Clas Ohlson AB (publ) (CLASB) Earnings Call Transcript & Summary

Hello, and welcome to the Clas Ohlson Q3 2019/2020 Report. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Lotta Lyrå; and CFO, Pär Christiansen. Please go ahead with your meeting.

Thank you. Good morning, everyone. This is Lotta Lyrå speaking. I will do this presentation regarding Q3 '19/'20, together with our CFO, Pär Christiansen. Turning to Page 2. This is a quarter with improved profitability, all according to our plan and as a result of the action program we have been pursuing during the latest 18 months. During the quarter, with the organic growth, although fewer stores in our Nordic home market, we see improved underlying and reported profit margin. We continue to have high speed in both growth and cost-saving initiatives, and we focus a lot on maximizing the synergies between our channels and different offerings. So far, we see no material impact due to the coronavirus in our results. Turning to Page 3. The agenda for this call is that I will take you through a business and Clas Ohlson 100+ update. Pär will then go through the financial development and the February sales. And then I will summarize, and we will have a Q&A. Turning to Page 4. Looking at Q3 '19/'20 in brief. Nordic sales were up 2%, and the organic sales in the Nordics were up -- also up 2%. Total sales were unchanged, impacted by the closure of stores in U.K. and Germany, and like-for-like sales were up 1%. Online sales continued to grow during the quarter with 19%, and the gross margin was more or less stable at 40.1%. As a consequence, the EBIT margin was strengthened during the quarter to 13% compared to 3.6%, similar quarter last year. And looking at rolling 12, the EBIT margin increased to 5.8% compared to 3.2% a year ago. This is due to an improved operating result, both reported and underlying, all in line with the guidance we have given. We see that we are well on our way to deliver on the guidance of an EBIT margin of 4% to 6% for '19/'20 that we have given. We will continue to have focus on lower costs when implementing our action program. Now turning to Page 5. Christmas trade is an important part of this quarter. It started already in Black Week. And we saw during Black Week, a strong demand for capital goods and a lot of Christmas presents being bought already at that time. Black Friday was the all-time high sales day for us, both in stores and online. A slight change in pattern is that we see Christmas celebration now happening throughout December. We see a lot of focus on socializing at home, leading to higher demand for consumables and also smaller gifts. We see that we have -- had relevant offerings throughout the whole period, and this, together with an active approach in relation to our inventory, led to an improved inventory level. We also have a lot of valuable insights for the coming Christmas planning, especially in how to optimize trade in December. Turning to Page 6. We are, in different ways, impacted by the coronavirus. As we speak, we see no material impact. And this is then taken into account, supply, production and sourcing as well as the precautionary measures we have taken with care for our coworkers as well as consumer behavior. This is a development that we now follow hour by hour, day by day, and it's difficult to say at the moment exactly what will happen. What we do know is that the future development will be steered by how the virus is spread in the Nordics, impacting customer behavior as well as the pace of recovery of supply chains in China and the possible impact on sourcing in Europe. And also, a weaker macro economy may slow down consumption, but all of these is to come. We are continuously evaluating various scenarios to handle the consequences and will, in the coming quarters, come back on any impact that this will have on our results. Turning to Page 7. The Clas Ohlson 100+ action program. Turning to Page 8. We have, during the last 18 months, pursued an action program called Clas Ohlson 100+. The purpose of this program is to create 3 conditions for us to deliver on our financial targets, that is to deliver an average annual organic growth of 5% during the current 5-year period and to deliver an operating margin of 6% to 8% from 2021 and onwards. This program includes both cost-saving initiatives as well as growth initiatives. And we have, during '18/'19 and '19/'20, invested 1% to 2% of the underlying operating margin in this initiative. Turning to Page 9. An important part of the program is to ensure that we have a cost level and a cost structure that enables long-term profitable growth. Therefore, we have pursued initiatives totaling to SEK 200 million to SEK 250 million in savings. We have worked in 3 main areas: a more efficient organization, a more optimized assortment and a systematic approach to supply chain and indirect purchasing. Most of the activities within this part of the program has been done now, and the impact of it will be seen in the 2021 results. Turning to Page 10. Another part of the program is the growth initiative. These are to enable us to deliver 5% organic growth. We are working with initiatives in 3 areas: the first one to increase sales per square meter, the second one to increase sales per customer and the third one to double online sales every other year. Turning to Page 11. We see some of the investments that we have made in this area to ensure future readiness. One important change during the year has been the investment to modernize our e-com platform to enable future growth. A second one has been to continue to drive synergies between the different channels that Clas Ohlson is present in, this is to increase sales per customer. We see today that 1 out of 5 MatHem.se bags contains a Clas Ohlson product. We see that 1 out of 10 Kolonial bags in Norway contains a Clas Ohlson project. We are working on scaling up the Amazon project in the U.K. as well as the Clas Fixare service in Sweden. And we just, this week, launched a pilot together with Wolt in Finland, with a similar approach as with MatHem.se and Kolonial. We're also working hard to optimize and make sure to have a dynamic approach to our store network. This is about providing customer experience, but also using the store as an important part of the logistics network. Turning to Page 12. To optimize the store network is about ensuring that we have as profitable as possible square meters. This is about being in the right location with a relevant format. We have during some time talked about the importance of fruitful dialogue together with the real estate owners, and we see progress in this dialogue and things moving in the right direction. During '19/'20, there have been a number of actions when it comes to ensuring a profitable store network. We have completed the closure of stores in U.K. and Germany, apart from 1 store in the U.K. that remains in Reading serving as the logistic hub. In Finland, we have closed 3 stores, have 1 more to come. We opened 1 new store and have an additional to come. In Sweden, we have opened 1 store and closed 1 store. And in Norway, 1 store is to be opened. This dynamic way of working with the store network, we believe, is the road ahead. On the 11th of March, we had 229 stores. I will now hand over to Pär for the financial development.

Thank you, Lotta. And I will now go through the financial development, and turning to Page 14. Starting with the sales development in the quarter, the total sales was unchanged. Like-for-like sales was up 1%. Looking at the Nordics, we saw a growth of (sic) [ up ] 2% and organic 2% growth. Online sales was up 19%, and we had a reduction of 8 stores in the quarter. Turning to Page 15. Looking at the sales development for the first 9 months, we had a -- total sales was up 1%, organic sales was up 1% and like-for-like sales up 2%. Looking at the sales in the Nordic region, we saw a growth of 4% and organic up 3%, and online sales was up 20%. Turning to Page 16. The gross margin in the quarter was 40.1%. It was mainly negatively impacted by the stronger purchasing currency, dollar. We are constantly reviewing and reducing purchasing prices as part of the program to mitigate these type of factors as well as reviewing the offerings and pricing on products. Turning to Page 17. For the share of selling expenses in the quarter, we saw a decline. It was down to 25.2%, down 2.2 percentage points. If we exclude the IFRS 16 effect, it was down 1.5 percentage points. The share of selling expenses was impacted by lower cost in U.K. and Germany as well as the result of the Clas Ohlson 100+ program. Turning to Page 18. The administrative expenses in the quarter was down 14.2 percentage points to SEK 54 million. The trend is in line with our expectations and also implementing the Clas Ohlson 100+ activities. And objective going forward is, of course, to maintain and continuously improve this trend over time. Moving to Page 19. The reported and underlying profit in the quarter. The operating profit improved to SEK 378 million compared to SEK 105 million last year. The underlying EBIT was SEK 368 million compared to SEK 363 million last year. This means that the EBIT margin was improved to 13% compared to 3.6% previous year and we had 0.8 percentage points positive impact from IFRS 16. Earnings per share was SEK 4.47 compared to SEK 1.24 previous year. Moving to Page 20. Looking at the operating margin development, we see a continuously positive trend towards our operating margin target of 4% to 6%. The EBIT margin rolling 12 for the quarter was 5.8%. Excluding IFRS effect, it was 4.9%. Moving to Page 21. The reported and underlying profit for the first 9 months. The operating profit improved to SEK 590 million compared to SEK 171 million previous year. We had a positive impact of IFRS 16 of SEK 75 million. And the underlying cost and nonrecurring cost was SEK 97 million compared to previous year SEK 378 million. This means that underlying EBIT increased by 11% to SEK 612 million compared to SEK 549 million the previous year. The earnings per share for the first 9 months is SEK 6.68 compared to SEK 2.11 previous year. Turning to Page 22. The investments for the first 9 months amounted to SEK 147 million compared to SEK 174 million previous year, and the vast majority was into IT systems. Turning to Page 23. Cash flow and financial position. Cash flow from operating activities for the period was SEK 1.3 billion. If we exclude the IFRS effect, it was SEK 943 million. The inventory levels improved to SEK 1.821 billion compared to SEK 1.983 billion at the end of the previous year -- at the end of the same period previous year. Net debt-to-EBITDA was at minus 0.3x, well in line with our framework, and we have now approved credit facilities of SEK 850 million. Then looking at events after the reporting period, turning to Page 25. The February sales development, total sales was up 5%, organic sales up 6% and like-for-like sales up 8%. The sales in February were positively impacted by a calendar effect of approximately 4%, online sales was up 16% and we have reduced by 9 stores compared to same period last year. Turning to Page 26. Investment in MatHem. MatHem had a funding round of approximately SEK 500 million, announced on 14th of February. The main purpose was to enable a new certified -- an environmentally certified warehouse in Larsboda within Stockholm area. The main new shareholder will be pension fund AMF, which invested SEK 280 million. Clas Ohlson invested SEK 27 million to maintain its right, and we are the fifth-largest owner at the moment. Handing back to Lotta.

Thank you. Now at Page 27, summary and outlook forward. Turning to Page 28. So during the quarter, we see an improved profitability, in line with the guidance we have given. We see a stable sales development in the Nordic markets in all channels. And we continue to deliver on our Clas Ohlson 100+ program. We will, in connection to Q4 report, summarize this program, what we have done and what the effects have been. We have a very strong financial position and a strong brand to build forward on, and we will continue to work hard optimizing the synergies between stores, service offerings and also the e-com platform, both our own and others that we are present on. We will continue this, the coming quarter and the period after that to be forward-thinking, leaning in and really seizing the business opportunities that come up and, of course, secure best-in-class efficiency. And naturally, we need to monitor, evaluate and adapt to corona effects coming or the macro development. That concludes the presentation, and we will then go to Q&A.

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

Just a couple of questions from my end. Firstly, if you could comment a bit more on the current trading, quite strong your like-for-like sales of 8%. Obviously, leap year here were -- contributed, and that's roughly half, but it's still a lot stronger than what we've seen in the previous months. I'm just curious, what do you think we're the drivers here? Any kind of impact from the coronavirus, either positive or negative, as you've seen in February?

Yes. Niklas, I can comment on that. We don't see any major impact in the positive or negative from corona in February. And we have -- when looking into it a little bit more in detail, it's actually a very successful campaign, the first winter campaign that has resulted in this strong development.

Okay. Excellent. And on the topic of the corona, you seem quite relaxed here about the impact being quite limited. And I just imagine and from own experience looking at shopping malls, et cetera, the traffic seems to be down quite significantly. And that's not something that you have seen yet or that you anticipate will have a major impact on your sales?

What we are saying is that as of today, we have not seen a major impact on our sales. But of course, development here is happening hour by hour, day by day, so what is true today when we talk might not be true tomorrow. So that's a little bit the character of the situation we are in. I think it's important to emphasize that part of what we have built during the last 18 months is numerous ways for the consumers to be Clas Ohlson, meaning that you can shop in our stores, but you can also shop in line with multiple -- online with multiple delivery options, including home delivery as well as the fact that we are present on both MatHem and Kolonial, and I think this is an asset in a situation like this.

That's a good point. And on the topic of supply that's also -- you don't see any disruptions at the moment. Is that because you've managed to move production from some facilities to others? Or you just haven't seen any impact in the facilities where you source? Is that a comment that reflects kind of the Q3 sourcing? Or is that also for the coming quarters?

I think if I start with why we are where we are, I think it's -- of course, we have also had factories that have not been up and running. But what we have seen is that the inventory level that we have had has enabled us to mitigate part of this effect, both what we have in our distribution centers, but also in our stores. And the other part is that we have a quite broad assortment. And in a situation like this, this means that we can, of course, offer the customer options. And so far, we have been able to mitigate the supply disruptions with that. So that's the reason we don't see an effect yet. And I think we -- also, going forward, we have the possibility of adapting the commercial agenda to take into account disruptions that might come, so we are very -- working very actively in that. Having said that, of course, should there be now a slow recovery in China or the virus impacting supply chains in Europe, there could very well be effects and that's what we're saying in the report. But here and now, we don't see an effect, and we are extremely forward-leaning in mitigating as much as possible of this.

That's very clear. And then also, I'm just curious on the cost savings. I know that you say here repeatedly that you will come back with more details in the Q4 statement. But I'm still curious if you could give any kind of indication, given that you said here in the statement that most of the initiatives are now done. And I'm just curious how much of this we have already seen in the results. We've seen earnings improving quite considerably in Q1 and Q2, less so in Q3. So I'm just curious where you are in terms of these cost savings improvement.

I think starting off with our target is that, of course, for this year, our target is to deliver 4% to 6% EBIT level. And for next year, we have a target of 6% to 8%. And I think for us, that is the framework. And this cost-saving program is one part of achieving this step change. And as you say, we have implemented activities during the period, which means that, of course, there are some -- some things has already happened. We are not in the position where we comment it by calendar or timing, which means that we start with the framework and don't comment on the underlying component right now. Looking at the U.K., we announced the U.K. closures 1 year ago and some of the stores were closed pretty quick. And I guess the last part was then closed here in October. So we had a full effect of that. But that -- a lot of that effect came quite early compared to the other parts from the CO100+ program.

Excellent. And also, a follow-up there. I'm just curious, what is the base for these savings? Because if you look at your ongoing EBIT, it's bottomed around SEK 500 million on a rolling 12-month basis, around SEK 600 million if you look post-IFRS 16. And if you take all these savings, SEK 200 million to SEK 250 million, and add the SEK 75 million from U.K. and Germany, that would push your ongoing EBIT above SEK 900 million with the full savings. That would push the EBIT margin to more than 10% rather than 6% to 8%. So I'm just curious if I'm missing something here. The base is lower than the SEK 600 million?

No, I think you should start in the target setting where we have the target of 6% to 8%. And in that frame, of course, we have this factor, but we also have other factors as salary and inflation and residential changes that are part of normal trading. And of course, there will be other fluctuations of things and also need to invest in things going forward. But -- so there are -- going from this year to next year, of course, there will be a bridge of factors which goes both ways. And you need to see the full picture to take this to not ending up at SEK 900 million, which is not, at the current moment, in our target framework. It's 6% to 8% still.

Your next question comes from Andreas Lundberg from SEB Equity Research.

If I start with the working capital and inventory, you saw some improvements there. Could you talk a little more what's driving this? What is the status of the working capital? And what do you expect from here? That's my first question.

I mean looking at the reported number, it's an improvement compared to the previous year. And as we write, it's -- we're getting better and better in controlling and steering the inventory levels, both in our stores and in DC. And I guess that is a factor. And it goes together with what Lotta said, having successful campaigns, a little bit being better at forecasting and increasing and reducing inventory levels as customer demands change. Going forward, of course, we'll always have a very strong interest in reducing inventory levels. Having said that, a corona situation like this, having a little bit more of things is apparently a good thing. So what is the correct level will probably be debated in a lot of companies going forward with changes in supply chain and the vulnerability in those. But right now, our aim is to, from a working capital perspective, reduce the inventory level over time.

And another one is on currencies. What do we expect with the current spot rates, including your hedging contracts, how that will impact your gross margin in the coming quarters?

I guess forecasting currencies is not easy in the first place and, again, given the situation right now, it's probably even harder, so I won't comment on that. But this -- the latest change in both U.S. dollar and NOK has changed the positions quite differently from when we reported. The NOK has changed the most, which means that our hedging contract is worth more, being a buffer in this, but let's see what's happening going forward.

Okay. And then a few maybe in net equity. You had a pay tax of SEK 20 million in the quarter and you had a reported one-off of SEK 79 million, what's the difference there? And how should we look upon this going forward?

I think you should look at the tax rate over time being in line with what we usually have. So this is a, yes, nonrecurring event, and it should even out over time.

Okay. And what remains of your one-off costs, if any?

For the fourth quarter, I mean, we have guided to stay in line with the 1% to 2%, and we stick to that. And for the fourth quarter, and I think we have said that before, is that mainly costs related to people leaving and another one-offs might occur even in the fourth quarter. The third quarter was quite thin in terms of one-off costs, but that there might be some one-off costs occurring in the fourth quarter that is higher than third quarter, but we will still remain in the framework of 1% to 2%.

Okay. And lastly, if you could give some more flavor on your rental negotiations, please?

Yes. No, we're working very actively on that. And I think we -- it will be an important way of ensuring that we have profitable square meters. As I said in the presentation, I think we see a good tendency in the dialogues with the real estate owners now and that there is, I would say, a common interest in finding models suitable for the future. So I'm very, very happy about that.

But anything that has been completed?

Yes, we have some good examples, of course, also building up this statement. But we don't communicate in detail what that means. But we see -- dialogues are improving, which is good.

Our next question comes from Niklas Ekman from Carnegie.

A couple of follow-ups from me, if that's okay. Firstly, if you can talk a little bit about expansion plans over the next few quarters. What are you seeing in terms of store openings and store closures? And it looks like -- I mean you're mainly closing larger stores and mainly opening smaller stores. So are we -- should we expect a general decline in square meters over the next few quarters?

Yes. I mean we have been quite clear on what the direction is, that we take a very dynamic approach to the store network. It means -- part of that is to be sort of able to act quickly when we see that a store is not successful or a square meter is not profitable. So there is a general change in how we negotiate contracts, you can say. And then the other change that we have communicated is that as part of improving sales per square meter, we are reducing, in general, store sizes. And I think this is what you will continue to see. And you have on Page 25 in the report, the sort of official numbers around this as well as the contracted coming openings. So the direction is still the same. And the 3 concrete stores to be opened as well as closed, you have on Page 25, 3 closings and 3 openings.

Okay. Excellent. Very clear. And on your online growth, in the last couple of months here have been well below your target. Can you elaborate a bit on this? I think there's been a transition from -- between different platforms, is that complete? And do you expect that this number will increase over the coming months?

Yes, we still have the same ambition level. The strategic goal remains of doubling every other year. At Q1, 2, we did the transition, basically moving from 2012 technology -- or code to 2019 code. We did that late autumn. And we have seen during Christmas trade that the platform has been very stable and so on. And now we need to continue to work on commercially optimizing, of course. So we want to get back to the old level. There's no change in that ambition.

[Operator Instructions] And we have a question from Andreas Lundberg from SEB Equity Research.

On your organic growth target or ambition of some 5%, given that now the store network is being reduced a little bit and then maybe it's hard to see that store growth will have that much -- I know you mentioned a few factors to drive your growth, but I guess most of those initiatives are rather small, so could you maybe give more color on how reasonable is it to reach this 5%?

Yes, of course. I think there will be 3 main contributors to this. The first one is that e-com is starting to sort of become substantial, SEK 0.5 billion business, and growing that with the ambition we have will also be an important contributor now to the organic growth number. The second one is that we are constantly working on the assortment and launching partly new assortment directed to new wallets. And an example of that is the kids' assortment that was launched during the last couple of months. It's been very successful and partly attracting new customers and new wallets to Clas Ohlson. And you will see similar things happening in other segments going forward, and this is another important contributor. And then still, I think there are possibilities for us to also, in a net sense, add square meters that will support the organic growth. So I think those are the 3 main buckets that we're working with to drive this development.

Sorry, could you repeat the last one on square meter? I didn't get really to hear it.

Yes. What I meant was that, as I said before, we are closing stores, we're relocating, but we are also opening new stores. And if I take the net effect of that, it's still a positive contribution to the organic sales number.

Your next question comes from the line of Nicklas Skogman from Handelsbanken Capital Markets.

You have guided for a net benefit of SEK 75 million from exiting the U.K. and Germany on a full year basis. But I was thinking, if you look at Q3 last year, did those 2 countries actually contribute positively to your earnings?

We have not comment on the segment level on earnings on that level before, so I will not comment it from -- today either.

Okay. I mean thinking you delivered 1% underlying growth in earnings despite all the cost savings that are going on. So my thinking was that maybe actually in Q3, these countries that overall contributed negatively actually had a positive impact, which might explain the, what should we call it, slow earnings growth in the quarter. But you don't want to comment?

I think what -- maybe not directly answering your question, but I think it's important movement is that you see compared -- if you compare the -- this Q3 compared to last year's Q3, the underlying results and the reported results are coming very close together. While Q3 last year, there was a sort of -- the underlying and the reported were more far away. So of course, I mean, that is a consequence of the thing that we have done, generating what we have put on plans, so to say. So -- and that's been the thinking all along to put this action plan and all the closure of U.K., Germany to contribute to taking us to position where we can deliver 6% to 8%. And we also said when we announced the closure of U.K., Germany that there would be a positive impact of SEK 75 million EBIT of that closure.

Yes. No, I get that. And then I was thinking on your supply chain, at what -- if factories sort of wouldn't restart as you may be planning for, at what point in time would you start seeing significant shortages of inventory? Are we talking about after the summer or later than that even?

We're doing scenario planning all the time on these questions. And I think the good news is that we have good information that things are leaving the harbors, deliveries are coming into the harbors in China and factories are sort of confirming deliveries. So we see good signs here. And should there be further disturbances that will have a major impact on the result, we will update on that. But right now, it's -- there are positive signs in that part of the development.

[Operator Instructions] As there are no further questions at this point, I would like to hand the conference back to the presenters. Please go ahead.

Thank you, and thank you all for participating, and have a good day. Bye-bye.

Thank you. Ladies and gentlemen, this concludes the conference call. Thank you for participating. You may now disconnect.