Axfood AB (publ)

Welcome to the Axfood Q4 2023 report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now, I will hand the conference over to speakers CEO Klaas Balco and CFO Anders Lexman. Please go ahead.

Thank you and good morning everyone and thank you for joining today's call. Now as you can see on the headline we are continuing to take market share in this exceptional time and as you've heard with me today I have our CFO Anders Lexman and together we will go through this in more detail and present to you Axel's year end report for 2023. In the investor section of our website you will find the presentation material for today's call and a recording will, as usual, also be made available after the presentation. So with that, I would like to get started and please turn to page number two. And here you'll find today's agenda. First, a brief market overview, and then I will give you a review of our fourth quarter performance. And after that, Anders will take you through the financials. And following Anders' part, I will talk about the progress we are making with some of our strategic initiatives and investments for the future. And also, I will cover the outlook for 2024 that we are presenting today, as well as the board's dividend proposal before we open up for the Q&A session. So we are now on page number three, but let's get straight into page number four, and we will take a look at the development during the final quarter of this year. First of all, market growth amounted to 6% during the fourth quarter. This was the same level as the price inflation, which continued to decline on a sequential basis. In other words, market growth held up quite well. And actually, if you look at the end of the quarter, we saw volume growth for the first time in two years. While it's positive that volumes are growing again, we expect the market dynamics to continue to be impacted by price consciousness. Let's go to the next slide, number five. And then Axfood's retail sales grew 9% in the fourth quarter, which was significantly higher than the market. This performance should be seen in the light of significantly higher comparison figures for Axfood than the overall market. I therefore think it is meaningful to also analyze our figures on a two-year stack, where our growth amounted to a full 28%, doubling the rate of the market, which was 14%. Please go to the next page, number six. And in e-commerce, our sales increased slightly more than 8%. Market growth turned positive for the first time in more than two years. But obviously, we once again outperformed. Our share of consumer sales from e-commerce was slightly more than 5%, one percentage point higher than the penetration of the market. On a two-year stack, Axfood growth was 4%, also that better than the market. And if you go to page number seven, we have also included a slide on that shows our 10 years performance in terms of market share gains over the last years. But let's go now into page number eight. Our consolidated net sales for Axfood grew by just over 5% during the fourth quarter. Strong sales performance in Axfood's concept drove the overall growth. Dog app sales to external companies however came in softer which clearly held back the overall net sales growth with the growth in the fourth quarter and consistently high growth over the course of the year we actually passed 80 billion sec in net sales for a full year for the first time ever please go to next page page number nine in total group operating profit amounted to 744 million sec and the operating margin was 3.6 percent substantially increased versus year ago But this development was largely due to easy comps with higher cost affecting comparability in the prior year period. The adjusted operating profit, which exclude items affecting comparability, amounted to 850 million SEK. This increase was mainly the result of strong growth and effective cost control. But higher rental levels and salary increases, however, had a negative impact on profit. And the adjusted operating margin was 3.9%. And if we then go into our various segments, and I would like you to turn to page number 10 and Willis. And I really want to emphasize Willis' unique concept in the market. In the fourth quarter, Willis once again gained market share through robust volume development, and the loyalty of existing customers remained strong. Our share of sales from campaigns was still high. However, compared to prior year, it was actually slightly lower. In all, total like-for-like growth in the segment amounted to 9% and 7%, respectively. Willys' market share in the fourth quarter was approximately 15%, which compared to 13% two years ago. I think this is clearly a very strong development. However, we see continued great potential for Willys to take more share, both in stores and online. Operating profit. increased 10 amounted to 469 million sec corresponding to an unchanged operating margin of 4.1 percent the strong growth in like-for-like sales and effective cost control compensated for the cost associated with our higher rental levels and salary increases With that, please go to page 11 and look into Hemshöp's segment. Hemshöp continued to strengthen its position in the traditional food segment and once again succeeded in outperforming market growth. For several years, Hemshöp has worked now to consolidate its position with a high rate of store modernization, investment in price value and important progress in the area of sustainability. This has created the right condition is now helping to further boost HempShop's impressive performance, creating a solid base. Net sales increased 10%. Total and like for like retail sales growth was 8% and 7% respectively. Stores within HempShop banner performed better than the Tempo stores. And similar to other countryside and smaller store formats in the market, Tempo is facing some challenges due to consumers' preference for price value over convenience. Our operating profit amounted to 77 million SEK and the operating margin was 3.9%. Positive effects from the growth and effective cost control were offset by negative effects from higher rental and salary levels. Now, let's move on to Snabgo's page 12. SnubGhost's market has shown a gradual deterioration during the year, and many cafes and restaurants are facing some challenges. SnubGhost has, however, delivered a stable performance with higher sales and profits and flexibility and ability to adopt its offering. Sales during the quarter increased 6% in total and 5% on a like-for-like basis. An increase in the number of customers and sales to consumers through member-based SnubGhost Club contributed to this growth. Our operating profit amounted to 58 million SEK, corresponding to an operating margin of 4.6%. The increase in profit was primarily driven by the growth in like-for-like sales and effective cost control. However, negatively impacted by again, higher staff and rent levels. Next page, number 13. Net sales for Dagab increased 4% in the quarter. And as I mentioned before, strong growth in sales to Axfood's own concept was somewhat offset by soft sales development to external customers, including smaller store formats and the service trade. Reporting operating profit amounted to 248 million SEK. This year, we had 71 million SEK of costs related to our logistical restructuring compared to 186 last year. And also last year we had 46 million SEK integration costs for the Bergendal food acquisition. The adjusted operating profit amounted to 390 million SEK and the adjusted operating margin was 1.7%. The increase in profit was primarily due to growth, synergy effects on Bergendal food and more neutral currency effects with the strengthening of the Swedish krona. Let's now turn to page number 14, and it's time for me to hand over to Anders to walk you through the financial development. So please go to the next page, number 15, and Anders, please go ahead.

Thank you very much, Claes. For the full year, net sales for the group increased with 10% to 81 billion SEK. Retail sales increased by 14.3%, which was clearly higher than the full retail market in total. where growth amounted to 7.5%. We also, for the full year, had a lower growth for Dagab's external customers. The operating profit excluding items affecting comparability of minus 249 million SEK increased by 373 million SEK to 3.6 billion. The increase was mainly explained by the strong growth and effective cost control, partly offset by lower gross margins in the segments and increased costs related to, for example, rental levels and personnel costs. The operating margin excluding items affecting comparability was unchanged at 4.4%. Items affecting comparability pertained entirely to parallel warehouse operation during the transition to the new logistics center in Bolsta. Last year items affecting comparability included a capital gain of 221 million SEK for the divestment of mat.se and structural costs of 263 million SEK connected to the restructuring of Dagab's logistic operations. Then turn to page number 16. For the full year the cash flow compared with last year was 304 million SEK higher, the relatively weak cash flow from operating activities in Q1 due to negative networking capital was compensated in the second and fourth quarters by strong underlying operational performance. The cash flow from investment activities of 2.2 billion SEK was significantly lower than last year, as we now have a lower pace in automation investments. Investments in our retail operation and joint group functions was in line with last year. At the end of the fourth quarter, we utilized approximately half a billion SEK of our credit facilities, 0.3 billion SEK more than in Q4 last year. And then turn page to page number 17. If we then look at the financial position, the net debt has decreased compared to previous quarters due to lower utilization of the credit facilities. This was also reflected in the lower net debt ratio, which amounted to zero at year end. The equity ratio at year end has been very stable over the last couple of years, and the equity ratio in Q4 amounted to 23.9%, well above our target of 20%. And total investments excluding leasehold for the year was 647 million lower compared to last year. And again, we see now a lower pace in investments related to the logistics entry in Bålsta. We have established 12 new Groupon stores during 2023, which was three more than last year. And we will get back to the investment outlook for 2024 later in this presentation. And then let's turn to page number 18. Looking at the capital efficiency, we have a positive developing net working capital in absolute terms. However, in relation to sales, we saw a negative trend during the year due to the higher inventory levels related to the ongoing warehouse transition. The ratio is now minus 3.2. A reversal of this effect is expected gradually in the coming quarters. as the warehouse transition progresses. The capital employed has increased over the last years, mainly due to the recognition of leasehold debt in Bålsta and in Landskrona, and higher capital expenditures, which have had the diluting effect on the return on capital employed. However, the return on capital employed is now quite stable, at little more than 20%, looking back at the recent quarters. And that ends my part of the presentation, Klaus, and I hand over to you again.

Thank you Anders, and we are now on page 19, but let's go directly into page 20. Now, 2023 was an eventful year, a year with continuous strong operational development and also progress with our initiatives and investments for the future. So I would like to highlight a couple of areas where we made major strides during the year. Let's go to page number 21. First of all, something that has been pretty well covered already during this presentation, growth. In 2023, we had a very strong momentum in terms of sales, with volume growth and large inflow of new customers to our stores. We saw a very strong demand for our concepts, and that is why we have been expanding our presence at a rapid rate throughout the country with new stores. In all, during the year, we established nine group-owned Willys stores, two Hemship stores, and one new Snuggles store. Let's turn to page number 22. Digitalization, AI and automation are rapidly evolving areas and are also crucial for creating a high level of efficiency and strong customer offerings. We have developed our business considerably over the years and our digital transformation is continuing. In all areas, we are continuing to develop a data-driven approach. In 2023, for example, we implemented a new system for campaign and assortment planning. And in 2024, we are upgrading our back office system in order to simplify and streamline processes for our store employees. And logistics is, of course, also a big part of this. The implementation and ramp up of our new highly automated logistical center in Båstad outside Stockholm was ongoing through 2023. And in 2024, the facility will be completed. In addition, The automation solution at our new fruit and vegetable warehouse in Landskrona was recently put into operation. And we are adding more capacity with our new high bay warehouse in Gothenburg. And our combined logistical investments will result in significant efficiency improvements and cost savings starting in the second half of this year. And lastly, a couple of initiatives within the sustainability on page 23. And here our ambition is really to be at the forefront and to take the lead in promoting a sustainable food system. In particular, we are continuing to offer our customers a sustainable and healthy assortment of products in our stores and to guide them towards sustainable and healthy choices. But this is in a time when consumers have reprioritizing their purchasing decision due to the high inflation and to a lesser extent have been focusing on these matters. But I also would like to mention our new extensive solar power initiatives, including a large rooftop installation at our warehouse in Bålsta and Landskrona, and the construction of Sweden's largest onshore solar park in Hallstavik. And lastly, just recently, to further reduce our greenhouse gas emissions, we initiated to accelerate the phase-out of fossil fuels by switching to using only renewable fuels in both our own and procured transports. that go to next page 24. and let's turn to the outlook for 2024 which we are issuing today investments are expected to amount to 1.6 to 1.7 billion sec excluding acquisitions and right of use assets the largest part of this is related to recurring investments in our operations but it also covers expansion And however, 300 million SEC of the total amount is related to automation in our new logistical structure. And in terms of our presence, we will maintain a high pace of expansion with the aim to adding 10 to 15 new stores to our store base, the majority of which will be village stores, so that even more customers can benefit from our concept. And moving on then to dividend for 2023 and page 25. Oxford has a strong financial position, and the board of directors will propose to the annual general meeting an increased dividend of 8.50 SEK per store. The dividend will be split into two payments, 4.25 SEK per share in March and 4.25 SEK per share in September. The dividend proposal corresponds to 78% of profit after tax, well in line with our dividend policy. Now let's turn to the final page of this presentation, page 26. At an exceptional time of historically high inflation and changing consumer behavior, we are closing the books on a successful year in which we strengthened our market position and took major steps to strengthen our competitiveness in the long term. We're entering the new year with an even stronger position, which will provide us with the favorable conditions to continue to attract new customers and strengthening the loyalty of our existing customers and to become even more efficient in our underlying operation as our new logistic initiatives will put into full use. And with that, please turn to page 27. And I would like to hand over to the operator to open up the line for questions. Thank you.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Frederick Ivasan from ABG S. Undal Collier. Please go ahead.

Good morning, guys. Well done. I've got three questions. I'll take them one by one. So the first one on Willis margin. So I guess you've been talking about gross margin pressure for quite some time now, and you mentioned it today in the report as well, even though the margin was stable in Willis. So the question is, when do you see this gross margin pressure sort of turning and maybe even turn positive, given that we've seen positive CPI, PPI gap for quite some time? That's the first question.

Yeah. Morning, Fredrik. Well, I think, first of all, if you look from the supplier side and how that works, there is currently a lower cost pressure from the suppliers, which we think is positive. However, as you're all aware, there are many things that is now affecting our structure and we are still at higher levels versus before the inflation started. There's a climate impact. Overall, the whole market has cost inflation into the system. So I have to say it's difficult to predict. What we have seen in terms of the market currently, we've seen slightly lower campaign effects. which has obviously has a positive sign in terms of margins. But on the other hand, we are still on a significant lower margin. So we have not been able to compensate for the cost pressure from the supplier at extent on that. And then, of course, it's a very competitive market. So we'll see how it goes.

Okay. Thanks. And then... On the store openings, if you can just remind us, I guess we talked about it on the capital market today, but if you can remind us if you have any planned closures or if that 10 to 15 is more or less a net figure.

There are no planned closures. So in that perspective, it's a net figure. Then obviously there's nothing that we are aware of today at least.

Okay, great. And last question on 2024 cash flow and the working capital. We talked about, I think, 200 to 300 million cash flow or working capital release. As you close down the overlapping warehouses, is that figure still relevant?

Yeah, I think it's very relevant to assume that. Okay, perfect. That's all my questions. Thanks.

Thanks.

The next question comes from Nicholas Ekman from Carnegie. Please go ahead.

Thank you. Yes, a couple of questions from my end. Coming back to the margin discussion here, and maybe not for Willis, but for the group, you've had two years now with a stable or declining margin, and this is the first quarter where we see a clear year-over-year increase. Can you elaborate a little bit on the factors behind this? The price has now started to finally catch up with costs, and is this something you think could continue, or are there more one-off factors that are boosting the profitability in Q4 here?

Well, obviously, as you look at the one-offs, and I think you've seen that clearly, but I don't think that's what you're related to.

No, no, the underlying.

Yeah, I understand that. And then, you know, as... you're all aware when you get positive like for like and you get that dynamics and now as you've seen and heard that we're not seeing a shrinking gross margin at the same extent that we saw uh you know last year so obviously from that base uh and we continue to drive that growth we we can um offset the cost that we have in our structure. We also have cost structure, as you know, of rent and staff cost, as I commented several times in the report. So we continue to work to make sure that we get customers into our stores and we can drive our like for like. That is the way for us to drive it further, unless and to see what happens in the overall market when in terms of price pressure and all of that. It's a clearly competitive market. We've seen that the full year, and we continue to make sure that we keep our price position in the market, which is crucial for us.

Yeah, very good. Thank you. And on HempShop, I'm just curious about the strong momentum of HempShop in this quarter and in previous quarters. You point at price value, and That seems to be where ICA and Coop have really been struggling. And they're kind of acting in the same segment. Or if you talk about the supermarket segment, why is Hemsjöp really standing out in this market? And what is to prevent your major peers from doing the same?

no i i i'm glad you're lifting it up obviously i think it's the fifth quarter that uh you know we're not only uh in our view at least uh assumption we are clearly uh beating our traditional segment but because as hems is also uh you know beating the overall market growth including the full uh low price segment as well so so but i think it's been a You know, we have been very clear in terms of we have worked with our price value, as you know, and we have communicated that for now a long time, even before this started in terms of we have really, you know, some of our other ranges is put into, you know, the best offer in that perspective. But then in addition, I think we've had a journey now, as you're all aware, that we are modernizing our stores, we are upgrading our stores, we are you know, developing the brand. We also, and I'm pleased to see that we put a lot of effort in the sustainability progress in Hemsjö. They still have the double points when you're buying sustainable products, etc. We still, I think we still have the highest share of ecological for organic products in the market in Hemsjö. So hopefully that we are also getting rewarded for that from our customers. But it's a journey and we're pleased to see that we are for the last five quarters, taking positive steps on that journey.

Very good, thanks. And turning to Bålsta and the new distribution center, you've started now with refrigeration. Have there been any hiccups along the way here, similar to what we've seen before, or just an update on the progress here? Is it following in your plans?

Now we are following the plan right now. I think that as we have commented several times and many of you have now seen the facility, it's a large facility. We will have daily things that we are trimming and that we're working on. But overall, the dry range is now set and we are now rolling out the chilled and that goes according to plan. We have daily things we need to fix, but we are in a good place and significantly compared to what you referred to, so we have nothing like that in the ramp-up at all.

Can you update us also on the closure of the warehouses that it will be replacing? How is that progressing? And what can we expect? When will you close the last of these six fulfillment centers?

Well, as you've heard, we are gradually now facing out. We also start to leave parts of the facility in Jordbro. We have rented out some of that as well. So that will take gradually over the year. and then you know and i think we've talked about that we also have service trade we continue to have service trading in uh that and we will not make any other decisions on that yet we'll see how that is developed because of course we see that how we are now ramping up we make sure we make a controlled ramp up base of our business uh so we have to come back to you on that part but uh that facility runs uh you know as a separate with the service trade

Okay, and any update on one-off items in 2024? I think you've indicated the one-off costs of around 20 million. Is that still valid? Yeah. Very good. Thank you so much for taking my questions. Thanks, Niklas.

The next question comes from Simon Ayes from DNB Markets. Please go ahead.

Good morning, guys, and congratulations on a very strong finish to the year. Just give us an update on your outlook for feed prices in 2024. So now we have seen, obviously, in 2023, on a sequential basis, prices were basically flat throughout the year. Should we expect a return to our normal inflation now, 1% to 2%? Or how do you guys reflect on that? That's my first question.

Understanding. Good morning, Simon. And I think this is a kind of the questions I get daily now in terms of how would it look going forward. And as I, you know, I can only comment on what we actually see right now. And then it's as you've seen and you looked at the inflation rate is going down. So it's less cost pressure from that perspective. But I have to just say that going forward, there are so many areas right now that are affecting the overall food supply chain. We have climate concerns that are affecting harvests. I'm sure you follow that. We have some around Yemen. So there are many factors that could impact this, and in Sweden also the currency. So I have to be vague on that response in terms of what we're seeing right now. And we are pleased to see that, that we are not seeing any strong inflation pressure at the moment. But how it will turn out going for the rest of the year, I don't want to give you a forecast on that.

okay yeah i get i get that it's it's hard to predict but uh just uh i know you don't comment on current trading but uh have anything changed from what you saw in q4 now into 24 in terms of you know willis and everything that's a good question but uh i'll follow that up in april when we talk about the first quarter so so i only comment on the on the fourth quarter right now uh yeah yeah yeah sure sure i get that and then just one final one for me and uh know last year especially during the first part of 23 you know the industry volumes was was very very weak and given that you guys were growing volumes i guess that you know it was econ that was the main losers to that so now that you sort of entering the first half there and i i guess that those guys want to grow volumes to to return to restore margins should we expect you know if

volumes are returning now for them should that be a healthy sign for the industry as a whole and could this no I think something less competition yeah I don't you know I'm not going to come comment the competitors activities but I think overall of course we've seen as I as I started to say we've seen an exceptional time where it's been a lot of you know price pressure pressure for the power industry, for suppliers, for us, but also for households, which has put some pressure, of course, in terms of food. And therefore, you've seen that reflected as well in the overall market with negative volume development. I think in in any market you are in. And I think that as well, it's positive that we now start to see in the end of last year, volume is picking up again. And I think that's just a healthy sign.

Yeah. Okay. Thank you, guys. And that's all my questions.

Thanks.

The next question comes from Anna Schumacher from BNP Paribas Exane. Please go ahead.

Hi. Yeah, congratulations on the great results. So I have two questions, if that's OK. The first one is, across all of the banners you talk about effective cost control, would you be able to talk further on how you've been able to do this, especially given rental and salary costs have increased?

Morning. Yeah, of course. It's kind of part of our DNA to make sure that we drive as efficient operation as we possibly can and as i pointed out it's been a uh you know an exceptional year with which we have changed in consumer patterns and uh in terms of differences in campaign etc and i think the staff and the store managers and the whole operation has been able to navigate and try to adopt and adjust as good as they can in this environment and that's what i'm relating to that we'll be able to handle and to manage an efficient operation Yes, we have higher fixed costs in terms of rental and also some salary costs that goes up. And of course, it's up to us to make sure that we can be as efficient as we can. We're also investing a lot, as I pointed out in the end of my presentation, in terms of our IT systems and IT platforms. that should support and guide our store operation and our logistical operations also to be more efficient through data and through digitization and through a data-driven approach. So that's how it refers to.

OK, great. Understood. And then my last question is, in Q3, you had a chart showing the addition of new Willys Plus members. I was just wondering how that has evolved since.

Very healthy. We are positive to see that we are still on a significant higher inflow of new customers in our loyalty program. We've continued to see a higher inflow. So we are pleased to see that, as I also comment on the report, that we've got many new customers coming into both the stores, but also adding up to our loyalty program.

Okay, great. Thank you.

Thank you.

The next question comes from Gustav Hagius from SEB. Please go ahead.

Thanks for taking my questions. I was a bit late into the call, so apologies if you already answered these. But two questions, just first one on the margins then. Is there a notable impact from bonuses or kickbacks from suppliers in terms of volume targets being reached that have been paid out in Q4 affecting your gross margin year-over-year?

No, I will not say that, Christophe. That is an ongoing, so no, I won't say that.

Okay, perfect. And then secondly, since you have customer data on both Hemshep and Willys, and they do represent quite two polar opposites in the market, I guess, have you been able to sort of follow any customers that have migrated from Hemshep to Willys and migrated back, so to speak, in this quarter? Do you see any of those flows going back since Hemshep now outperformed Willys for the first time in like-for-like for quite some time?

No, I wouldn't say there's nothing significant on what we see there. But I want to comment on what you're saying there, which is also valid for the market, somewhat also valid for HempShare, when you're comparing Willys versus HempShare. If you look at Willys' growth last year, it continued to grow on very high comp figures and have volume growth on very high comp figures. So it's not that and Hemshep had obviously somewhat lower comp figures as the rest of the market. So I don't think you really can make that conclusion.

Okay. And the final one for me online was obviously better than the market. Could you remind us of the margin profile for online versus your traditional stores fully loaded?

Well, the margin on online is lower. There's nothing as dramatically changed on that. So, obviously, we are pleased to see that the largest growth, as you know, is Willys, and Willys has a very solid model, also transparent in their pricing. But it's a volume that, and as you're also aware, that we are about to take our steps as well into in the back end of optimizing to improve our margins. But margins is significantly lower in online.

Okay. Perfect. Those were all my questions. Thanks.

Thank you. Thanks.

The next question comes from Daniel Schmidt from Danske. Please go ahead.

Thank you. Good morning, Claus and Anders. Just, I think, one question from me. Coming back to pricing in the market, and I think you said that price... campaign intensity has actually eased a little bit. If you look at sort of your biggest competitor, Ikea, they continue to indicate that they have closed or gradually are closing the price gap between Ikea Maxi and Willys, and it's gone from basically 5% to 2.5% over the past year. What's your sort of reflection on that? What does your sort of...

statistics tell you what where is the price gap and has it moved at all or is it standing still or where are we in that morning Daniel now there's a lot of discussions and a lot of comments from from various competitors of doing a lot of activities for us we are really focusing on to make sure that we keep our price position in the market and we'll continue to drive that I think You know, you're mentioning some actors. I'm not sure they have one price. I think they have many prices out there, if I'm understood right. So, you know, for us, it's really that we are driving our agenda. We are making sure that we keep our work on price decision. With that said, it is, and I think we said it the full year, it's a very competitive market. There's a lot of, you know... PR and activities and campaigns out there. And we want to make sure that we continue our steadily positioning to make sure that what we offer to the consumers is something they can trust. And we see that on various surveys out in the market, how will this come out very well in the service in terms of price and their position.

So basically your conclusion is that the gap has not really moved over the past year if you look at your data.

No, I'm not going to comment in terms of specifics. As I pointed out that there are various players out there, there are various stores out there that is driving their position, etc. And I think that's what basically also relates to it. But yes, it's a very competitive position out there.

But do you feel that competitiveness is more elevated than a year ago?

I think the competitiveness has increased, yeah.

Okay, thank you, Klaus.

Thanks.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Well, thank you for listening and thank you for all your questions and thanks for today and I wish you a good day. Thank you.