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Edited Transcript of AXFO.ST earnings conference call or presentation 15-Jul-19 7:30am GMT

Half Year 2019 Axfood AB Earnings Call

Stockholm Jul 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Axfood AB earnings conference call or presentation Monday, July 15, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Lexmon

Axfood AB (publ) - CFO

* Klas Balkow

Axfood AB (publ) - President & CEO

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Conference Call Participants

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* Daniel Schmidt

Danske Bank Markets Equity Research - Research Analyst

* Fredrik Ivarsson

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Niklas Ekman

Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst

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Presentation

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Operator [1]

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Hello, everyone, and welcome to the Axfood AB Q2 2019.

(Operator Instructions)

Today, I am pleased to present CEO Klas Balkowp; and CFO Anders Lexmon.

Speakers, please begin your meeting.

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Klas Balkow, Axfood AB (publ) - President & CEO [2]

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Thank you. And good morning, everyone, and welcome to Axfood's financial report for our second quarter.

As you heard, with me today, I have our CFO, Mr. Anders Lexmon.

And let's now move into the report and finally then ask you to turn to Page #2. Our agenda for today will follow our normal structure. We will go through our key ratios for the quarter as well as our financial position. This time, I will also be fairly brief in our strategic update. And we will, as always, end the conference with a Q&A session.

Turn page to #3. Let me start with a quick overview of Axfood.

Our House of Brands structure is clear with a common logistics and sourcing that create economy of scale. Versus last time, you may see on the slide that the brand Direkten is not longer there. This is due to, in the quarter, we have divested our shares. We had a 50% ownership through the franchisees. At the same time, we have prolonged our agreement to be their supplier for the coming years.

Going to Page #4. And before we get into the key ratios, I would like to highlight the essence of the report. With our growth of approximately 7%, we are clearly gaining market shares. We also reported a solid profit, as we -- even excluding the IFRS 16 effect, we beat last year's record quarter. Our profit is also solid, as our number includes several investments for the future.

I kindly ask you to turn page to #5. And let's now move into the key ratios for the second quarter, so please go to next page.

And then we are starting with our sales. For Axfood as a whole, we report the net sales growth of 6.7% to slightly above SEK 13 billion. This then includes a positive eastern (sic) [Easter] effect, in our case, of approximately plus 1.5 percentage points. And worth noting is that we are meeting high comps not only from last year. Since 2016, we have performed a 20% growth over the 3-year period. And all our segments have contributed in this quarter, while it must be said that particularly Willys and Axfood Snabbgross shows really strong like-for-like numbers.

Turn page to #7. And if we look at our sales development, in our stores and online, including then Hemköp franchise, it shows a total growth of 7% compared to the market growth of 4.3%. Both numbers include then the positive calendar effect due to eastern (sic) Easter . We are clearly continuing to gain market shares.

Turn page, #8. And food online in Sweden, if I base that on Svensk Dagligvaruhandel index, they noted a 24% growth for the second quarter, while for us in Axfood we report a 37% online growth.

Please go to next page, #9. Moving then to our profit. Our operating profit came in at SEK 601 million including IFRS 16 and SEK 557 million excluding the IFRS effect. Last year, we noted a strong, record quarter, so it's solid that we're able to slightly overperform even last year's number. And this is mainly driven by a strong like-for-like growth and a balanced cost control, particularly in Willys and Snabbgross. On the other side, Hemköp is still in its investment phase, that has influenced our margins negatively. Also, we have in this quarter started our dark store in Stockholm, a project that we have several learnings from and initially drives additional costs, but I will come back to all of this later on in my presentation.

So let's now go through all our segments, and I will start with our largest one, Willys. So turn page to #10.

And even if we -- for Willys and for all of us had a positive eastern (sic) Easter effect, it must be said that Willys shows really strong like-for-like growth as comps are very high. Behind our refurbishment program, more customers and increased basket, Willys noted an 8.9% growth and almost 8% like-for-like growth. Versus last year, we have 4 more stores in the network, and we continue to roll out our online offer to more stores. In the quarter, we've added 9 stores to total 70 stores with our online offer. And with the positive like-for-like, Willys increased our profit to SEK 368 million or SEK 342 million excluding the IFRS 16 effect versus last year's SEK 307 million.

And with the latest year's development, we think it's well deserved that Willys in May received retail of the year award among all retailers in Sweden.

Please turn to Page #11, going then into Hemköp. And Hemköp as a whole came in with a 3.4% growth and 3% growth in like-for-like. Our franchise stores continued to outperform the market, while we had slower growth in our group-owned stores. As you are all aware, we continue to invest in Hemköp. And even if I would have liked to already now see stronger effects out of these investments, we are confident that, over time, investments will pay off.

Our profits came in at SEK 52 million or SEK 42 million excluding the IFRS 16 effect versus last year's SEK 68 million. This is mainly due to slow like-for-like in our group-owned stores, less-favorable sales mix and market investments.

Please turn to Page #12, going to Snabbgross segment. It is pleasing to see this quarter's growth in Snabbgross, as we are also in Snabbgross meeting high comp last year. Our growth rate of 6.8% is driven by more customers and higher average ticket. And behind the positive like-for-like and some lower campaign intensity, we are improving our profit to SEK 57 million or SEK 55 million excluding the IFRS 16 effect versus last year's SEK 42 million.

Turn to Page #13. And our last segment, Dagab, reports a stable quarter. Our positive sales growth of 6.7% is driven by strong sales in Willys, Snabbgross and Hemköp franchise. Profit came in at SEK 179 million or SEK 173 million excluding the IFRS 16 effect compared to last year, SEK 181 million. Our underlying operating profit is healthy, while in this quarter, the profit has been impacted by future investments like the dark store implementation and investments in Urban Deli and Apohem. In addition, we have some negative currency effect in this quarter as well as increased fuel cost.

With this, please turn to Page #14. And I would like to hand over to our CFO, Mr. Anders Lexmon.

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Anders Lexmon, Axfood AB (publ) - CFO [3]

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Thank you, Klas.

And then we are on Page 15. Let me then first summarize the development of the first 6 months. We see that Axfood had a good growth and, as Klas mentioned earlier, especially from 2016. We had an average yearly growth of 5.6% during that period. Net sales for the first 6 months this year showed a growth of 5.5% compared to last year, and our like-for-like sales within the Axfood Group stores were a healthy 5.2%. And we gained market share also in the first half of 2019. The operating profit summed in the first 6 months, up to SEK 1,086 million, which implies an operating margin well in line with our long-term goal of 4%. IFRS 16 had a positive effect on operating profit with SEK 87 million and on the operating margin with 0.3%.

Then please, page -- turn to Page 16.

Our total cash flow for the first half year is in line with last year, minus SEK 833 million compared to minus SEK 863 million 2018. As we had in the first quarter, we also in the second quarter had an IFRS 16 effect that affects both operating cash flow with plus SEK 760 million for the first 6 months and amortization of debt with minus SEK 760 million. That's 0 effect on the total cash flow in the period.

The change in working capital was on negative this first half year, but compared to the first quarter, it was an increase with a little bit more than SEK 100 million in the second quarter, mainly due to a positive calendar effect at the end of June but also to improvements in the underlying net working capital, which I will come back to. We also had lower impact of net investments this year, but that is explained by a divestment of an asset held for sale with approximately SEK 100 million that we did in the first quarter this year. Share repurchase and dividend payout was in line with last year.

Then turn to Page 17, looking at our CapEx. We had investments of approximately SEK 500 million during the first 6 months. This is well in line with the estimated CapEx for the full year. Therefore, we reiterate our guidance of a CapEx range between SEK 1.5 billion and SEK 1.6 billion, including SEK 600 million in automation in our new logistics center outside Stockholm. The difference compared to last year was mainly attributable to higher investments in our retail operation, higher pays in establishments both in Willys and in Hemköp and also refurbishments. In the wholesale operation, Dagab had some lower investments mainly due to the major investment in the warehouse in Jönköping last year. The new Jönköping warehouse is now fully up and running. IT investments and others were also in line with last year. The IT investments consist of IT projects, infrastructure in stores and licenses.

Please turn to Page 18, coming back to the development of net working capital. We saw further improvements in the second quarter both in Swedish krona and as a percentage of net sales. These graphs are showing the net working capital for 2019 on a rolling 12-months basis. If we break this down to the most important items: We have a stable or improved share of net sales. Especially the development of accounts payable has a positive trend so far this year, explained both by better payment terms but also the progress in our work with supply chain financing.

Then turn to Page 19. This is a picture of the development of Axfood's financial position. During the last 5 years, we have more often had a net debt receivable position than a net debt at the end of June, and so also this year if we exclude the effect of IFRS 16, as you can see at the right side of this slide. This year, we are back on the levels we saw in 2015 and '16. If we then include IFRS 16, we increase our net debt with over SEK 5.8 billion at the end of June, and the equity ratio dropped to just below 20%. If we exclude the IFRS 16 effect, the equity ratio was in line with last year. We continue to stand on a solid base with an equity ratio well in line with our long-term goal of 20% at year-end.

Page 20. You could then take a look at the development of our capital employed. We see the same picture. If we exclude the IFRS effect, we had a capital employed level of SEK 4.2 billion and a ROCE of just about last year, approximately 49%. In other words, we continue to have a high capital efficiency with increased earnings but although a big effect of IFRS 16.

Turn to Page 21. Then finally let me just repeat the effects of IFRS 16 in a couple of key ratios.

The equity ratio decreased with approximately 12 percentage points, and net debt increased with SEK 5.8 billion.

In the P&L, EBITDA in the second quarter increased with SEK 389 million to SEK 1,137 million. And EBIT increased with SEK 44 million to SEK 601 million since the lease payments now are divided into partly depreciation and partly interest costs. ROCE decreased from 48.6% to 30.9%. And the cash flow from operating activities increased with SEK 362 million to SEK 1,085 million. And the cash flow from financing activities decreased with a same amount, and the total effect in the cash flow was therefore 0.

And with this, I hand over to you again, Klas.

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Klas Balkow, Axfood AB (publ) - President & CEO [4]

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Thank you, Anders.

And I will now end up this part of the presentation through providing a quick and short update on our strategic agenda, so please turn to next page, Page #22. And we'll move on to #23.

As earlier informed, we have 6 strategic areas with some clear priorities, and I don't intend to go through all the 6 areas today. However, I would like to make some comments in 2 of them, so please turn to Page #24.

And first, expansion. We have a target this year to open up 5 to 10 new stores. And with 5 store openings this quarter and 1 store in our first quarter, we must say that we are well in line with our target of 5 to 10 new stores that we have set out for this year. In addition to new group-owned stores, I also can remind you of that, as of end of Q3, we will welcome the retailer Östenssons with 9 stores as new franchise members in Hemköp. We will also continue to roll out our online offer to more stores. And finally, our online pharmacy store Apohem is now fully up and running, and with Apohem we now continue to build the brand and reach out to more and more customers.

Let's turn to Page #25, and let me then provide some update regarding our supply chain. And let me start by sharing the news that we have, after the period -- after the end -- after the period end, signed the agreement with NREP for them to provide the facility for our new logistic center in Bålsta northwest of Stockholm. The agreement is in line with the earlier announced letter of intent where we will have a long-term rental agreement with NREP. Next step is now to finalize the agreement with the automation supplier WITRON. We plan to give you more details around all of this when we have all of this in place, most likely already in the next quarter.

Another priority within supply chain has been to implement common dark stores. So please turn to next page, #26. As -- we have, as communicated earlier, as of May introduced our first common manual dark store in Stockholm for all our food online brands. We have many learnings from this introduction in terms of systems, range and routines. And the next step are now to capture all these learnings and to improve our efficiency before we implement this in Gothenburg, which we plan to do in 2020.

Let's now go to Page #27. And I'm now going to give you an update on our outlook, so please turn to Page #28.

And as Mr. Lexmon said, we are repeating our outlook for our planned CapEx. Plan is to spend SEK 1.5 billion to SEK 1.6 billion, which then includes SEK 600 million for the automation of the new logistical center that is an investment that will happen this year.

So go to next page, #29. And before we go into the Q&A session, let me then summarize this quarter with, first, we report strong sales, with all segments contributing. And based on this morning's market data from Svensk Dagligvaruhandel, it's clear that we continued to gain market shares. Two, we report solid profit, which also includes several investments for the future.

Now we'll now go to the Q&A session, so I ask you to turn to next page. And with this, I hand over to the operator to moderate these sessions.

Over to [Aralac].

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Niklas Ekman from Carnegie.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [2]

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Yes. First, I'd like to just ask a little bit about Hemköp. If you can talk a little bit more about the reasons for the weak development and then also what restructuring efforts that have been made. If you could just elaborate a little bit on this topic, I think that would be very helpful.

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Klas Balkow, Axfood AB (publ) - President & CEO [3]

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Niklas, well, as I stated, we have -- for some time now, we continue to refurbish stores. We continue to develop the concept. We have invested in somewhat more marketing activities. We're also investing in our staff. And we also have in this quarter opened up 2 more stores. We have looked into our store network. We also closed 1 store. And the -- all of this is also bringing some additional costs versus last period. And so these are the kind of investments we are doing. And as I stated, I already now would have liked to see more effects out of these in terms of like-for-like growth, which we are sure will come. We have not seen it fully yet. So basically that's kind of the elaboration.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [4]

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So -- but there's no particular time line here where you are now in an investment phase and where what kind of the payoff is expected within a defined number of quarters or anything like that. Is it more a work in progress?

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Klas Balkow, Axfood AB (publ) - President & CEO [5]

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That's correct. We are, for some time now, continue to drive the agenda for Hemköp to further step up our stores, to meet more customers and to drive that. And obviously, we wanted to see the effects out of that in terms of like-for-like as we move along. So it's a work in progress.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [6]

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Okay. And online sales now in the Stockholm area, you have shifted entirely to dark store. Is that correct? So you've stopped picking in stores. Were there any costs related to this or anything else?

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Klas Balkow, Axfood AB (publ) - President & CEO [7]

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That's correct for the home deliveries. All Stockholm area now goes from our dark store. And yes, it has been costs connected to this in Dagab. As we -- when we do this, we have 3 or 4 brands with various range. And so it has been, as I said, some learnings where we have increased staff particularly to handle this in this initial period. So we are capturing now the learnings. We want to see more efficiency as we move along, but initially we have added more costs into it, particularly or mainly then more staff into the dark store, as we're handling it. We are learning and we are seeing and we are getting more experience out of it. So the system there -- is there. We're pleased with that. And restructuring -- or the structure is there, but obviously it's kind of a startup phase here.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [8]

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Okay, excellent. And I'm also curious, when you talk about the market development in general, taking a step back, you're looking at the sales growth 7% versus 4.3%. I mean it's clear that Axfood is outgrowing and Willys here in particular. It looks like ICA has been performing kind of in line with the market, so are we still mainly seeing that the Coop is the one that is losing market share? Have you seen any changes there in the competitive environment in terms of the dynamics there?

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Klas Balkow, Axfood AB (publ) - President & CEO [9]

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Well, I can only see, as you are seeing, the total market, so I can just conclude that from total market perspective we are gaining market shares. And unfortunately, I don't see the other players in the market reporting their numbers, so I can only sum up that, versus the market as a whole, we are growing faster.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [10]

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Okay. Great. And I've also noted here, of course, Lidl is ramping up significantly in 2019, opening some, I think, 23 stores this year. Have you seen any impact to kind of the closest Willys stores? Or is it too small to have a measurable impact?

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Klas Balkow, Axfood AB (publ) - President & CEO [11]

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Well, if we look at Willys, particularly as you see from the report, we have a very healthy growth in Willys at the moment both in terms of Willys Hemma, our large Willys as well as Eurocash. So from that perspective, we are pleased with our development.

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Operator [12]

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(Operator Instructions) Next question is from Daniel Schmidt from Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [13]

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Yes. Just some more questions on Dagab and the cash components when it came to the dark stores and some extra costs. It sounded like you were saying that you are hoping to get better efficiency but it will take some time. Does that -- is that a correct interpretation, that we should see some extra costs also for Q3 and maybe for Q4? Where -- could you also sort of add comments for fuel and FX as you enter Q3? If we start with that.

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Klas Balkow, Axfood AB (publ) - President & CEO [14]

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No. I think you -- I mean you capture it right. We have started our -- basically we are up and running fully for all the -- all Stockholm stores now in -- as of May. And I expect to continue to have some higher costs even if I also have expectations that we will also be more efficient in this, but initially we have higher costs out of that. So that will continue for some quarters. I expect that. Regarding the other comments you mentioned: So currency, we'll see how that turns out. We don't know, but in this -- as you follow the krona as well, so you see that, that has an impact. And then fuel cost is also somewhat higher, not so much but somewhat higher. And then just to remind you all of that, I pointed out as well in the report, that we now have for us the change that we are looking into and from a consumer perspective where we are now meeting more prepared food, a consumer who wants to more -- have more alternatives. We have Urban Deli. That has been a -- we think it's a fantastic brand that we -- is now fully -- 90% ownership. It's in our books today. And we continue to invest in Urban Deli now with more sustainable alternatives. We also start to roll out some of their brands into Hemköp. So we see that it's part of the structure at this stage. And also, Apohem is up in a phase where it's building up its brand, and obviously that's also drives some costs. So we have some future investments in this report that we actually like to have, that obviously, it's something that we believe is right for the future.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [15]

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Yes, yes. Good. And then this online growth is, of course, impressive and much higher than the market. Is it any sort of an anomaly that it's actually down sequentially, if I'm not mistaken, in terms of absolute numbers coming out of the online despite the fact that you are extending the number of stores that you're providing online from and that you had at Easter in Q2 and not in Q1, if you see what I'm saying?

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Klas Balkow, Axfood AB (publ) - President & CEO [16]

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Not sure. I mean, if -- online is...

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [17]

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I think it was (inaudible) [22] versus [3] for you, [5] in Q1. i.e., sequentially online is a bit lower in terms of absolute numbers.

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Klas Balkow, Axfood AB (publ) - President & CEO [18]

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And I think you will have and you will see that as we move along, some variances regarding online that differ somewhat from the physical stores. I think, as we move along...

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [19]

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It has nothing to do with sort of disruptions when it comes to the dark store in Stockholm or anything like that?

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Klas Balkow, Axfood AB (publ) - President & CEO [20]

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No, no, no. It's more related to various of the -- I mean normally you see a somewhat slowdown prior into when customers go into vacation period and they go to the travel or they -- summer houses and so on. So it's a different pattern, you can say.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [21]

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Yes. So -- and then just finally, Easter 1.5%, there's no reason to believe that the earnings impact was any different than what you usually set when it comes to the...

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Klas Balkow, Axfood AB (publ) - President & CEO [22]

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We have -- no. Margins is as -- we are meeting a sales mix last year which, I think you remember, was very positive to this warm period there. Eastern (sic) [Easter] is somewhat lower. We can also mention that we have a somewhat slightly higher eastern (sic) Easter effect in Willys, and Hemköp is not having that high eastern (sic) Easter effect.

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Operator [23]

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Next question is from Fredrik Ivarsson from Kepler Cheuvreux.

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Fredrik Ivarsson, Kepler Cheuvreux, Research Division - Equity Research Analyst [24]

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Broad question here. Most have already been asked. So one on the supply chain financing program. Is there any chance you can sort of give us ballpark figure on the positive impact on the working capital there? And also some guidance on what to expect in the upcoming 2, 3 quarters?

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Anders Lexmon, Axfood AB (publ) - CFO [25]

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Yes. We see on a rolling 12-months base that we have a positive effect of approximately, I will say, SEK 150 million in accounts payable. And regarding to what we see ahead, I think it's quite hard to give a figure there because it depends on how the progress will develop with the supplier section. So we will come back to it.

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Fredrik Ivarsson, Kepler Cheuvreux, Research Division - Equity Research Analyst [26]

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But it's fair to assume that it will be fairly positive in the upcoming quarters as well?

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Anders Lexmon, Axfood AB (publ) - CFO [27]

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We still work with it, of course, and we do what we can, but it's hard to give any guidance there.

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Operator [28]

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And there are currently no further questions registered, so I'll hand back to the speakers. Please go ahead.

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Klas Balkow, Axfood AB (publ) - President & CEO [29]

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Thank you. And I think it's summertime, and I would like to say thanks for listening. And I wish you a great summer. Thank you all.

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Anders Lexmon, Axfood AB (publ) - CFO [30]

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Thank you.

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Operator [31]

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This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.