Max Stock Ltd

So, good morning and good afternoon, everyone, and thank you for joining us today. In particular, we welcome our U.S. investors who are joining us early after the Thanksgiving weekend, which we hope was joyful. I'm Talia Sesler, Chief Corporate Development and IR Officer, and with me on the call today is Nir Dagan, our Deputy CEO and Head of Finance. Nir will start with a review of our third quarter and September year-to-date financials, and I will address the swords of iron war and the impact on our business since October 7, as well as present the second part of the presentation. Before we start, as a reminder, there is a presentation accompanying today's prepared remarks. The slides are available, as always, on our IR site at ir.maxtalk.co.il. And slide number two is our standard disclaimer language, which I'm sure you are all familiar with. With that, I'll turn the flow over to Nir to go through the financials, Nir.

Thanks, Talia. Slide four. Starting with our operational highlights on slide four, we are very pleased with our results in the third quarter. We delivered record revenue of 314.5 million, representing a growth of 7.1% for the third quarter of 2022. This strong revenue growth was driven by two primary factors, strong store traffic and the addition of approximately 1.3 net square meters of selling space compared to the year period ago. We also delivered same store sales growth of 1.5% in the third quarter, driven by strong volume growth that was partly offset by lower average price per item. Despite the low average item price, we deliver strong growth margin expansion of 180 basis points or 12% versus the prior year ago. The combination of stronger top line and gross margin were the main driver behind the almost 18% increase in gap net income attribute to shareholder in the third quarter. Going to slide five. Our strong third quarter added to the momentum that we've built throughout the year. For the first nine months period of 2023, steady store traffic, store expansion, and the 2.4% increase in sales, drove a 6.2% increase in the revenue compared to the first three quarter of 2022. Similarly, through the first nine months of 2023, we've seen strong gross margin gain with margin up 200 basis points to 41.5%. As a result, for the nine-month period, we delivered a 35% increase in GAAP net income and adjusted net income to shareholder increased by 7.4% to almost 60 million shekels. The reason for the difference in our stock-based compensation that is the only item included in our EPS adjustment, in the first nine months of 2022, the expansion was 11.1 million, while this period, as we guided in the past, there was an insignificant amount. Still, in the first nine months of 2023, adjusted EPS attribute to shareholder was 0.343, up almost 10% compared to the prior year period. Now I'll turn the call back to Talia.

Thank you, Nir. Turning to slide number six, I want to address the sword of Iran war and the impact on our business since October 7. About two months ago, our country was brutally attacked by Hamas terror organization and now finds itself at war to protect itself and its citizens. The unspeakable acts committed by known terrorists and the resulting unrest in the region have brought significant change to Israel and its people. Our hearts go out to all those directly and indirectly impacted, including some members of our team. The turmoil has also brought about unforeseen headwinds for Israel's business community, and given the extreme nature of recent events, we feel that we have navigated the situation adequately and that we have positioned Maxtalk for the best outcome. From a business perspective, the company's stores were closed at the outbreak of the war, and as of October 9, two days after the start of the war, and over the duration of approximately two weeks, the branches gradually reopened with a reduced scope of operations. Comparable store sales for the period July 1, 23, until October 31, which includes the impact of the Jewish holiday period, decreased 2.1%, primarily reflecting the temporary store closure and subsequent reduced operating schedule during the month of October due to the war. From the end of October and as of today, 60 of the company's 60 stores in Israel are fully open and operating as usual. While these reduced hours did impact sales in the month of October, store productivity while stores were open was robust. And in November, we see revenue in line with our budget and tracking to our original plan. More importantly, we haven't experienced any long-term impact to our business to date, and as of the end of November, we had no material supply chain issues and employee staffing remained at pre-war capacity. Additionally, the NAS depreciation experienced in October has rebounded, with the current exchange rate even below that on October 6th. Given the limited disruption, we still plan to move forward with our current store expansion strategy, including one additional store by year-end. Since October 7th, we have donated thousands of products to our defense forces and Israeli residents that have been evacuated from their homes. And as we look ahead, we will continue to support our fellow Israelis while also remaining focused on our long-term plans. With that, I'll turn the call back to you, Nir.

Thanks, Talia. Turning to slide seven, our operational strategy of rapid growth coupled with moderate capital expenditure result in a very strong operating cash flow for Maxtalk. Due to our modest capital expenditure and working capital needs, we've been actively returning value to shareholders through annual dividend and our share buyback program. From 2017 to 2022, we generated $596 million in cash flow from operating activities at a CAGR of 31.1% compared to CAPEX of $140 million at a CAGR of 16.8%. This outsized cash flow relative to our CAPEX allowed us to retain $240 million 8.9 million to shareholders throughout dividends and buyback over the same period. On slide 8 is a more detailed look at how we deploy excess capital and retain our financial flexibility. Since 2017, we've retained approximately 309 million shekels to our shareholders, including 60 million this year to date. We have a net cash position at a quarter end of almost 90 million, a very strong position that provides us with ample liquidity and financial flexibility. On slide 9 and 10, you can see additional detail of our financial performance over the past four years. Now, I'll turn the call back to Talia.

Thank you, Nir. Next, let's take a look at the strategies and opportunities that will drive growth as we move forward. Slide number 12. Some very pleasant recent development. We are happy to share that yesterday we signed a lease agreement with a new distribution center partner, a JV jointly held by Megaor and Kibbutz Shomria. This new 31,000 square meter location will allow us to consolidate our three distribution centers into one at roughly the same logistics costs. While this will initially require an estimated 30 million capex investment, this action will support our future growth in Israel while potentially extracting operational efficiencies, including the elimination of needed TPLs, centralized operations and other logistical streamlining. The 25-year rental agreement is expected to commence in May of next year with monthly base rent of approximately 1 million. And subject to the lesser completing the necessary construction and other terms in the agreement, the site will further increase by about another 10,000 square meters to a total of 41,000 net square meters, allowing us to more than double the capacity of our distribution centers, versus what we currently have. On slide number 13, I wanted to emphasize several characteristics of our business model which have helped us remain relevant, certainly during these times, in times of war. Well, first, we focus, as you know, we focus on providing our customers with the best retail prices, and our ticket prices are low. You may recall that approximately 70% of our products by volume are sold at 10 shekels or less. It's about... I would say $3 roughly, $2.53 or less. Second, we focus on non-discretionary basic products that are also necessary during times of war. You may recall also that approximately 60% of our products are basics. Our third unique characteristic is our high level of product flexibility in terms of range and section due to the fact that our fixed product selection is relatively limited and our product range is very diverse and constantly changing. This allows us to respond very quickly when we see a change in demand, and it allows us to offer our customers what we always say the right product at the right time and obviously at the right price. Now, since the onset of the war, we have sold a large volume of basic apparel for soldiers and for evacuees, batteries, transistors, batteries. emergency lighting, battery charges, laundry drying racks, which, for example, was the most in demand product in Eilat due to the fact that evacuees needed to dry their laundry, and more and more. On the next slide, slide number 14, along with this strong business model, the continued expansion of our store base, which has grown nearly 50% in the last four years, is a key driver of our success. This expansion has come in two formats, max and minimax. Max, our big box format, is our main format of current expansion, and our small box format, Mini Max, also offers a strong growth profile through a franchise concept. On slide number 15, you can see the evolution of our own store expansion. And as of quarter end, we had 62.3 K net square meters representing growth of 6.5% from the same period last year and 26.7% growth from Q3 2021. As we continue to expand our own store footprint, we have also expanded our number of franchise stores. Since Q3 last year, we have added three owned stores, one in Israel and two in Portugal, but have also transitioned one owned Minimax store into a franchise store, while adding three additional franchise locations. Bringing that figure current to the end of November, we have added two additional owned stores and one additional franchise location. This brings our total store count to 65, including Portugal, as of the end of November. That is comprised of 28 franchise stores and 37 owned locations. Of those 65 stores, 18 are minimax or small box, while Max, our big box format, represents 44 locations, and our Portugal locations, branded as Max 10, comprise the remaining three locations. So now you have all the details for your model with all formats, sizes, and numbers. Slide number 16, turning now to our KPIs for both the third quarter and nine-month period 2023, as Nir mentioned. The driver behind our lower same-store sales growth this year is a reduction in the average item price that was partially offset by increasing both the number of items per basket and the number of transactions. Through this process, we were able to simultaneously expand the company's gross margin while driving and increasing volume across our store fleet. As we lap these price reductions in Q3 2024, we expect to return to our normal level of same-store sales growth and basket-size expansion. On the next three slides, 17, 18, and 19, you see our three new stores that we have opened since the beginning of the third quarter, Be'erot Yitzchak, Bat Yam, and the franchise location in Jerusalem. The Be'erot Yitzchak and Bat Yam locations are company-owned and total approximately 2,900 net square meters and serve a combined addressable population of nearly 2,000. 200 000 people on slide number 20 looking at our store pipeline we have signed agreements for six new stores with a total of approximately sixteen thousand seven hundred gross square meters over the next two years including one final location before year end 2023. Lastly, turning to an update on our new business in Portugal on slide number 22. And by the way, on 21, you can see pictures from our new store in Matocinos. So on slide number 22, in line with our plan, we opened our first Max10 store in Portugal in May of this year. A second store in Porto was opened in June, and we also opened our third location in Matotsinos in November. As you may remember, Max10 offers a wide selection of products in categories like our Israeli business, but with a cap of 10 euros per item. The new store in Matotsinos is about 700 net square meters of selling space. We're very pleased with the progression of Max10. While still a small portion of our business and a slight drag on our EBITDA in the near term, we are excited about this expansion beyond our home country and the longer term impact for the company. And so before we move into the question and answer session, I wanted to close our prepared remarks by thanking all of our MaxTalk team members for another quarter of strong delivery and financial results. As we look to the final quarters, as we look to the final quarter of what has been a very strong year, We remain encouraged by the near-term trends in our business, even as the operating environment in Israel poses a near-term headwind. Despite these near-term challenges, we maintain our long-term optimism about our growth trajectory and remain focused on the execution of our growth strategies and delivering long-term value for our shareholders. Now we are ready to take your questions. Let us look at the queue. No question. No? Okay.

Any question?

Well, I guess it's too early in the U.S.

No, maybe all the results are very good, so there's nothing to ask about.

Yeah, and the results are really good, but we are... Okay.

Yeah, there's one.

How is the health of the Israeli consumer in Israel today? Yeah, a great question. So, listen, we do hear, you know, other retailers, primarily in fashion, home fashion, saying, they do state that even before the war started, they did feel some softness in the Israeli consumer, as they also feel some softness in consumers in Europe and in other parts of the globe where interest rates increased and consumers feel some pressure on their pockets and so forth. However, as we always say, our consumer is behaving slightly different, and we do see, as Nir mentioned, November, and I also mentioned throughout the update on the war, that November was very positive. And so because we are really focusing on low-ticket items and very basic items, the Israeli consumer behaves differently in our case, and we do see consumers in volume and transactions and the number of items in the basket behaving well, definitely, according to our plans. Anything else? How are you thinking about logistics and freight costs in the fourth quarter and moving through 2024? Will this continue to be tailwinds to gross margins? Okay, so freight costs have been relatively comfortable. I would say that the cost of a container of our type coming from China to Israel is around slightly above $2,000 per container, where in the spike during COVID, it could have been $2,000. Even 20,000. So the rates are still very attractive. There is some risk premium to Israel at this point, but that is minor. And we also have some hedge. If we do see some spike in short-term freight rates, we will be able to absorb it through our hedging position. In terms of gross margin, you know, we had excellent gross margins this year. And we do think that given the current rates in terms of exchange rate, dollar, NAS, and the freight cost, 41% of gross margins is achievable in the fourth quarter. Yes. Let's see if anything else.

About the shifting in the Israeli holiday schedule for 24 versus 23. So this year Purim and Passover was in the first quarter. While next year it's going to be in the first and the second quarter. I think this is something that will have an effect between the first and second quarter, but as we did this year, we will give a look in the first quarter of the result until April.

And what is the expansion forecast for Portugal?