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Edited Transcript of ICA.ST earnings conference call or presentation 15-Aug-19 8:00am GMT

Q2 2019 ICA Gruppen AB Earnings Call

Solna Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of ICA Gruppen AB earnings conference call or presentation Thursday, August 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Frans Benson

ICA Gruppen AB (publ) - Head of IR

* Per Strömberg

ICA Gruppen AB (publ) - CEO

* Sven Lindskog

ICA Gruppen AB (publ) - CFO

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Conference Call Participants

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* Carole Gladys Madjo

Exane BNP Paribas, Research Division - Research Analyst

* Daniel Schmidt

Danske Bank Markets Equity Research - Research Analyst

* Fredrik Ivarsson

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Gustav Sandström

SEB, Research Division - Research Analyst

* Niklas Ekman

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

* Stellan Hellström

Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods

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Presentation

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [1]

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Good morning, everyone, and welcome to this webcast where we'll run through ICA Gruppen's financial and sustainability report for the second quarter 2019.

A little different setting today as we are broadcasting live from our head office in Solna, but content-wise, it will be a familiar story, with first, a presentation and then a Q&A session. And today's presenters, Per Strömberg and Sven Lindskog, are beside me.

And with that, I guess I just hand over to you, Per. So please go ahead.

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Per Strömberg, ICA Gruppen AB (publ) - CEO [2]

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Thank you, Frans, and good morning to all of you.

If we start with a summary. This has been a good quarter.

And if we start with sales growth, it's a strong development, and we see a particularly good development when it comes to online sales, where we are clearly outpacing market growth. We also see a sustained progress on EBIT margin. And we have successfully divested Hemtex, and this will help us and gives us a simplified group structure going forward.

So if we look at the financial numbers.

We see that net sales is up just above 4%. And also in local currency, it's around 4%. We are, of course, helped by a positive calendar effect coming from Easter of around 1%. And we see both EBIT and EBIT margin being up. EBIT margin is now at 4.5%. And when it comes to EBIT in absolute terms, we are up 27% in this quarter.

We have 2 key events. First of all, the fact that we sold or divested Hemtex in May. And the second thing is that we have appointed Anders Bärlund, and he's going to start as our new strategy and develop -- business development officer end of September.

If we move on to the market development, and starts with Sweden or ICA Sweden. We see that ICA store sales is up just above 4% in the quarter, which is in line with market growth, which was 4.3% in the second quarter. And as I said in my introduction, we have very strong online sales. Online sales growth was 36% in the second quarter for ICA Sweden. And if we compare that to the market growth of 24%, we are clearly outpacing market growth.

Moving to Rimi Baltic. Rimi Baltic store sales up 3.6% or comparable sales just above 5%. And the key reason here why comparable sales is so much higher is, of course, that we are doing the store conversions, which is mainly then impacting the Latvian number.

Market growth is exceptionally high in the quarter, market growth as high as 8%, and in Lithuania, close to 10%. So we are losing a little bit of market share on the Baltic market.

When it comes to our pharmacy business, we see a good development. Store sales up 3.4%. And the -- what we call the adjusted growth when we work with fixed price on prescription drugs and where we adjust for Minutkliniken, we are up 2.8%. And you can see that both these numbers are slightly higher than market growth numbers. So here, we are gaining a little bit of market share.

Also, on online, we are seeing a good development, we are up 45%, while the market is growing 37%. So a solid and good development for our pharmacy business.

We also want to take you through a couple of highlights. And starting again then with the summary of our online development. Overall, as I said, very good. And if we look at ICA Sweden, we now see that these stores that are working with online, they have sales above 3% going through that channel. We now have just above 290 stores selling food online and 61 stores are served from our dark store or our e-commerce warehouse in the Stockholm area.

On the pharmacy side, as I told you before, good growth numbers. We have now also Click & Collect, where you can as a customer pick up the products -- the pharmacy products in our pharmacies, in 267 pharmacies. And we are also starting to pilot Click & Express.

Another very important milestone when it comes to online will obviously be when we open our new e-commerce warehouse, they're our customer fulfillment center. And it's going to be placed north of Stockholm in an area called Brunna. We're going to open it in 2022. And obviously, this is a big bet and a big investment from the company.

We talk a lot in these meetings and in other sessions about the importance of making the digital transformation. And of course, we've put a lot of focus on that. But this, for us, it's of course, also very important to work with our stores and make sure that they develop in line with new customer needs.

And 3 recent examples. First of all, the fact that on Nära, we are focusing more and more on convenience. And the latest example is a new ICA Nära store in Malmö, Triangeln, where we have a lot of focus on convenience and meal solutions.

We have also now for quite some time developed the successful Rimi Express concept where we have opened 18 stores in total in the 3 Baltic countries to better serve. And these stores are, of course, very much focused on convenience and meal solutions.

And then we are developing our hypermarket concept. And we are now started a journey where we will do pilot test in a Maxi store in Visby in Sweden to test the new hypermarket concept, where there will be several changes versus how we are doing it today. Obviously, much more focused or stronger focused on meal solutions, better omnichannel solutions to mention 2 of them. And the pilot store will open in the beginning of next year.

Another thing that we are announcing today is our new fuel strategy. This is an important step on the sustainability area. And the idea here is that all goods transport by road will be fossil-free by 2030. And in the metropolitan areas, meaning Stockholm, Gothenburg and Malmö, we're going to achieve this already 2025. So this is a big step and a natural next step also when it -- linked to our climate neutral target that we will hit already 2020.

Another factor here is that we see a big change when it comes to our product portfolio and the assortment. We see that sales of fresh and frozen vegetarian food has increased more than 20% in the first 6 months of this year and we also see a higher demand for alternatives to meat. People are changing meat to halloumi or lentils or beans or other products.

So Sven, we are ready for some financials.

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [3]

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Thank you, Per. So good morning, everybody. And I will, like I usually do in these sessions, go through some of the main financial KPIs of the quarter, first of all.

And Per talked about the net sales growth, some 4% in local currency, quite a significant Easter impact, of course, due to the change in timing of Easter compared to last year. EBIT improving very nicely, both in absolute terms and in margin terms, as you can see in the table here on the right-hand side, but you see also on the lower -- on the bottom line, that the earnings per share is significantly down, in fact, compared to last year, that despite the fact of this EBIT before nonrecurring items improving significantly.

And as you read in the report, you will find then that a lot of this is linked to tax. We have, on the one hand, of course, the nondeductible loss of divestment of Hemtex in this quarter, but we also had quite a significant dividend tax payment in Latvia in this quarter, which we didn't have in the same quarter last year. And some of you may also recall that in the second quarter of last year, that was the time that the corporate tax rate in Sweden was changed, so we had a significant positive one-off impact in the second quarter of last year. So that then provides the explanation for this earnings per share reduction compared to last year.

If we then look at the simplified various analysis compared to the same quarter last year. You see sales volume impact on our earnings progress being relatively limited, it's up some SEK 20 million or so despite this positive Easter impact, but that is, of course, very much linked to the fact that we had a very strong volume growth in the second quarter last year, not least due to the fantastic weather at that time. This year, as you are well aware, it was more of a normal second quarter, so volumes then being somewhat lower. So that is sort of reducing the overall positive Easter impact on volume.

Margin, on the other hand, showing a very strong development, just like we had in the first quarter of this year. If you look at the store costs, it's up by a relatively low number, SEK 26 million. But then you need to keep in mind that on this line, we're also including then the increase in store profit contribution. As you can see in the report, it's up by close to SEK 30 million, so that is then sort of reducing this negative variance.

Then other costs up by some SEK 50 million. Also that, maybe a relatively low number, but in the report, we're also commenting upon the fact that marketing and advertising costs are due to say, timing or phasing differences slightly different compared to last year, so in fact, some costs are lower than what we had in the second quarter of last year.

And then revised useful lives on fixed assets in the real estate company. We spoke about that also in the first quarter. It has in this quarter also a positive impact of some SEK 15 million compared to last year. And we have said that, that will, all other things being equal, that will also be the effect that we see in the coming 2 quarters of this year.

And then finally, acquisition divestment-related effects. It's a combination of 3 different effects, summing up to these sort of SEK 15 million positive. You may recall that, you find it in the report, the ICA integration costs that we had last year. Last year, also, we had a bit of a negative impact. We had Hemtex, the whole of the second quarter with negative results. This year, we divested Hemtex early in the second quarter. On the other hand, then on the negative side, we now have Min Doktor in -- our share of Min Doktor results in our results. So that is a negative impact then compared to last year where we didn't have that.

If I then go through the segments one by one briefly.

Starting with ICA Sweden. As Per said, we have sales up by some 4%, quite a significant positive calendar impact, as we said, close to 2%. Very strong progress in terms of EBIT and EBIT margin compared to these -- relatively weak second quarter of 2018. I'm sure a number of you remember that report.

If we look at where the improvement is coming from. Just like in the first quarter, price -- positive price impacts, good assortment mix impacts. In addition, then of course, to the positive Easter impact that we are spelling out here, close to SEK 40 million. And then store profit sharing, as I said before, up by close to SEK 30 million compared to last year. Then maybe some of you remember that in the third quarter of last year, we had, in fact, a very strong increase in store profit sharing. This year, it is more coming now in the second quarter.

And also, on marketing and advertising costs, as I alluded to before, a slightly different timing, which means that marketing and advertising costs are lower in this second quarter specifically compared to last year.

Logistic costs, we have spoken a lot about over the previous few quarters. They are still increasing. If we compare to last year, we have still a relatively sort of large inflation component. But we are happy to see that measures that we have taken meant that our efficiency in logistic costs are now improving. Also, of course, linked to the fact that in the second quarter last year, with the sort of exceptional volume growth, high volatility in volumes, that also meant challenges for logistic costs at that time. Now linked to this, in fact, we then also see our shrink numbers improving. So shrink is significantly lower than what we saw in the second quarter of last year.

Then business development costs, costs related to digitalization, scaling up of our e-commerce warehouse and so on. Those costs still continue to be higher than the corresponding period last year.

Then going to the Baltics. And also here, in fact, the net sales growth in the order of 4%. The calendar impact linked to Easter, not as high as in Sweden, but still close to 1%. Per mentioned this effect of the store conversions in Latvia. Temporarily, we had a negative impact of that. We are now coming close to the finalization of those store conversions. But still, in this second quarter, we had a significant negative impact on our net sales.

But overall, still, you see EBIT and EBIT margin developing positively. And the reasons being quite similar to what we reported in the first quarter of this year, we have also here improvement linked to price, assortment mix, our private label margin improving, campaign promotional efficiency, improving. Also, of course, the fact that we don't have these ICA integration costs that we had last year, that is helping the comparison.

On the negative side, now as we are in a quite intensive phase of the central warehouse expansion project in Riga, we have temporarily some higher costs linked to that, additional warehousing being rented temporarily. Salary inflation, we have also talked about in the previous few quarters, and that continues to be quite high, affecting mainly logistic costs and store operating costs. And then store conversions, that I mentioned before, not only having a negative impact on net sales, but also, in fact, some negative impact on EBIT due to additional costs being linked to those conversions.

Then the pharmacy segment. Also here, in fact, a net sales growth in the order of 4%. If we adjust it to constant prices, then it's more in the order of 3%. And here, unlike the grocery retail businesses, we have a negative calendar impact linked to Easter. So if we adjust for that, we continue to see a good volume progress. And as Per said, particularly in the online channel, continued very good volume progress.

So that means also a positive impact then on our earnings development, but of course, some negative impact coming from the Easter calendar effect. We are also mentioning in the report of this quarter that with the ramp-up of the new automated warehouse in Norrköping, we have incurred some additional costs in this quarter linked to that. And we continue to invest, [with a] higher cost in e-commerce, digitalization and so on also in this quarter if we compare to the second quarter of last year.

Still, when judging the numbers, you need, of course, also to take into account the Min Doktor acquisition, as I said before. This year, our share of the results of the second quarter was SEK 11 million negative. And of course, we didn't have that in the last year.

Then real estate, another very strong quarter, I'm happy to say. Good growth, both in terms of income, but we see also operating costs being lower. Some of you may recall that in the second quarter of last year, we reported relatively high maintenance costs at that time, so that is, of course, helping a bit. But still, also, if you adjust for these revised estimates of the useful lives of fixed assets, sort of reducing depreciation by some SEK 15 million in the quarter, you can see an EBIT development which is very satisfactory.

And then finally, the bank. And also here, a very good second quarter, good volume-driven growth, both in the banking business and in the insurance business, and that then creating a positive impact on our EBIT progress. Also, some help, obviously, from the higher repo rate, the Central bank increasing the Swedish repo rate at the end of last year, so there's a positive variance coming from that as well.

But we're also very happy to see now, with the growth of the insurance business, that the cost absorption is clearly improving, the cost ratios are improving a lot, and we start to see very good numbers now also in our insurance business. Although in all fairness, we should mention, just like we did in the first quarter of this year, that there is a kind of a one-off impact from the release of some claims provisions also in the second quarter.

We had some increase in credit losses in the bank, but I would say is nothing out of the ordinary if we look at the volume growth that we have in the business.

So then just a few words about the cash flow. Obviously, the improvement in earnings, also the financial net improving, like we have said in previous quarter coming from a successful refinancing, our interest costs are going down. But also slightly lower paid tax in the quarter, but we have a negative impact in our working capital movement. So account receivable inflow is not as beneficial as it was in the second quarter of last year due to the change in timing of Easter.

But overall, it still means net debt is down, whether we look upon it as pre-IFRS -- IFRS 16 basis or after IFRS 16, net debt is down. The net debt ratio to EBITDA is more or less in line where we were at the end of the first quarter despite then the fact that we paid the dividend in the second quarter.

So overall then, where we are compared to our long-term financial targets. In terms of growing faster than the market, on a rolling 12-month basis, still doing so in Sweden. Not yet in the Baltics, as Per said before. In the pharmacy, we are more or less in line with the market on a rolling 12-month basis.

But very pleasing, of course, the EBIT margin improvement on a rolling 12-month basis, where you can see now in the numbers, we are now coming very close to the long-term target of 4.5%.

And then return on capital employed, net debt to EBITDA, dividend ratio, all quite similar to where we were at the end of the first quarter and very much in line with our long-term financial targets.

So with that, back to you, Per.

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Per Strömberg, ICA Gruppen AB (publ) - CEO [4]

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Thank you, Sven.

And just to sum it up a bit. If we start with the outlook, looking a bit into the future and saying a few words around our different businesses.

Starting with ICA Sweden. First of all, we are -- we have implemented the new organization, but obviously, it's going to require further work during the autumn to make everything work according to our plans.

We are -- we will continue to invest in digitalization and business development to make sure we stay competitive in all of our business areas.

And even though we saw improved numbers when it comes to logistics here in the second quarter, we're obviously going to continue to work with efficiency.

We have the ramp-up of our dark store or our e-commerce warehouse in Stockholm where we're going to see a few more quarters where we really need to work with the efficiency to get the better numbers.

And we're going to have 10 store openings in 2019.

On the Baltic side, it's worth mentioning that food inflation is now clearly coming back. It was above 3% in the quarter, and we expect food inflation to that extent, also going forward. And cost inflation remains high, and that obviously hits salary costs.

We have the new distribution center in Riga, Sven talked about that. But this means, of course, that we are, to a certain extent, having double costs when it comes to warehousing in Baltics.

The One Brand Strategy is close to completion, meaning that all discount stores are now Rimi stores.

And we will launch e-commerce in November in our Baltic business.

And we have also here 8 to 10 store openings in 2019.

On the pharmacy side, very important for us to continue to invest in the online business, and of course, also in good last mile solutions that we talked about.

We have the ramp-up in Norrköping, and Sven talked a little bit around that, but it's been a challenging start and this will require a few more months before we are on track when it comes to our new warehouse in Norrköping.

We have the expansion of Min Doktor. The Min Doktor clinics seems to work very well. We're going to have roughly 20 clinics when we finish the year. And out of the 12 new clinics that we are planning for this year, we have so far done 4.

If we look at real estate and bank, I think the strategy is working well. We will continue to do the same things going forward, but even more of it. And on the bank side, it's growing the business that's -- and it's mainly around customer loans and continue to grow our insurance offer.

And when it comes to the central costs, they will remain at around SEK 460 million that we announced also after the first quarter.

So if we sum it up. This has been a really good quarter for our company. We have seen good sales growth throughout our business and especially so when it comes to the online channel, where we are clearly outpacing market growth.

We have sustained progress when it comes to both EBIT in absolute terms and in EBIT margin. And if we look at the results for ICA Sweden, our real estate business and the ICA Bank, they are clearly very strong in this quarter.

And we have successfully divested Hemtex, and this will give us even more focus on our core business going forward.

So with that, Frans, I give it back to you.

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [5]

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Thank you, Per. Thank you. It's time for questions. And this time, you can also ask questions if you're following this on our website. So scroll down to the bottom of the page, and there you can see. I think it's fairly self-explanatory how to do it.

But let's start with the phone conference. So operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we've received is from Gust Sandström of SEB.

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Gustav Sandström, SEB, Research Division - Research Analyst [2]

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Congrats on a very solid result. If I may start with the profit sharing which helped in the quarter by SEK 28 million. You state that there's a phasing element to that rather than perhaps absolute earnings coming up in Maxi. But I would assume also that the earnings in the Maxi stores are higher this year compared to last year. So just thinking about H2 now, should we assume -- is it fair to assume sort of a flat contribution from profit sharing year-over-year rather than a reversal of the strong performance in H1, which I think you previously indicated sort of flat contribution year-over-year?

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Per Strömberg, ICA Gruppen AB (publ) - CEO [3]

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Yes. I think, indeed, it looks slightly better than what we have, maybe what we thought in the spring. So I think we have said that it is likely to be somewhat better than last year. But maybe now, it will be -- we think it will be more in the order of say flat compared to last year in the second half of this year. But the important thing is, of course, to remember that this sort of positive SEK 30 million or close to SEK 30 million impact that we have in this quarter, we are not likely to see in next quarter.

And you also see -- I'm sure that you looked back at the third quarter report of last year, and then you saw that we were up more than, I think, SEK 40 million or so compared to a year before. So I think that is the important thing to keep in mind.

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Gustav Sandström, SEB, Research Division - Research Analyst [4]

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That's great. And the ICA Sweden growth was like-for-like over 3.9%, which is solid. But looking at the calendar impact, inflation and online, I would assume that volumes then are negative in the store network. I'm just curious, in your internal modeling, do you assume that store volumes -- that, that trend will reverse going into H2 or -- given your assumptions of online growth in underlying market?

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Per Strömberg, ICA Gruppen AB (publ) - CEO [5]

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So what you normally see here, Gustav, is as soon as inflation picks up, and that's what we are seeing, you saw the numbers here and we were at 2.6%, 2.7% in the second quarter, and we saw also the data released from SEB yesterday that we had really high food inflation here in July. And short term, that means that volume growth will slow down. That's the way the market tends to always react. So if food inflation remains at a high level, volume growth will be limited or perhaps even negative in certain months. So that would be my anticipation going forward.

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Gustav Sandström, SEB, Research Division - Research Analyst [6]

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Great. And given the strong online growth we're seeing now in Sweden, are you -- do you think you're closing in to a point now where you're as profitable online as off-line? Or should we more sort of have to wait until 2020 with the new -- 2022 with the new warehouse until you sort of see similar margins off-line as online?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [7]

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And still, we are clearly both from a store perspective, which we are not reporting in our numbers, but still, from a store perspective, we are clearly in a buildup phase. And that's also true for ICA Group. And we are investing a lot of money into this. We are still at a limited scale when it comes to our dark store. So that means that we have a negative result coming out of our dark store. And we're going to have that for several quarters going forward. So we are definitely still in a build-up phase.

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Gustav Sandström, SEB, Research Division - Research Analyst [8]

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Great. And then finally from me. I might get back in line. But in the Baltics, which is a very strong market at the moment, but you're losing a little bit market share in the quarter, as you say, partly relating to the store commercials, but partly not. If I understand correctly, there has been sort of a high campaign level in these markets while you have not engaged in campaigns to the same extent. And do you believe that you can continue at a lower level of campaigning compared to your peers, but still sort of regain that market share?

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Per Strömberg, ICA Gruppen AB (publ) - CEO [9]

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We actually saw -- first of all, we actually saw the campaign level generally going down a little bit in the second quarter. It's not a big shift. We're definitely going to stick to our strategy. 40% sold on promotion is not a good long-term solution for any market and especially when Lidl enters later, I think that's going to mean that life is a little bit easier for Lidl. So we're going to continue -- still stick with our strategy. To be honest, when it comes to the market growth numbers that we saw in this quarter, 8% or even above 8% in certain markets, we were surprised by that number. And it might also be that it is a bit overstated. But that's the number we have received and that's the number we are communicating. But it seems to be a bit on the high side because what we have seen before is that we have started to close the gap versus market growth. But now we have a -- we didn't do that in this quarter, and there we were a bit surprised by that, to be honest.

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Operator [10]

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The next question is from Daniel Schmidt of Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [11]

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A couple of questions from me. Starting with ICA Sweden. And you mentioned [ICA on] Brunna. Could you just give us an update? And maybe you said it and I missed it, but an update on the time line, where we are in terms of the investments and what we should expect in the coming year basically.?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [12]

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We have said -- Per mentioned it here, we have a go-live of 2022. On the...

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

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No, I'm just meaning sort of medium-term here.

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [14]

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How do you mean -- what do you mean medium term?

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

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Are you incurring any sort of CapEx or extra costs already this -- by the end of this year and starting into 2020? Or is it really sort of back-end that -- you probably said this and I've forgotten.

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [16]

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No, no, no. But this is -- I think this -- yes. Sorry, sorry, Daniel. No. But this is very much in line with what we said at the Capital Markets Day. And also, we are in a period where we are investing. And we will see, probably, I mean if everything goes according to plan, a bit of a peak in 2020. I think the numbers, we -- so we are investing some SEK 900 million on real estate, and in addition to that, some SEK 600 million also in ICA Sweden. So there are large investments linked to that, over the coming few quarters, peaking, according to the plan in 2020.

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

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Sorry. I didn't hear the last thing you said. They're peaking?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [18]

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In 2020.

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

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Yes. Okay. But do you want to give any sort of absolute numbers or guidance for 2020 on this?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [20]

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I don't think we -- we don't have any updated guidance compared to what we said in the Capital Markets Day. Or did we talk -- I'm looking at Frans here. We talked about 2020 as well in the Capital Markets Day?

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [21]

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No, very superficially, but we will come back to that as soon as all the figures are finalized in December, at our CMD.

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [22]

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Yes.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [23]

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All right. Okay. Okay. And then sort of jumping to the pharmacy business. The fact that Sweden now has introduced VAT on health care services from private providers, is that meaningfully in any way changing the -- sort of the economics and your way of thinking when it comes to Min Doktor from here on out?

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Per Strömberg, ICA Gruppen AB (publ) - CEO [24]

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We are absolutely -- we have -- absolutely have a long-term commitment to that business. But of course, the VAT change and also the lower remuneration that we get clearly has an impact on that business. And to the extent possible, we are, of course, adapting our -- the way we work with the -- if you take the VAT as an example, we can clearly then work with more full-time employed people and then we have a more cost-efficient setup.

So we are clearly adapting to the new rules, but of course, it has an impact on the business. And we have also said that if you -- if we previously said minus SEK 10 million roughly per quarter, we are now for the third and fourth quarter talking roughly about [SEK 50 million]. Right, Frans? So it will have some kind of impact. Absolutely.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [25]

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But it's not going to be more than that, do you think basically?

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Per Strömberg, ICA Gruppen AB (publ) - CEO [26]

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That's the best estimate that we have right now because there is an opportunity for us also to adapt the way we work and how we employ people.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [27]

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Yes, of course. Okay. And then in another sort of -- I know there is a report out from the Ministry of Health suggesting possibly sort of the banning of parallel imports when it comes to drugs. And do you have any sort of view if that's going to become reality or not? Or is that very unlikely?

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Per Strömberg, ICA Gruppen AB (publ) - CEO [28]

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You know how it is with these kind of things. It's very hard to really predict. The only thing we know is that there has been a lot of criticism on that proposal. So our expectation is that it's not going to happen, but nobody can be really sure about these kind of things. But there's been a lot of criticism on that proposal.

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Operator [29]

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The next question is from Fredrik Ivarsson of Kepler Cheuvreux.

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Fredrik Ivarsson, Kepler Cheuvreux, Research Division - Equity Research Analyst [30]

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A few questions from me as well. Starting with ICA Sweden.

You mentioned lower waste levels as a driver for the margins. Can you sort of elaborate on the financial impact you see from this and maybe also the potential if looking ahead a couple of years?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [31]

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Yes. Fredrik, I think this is very much linked to this -- the fact that we had extreme volume volatilities in the second quarter of last year. Of course, we are also always working. We have always projects ongoing to optimize waste and shrink and so on going forward. But the impact in this quarter, and I don't think we are not giving an exact number, but say it's a lower double-digit positive impact on shrink, and that is quite a lot in terms of positive impact in a quarter. But it's not something that say we should sort of pen into the future that in every quarter from now on, we will have that positive area. So I think it's very much linked to the sort of logistic challenges we had in the second quarter of last year, that having a negative impact both on logistics efficiency at that time, but also on shrink and waste at that time.

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Fredrik Ivarsson, Kepler Cheuvreux, Research Division - Equity Research Analyst [32]

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That's clear. And a follow-up on the pharmacy here, also. Regarding the disruptions of the Norrköping warehouse. How big were the additional costs from this? And what should we expect in Q3 given that it will take a couple of months to fix?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [33]

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Of course, as Per said, we have had challenges over the summer. We still say that we have a few months ahead of us with challenges. I think now in the second quarter, maybe not so big impact, a few million, say, higher single digits.

For the second quarter, I think it could be a bit more than that. It's -- so it will not be huge numbers, but still a significant additional cost in the third quarter, would be my expectation. But of course, I mean people are just back from summer now and we will need to sort of follow this very closely during the months going forward.

But clearly, as Per said, the challenges are not yet over in the ramp-up of this automated warehouse.

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Operator [34]

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The next question is from Niklas Ekman of Carnegie.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [35]

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Just a couple of questions from me as well, if I may. Firstly, and I realize this might be a difficult question to answer, but you have 27% earnings growth in this quarter. And I'm just trying to strip out here what are -- what is the underlying earnings growth, if you try to make a similar attempt? If you try to strip out the Easter effect, the timing of profit sharing, revised life of real estate, release of claims provisions in the bank division, et cetera, do you have a view of what the actual underlying growth is on the earnings side? That's my first question.

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [36]

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Yes, Niklas. And I understand the question, but I think it's very difficult to say. I would rather look upon it as I maybe tried to indicate earlier on. You know when we reported the first and second quarter of last year that we said we had a number of challenges. Results were quite weak. We could see our rolling 12-month margins going down. We said we will work now. We present the specific actions that we would do to recover. And in fact, if you now look back you will see, when you look at rolling 12-months' numbers for ICA Sweden, that we have now recovered.

So the way we see it now, we have now a very successful half year recovering after a weak half year. Last 6 months of last year were much better if you look back at the reports. And it's -- we are then coming back to what we have basically always said that ICA Sweden is not really a margin improvement case. If we see margins going down, we need to fix it because we need to sustain a good margin level, that we have now done. But over the future, I would not sort of anticipate that we will sort of continue to see very large EBIT margin variations because the comparison basis becomes much tougher for the remainder of this year.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [37]

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That's a good answer to a complex question, I guess.

And secondly, I mean you said here that you are gaining market share for ICA Sweden. And I think that then you're referring to H1. But in Q2, I think it's the first quarter in a very long time where you're losing a little bit of market share. Is this anything that raises concerns internally? What do you think is behind this? Is it a shift to discount? Is there anything that you need to adjust in your offering the way you see it at the moment?

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Per Strömberg, ICA Gruppen AB (publ) - CEO [38]

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If I start with just giving you -- talking a bit about the numbers. When Sven said we are gaining share, it's on a rolling 12-months' basis. There we are gaining share. Then we are basically flat when it comes to share if you look at the start or year-to-date 2019.

I think when you look at the quarter 2 numbers, you have to -- there is clearly a negative weather effect for ICA. We said last year that we benefit when we have fantastic weather and we had a fantastic May last year. This year, May was really a -- and we clearly see that in our sales that our smaller stores, especially by the coast, they really struggle to keep up sales when the weather is not as good as it was last year.

So we have clearly lost a little bit on ICA Nära and on ICA supermarket. But on the other hand, we have gained a little bit back on the Kvantum and the Maxi stores. So we -- it's a bit different from a structure perspective. We still think we have a good sales here in the second quarter. We can't impact the weather effect. So I would say it's a solid performance also from a sales perspective.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [39]

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Okay. Excellent. Fair enough. And a third question will be on the cost reduction program. Can you talk a little bit about the phasing of these cost reductions and how they compare to the increased investments in digitalization? Are these -- are they cost reductions, and the increased costs for digitalization, are they overlapping perfectly or is there a discrepancy, so to speak, in the -- are cost reductions coming sooner and then digitalization efforts increasing later? Or can you elaborate a little bit on that issue?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [40]

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Yes. Niklas, I think it is, like we said, when we -- I remember we got this question in -- after the first quarter, that no, there aren't, sort of, no significant timing effects of this. It could be to say, to some extent, as we have now put a new organization in ICA Sweden in place, people have -- a number of people have new jobs and so on. We are in a period where we are filling vacancies and so on in the organization. There could be some positive impact of that, of course.

On the other hand, we're also incurring some additional charges. There are always some consultants involved in this process and so on, so there's also some additional costs. So our judgment is still that, no, there is no significant impact on this from our result development. And just like we have said before, these savings that we are generating, we will invest them in the business. There will not be any sort of large positive impact coming from that. Not in this quarter, but also not in the coming quarters. That is our best estimate today.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [41]

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Great. That's very clear. And a final smaller question. Just on the other line here, we saw losses decreasing from SEK 146 million to SEK 115 million. And yet you're talking about the other line being rather flat or even slightly higher losses at SEK 460 million for the full year. Is there also a timing differences here? Or what's behind the strong improvement in Q2?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [42]

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Yes. I would say, you have some timing effect where we were a bit low, but it's sort of normal phasing questions on the sort of central business development costs and so on in the second quarter of this year. Maybe there is also a bit of effect of the GDPR. You remember that we had in May last year the introduction of GDPR. So of course, in the second quarter last year, we had relatively high costs linked to GDPR and we don't have now. We are more in a kind of operational mode. So there's some positive impact of that.

But for the -- so -- but we are still sticking to the overall numbers. So the main thing is still a question of phasing.

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Operator [43]

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The next question is from Kellan (sic) [Stellan] Hellström of Nordea.

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Stellan Hellström, Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods [44]

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Yes. This is Stellan Hellström from Nordea. First, the logistics costs in ICA Sweden are up year-over-year again on a pretty high number last year. Just wanted to know if the net of this, also with -- looking at your increases in logistic cost -- fees to retailers. Is the net also from that, is that also up year-over-year?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [45]

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Yes. So what it means, Stellan, is, of course, as we have now, just like we said when we spoke in spring, we are now recovering. We have implemented sort of adjustments to the logistic fees. So that means that we're recovering now the cost increases that we saw in last year. So that is obviously giving a positive contribution to our earnings in this quarter.

But as the costs are still higher than what they were a year ago, it means that there is still, of course, a net for us to recover also going forward. I know that you know how this works, that we work within a certain span, so you know it's not every million that we're recovering instantly and so on. We're working within a span of plus/minus SEK 50 million. But it means that even if we have now -- we are recovering, as I said, money from last year, there is still money to be recovered also going forward.

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Stellan Hellström, Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods [46]

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Right. And just finally, also, I wondered if you could elaborate a little bit on the price mix effect in ICA Sweden here that seems to have been quite positive -- even more positive than in the first quarter?

And also, maybe if you can elaborate on what it is, given that it looks like your private label share [margin] didn't really improve in the second quarter specifically?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [47]

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No. But I would say that the effects are quite similar to what we saw in the first quarter. Of course, as you know, I mean, normally, we are benefiting from a -- good inflation numbers. That always makes our life easier. But then there are also in a number of categories where we maybe -- we have a better outcome on the campaigns, and promotions and so on. We see, overall, the mix of the assortment also being favorable. We see the nonfood segment also doing better, clearly better in margins than what we had in the second quarter of last year.

But it's very much, I would say -- still, I would say, a general recovery just like we had in the first quarter.

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Stellan Hellström, Nordea Markets, Research Division - Senior Analyst of Retail and Consumer Goods [48]

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Just the details also in that. Is there any sort of timing impact here as well that high food-type inflation and vegetable prices have not been sort of -- have been sort of not good -- or the costs for that haven't really affected your sales yet, but have been passed on to retailers early or nothing like that?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [49]

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No. Nothing significant. No.

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Operator [50]

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The next question is from [Carole Madjo]of Exane BNP Paribas.

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Carole Gladys Madjo, Exane BNP Paribas, Research Division - Research Analyst [51]

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This is Carole Madjo from Exane. A few questions from me. First of all, on ICA Sweden, just to follow-up on the logistic costs. Can you maybe share with us or remind us the weight of logistic cost as a percentage of sales in Q2 this year and then in Q2 last year as well?

And second question, on the real estate. Should we expect a similar trend going forward as regards the lower maintenance costs that you have seen in Q2 and the gain as well from a new investment on revenue?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [52]

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Thank you, Carolyn (sic) [Carole]. Now if we start with logistic costs, we are not going into those details, we disclosed exactly logistic cost ratios and so on, how they are developing. We have logistics costs in the order of SEK 5 billion, I believe, in the business. And I would say that the ratios, as we said, the rate of inflation is still high, but our efficiency numbers are improving. So it means that the ratios are slightly better, but it's not -- I mean, we still talk fractions of a percent, so it's not huge numbers.

Then concerning real estate, I believe I said before that we had relatively high maintenance costs in the second quarter of last year. We didn't have that to the same extent in the second half of the year. So no, I wouldn't expect maybe the same sort of favorable cost movement going forward. We have also, of course, inflation in the -- in the real estate business.

On the income side, there on the other hand, I would say, we are quite positive as we have had a very good development in the first as well as the second quarter. And I think we have reason to believe that, that will continue also in the second half of the year.

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Operator [53]

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The next question we've received is a follow-up of Gus Sandström of SEB.

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Gustav Sandström, SEB, Research Division - Research Analyst [54]

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Just a few follow-ups. Nitty gritties. First, on CapEx. Is the guidance you gave for in the Capital Markets Day of SEK 4 billion for the full year is still relevant? It seems like you're lagging a bit behind in H1.

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [55]

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But I think our guidance is still relevant. We don't have any different number at this stage.

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Gustav Sandström, SEB, Research Division - Research Analyst [56]

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Okay. And on working cap, it has been rather flat year-over-year in H1, is that -- - should we expect that to move somewhere in H2?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [57]

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We need, of course, to be a bit careful. As I said, we see this cash flow now that we have in the second quarter as a strong cash flow. We don't have this -- any sort of significant positive impact of this supply chain financing program in this second quarter compared to last year. You will remember, in last year, we talked a lot about that.

Of course, in all fairness, a bit linked, of course, to the sort of restructuring that we're doing in ICA Sweden. We have maybe not focused exactly to the same extent on that in this past couple of quarters. We see a potential also going forward. But of course, I would not sort of promise anything for the coming 2 quarters. We still think there is money to be taken out, but I wouldn't sort of bet on it specifically on the coming quarter or so.

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Gustav Sandström, SEB, Research Division - Research Analyst [58]

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Okay. And then final from me, on corporate costs, they were quite low in Q2, below our numbers at least, and they're down H1 versus last year. Do you think it's prudent to assume that they will -- actually be in line or perhaps lower than last year, or should see a pickup also there in H2?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [59]

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No, I think this is very much -- I don't know, Gustav, maybe you didn't hear, this was the question coming from -- also from -- Niklas came with this question. So no, you should see this as a kind of a phasing effect. We -- our best belief is still in line with the guidance that we have gave before and as Per had on his outlook slide. So there are differences in terms of phasing.

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [60]

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I have a few a questions coming in from the web. So if I -- better ask those before we run out of time here.

It's from -- the first one is from [Reda Molter]. And I guess the second of his questions, that we already answered, and that is, do the company and then the shops have a profit on online shopping today in groceries and in Sweden. And someone else asked that question. I guess we already answered it. But the first question is, what is your estimate on the market share of online shopping in the next 5 to 6 years in Sweden?

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Per Strömberg, ICA Gruppen AB (publ) - CEO [61]

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And we have said, online will be -- in 2025, we are talking up to 10% of the market, or say between 7% and 12%. It's obviously very, very difficult to give a number on this, but that's the number that we have that we believe in.

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [62]

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Thank you. And the next question is from Matt Pickering of Select Equity in Chicago. And his first question is, how material was the phasing timing of marketing spend for ICA Sweden in the second quarter?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [63]

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We could say -- maybe without giving exact numbers, but it's also a kind of lower double-digit number that we are talking about.

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [64]

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And his second question is, how is the weak Swedish krona impacting your business and profitability?

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Sven Lindskog, ICA Gruppen AB (publ) - CFO [65]

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Yes, that is maybe a bit more a complex question. I mean, we are, of course, trying to sort of hedge in the short-term our large exposures and so on. But our -- basically, our model is building upon that. If we see a weakness of the Swedish currency like we have now seen in the first half of this year, ultimately, of course, the effect of that, sort of goods purchased from abroad being more expensive and so on, that will have to be carried forward to the consumer.

So we are not sort of working on a sort of revising our targets or our profitability targets and so on for the future based on that. Of course, there may be, just like we reported in the first half of last year, there may be some shorter volatility, particularly if we see big sort of sudden volatility in exchange rates. But otherwise, this is the way it needs to work.

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [66]

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And in addition to that, we might also say that the delta between second quarter last year and this quarter has been basically 0 when it comes to currency effects.

And his last question is, what do you expect margin-wise for Rimi Baltic when Lidl enters into Latvia? That's an interesting one, I guess.

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Per Strömberg, ICA Gruppen AB (publ) - CEO [67]

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And then obviously, this will have an impact on the Lidl and it will have an impact on our business. We believe, however, that we're going to be a bit less impacted than the other players. That's what we have seen in Lithuania as well. We have more of a mainstream-plus brand, and that's less impacted when you have a discount brand entering the market.

Rimi is very well appreciated by a biased customer and especially so in Latvia. So we have said that the long-term target in Baltic is also 4.5%. There might be a small hit to that, especially when they enter the market, but long term, that will remain our target also in Latvia and Estonia.

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [68]

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Thank you. There are no more questions from the web. So operator, we have perhaps time for one remaining question before we close this. If there are any more questions, guys.

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Operator [69]

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There are no further questions at this time.

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Frans Benson, ICA Gruppen AB (publ) - Head of IR [70]

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All right. Thank you, everyone, that has participated. And see you next time around.