter, a true discount retailer, we, of course, need the large volumes to have the best prices. But it also should be -- should be easy to access the products in our stores. So we need to have them available when you want to buy them. So that has been something that we are very successful with during the last 6, 9 months or so.

[Operator Instructions] As we currently have no further questions, I will hand back over to Karl to conclude.

Thank you and a warm thank you for your attention and for questions. And we're really looking forward to speaking to you again. As mentioned, we have our Q2 report, the 12th of July. So if not before, I hope to be able to speak to you by then. Thank you.

And this concludes today's call. Thank you for joining. You may now disconnect your lines.