Byggmax Group AB (publ)

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2024 interim report of Big Macs Group. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. If you would like to ask a question, please press start followed by one on your telephone keypad. I would now like to hand your conference call over to the host, Carl Sandland, CEO. Please go ahead.

Thank you. Thank you very much. And again, a warm welcome to this conference call where we will present Big Mac Group's report for the second quarter of 2024. And as you heard, I'm Karlsson Lund, the CEO of Big Macs, and with me is Lina Nathorst, our CFO. And as usual, the presentation that we will go through is available on our website, and we will guide you to the right page throughout the call. And I will start with a short business update and an overview of our focus areas. Later, Helena will cover the financials. And as you heard after the presentation, we, of course, open up the floor and are ready to address your questions. But let's begin and start with page number two in the presentation. This second quarter of the year is part of our high season, as you know, and it's a quarter where we see substantial effects from our priorities. We have improved our profitability despite operating in a continued weak market. And we have further strength in our balance sheet with a reduced net debt. Our net sales in the quarter was 5.5% lower than last year. And this is a lower decline than what we have seen the last quarters. And we also see that there are significant differences in demand between categories in the quarter. where products related to smaller projects, garden, paint, et cetera, have done well, while we still experience a weak demand for larger innovation. And this is expected. The time to decide, to plan and initiate larger investments, larger innovation is somewhat longer than for the more everyday consumption. And the variances in demand between categories also affected our product mix in this program. As you have heard us saying before, our focus this year has been on securing strong operational excellence and to reduce net debt. And we saw that from both those areas during the quarter. We improve our profitability and deliver an EBITDA of 184 million or 8.8% margin in the quarter. And that is higher than last year, and the margin is also higher than what we had before the pandemic in 2018-19. It's driven by cost control and by a strong gross margin. The high gross margin is the result of successful purchasing, continuous efforts to improve the assortment, but also from the product mix mentioned earlier. We have a slightly different product mix where we experience higher demand for products with stronger margin than we usually have in the second quarter. In addition to improved probability, we continue to reduce our net debt. Cash flow from operations, optimization of the inventory, and the lower capex result in 29% lower net debt than last year. And we're now down to $480 million by the end of the quarter. So strong delivery on our priorities, and Helena will come back to more details when it comes to financials in a minute. Sorry, if we flip to slide number three, just for those who might not know us that well, we were founded in 1993 as a challenger on a business-to-business focused market. Today we have grown to 230 stores across four Nordic markets. establishing ourselves as the leading discount player in the Nordic region. And the Nordic region as such has a strong DIY tradition. Our buildings are often made from timber, and a large portion of the population have access to multiple homes, and also the fact that the home serves as the social focal point. This makes our market particularly attractive. Looking at our sector, it differs somewhat from other retail industries. since it has a low level of trends in assortment, leading to very low obsolescence and a stable product range, and also a difference from the fact that most suppliers are in the market where we operate, making logistic efficient and reducing lead times. Our Big Max Foundation is built on a very strong assortment for home renovation and maintenance, where we offer building materials, paint, tiles, and porings, And in addition, we sell garden houses and conservatories. And we have a very carefully selected in-store assortment, which is complemented by a broader online range, allowing our customers to find the product that they need for their projects. And we are true discount. We are true discount retailer, and offering the best prices requires that we always maintain the lowest possible cost. And both our We need store design, but also our strong engagement among our personnel makes this happen. And we also see that we have both a very efficient shopping experience, but also very high customer satisfaction due to this. On page number four, you see that we, size-wise, are a 5.9 billion company, and we delivered $168 million in EBITDA last 12 months. And that is, of course, a result negatively impacted by the weak order consumer market that we have experienced the last two years. We have an efficient business model with high cash generation, which is seen in a strong cash flow. As you see, $744 million the last 12 months. We see that the omnichannel presence is really crucial in our sector because along with groceries, building materials have the lowest expected online share in retail. This makes access to attractive locations key both now but also in the future. With that said, we truly believe that you need a combination of online and stores. And we have a successful mixture of the two. As you see, currently we have approximately an 8 to 20 between store and online sales in the group. On page five, just to give some context on the current market situation from a macro perspective, and I'm sure you know this and have info about it from other sources, of course, But we currently see an improvement of macroeconomic factors with lower inflation and stabilization of interest rates, which gradually improving consumer confidence in the Nordic markets. And as mentioned, this means significant and larger than before differences in demand between different categories, where demand for the publishments of smaller projects about wealth It seems like the consumers have started to spend more again when it comes to these types of products. When it comes to the building material for the larger projects and renovation, we still experience somewhat accidental consumers. As mentioned, this is natural. Since it takes longer time to design and present these kind of projects. We saw an increase in number of house transactions starting in April and May. And with some lead time, this is usually normal. have been historically a driver for increased demand also when it comes to building materials. But over time, there's no indication that the market has structurally changed or saturated. As the consumer confidence rebuilds, renovation projects will rebound regarding growth. Page six illustrates one of our main priorities during the second quarter. Because we have high seasonality in our business with stronger demand during the summer than during the winter. And we are used to ramp up and down the business between seasons. As you see in Q2, our sales is almost 2.5 times higher than Q1. And this, of course, requires the entire organization to be fully focused to secure a successful and efficient ramp-up. And our strong operational Focus operation excellence with further improved store operations with smaller buildup of stock levels and all scheduling of personnel have resulted in a better ramp up this year than before. We have a higher service level in stores, and at the same time, we have further managed to improve our efficiency compared to previous years. And this is crucial because to be able to offer the best prices, we need to maintain the lowest possible cost. And our cost position is key for profitability, especially in current market conditions. And as you see, we have reduced our operating costs more than the decline in sales if you look at the percentage changes. And despite more stores and inflation during the year, our operational cost decreased by 7% in the quarter compared to last year. It's driven both by more efficient store operations and manning, but also from the reduction of administration that we made during the winter. The reduction is slightly lower than the last orders, and as we started the cost reductions already in the beginning of 2023, our comparables is getting tougher. Another focus area, if we flip slide, another focus area is seen on page number seven. We have focused a lot on optimizing our assortment and inventory. both to improve profitability but also to strengthen our value sheets. We see the results in higher gross margin and lower inventory value than the previous year. And lately we have reviewed our entire store assortment category by category to set the right inventory levels and to decide which products to push but also which products to discontinue. And new tools and better inventory forecasting have ensured that we don't run out of popular products. And this approach results both in less tied-up capital, but also in opportunities for improved sales and increased margins. And as you saw in the beginning, lower inventory levels combined with cash flow from operations and less investment allowed us to reduce net debt by 29% compared to the last year. In addition to securing operational excellence and improving balance sheets, we are constantly working on improving our customer offering. You see some example of this on page number eight. where we see that during the quarter we have opened two new stores, one in Bergen, Norway, and one in Melbourne, Sweden. And this means that we in total now have 230 stores on four Nordic markets. And if we just take a step back, this is 33 more stores than we had three years ago, something that has substantially increased our revenue potential when the market returns. And in addition to more stores, they are in better shape than before. We're constantly improving our store experience, both when it comes to operations, as mentioned, but also when it comes to the customer experience and product display and so on. And one effect from this is seeing in the high customer satisfaction that we experience. Every year, more than half a million customers give us feedback in the stores, and the score continues to be at a very high level, even though we are in the busy high or peak season. Another improvement is related to online. During the quarter, our e-commerce assortment developed well. It was a result both of high demand for the smaller projects and products, but also from our focus on offering customized products online. Our big much by me concept where customers can configure windows and doors to their specifications shows significant growth in the quarter. And this is something that we continue to develop going forward with more made-to-order products. Before handing over to Helena and the financials, please turn to page number nine, because as you might see, we updated our financial targets in May. Our strong discount position coupled with commercial leverage will drive sales growth. Our target is to grow beyond the market, which implies at least 5% annual growth over a business cycle. And our profitability target is to deliver an EBITDA A margin about 7% per year. And apart from current level 2, our target includes improved efficiency, scale, optimized assortment, and leverage our commercial improvements. Strong balance sheet is a key priority, and our target is to maintain and assess the over EBITDA ratio below 2.5%. And finally, we have an efficient business model with high cash generation, and this enables us both to invest while also providing dividends to our shareholders, and the company shall distribute 50% of net profit considering the financial position. And to deliver on this, we have a clear and actionable roadmap built on three main pillars, where first, we are a true discount retailer, and we recognize the potential and the By refining our assortment, boosting efficiency, we will always continue to streamline and improve our operations. Second, our commercial investments that we have made over the past year have significantly amplified and increased our revenue potential. And going forward, we will make sure to fully capitalize on these investments. And finally, we will continue to enhance our product offerings and optimize our score portfolio to meet and exceed market demands. So Big Mac is really ready for the future. We have a strong discount position and further include efficiency, enabling us to have substantially increased volumes. With that, over to Helena and this quarter's financials.

Thank you. I'm going to present some of the financial achievements in this quarter, starting with our sales performance on page 10. We see a slight decline in net sales by 5.5% in the quarter. Despite this, our net sales growth rate has improved versus last year and versus preceding quarters. Still, as mentioned, we clearly see that product categories related to smaller projects perform well, while larger renovation projects continue to lag behind. Sweden has shown a better performance overall, and a market decline for building materials was expected in the quarter, and we consider that to be at least at the market. We also demonstrate a strong gross margin in the quarter at 33.6%, driven by a positive product mix, an improved product margin, and utilization of supplier cash flow. We have now next four new stores in 2024, and the new stores contributed to sales at 1.1%. Moving on to probability, our EBITDA has increased from 172 million in the second quarter last year to 184 million this year, resulting in an EBITDA margin improvement from 7.8% to 8%. We have managed to sustain our gross profit versus last year by margin increase. In addition to maintaining gross profit, the improved probability is driven by increased efficiency and lower costs, both in store and administration, a 17% decrease in total. The improved profitability is also demonstrated despite a rise in depreciation due to more leased stores and the write-down of the associated company, Norwood. Our cash position on page 12. Cash flow from operating activities remains strong, supported by prioritizing investment and optimizing inventory. Our strong cash generation continues to strengthen our financial position and provide flexibility for future opportunities. We have significantly reduced our net debt from $679 million in the end of the second quarter 2013 to $408 million this year. Our net debt leverage is 1.5 times in the quarter. We have high seasonality in sales between high and low season, driving corresponding seasonality in the net debt leverage. Our leverage over the last 12 months is below our target of 2.5 times. Additionally, we have extended our credit facilities at year end, ensuring a liquidity position with a billion available. So in conclusion, despite a challenging market financially, we have achieved significant milestones by showing improved profitability And the co-author has a strong cash remuneration and a reduced net debt position. And by that, I hand over back to Carl before opening up for the questions.

Thank you, Helena. And please move to the final slide, number 14. To summarize our presentation, here are our key messages again. As you heard, we delivered on our prioritized areas during the quarter. In a continued hesitant market, we managed to improve our profitability, delivering an EBITDA margin above last year, but also above the margin that we had during the years before the pandemic. And in addition, we continued to strengthen our balance sheet. Some positive macro signs have spread lately with improved customer confidence and higher activity in the housing market. And this is seen in particular categories, and over time, this will have an effect on overall demand. And Big Mac is ready. We have used the time wisely, and when the market rebounds, Big Mac is fit for growth. We have a strong discount position and improved efficiency, resulting in both revenue and profit potential. Finally, we are currently in the middle of our high season, and we have a strong operational focus at the moment. Our fantastic employees are working intensively to make sure that our customers can fulfill their home improvement needs. And with high engagement, upgraded stores, and efficiency districts, we welcome our customers during this summer season. And with that, we thank you for your attention and are now happy to take your questions. So let's open the floor to your questions.

Thank you. If you would like to register a question, please press start followed by one on your telephone keypad, ensuring that you are unmuted locally. If you'd like to withdraw your question at any time, you can do so by pressing start followed by two. The first question comes from the line of Benjamin Walstead of ABG. Your line is now open. Please go ahead.

Good morning and congratulations on strong results. I have three questions today. First of all, I was wondering if you could share anything around consumer behavior. You note that transaction volumes are up and consumer confidence is trending even better. Is this seen in stores as well in any way?

Thank you, Benjamin. Well, yeah, as we mentioned, we see quite And larger than before, differences in the demand between different categories, where products related to the smaller categories developed well, while we still see hesitant consumers when it comes to the larger innovations. We also see consumer behaviors more like the one that we saw before the pandemic, both when it comes to during which hours the customers come to the stores, but also when it comes to the split between e-commerce and online stores, where we see more of a consumer behavior that we saw pre-pandemic than what we've seen during the last, say, three, four years. So there are some changes in the consumer behaviors than before. compared to what they've seen before.

Perfect. Thank you. I was wondering as well about your inventory. It is much reduced versus last year, I believe, on the back of ongoing assortment efficiency improvements. In Q2 of 24, your inventory ratio was some 24%. And basically, I was wondering, what is the Q2 27 inventory ratio? Any thoughts on that would be helpful. Thank you.

I'm not quite sure that I understood the question. I didn't hear the beginning of it. Could you please repeat?

All right. I can rephrase it as well. What do you think is the sort of mature impact of the ongoing assortment efficiency improvements in terms of inventory ratio, please?

So, well, we have worked a lot with optimizing the inventory. That is a combination of both to see what kind of assortment should we have, what products should we push, what products should we discontinue with, but also what is the right inventory level from different products. When it comes to ratio going forward, if you measure it in terms of sales or in inventory ratio, turnover ratio and so on. That depends, of course, both on the inventory level, but also on the sales development. So let's see going forward. But making sure that we have the right inventory is a key priority for us. Compared to last year, the inventory in absolute terms is down. But at the same time, we have managed to improve what we call the service level. That is availability of products in the stores. So it's something that we work a lot with to make sure that we both can reduce the overall level, but also make sure that we have the right product and source. And one way to do this is to make sure that we all the time work with very efficient logistics and have short lead times when it comes to more popular products.

Perfect. The reason I'm asking is before the pandemic, your inventory was, share of, so to speak, sales was about 20%. And during the last two years, it's been around the 25% mark. Do you expect sort of going back to the olden days in terms of the inventory ratio? Yeah, I remember that.

Yeah. Well, as you say, right, that during the drop in demand the last two years, the inventory turnover rate or order ratio to sales has, if you look at it as a turnover rate, it has come down, right? Because we feel no demand, no sales, and that's also why we have focused on optimizing and adapting the inventory to the sales levels. So without giving any forecast on ITR or something like that going forward, I can say that this is, of course, an important KPI for us and something that we work with to make sure that we have a very capital-efficient inventory and an inventory that turns all the time.

Perfect. Thank you very much. And a final one as well. The gross margin improvement, you hint that it's due to both a better product mix and also cash discounts. I was wondering if you could give us a sense of the relative importance of these two factors, please.

Yeah, it's actually several factors, and more than the factors you just mentioned there. It's an effect from a constant effort to adapt the product range to the customer needs, where we have both added but also removed products. It's a result of successful purchasing efforts during the winter, where we have managed to improve our purchasing conditions. It's a factor or a result of a slightly different demand in the quarter where the quarter has weighted more towards products with higher margins and it discounts, the cash discount that you mentioned. So it's a combination of several factors and I don't really have the exact between those three or four factors but it's a mix of all of them and it's a I think it's a result also of a strong focus and effort to make sure that we improve profitability also in a weaker market.

Fair enough. Thank you very much. Those were all my questions for now.

Thank you.

Thank you, Ben.

The next question comes from Julian Batu of Pascal Advisors. Your line is now open. Please go ahead.

Yes. Hello. Good morning. Congrats also on my side. Very impressive. Just two questions. The first one is, can you remind what you describe as the cash discount supplier? Is that some rebates that are giving you and that you are able to keep for yourself without passing them through retail prices? That's the first question. And the second question is, I mean, now that the market seems to have finally stabilized and even seems to be improving, at least on the macro side, how would you look at the slope of the EBITDA margin trajectory towards the 7% from the actual level, which is around 2% to 3%? My question is, is it 12 months, 18 months, 24 months? Yeah. Okay. Will you take the cash discounts? Yes.

It's our supplier agreement where we have normally long-term payment conditions, and then they can use the discount if we pay earlier. So it's reducing our costs.

Yeah, I know that's it. My understanding of the discount was the discount used to be in the back based on volume, right? I suppose volume are down.

No, it's not those. Sorry, it's not those ones. It's not the volume-driven discount. That's another thing. This is only in respect of the payment. So nothing of volume and pricing of the product. It's the same. It's only on the invoice.

Okay.

And when it comes to the profitability, well, we see that our priorities are having an effect in this quarter. We have said that we are focusing on strengthening balance sheets and improving profitability, and we are seeing evidence of all this in this quarter. And we will continue to focus on this. And our goal is naturally to always make Big Macs as good as possible and to reach our target as soon as possible. But we don't provide forecasts, but our ambition is to continuously get better all the time. My question was more to rebound on your comment about the cost per store, which, as you say, we're very, very efficient now. And I think you alluded to the fact that it would be hard to improve further. And I was wondering if the market come back, volume come back, traffic improve, there will be some kind of cost re-increasing, which would decrease the leverage a little bit. Sorry, then I misunderstood you. Well, a lot of the cost reductions that we have made, I would say that the majority is working smarter, in new and more efficient ways. We have been able to increase our efficiency and are able to increase the volumes in current infrastructure. Of course, with a ramp-up of sales, we would add some personnel in the stores and so on. But, you know, our ambition is to be able to have scale effects as the market rebounds or when it rebounds. So, some is sticky, then. Some of the cost improvement is sticky, then. Yeah, exactly. Some of the cost improvement is, you know, regardless of the volume, and others are, you know, related to the number of deliveries to the stores, number of customers, and so on. And with a substantially higher volume, we also need to add some personnel in the stores. But we see that we have potential to significant more volume in the infrastructure.

Okay, thanks.

Thank you. The next question comes from the line of Magnus Ramann of Calpershevx. Your line is now open. Please go ahead.

Thank you very much. Magnus Ramann here from Calpershevx. I just have a follow-up here on previous questions. So if we look at the gross margin improvement, for example, we would assume that the pay early cash discounts represent, say, a fifth or so of the improvement, and then you have a certain positive effect also from assortment, improvement, or efficiency. That would anyhow leave a rather large share of this explanation of the cost margin improvement to the mixed effect, where you have sold more of items carrying a higher product margin, higher ticketed projects have been held back. Is that a fair assumption? So the assumption was... Yeah, it's the assumption that a rather large part of the gross margin improvement you have showed is related to positive mix effect, i.e. selling more of the low-ticket type of items with a higher gross margin than the high-ticket items with a lower gross margin. Yeah, okay. Well, it is really a result of several factors, but it is. It is, you know, successful purchasing. It is the cash discount. It's the optimization of the tournament. But, yes, you're right. It's also, you know, it is, yeah, the assumption that, you know, this is, A significant part of it or a part of it is due to the fact that we have different product mix where we see large differences in demand between the different categories. Right. And then, I mean, can we also make an assumption then that when you are anticipating a recovery, of course, and on the sales side eventually, and when that recovery comes, it should be rendering sort of more sales of the higher ticketed items, for example, timber-related products? Yeah. Yes. Yes. You know, in a more normal – yeah, you're correct, right? In a more normal product mix, you know, with a stable demand for more categories, And that will also, you know, have an effect on the gross margin. And then you see that also, you know, if you compare our gross margin between the quarters, then you see, you know, that the margin difference between the quarters given by, you know, what kind of products there are, you know, the main products in that quarter. Yeah, sure. Right. And then just finally here... as it relates to an expected recovery, and, I mean, maybe this relates then to the release of sort of purchasing power from reduced interest rates, because now we've had the consumer confidence rise from consumers seeing the sort of fatigue of interest rates, but the cuts have just merely begun, and then this is fair to say, I mean, you are more than halfway through, I guess, the the high season now, the Q2 and Q3, for your side, so that this potential recovery is on the higher ticketed side of your assortment. The effects will be materially seen first in Q2, Q3, if anything, next year. Well, I actually still think it's too early to tell. We are, you know, in the beginning of July. The summer vacation has just started. So I think, you know, we need to summarize the peak season of the Q3. I think it's really hard to tell which week or month the overall demand will increase. As mentioned, we see large differences. in the quarter. And I honestly think it's hard to tell, you know, where we would see different types of demand for all categories. I wouldn't say that we are, you know, far in the peak season. I would say that we are, you know, in the first third almost, right? Because we have July, August, and September also with peak season. So I think it's too early to tell. Right, but then we're halfway almost into July. I think, would you care to, I mean, I know it's the very, very early days of the Q3, of course, but would you care to comment anything on what you see in terms of, you know, the temperature in the market, if I can phrase it like that, in the beginning of July? No, I don't want to do that too early. Then they will start speculating in days, right? So I'm sorry, but we need to come back to that later when we see the full amount of the report. Okay. Thank you very much. Thank you, Magnus.

Thank you. We now have a follow-up from Julian Batu of Pascal Advisors.

Yes, a very quick one. As you say, large renovation projects are still weak at the moment. Should they come back? What would be the impact on the gross margin? Would that be slightly diluted? I don't have an exact figure, but... It also depends a little bit on CISA, right? But some of the larger innovation projects have slightly lower margins than the smaller ticket items. But I don't have an exact figure on how that would impact. But if you think about the main products that would go into large innovation products, do individually, do they have lower growth margins than the actual ones? Some of the product items that goes into that basket, yes, have a lower than the average. So that's correct, right? So the more heavy building materials have slightly lower margin than the smaller products. That said, we have, as I mentioned again, right, we haven't worked successfully with the purchasing and so on, right? So many different factors into that.

Okay.

Thanks.

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Carl Sandlund for closing remarks.

Thank you. Thank you. Thanks a lot for your participation and for many questions today. We really hope that you will have a nice summer and peace coming with our stores. And as before, we are looking forward to meeting you again after our third quarter. So thank you.

Ladies and gentlemen, I'd like to thank you all for joining today's call. Have a great rest of your day. You may now disconnect your lines.