Europris ASA (EPR) Earnings Call Transcript & Summary

Good morning, and welcome to Europris presentation of the first quarter results. I'm Espen Eldal. And joining me on stage today is Stina Byre, our CFO, who will present the financial details; and IR officer, Trine Englokken, will manage the Q&A at the end of the presentation. I know it's a busy day in the market. It's a lot going on. And we will, of course, try to complete this presentation in due time before the market opens so you have time to fully focus on that as well. The first quarter has always been a challenge to report in the retail sector due to the timing of Easter. And this year is no exception from that. In 2025, we have a very late Easter. Historically, that is very positive for sales, but it also then means it has a huge impact on comparable figures to last year. In addition to that, we have added some more complexity this year with the acquisition of ÖoB from May last year. We have increased sales and, of course, also impacts on all key ratios significantly, and that is not fully comparable until the third quarter reporting. On top of that, we have a very volatile market that impacts Europris as well, and we have seen large fluctuations in the currency market recently. All these effects are, of course, well explained in the report and in the presentation, but before we dive into the details and the complexity, I will try to give you like a 2-minute elevated pitch on the quarter. The overall headline for the group is increased sales and lower EBIT. That is, of course, not the headline you want. But there are some valid reasons for that. Starting with the market volatility. The currency market has been extremely volatile over the last couple of weeks, and that has impacted the unrealized losses we have on currency hedging. That led to a loss of NOK 34 million in the first quarter compared to a profit of NOK 19 million last year. And thus, that explains NOK 53 million of the change in EBIT compared year-over-year to last year. In Norway, we see continued very good performance in the market. We have a sales growth of 1.2%. And when we adjust for the late Easter, the underlying growth is 5% to 6%, which is strong in the retail market. Also adjusting for the unrealized currency effects, we see the continued improved gross margin, just like we saw in the fourth quarter. So the good performance we had at the end of last year has continued into 2025 for Norway and that is very satisfying to see, increase in sales at better gross margins. The segment Sweden is impacted by the late Easter and the currency effects just like Norway, but that does not fully explain the deviations in sales and profits compared to last year. ÖoB is in the turnaround process. And this quarter, we have focused on finalizing and completing the clearance sales in order to prepare for the full -- first full modernizations of categories with new product ranges that we completed now in the second quarter. We have also taken on some integration costs and also costs in relation to the implementation of a new ERP system in Sweden. Customer traffic is still low, and we need to improve the customer experience in Sweden in order to drive more traffic. And that will come, and those investments we are making right now will pay off later on. So with that introduction, I will jump into the details. Group sales was NOK 2.9 billion, an increase of 45% from last year, and EBIT ended at minus NOK 37 million. Stina will move into the details later on and explain both the segments and the group figures. I will pay some attention to the currency fluctuations we have seen in the market over the past weeks. That has been -- in historic terms, it has been very significant. And of course, when we have a 6-month currency hedging strategy, we have a lot of forward contracts where we buy dollars and also euros on contracts. And when the currency -- when the NOK and the SEK appreciates compared to dollar and euros, we get initially a loss on these contracts. But long term, it's positive to have a stronger NOK for the cost of goods sold for Europris. But it will take time to realize as we have the 6-month hedging strategy, and we also need to do the inventory turnover. But the volatility in the market explains itself. If we had closed the books today, the results would have been quite different from what we saw when we closed the book at the end of March. So we will just adapt and follow these market changes quite intense. Segment Norway, I talked about that. That has a very positive trend. We see increased footfall and the late Easter this year has an impact on the sales. And also it was a leap year last year so we have 1 less calendar day in the first quarter. We have opened 3 new stores, all at central locations: 1 in Kristiansand and 2 in the Greater Oslo area. And this is part of the strategy we have for new stores, to establish more stores in the large cities. And we are seeing very good results from these new store openings. And actually right now, at 9:00 today, we are opening another new store in Larvik. So we are progressing good with expanding the footprint of Europris in Norway. We also closed 1 of the 3 stores we had in Tromsø for commercial reasons. This quarter, we have upgraded the home & interior category, which is still very important for us. That is a high-margin category and also a category that drives more seasonal sales. So it's important for us to be successful in that. We have had a very good start. And we're also leveraging on social media trends and have sold Dubai chocolate at the lowest price in the market and also at the highest volume. So we are also trending on TikTok these days. IT platforms might sound a little bit boring, but when we presented at the capital market update back in 2022, we said that we should fully modernize the IT platform of Europris. And that journey has now actually been completed. Over the past couple of years, we have introduced a new data platform with the business intelligence system. We have implemented a new ERP system in Norway, and we have also introduced a new point-of-sale system for all the stores. And that is a tremendous job that has been done. It has been completed on time and on budget and without any disruption to the business. And now in the first quarter, we have also implemented a new ERP system in Sweden. That is the same system as we have in Norway, but it's cloud-based. And that's impressive effort to have completed that on time and budget by the organization in Sweden, of course, with support from Norway. But it's a great job to complete that shift in just a year. And the next in line is supply chain. And of course, a modern IT platform and harmonized systems across the borders will support, giving us more efficient operation of the group and working as one entity in the future. That has, of course, also enabled us to report early. We are early out with reporting, just a little bit more than a week into the new quarter. And we have been able to do that because we have harmonized the systems across the two countries. Moving to Sweden. ÖoB integration is progressing according to plan. It is a turnaround process and it will take time as expected. And as I said in my introduction, we have focused on clearance sales now in the first quarter, and that is very important that we are improving the quality of the inventory, clearing out all the old goods so we are prepared to take on new upgraded product range in the categories we are implementing now in the second quarter. But sales cannibalized on normal sales and then also giving us a lower gross margin in the period. In the second quarter, we will upgrade the kitchen category, the home & interior category, just like we've done in Norway recently, and the DIY category. And there, we will introduce the exact same assortment and product range as we have in the Europris store. So these are actually the first full test of category modernizations in ÖoB. More category upgrades will follow in the second quarter and into 2026. And the first full store remodeling will be completed before summer, and we will follow up with some more test stores during the autumn. And all these changes are expected to gradually improve sales and profits in ÖoB. We maintain our high ambitions for ÖoB. We should grow the revenues to SEK 5 billion with a 5% EBIT margin in 2028, and that will be achieved through harmonizing the categories and doing joint sourcing. And that work is well on schedule and really move progressing as planned. Improving the customer experience, I think that is actually the most important thing. We need to regain some of the lost customers over time and get new customer traffic into the stores. And that cannot be done before we are actually improving the customer experience. So remodeling the stores will be extremely important to get this effect of new customers coming in. And of course, we will strengthen the execution across the value chain. And in there, we talk about the IT projects we're doing and harmonizing work we're doing on campaigns and so on. With that, I will leave the stage to Stina to give you the financial details.

Thank you, Espen. I will not spend too much time commenting on the group figures as they do not meaningfully compare to last year since ÖoB was not included before May. I would like to emphasize that when we are commenting on organic change, we have adjusted for the acquisition of ÖoB and as organic figures matches those of segment in Norway. I will come back to this when I cover the development for that segment. Group sales were adversely impacted by a later Easter this year and also for 1 less calendar day as 2024 was a leap year. The gross margin was negatively impacted by unrealized currency effects where the group recorded an unrealized loss of NOK 34 million this year compared to an unrealized gain of NOK 19 million last year. The group reported an EBIT loss of NOK 37 million. And the main explanations were the inclusion of ÖoB and the mentioned unrealized currency effects. Net profit to parent was negative with NOK 80 million compared to a positive net profit of NOK 47 million last year. Due to normal seasonal fluctuations, cash flow from operations is negative in the first quarter. It was, however, more negative this year at NOK 544 million in minus. This was due to higher net working capital following a planned inventory buildup in order to improve the service levels in the stores and also higher seasonal inventories. I would like to underline that the inventory is healthy and that the group will soon have finalized the clearance of obsolete stock in Sweden. Higher net working capital has been financed through increased use of credit facilities, and the net change in cash of minus NOK 457 million was slightly less negative than last year. Net debt was NOK 5 billion or NOK 1.5 billion excluding lease liabilities, and cash and liquidity reserves were NOK 1.4 billion. Sales for our segment Norway were NOK 2.1 billion, up 1.2%. The gross margin was 42.9%, down 0.4 percentage points but up 1.7 percentage points if we adjust for the mentioned unrealized currency effects. The OpEx to sales ratio increased to 30.5%, but adjusted for a later Easter, it would have been more in line with last year and the OpEx is under control. EBIT was NOK 78 million, down NOK 29 million, but would have shown an increase of NOK 14 million if we exclude the unrealized currency effects. Sales for the Europris chain were marginally lower than last year, but it was pleasing to see higher footfall despite the timing of Easter and 1 less calendar day. Sales for the pure-play companies were NOK 145 million, on a par with last year but up 3.2% if we adjust for the divestment of Lunehjem. Lekekassen had sales growth in Norway and Strikkemekka had sales growth in its international markets. Sales in ÖoB were NOK 0.9 billion. The gross margin was 29.8%, negatively impacted by NOK 10 million unrealized currency loss and also clearance sales that cannibalized on other sales. The clearance sale is an important part of preparing for the category upgrades and to improve the health of the inventory, and it will be finalized during the second quarter. ÖoB recorded an EBIT loss of NOK 115 million. The ERP project is expensed as OpEx and not capitalized as this is a cloud-based system, and this impacted with NOK 8 million in the first quarter. And if we compare the performance in ÖoB to last year prior to our ownership period, some of the sales decline is explained by a later Easter and 1 less calendar day, but also footfall was down. It will take some time before new customer segments are expected to find their way back to the stores, and the group's main priority is delivering on the integration plan. Higher OpEx was also impacted by wage growth, vacant positions last year and costs related to the integration plan. In summary, this explains the weaker results compared to last year. And with that, I will hand it back to Espen to go through the outlook.

Thank you, Stina. It's time to summarize and also look at our perspective for the future. Of course, the market is extremely volatile these days and the geopolitical climate for international trade and cooperation is really in uncharted territory, and the group monitors this situation closely. We entered this year with a very positive consumer outlook, that we have seen higher real wages in '24, expected the same for 2025. I think that is still the case. We have seen lower interest rates in Sweden but the expected cuts in Norway has been postponed. So it's a little bit more uncertain than it was some months ago. But I think that we are well positioned in this prevailing macroeconomic conditions. And of course, selling everyday products that everyone needs at low prices is a good place to be in, in the current environment. We are well positioned for the spring and summer season that is coming up. And of course, we already see that the spring has arrived early this year, which is positive for sales. The turnaround progress for ÖoB is going as planned, and we remain confident that we will be able to grow sales to SEK 5 billion and also achieve the 5% EBIT margin by 2028. And with that, I will invite Stina back on stage, and we will open up for questions. So Trine, we will start with questions in the room before we go to the web.

Okay. Phillihp Bjerke, Pareto here. Just one question on ÖoB. Could you give some color on the footfall effects from the clearance sales you are now doing in ÖoB? Any positive effects, negative effects? How are consumers reacting to those clearance?

I don't think that the clearance sales had an impact on the footfall actually. So what we are seeing is that ÖoB, we are slightly moving the product mix towards more nonfood and we see that it has been a very strong concept for groceries. And in that shift, we need to balance this performance between groceries and nonfood maybe a little bit more carefully. So we've seen that when we're doing this shift towards nonfood, we are not a destination for nonfood yet. We will be there, but it will take some time.

Okay. And if it's okay, I'll just take another one as well. You highlighted a bit mild winter here in Norway negatively affecting sales of winter products and positively affecting sales of spring products. You touched up on it. Are there any negative effects from, call it, from an inventory perspective with softer winter sales during this Q1? And should we see any clearance sales in Norway?

No, you should not see that. We actually have a quite good inventory, and the inventory increase we have seen is actually on more basic goods and essentials. So we are actually not worried about the inventory levels.

Okay. And one last one. Can you just give the private label share in the quarter?

This is Stina's domain.

Yes. It's not very different from last year. It's 0.4 percentage points difference. So it's where it has been almost.

Then we start with the questions from the web. The first one is Ole Martin Westgaard, DNB. What was the like-for-like growth in Sweden?

It's -- in Sweden, if we compare in SEK last year, the sales development was negative with 7.3%.

And what was the development in prices and volumes in Norway?

Well, footfall was up and the basket was slightly down, but all the numbers are also impacted by a later Easter. So I think all of these questions will be even more relevant when we cover the second quarter reporting.

And what was the private label? It has been answered. And the grocery share in Norway in the quarter? And do you have the corresponding figures for Sweden?

Again, I think we'll come back to that in the second quarter presentation because the Easter has a significant impact on the numbers. But we have had higher sales growth for the nonfood compared to consumables, and this will then change again when we have finalized the Easter.

You mentioned in Q4 that you saw increased competition from grocery in December. How did this develop in Q1?

Actually it has not increased. We still see that, especially for Easter products. These days, we see that it's more competitive on chocolate and candy products for the seasons. So that is the same as what we saw in the fourth quarter. But besides that, we haven't seen any increase in competition from groceries. The market is basically the same.

Status on the freight agreement renewal?

We have renewed a contract for this year and we have competitive rates. We are not going to disclose the rates, but we have completed a good negotiation and know that we have rates that are very favorable in the markets.

And the last one from Ole Martin. How much has the total ERP investment in Sweden been so far?

NOK 27 million.

The next question is from Hakon Nelson, Kepler Cheuvreux. Around 30% of your goods are sourced from China, often priced in U.S. dollar. In light of the new U.S. tariffs on Chinese imports, which could broadly impact Chinese exporters, do you see this potentially increasing Europris' bargaining power with Chinese suppliers, particularly in terms of pricing and terms?

I think it's too early to really be firm on that. But theoretically, yes, it should open up for new possibilities for Europris. But of course, it's also difficult when you are buying for some of that, you are making losses. So it is a delicate situation and I think we need to just monitor this closely and follow the markets.

And then Hakon Fuglu, SEB. Are you seeing any changes in consumer behavior? And how will this develop in 2025?

We have actually not seen any big change in the consumer behavior. I think we saw that at least the retail statistics confirm that the fourth quarter in Norway was strong. We've seen the same from the figures we have from SSB in January and February this year. And also the shopping center statistics confirms that the retail sales has been good. So I think it's actually consumer spending has been high in Norway and actually increasing from last year.

And how do you expect Easter sales to develop in Q2 given the early spring?

I think it will be fantastic. It's always a blessing to have a late Easter. And when you get the nice weather as well, you get a boost start to the spring season during that period.

Next one is Petter Nystrøm, ABG. Despite clearance sales in ÖoB, sales were down over 7% year-on-year in Q1. Are you surprised that sales declined 7%? Or is this largely in line with your expectations?

I think that is a very good question. We are not that familiar with how the Easter effect applies to Sweden. But overall, as we've said, the Easter effect is not fully explaining the deviation we have in sales. So we have seen a lower traffic. And I think that the concept over time has lost its power in the market to attract customers. So we need to improve the customer experience, remodeling the stores, improving the categories and build a new platform. It's not enough just to have low prices these days. Price is not enough. You need to offer the customers some value as well. And that is what we're trying to build into the concept, and we are sure that, that will bring the customers back. But the customer loss in traffic has been higher than what we assumed when we started the process, but it's not critical.

On the gross margin for Norway, you say the product mix contributed positively to the margin development. Is this something we should expect will continue?

That's also a bit impacted by the timing of Easter and a higher share of nonfood. So let's come back to that one as well.

Henriette Trondsen from Arctic. Could you give an estimate of the underlying gross margin in ÖoB if it had not been for the clearance sales? Also, will the clearance sale impact Q2 as well to about the same degree?

Well, it's a bit hard because what it seems like is that people have -- the basket has remained rather stable. So they have kind of just swapped the products. So I won't go into more details than that. But I do think that we will have a lower impact in the second quarter as we have now done this for a couple of quarters and have a lower remaining inventory of obsolete stock.

That was the last question from the web. And more from the audience?

Thank you.