Europris ASA (EPRO.XC) Q3 FY2025 Earnings Call Transcript & Summary

Good morning, and welcome to the third quarter presentation of Europris. My name is Espen Eldal, CEO of the company, and joining me on stage later today will be Stina Byre, the CFO; and Trine Englokken, the IR Officer, will manage the Q&A session we have at the end of the presentation. Please feel free to type in your questions as we speak. Very happy to have the event here at DNB office in Bjorvika, Oslo. Thank you for arranging this, and a great thank you to the people that actually have showed up in person today. Today, we actually have the biggest audience for the quarterly presentation for at least 2 years. So that's great. Let's get started. This is a slide that I'm very proud of in Europris and it serves as a motivation for many of our employees. Every year since we opened the first store, we have had growth. And of course, no one wants to be the one that misses this streak. So we will make sure that it continues. And I think it shows some of the strength of the concept of Europris. Regardless of financial climate, we have been able to grow sales every year. Some years, acquisition has been a big part of that growth. But in every year, we have also delivered organic growth. And 2025 also demonstrates very high growth. And I think we have to go back at least a decade to see the same strong organic growth in Norway as we have seen this year. If I look at some highlights for the third quarter, Stina will provide more details on the financials later on. But overall, it was a sales growth of 9%, driven by strong performance in Segment Norway. The gross margin increased. We have demonstrated good cost control. So OpEx to sales ratio is reduced, and that has resulted in an EBIT for the group of NOK 256 million, which is an increase of 53% from last year. So all in all, a very solid third quarter for Europris Group. We'll talk a little bit about the Europris chain before we continue with the ÖoB chain. Europris has, over many years, built a position as a seasonal destination in Norway. And this year, we really managed to capitalize on the nice summer weather, and we saw large traffic to our stores, and we were well prepared. We were well stocked with good shelves. We had a very good base assortment, and we capitalized on the increased traffic and the demand that arise from the warm summer in Norway. So it's a strong execution of the campaigns, also a strong execution of the seasonal sales, and the growth has been driven by higher footfall as the nice summer weather creates some demand, and we see growth not only in the seasonal items, but also in the base assortment is where we have seen high sales growth during the summer. So it's -- but it has been a strong market as well. The Europris chain grew by 12.1% in the third quarter. And according to Statistics Norway, the broad variety retail market in Norway grew by 9.5%. So it's been a strong market, and we have been able to outperform in that market. So it's good sales. If we look at the financial climate we're in, we see that the consumer spending has been positively impacted by real wage increases and lower interest rates. Not only Europris has benefited from that, we see that the total retail market in Norway is very positive. But we also see that consumers are becoming more and more price conscious. And that has been something we have seen over the last couple of years, driven by the high inflation, but this is kind of sticky. The shopping pattern has changed among the consumers, and they keep following the prices more regularly and they also shop more on campaigns. And this is strong and good news for a concept like Europris. We have driven more sales towards campaigns as we have a campaign-driven concept. We have been able to attract new customers on our private labels. We have increased the share of private label sales. And these are, of course, low price points, and we managed to give the customers what they want. They want low prices. And it was a big price test in Nettavisen this October, where they looked at Europris compared to the three large grocery chains in Norway, and Europris was a clear winner on price, just like we were last year as well. And that is good for a low-price concept as Europris. If you look at the ÖoB chain. We have done several changes over the last year, and we see that the category upgrades give good sales development in kitchen, home and interior and DHY (sic) [ DIY ] but it's not material enough to really change the bottom line. We see that we managed to shift the consumers to buy more nonfood items. We see we managed to get them to buy more campaigns. The retail basics mechanism we introduced, that works, but still, the results are not material enough to give significant results. We have changed from negative like-for-like to positive like-for-like. We have lifted the gross margin, but it's not enough to make the turnover we need. So what becomes more and more clear for us is that we need to do the full remodeling of the stores in order to get the turnaround process we want in Sweden and especially to attract new customers to the stores. We need to reestablish ÖoB as a relevant shopping destination for more customers. And we see the very good results from the pilot stores where we have built 2 new stores in -- or remodeled 2 stores in Sweden based on the Europris concept. The first one was opened in Uddevalla in June. And that store basically ticks off all the boxes that we want. We see increased sales from higher footfall to the stores. We see increased sales of nonfood items. We see a higher margin and we also see a higher basket. So very promising and good results from that remodeling. The second remodeled store in Arninge outside of Stockholm was opened in -- early in September. And that basically gives us the same results, what we have seen from Uddevalla, and the third pilot opened 3 weeks ago in Malmö and the fourth pilot will open next week outside of Stockholm. So we will have then 4 pilots, and we will run that for a period. We get very positive feedback from the customers and the staff on the store layout and how it works and we see that it's evident that we do these remodelings to get turnaround process in Sweden. We are now executing a large store remodeling program over the next 2 years. We will remodel 40 to 45 stores every year in '26 and '27 and there will be some initial negative financial impacts. During the remodeling, the stores will be closed for 2 to 4 weeks, which means that we will have lost sales. In addition, we will do some discounting ahead of the closing period, where we will sell out the discontinued goods in order to have fresh goods when we open the new stores and we will do the remodeling with our own staff. So it will be dedicated remodeling teams employed by ÖoB, and that will, of course, be part of the OpEx for next year. So any improvements from sales uplifts anticipated with the remodeling next year will be offset by the cost associated with the remodeling of the stores. We expect then the financial results in Sweden in '26 to be on par with 2025, and then we will see a gradual uplift in the profits from '27 and the major uplift will come in '28 after -- the year after all stores are modernized. We will provide some more detail on the rollout plan and the financial impacts in the next quarterly presentation after we have evaluated the 4 pilot stores. We maintain firm on the high ambitions we have in Sweden. We will grow the revenues to SEK 5 billion with a 5% EBIT margin by the end of 2028. The first step in this plan is to do category harmonization and joint sourcing. That is well underway. And this is like the base for the store remodelings and then improving the customer experience, that is the store remodeling plan, and that is the key to really get the results. But you need to do the category harmonization and join sourcing first, and then we will improve the customer experience, and that is needed in order to attract new customer segments into the stores. Besides that, we are working on strengthening the execution across the value chain, which means that we are sharing the best practice, implementing the retail mechanisms from Europris also into ÖoB and working on the sales culture in the company. As part of that culture, we have hired a new CEO to ÖoB, that is Anders Lorentzson. He has a strong track record with more than 20 years' experience in the Swedish retail sector. He's worked with food retail in the Ica Group. He's worked with electronics in Expert and he's most recently worked with nonfood items and home textiles as CEO of Hemtex since 2018. Anders will join us actually next week, starting off with a month in Norway to learn the commercial tricks and trades of Europris and then he will take over full responsibility sometime in December in ÖoB. But we're really looking forward to have Anders joining the ÖoB team and the Europris Group. With that, I will leave the floor to Stina to take the financial details.

Thank you, Espen, and good morning, everyone. I will start with the financials for Segment Norway. The strong performance this year continued in the third quarter with sales of SEK 2.5 billion, up 11.6% and an EBIT of NOK 293 million, up almost 38%. The Europris chain had a total sales growth of 12.1% and a like-for-like growth of 10.7%. As Espen said, a warm summer had a positive impact on a seasonal destination like Europris. Higher footfall was the main driver behind the strong performance, but we also saw more articles in the basket. Sales growth was broadly based from seasonal items, campaigns and the base assortment. One store was opened in the third quarter, bringing the total number of new stores this year to 6. Our pure-play companies had sales of NOK 155 million. And if we exclude the Lunehjem last year, that's a growth of 3.5% where Lekekassen has improved their performance, while there is a challenging knitting market in Norway for Strikkemekka. The gross margin was 44.6%, up 0.9 percentage points or up 0.5 percentage points if we exclude impact from unrealized currency on hedging contracts and account payables. Seasonal items had a higher gross margin this year, impacting the gross margin positively. The OpEx increase of 8.7% was impacted by 8 more directly operated stores this year and also costs related to higher volumes. We are happy to see that measures taken to improve efficiency in the value chain continues to pay off, and we saw that the OpEx to sales ratio improved by 0.7 percentage points. Moving on to Segment Sweden. Sales were NOK 1 billion with a reported sales growth of 3.1%. But in local currency, sales were down 0.2%. The ÖoB chain had 2 fewer stores. And in local currency, the like-for-like sales improved by 0.4%. And this means that although we do see a positive development from upgraded nonfood categories and remodeled stores and also that initiatives to improve campaign sales have given results, this has yet to add materially to the total. As Espen said, to attract new customer segments, there is a need for store remodeling, and we see higher footfall and sales in our pilot stores. The gross margin was 31.1%, up 0.4 percentage points. Half of this improvement was related to unrealized currency effects. In addition, an uplift in nonfood sales had a positive product mix. OpEx showed a reported increase of 1.8%, but was down 1.4% in local currency. And this change was positively impacted by one-off costs and costs related to IT projects last year with a total of SEK 13 million. The segment had an EBIT loss of NOK 37 million, an improvement of NOK 8 million compared to last year's loss of NOK 45 million. I will briefly sum up the third quarter for the group. Sales were NOK 3.5 billion, up 9% or up 8% in constant currency. The gross margin was 40.7%, an improvement of 1 percentage points or up 0.6 percentage points if we exclude impact from unrealized currency. I would like to give a reminder that the group hedges up to 6 months and that the inventory also takes some time to turn. This impacts when any changes in NOK compared to purchasing currency has an impact on the cost of goods sold. And as far as any margin impact is concerned, that will depend on sales prices in the market when a product is sold. The OpEx to sales ratio improved by 0.6 percentage points to 25.9%. EBIT grew by close to 53% to NOK 256 million. And the net profit to parent was NOK 154 million, up NOK 70 million, of which NOK 14 million of the increase was related to unrealized impact from interest rate swaps. For the first 9 months, it's important to keep in mind that group figures include Segment Sweden for 4 more months this year. This obviously has a positive impact on sales, but on the other hand, it has a dilutive impact on both the gross margin and the OpEx to sales ratio. Sales were NOK 10.3 billion, and EBIT was NOK 642 million. Where Segment Norway delivered a strong EBIT growth of almost 23%, while Segment Sweden for the first 9 months delivered an EBIT loss of NOK 186 million. Net profit was NOK 350 million, down NOK 46 million. And last year was positively impacted by financial effects from the ÖoB transaction with a net NOK 34 million, and in addition, there is a higher unrealized loss on interest rate swaps this year compared to last year. I will comment on the figures for the first 9 months. Cash from operating activities were NOK 254 million. Change in net working capital is normally negative in the first 9 months due to seasonal fluctuations, but the minus NOK 735 million this year was more negative than last year. And that was primarily from timing of account payables, but also from a planned inventory buildup to support sales. Net cash from financing activities were less negative than last year as more of the credit facilities have been drawn upon. Net change in cash was minus NOK 247 million, and the net debt was NOK 5.1 billion or NOK 1.8 billion, excluding lease liabilities. Cash and liquidity reserves decreased by NOK 200 million to NOK 1.16 billion. And then I will hand it back to Espen to give you the outlook.

Thank you, Stina. We are entering now the fourth quarter, which is historically the most important quarter in retail. And the small seasons are coming almost every week. We have Halloween this week, a big event starting off the Christmas season next week. And of course, you have not only Black Week or Friday, you have Black November. So it's a pretty good lineup of events ahead of us. And I think we delivered a strong start to this year with a good performance in the first 3 quarters. And we see that consumer spending is driven by the better financial situation in the markets. We have seen increased -- decreased interest rates. We have also seen lower inflation and real wage growth for the consumers. And we expect that to drive sales also into the fourth quarter. Most important event ahead of Europris right now is the store remodeling program that we will launch in Sweden in next year. So remodeling 40 to 45 stores both in '26 and '27. And in the first year, the positive effects from those remodelings will be offset by the project costs associated. We remain confident in our long-term ambition and target, which is to grow sales in Sweden to SEK 5 billion with a 5% EBIT margin in 2028. I think that closes the presentation, and I will invite Stina back on stage, and we will actually open up for questions. So Trine, maybe we should -- if there are any, we could start with questions from the room, then we move on to the web.

Yes. Ole Martin Westgaard, DNB Carnegie. You expect ÖoB 2026 to be on par with 2025. What are your expectations for 2025? Do you find consensus EBITDA expectations fair? Or why shouldn't ÖoB improve in 2026?

We have been quite clear that we expect the financials of ÖoB in '26 to be on par with '25. And the reason for giving that is, of course, that we saw that analysts have phased in positive effects from ÖoB earlier than what we see is possible as the remodeling will take some time, and there will be some initial negative financial impacts from the projects. Regarding the fourth quarter, I would expect ÖoB to perform slightly better than last year, like we did in the third quarter this year.

And another one from Ole Martin. Can you give any more color on the expected negative impact of the remodeling in ÖoB next year? And how much is this expected to impact the figures negatively?

We will come back with a more detailed data set when we have had the time to evaluate the 4 pilot stores. We have 4 months of data on one pilot. That is not sufficient to make a good data sample. So we will have the 4 pilots, evaluate those, and we'll present the data when we present the fourth quarter results in the end of January. And then you will see data on how you should model this in for the full year, also the timing of how many remodelings we will do every quarter, the cost associated and also the uplift you should expect. So that will be a full data set where it's able to do the calculations.

And what was the consumable and private label share in Europris and ÖoB in Q3?

We saw in ÖoB that we had a higher share of nonfood, and that's very pleasing as we have upgraded categories. So that was up 0.8% in the third quarter. We have a total share of consumables in Sweden of 73%, 74%, as we also harmonized the way that we measure -- harmonized in the same way that we measure the Europris product range. So it's a bit higher than the 70% we have previously communicated. As for Norway, there has been very good sales of both consumables and nonfood, but the growth for consumables has been higher. So in the third quarter, it was around a little bit more than 55% with an increase of 0.7 percentage points.

And then a question from Hakon Fuglu, SEB. Can you comment on the high OpEx growth for Norway in the quarter? For Norway, why did not gross margin improve further by strong NOK and lower freight? Are you alongside competition seeing lower sourcing costs?

Well, if I start with the OpEx, I agree, at first sight, it may look like a big cost increase. But as I mentioned when I was going through the presentation, a higher number of directly operating stores obviously impacts the number, but it also gives sales. And also most of our sales is volume driven. And we have a very good improvement in the OpEx to sales ratio of 0.7 percentage points. So I think that the organization has actually done a very good job when it comes to OpEx this year. And the gross margin, sorry, there were two questions there. We have seen an improvement in the gross margin in Norway with an uplift in the seasonal product range. But as I also said, it can take some time before changes in currency, freight, all this washes into the products that are actually sold, but at the end, one must also remember that we are a low-price chain, and we need to follow the market prices. So that will also then decide how the margin ends up.

I think just to add on the margin side, it's -- we see that there are some comments in the market that a change in the NOK versus the U.S. dollar should immediately given an improved gross margin. And we do the hedging like you explained, Stina, and that will take some time to get the effects in. And that's also assuming that the market prices will remain stable. And we've seen historically that the shifting currency is actually not the driver of the gross margin. If you look on the historical numbers, you see that hedging basically make sure that you have like a stable margin, and that is operational improvements that drives your increase in gross margin, like we have seen this quarter, we're selling more nonfood items, we're selling -- we see good increase in base assortment with margins, and we also see increase in private label products. And that is the driver of the margin increase we've seen in this quarter, and that will also be what we're working on going forward.

And the next question comes from Petter Nystrøm, ABG. Regarding the ÖoB 2026 guidance. Is this development in line with what you expected 6 to 12 months ago? Or has the outlook become more challenging? If yes, what has changed?

Nothing has basically changed. I think we have reported what we have said the whole time that we do some step changes, small changes to the campaign model. We introduced some new categories. But we have seen all the time that we managed to shift the consumers and the way they trade, but it doesn't really add up to a big change in the basket. And that is basically because we see that the current customers of ÖoB have a limited capacity to spend money. And we managed to shift this spending across the categories, but doesn't really drive an increase in the footfall. So that's what we're looking for. And we have always said that we need to improve the customer experience in order to attract new customer segments, and that's what we're doing. And we have always guided on the '28 and that we stay firm on. We have been not sure about how this will evolve in that transition period. But now when we have done the tests, we've done the pilot so far, we see that it's evident for us that we need to do the remodeling and that is what will bring the step change and the new customer segments into the stores in Sweden. So that's why we also give such a clear guidance on it now because now we are -- have more visibility after we have done the pilots.

And that was the last question.

Then we say thank you, and we see you next time.