Clas Ohlson AB (publ)

Good morning everyone and welcome to the Klaus Olsson Q1 report. My name is Kristof Tonström, I'm CEO and I'm here with Penila Valfrydsson, CFO. So we'll cover a short presentation before we move into the Q&A and I'll cover the business update and events after reporting period and summary and Penila will take us through the financial development. So headlining the first quarter and also August, we have started the year well with 8% organic growth and 9% like for like. We've also seen improvement versus last year in gross margin and cash flow and we're ending the autumn now with a healthy and balanced inventory which is below last year's levels. Our cost saving efforts are progressing according to plan and we believe we're establishing a new base. This will be extremely important as we move into the fall. Macro is still very challenging. We need to be fast and flexible and we need to ensure that we stay very cost effective as we see obviously inflation hitting us from a lot of different areas. Looking at the growth in the first quarter, it's very assortment driven. Across our five consumer missions, the prioritized destination categories, all categories are actually driving growth which is encouraging and we also saw continued growth moving into August with 14% organic and 14% like for like. Our vision or our clear objectives are to grow 5% organic per year at the 79-emit margin and that remains moving forward and we also want to be industry leading in sustainability and deliver on our 2045 commitments. So those two areas are our key objectives moving forward. The short view on what's going to drive growth and profit. We have three main growth drivers that we're focusing on. The first one is an assortment making it relevant 12 months a year and the second one is building a profitable and growing online business and then also expansion of our store network. So those three growth drivers will be enabled by efficient customer communication, competitive cost base and the execution of our sustainability agenda. So just a few quick words on each of the growth drivers as we're closing out the first quarter. So as said, I'll come back to the assortment in a second but all the priority categories have been driving growth. The summer season in terms of seasonal products was actually fairly weak. So it was very broad based business growth during the summer. In terms of our online business, we are doing everything to focus on our own e-comm channel that has now surpassed the billion second sales and we saw 9% growth in the first quarter. Obviously, the ambition is to grow total Klaus Olsson but we do believe that this proportion of growth will continue to come from our own e-comm. In terms of the expansion of the store network in the quarter, we still had fewer stores than last year but we also opened one new store in Norway and we are on track for the expansion of the net 10 stores this fiscal year that we announced during the last quarter. When it comes to efficient customer communication, a huge enabler for us is our club class membership program and that is continuously progressing and we're also doing a fairly good job in terms of performance marketing and online communication during the quarter. Cost base, we'll come back to the details but we have done a lot of work to reduce complexity, simplify all the ways of working and thereby also a fairly significant reduction in terms of office functions and white collar employees. So we're actually entering the fall now with approximately 25% fewer office colleagues than we were one year ago. So that means that we're on track in terms of realizing the savings that we have been announcing of the last few quarters and obviously that is going to be important given the inflation we see in rents, salary increases, etc. In terms of our sustainability agenda, obviously we want to sell a lot of need-based products that makes a difference for our customers both in terms of their economy but also in terms of sustainability and being able to lead a more sustainable life and as part of that we are increasing our focus on spare parts to complement our assortment and we have seen nice growth also on spare parts during the quarter and we were also recognized on Albright's green list during the quarter. Taking a second just talking a little bit about our consumer missions. This has been a focus for us over the last one and a half years and it's pretty clear that we want to be a unique combination of those five consumer missions. We have seen over the last year or two that Tidy Up Your Home and Light Up Your Home, those two missions have been driving growth and we've also talked about reapplying that playbook onto the other consumer missions and the encouraging fact during Q1 and also Q2 in August is that we start to see growth also in connect, fix and also conscious home environments. So, right now all the five consumer missions are driving growth and that is crucial for us to ensure that we keep a balanced assortment while of course driving relevance across each area. We've done a lot of new product launches into each of the missions and there are more of those new products that we're seeing in the news lined up for the autumn. Apart from that of course we want to work hard in terms of seasons but we also want to be less dependent on the seasonal swings but of course we are entering the Christmas season where we are a destination and we want to continue to be a destination. Spare parts I've already mentioned and that is a big part of also fulfilling our sustainability ambition. On top of the five missions those are the key things that drive traffic of customers into Klas-Olsson. We also want to complement that with a consumable assortment and we have seen that also performing fairly well across the first quarter. We know that consumers are cautious. Consumer confidence is recovering a bit but are still on record low levels and we need to do everything to protect our price position. We do measure our price perception and we benchmark ourselves with low price competitors and we're going to continue doing so. So it's crucial for us to have the right price at the right quality product in the market and continuously building price perception. So obviously we are humble also moving into the fall now given the consumer sentiment. So with that short update I'll hand over to Panilla to take us through the financial development for the first

quarter. Thank you Christoffer and good morning to you all. Let us take a deep dive into the Q1 financial development. We are all aware that it is still quite tough time for many retailers. In this environment I think it is positive that we can report an organic increase of 8% to the sales of nearly 2.2 billion SEC. That was up 7% compared to Q1 last year. Also what highlighting is that this increase was made with four less stores compared to Q1 last year which is also illustrated by a strong like for like sales increase of 9%. Online was up 9% for the quarter. Online sales now stands for 12% of the total sales. And now looking at the sales development in our three markets. In Sweden we reported organic sales increase of 9%. In Norway we reported total sales increase of 7%. And a strong organic sales increase of 11%. And finally in Finland we reported total sales increase of 6% representing a decrease in organic sales of 3%. Before moving on to the gross margin I would like to elaborate a bit on the macro trends with business impact. And let me start with the freight cost. Let me remind you that these figures refers to spot prices and that we have a lag effect due to lead times from order placed to product sold. The sharp decline and a new normal level is a positive sign also going forward. The effect on the weak SEC however seems to remain. We are still at the historical high exchange rate US dollar SEC which will affect us going On a more positive note we are pleased that the NOC has strengthened lately. And let me now give you a picture of the main component explaining the gross margin improvement. This quarter we have been able to compensate for the macro impact by favorable price and product nicks. We also saw a positive effect from lower transportation cost and currency hedging. However the negative impact from the weak SEC versus the US dollar is still significant. All in all of gross margin increased by .1% to .2% in the quarter. As we previously have communicated we are putting a lot of effort in making close also even more efficient given the challenges in the market. And the measures we presented in Q2 and Q4 have progressed according to plan including the reduction of 85 plus 75 white collar employees. We will see the approximately 210 million SEC full effect of these savings on a fuller basis going forward. We reported 170 million SEC in one of cost in Q1 and we estimate 50 million SEC to be reported in coming quarter. Let me now give you an overview of our earnings for the first quarter. Our operating profit excluding one of cost totaled 154 million SEC compared to 90 million SEC last year. One of cost connected to our cost saving initiative totaled 170 million SEC in Q1. Last year we had a one of cost for the closure of the UK operation totaling 35 million SEC. The 170 million SEC in one of cost is more or less in line with approximately 165 million SEC we communicated in June. And the majority of the savings will be attributable to selling expenses going forward. We saw a decrease in share of selling expenses by 2 percentage point to 29.7%. The decrease is explained by both the highest sales and the net of one of cost and the realization of cost savings. Administrative expenses totaled 46 million SEC compared to 44 million SEC in Q1 last year. Also here our cost initiative has had a positive effect in meeting the effect of cost inflation. So the reported operating profit was then minus 16 million SEC that is in line with the same quarter last year. And if we then turn to the inventory compared to the end of July last year the inventory level is down with 255 million SEC compared to last year reflecting the lower transportation cost and strong it's sex. Also it is important to have in mind that the inventory value has been impacted by external factors such as the weak SEC in relation to US dollar. However that is now partly mitigated by the significant lower transportation costs. And looking into the cash flow for the quarter cash flow from operating activities totaled 328 million SEC compared to minus 35 million SEC last year. The improvement between the quarters is mainly due to a higher profit before write down and the difference in change in working capital explained by the lower inventory build up during the quarter compared to last year. Net debt EBDA excluding IF16 was minus 0.1 times which means that the financial position is well in line with the financial targets. I hand over to Kristoffer.

Thank you Brunilla. Looking at events after the reporting period the most specifically the August sales developments. So in all total sales was up 14% netting out at 860 million. With organic growth in Sweden of 15%, Norway 14% and Finland 8%. So a solid delivery across countries. We also saw that online sales was up 11%. Looking at August we had three stores less than August last year and we see the trend continuing from Q1 into August in terms of all the missions actually growing versus last year. So a strong August while obviously the mission moving forward is to deliver on our 5% and we should not expect double digit growth every month moving forward. So to wrap up before we move into Q&A. We know that the market is challenging and there is continued uncertainty especially when it comes to the consumer's demand and the consumer spending. So we're very humble about that fact and are doing everything that we can to drive the relevance in terms of assortment. Our value for money and price perception and obviously it's key for us to be flexible. We've shown that over the last 12 months that we've been able to focus a lot on need-based shopping and we need to continue being flexible based on how the consumer needs are developing. We're also expanding our store network and obviously it's all about quality expansion rather than quantity but we are on track versus the 10 new stores this year and obviously we're also doing everything to grow our own e-commerce channel. As Benilla explained the cost saving measures are being executed and on track versus plan and of course we need to continue being extremely cost conscious and do everything to reduce complexity but we believe that with the bigger changes we've done now we are moving into the fall with a more competitive cost base in total. So with that short presentation we will now move into Q&A.

If you wish to ask a question please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question please dial star 5 again on your telephone keypad. The next question comes from Magnus Rahman from Kepler. Please go ahead.

Thank you. Firstly congratulations to really good results in this quarter. I have a few questions. Firstly maybe on the headcount reduction here in the office staff. How will you manage to perform sort of the central work task with this decrease in staff? In what ways and if any will you be sort of negatively affected by this reduction?

So obviously the ambition overall is to simplify everything that we do, remove complexity and focus on the core business. So obviously the headcount reduction is never something we take light heartedly and it's based on a review across all the different functions. So it's broad based. It has impacted all the offices, all the functions and the ambition is to ensure that we focus on the growth drivers that are out before. So obviously we have taken out a few things in terms of what we have focused on historically and we're trying to keep very focused. Of course there is always a risk associated with making big changes like this. But obviously a large part of the change had already been executed as we moved into the summer. So I think it's encouraging to see that despite those changes we are able to focus on the biggest things. So all in all across countries, across functions, across offices and the ambition is of course to still be able to deliver on our targets despite this.

Right, so I mean since it's been working so well as you allude to, if we flip the question, I mean you're still some sort of 500-file employees. Do you see there is further potential to reduce perhaps that workforce with additional measures in the coming years or do you think we need to grow the central staff somewhat?

The key is to ensure we do not grow in terms of overall headcount. We want to really stay on this base moving forward. There are no other news in terms of further changes. We believe that with this we are in a competitive stage, we have a competitive cost base. But then of course we always need to be very open and flexible depending on how the market evolves. And the ambition is of course to get better results out of the organization that we have rather than expanding the organization or further decreasing it. So I think that's all in

all where we stand. Alright, right, that's clear. Then on your pricing, you mentioned the report with spare parts being up 21% -on-year. And you've also mentioned a lot how you become more selective in your pricing and sort of betting on the price visible parts of your assortment and the opposite for lower price visibility. So I mean for these items that you might think of maybe as lower price visibility, can you give us some sense here of the mix between volume and price? Would you say for example that it's a majority volume, the 21% or is it the majority price?

Obviously we haven't reported details of the spare parts business. It's still a fairly small part of the total. But when it comes to spare parts, it's mostly been driven I would say in terms of volume because we have made more spare parts available across 120 stores and online. So spare parts is obviously a category where the price sensitivity is a bit lower potentially than on some other categories with known brands, etc. It's more a complement to a purchase. So it's not a very price sensitive and it's also not a campaign intense part of the business. But it's still fairly small, but the development is obviously encouraging.

Yeah, sure. But still then what you're replying is that you have taken up prices on these low price visibility items by less than 10% and the less if I really can get

to. Sorry again. Yeah, so

what you're suggesting is that you have raised prices less than 10% even on these sort of low price visibility items as spare parts.

I think that's fair to say, but it's obviously varies between categories. But overall, yes.

Okay, great. And then you mentioned here also now in the presentation that you expect sort of this proportional growth from online or that to contribute more than the overall. But if we look at the recent say four months or so, I think you've had an online sales that have been sort of aligned with group sales in these months where you have a strong sales overall. So how are you going to push them if you expect online to contribute online sales to grow more?

Obviously, you're right. Over the last few months, we have seen strong sales development in our stores and especially on Like for Life. So and obviously it's never in a purpose to drive one channel above the other. So we will always optimize sales between the channels. But it's more if you take a step back and look over the next couple of years, we believe that we are still a little bit underdeveloped when it comes to online penetration on some of the consumer missions. So we do expect that structurally there will be an increase online. But it's not a and in itself to drive online more than the rest. It's more an observation and an expectation looking in the next few years that online will be a growth contributor. But as you say, over the last few months, that has not been the case.

That's clear. But just to understand that, are you expecting to catch up with the sort of overall online penetration in the market that you mentioned that you like? Or is it more that you think that online will grow structurally and thereby you will grow with it, so to speak, but remain your sort of lower penetration on the overall?

We believe it's very assortment driven from our end. So if you look across the five consumer missions, as an example, the Connect mission from a total market point of view, the online penetration is significant, whereas for us it's slightly lower than overall markets. So with the right assortment expansion, with the right availability, we believe there is an opportunity for us to catch up versus the market. So it's less a prediction on the total e-com penetration of the market and more on a category level where we see headroom to grow versus where the market is at.

All right, great. Just to find one middle that others ask questions. So on the positive mix effect here that's reported across the model that you mentioned, if we would just assume that mix would remain the same in the upcoming borders, should it continue to contribute then or sort of when do you think that would annualize that effect?

So obviously, as you said, mix will be, I think the asset in the first quarter is mix and pricing and less campaigning. Obviously, when it comes to pricing and campaigning, that's always also dependent on what happens in terms of competitor pricing, etc. Of course, our ambition is always to drive a positive mix as well in terms of what categories we focus on when we launch new products, when we expand the assortment. Of course, we want to target that towards high margin. And so I think it's more in general, the ambition is to continuously improving the gross margin versus last year. But based on the dollar effect, we still believe there will take some time before we're back to kind of historical levels of gross margin. I don't know whether that answers the question, but of course, the ambition is to drive mix. And I can't say exactly when that will be annualized, but in our effort to expand the assortment, it's always a balance, of course, between traffic driving sales and margin.

Yeah, so the way to try to understand was if you think that the midship is mainly dependent on sort of deliberate actions from your side in altering the assortment and so on and there, but that we can expect these positive effects to continue ahead sometime before they sort of annualize. Or if it's more that customer behavior changed from quarter to quarter and now you have a type of customer demand that was aggressive.

I think it's a mix of what we do and how the customers react. If I take the summer as an example, obviously, as I said during the summer, some of the traditional summer categories were not driving the growth. It was more the base assortment. And that, of course, is favorable for mix. If you remember last summer, obviously, some of the high ticket summer items, when the sales were slow, the prices went down across the total market. And obviously we followed. So that, of course, becomes a mix, but it's driven by that the prices went down in the market if you're following me. So obviously driving the total base is favorable for margin. But then, of course, it depends on what happens with seasonal items and more high ticket items during a specific quarter. Great.

Thank you very much.

Thank you.

The next question comes from Andreas Lundberg from SEB. Please go ahead.

Good morning. Thank you. If I start with the exit of your cooperation online with the various players, what's the strategic rationale for doing this?

Yeah, hi, Andreas. So, yeah, we announced today that we're ending the commercial partnership with Oden Matan. And in general, we've been very happy with the collaboration over the last few years and also the customers have been happy. This is more a sign of us very much focusing on our own channels. We have seen that over those years, our Ecom channel is now above one billion SEC in sales and also following all the things we have done to simplify our business and reducing complexity. It makes sense to focus our fairly linear resources onto our own channels. So it's also a natural step versus following the decision we took a year ago when we ended the partnership with Amazon. So it's more a reflection on our own focus moving forward rather than anything else. We've been very happy with the partnership.

Thank you. It's also on sales growth quite a bit. Could you perhaps give some more flavor on what's really driving here? How is the market performing? If you have any color on that. Thank you. Obviously,

we are operating a little bit in our own Claes Oelsson universe with multiple competitors and multiple markets. And obviously, our five missions is a way for us to frame where we are playing. I think there are some overall markets and categories where we've seen decline, like anything related to connect your home and multimedia, etc. We've seen market decline there, whereas in some of the other categories we've seen growth. But Netnet, we believe that we are strengthening our position in Sweden and Norway during the summer. But of course, low price continues to perform well. And in certain categories, we do see growth. But I don't have a total market for our universe. But so it varies a little bit in between the five missions.

Okay, cool. What would you say about the net effect of USD versus sourcing costs in the first quarter? And how do you see that going forward?

If you look at the bridge that we shared on the gross margin, and you see the arrows that shows the factors impacting gross margin, there you also see the relationship of the USD impact. So it has a fairly big impact. And all else equal, the gross margin would have been down unless the other positives came in. And we expect the USD impact to continue to put pressure on us in the next couple of quarters as well. But if you look at the bridge that we shared in the deck, that shows you the relationship.

What do you think the net effect will be less severe in the coming quarters? We talked about substantially lower transportation costs in your inventory, for instance.

So it's very dependent obviously on our own ability in terms of product mix and pricing. But the net effect of the dollar, of course, will also depend on how the dollar evolves now. But I think the net effect versus transportation and dollar is still negative.

So you want to talk about that it will be less negative going forward? You mean the impact of the dollar? And the transportation costs combined.

I think in the next one to two quarters, it will be similar to the first quarter and then it will net out.

Cool. And lastly on your cash position, you turn to net cash here again. You have now a few quarters, especially the Christmas quarter, where you have typically very high cash inflows. And you have a low dividend in the coming days here. So what do you want to do with it with a cash position or the balance sheet? Thank you.

So obviously the dividend that was recommended for DGM on Friday was announced last time. And of course, that was also done in terms of ensuring some protection and security in this volatile market. So obviously the intent is to stick to and really deliver on our financial targets. But there are no other news in terms of how to use that cash. We can see if you compare to a year ago, obviously it's gone really fast in the right direction. But nothing new on that today.

Thank you so much.

As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Okay, we seem to have no further questions on the webcast from any of the analysts or media. So with that, we will close down the conference. So thank you very much for taking the time to call in. And then we will see you for the Q2 update. Thank you very much.