Clas Ohlson AB (publ)

Good morning and welcome to the Klaus Olsson Q2 Report presentation. My name is Ekstof Nonstrom. I'm the CEO and I'm here with Pernilla Valfridsson, CFO. We will do a short presentation before we move into the Q&A. So I'll cover the business update. Pernilla will take us through the financial development and then I will go through the events after reporting period and a summary. So looking into the second quarter, we have delivered strong sales development with 10% organic growth across the quarter. We've also been able to improve the both gross margin and operating profit. And we have continued with our cost saving programs and thereby also focused on becoming even more efficient and flexible. The good news is that we see that the growth is broad-based from across all our key categories and also we have a high amount of new products being launched that also drives sales growth. Also operating cash flow has recovered versus last year. And today we also reported November where we saw 7% organic growth and we'll come back to that a bit more in detail. So starting with the business update, just reminding ourselves about our targets. We want to deliver 5% organic growth per year with a 7 to 9 EBIT margin and we want to become industry leading in terms of sustainability. So those are the overarching objectives. Looking at the focus areas for this year relating back to our strategy that we launched back at our Capital Markets Day in 2022, we have three main focus areas. The first one is to make our assortment relevant 12 months a year. And the second one is to drive profitable growth on Ecom. And the third one is to start expanding our store network. So just briefly touching what has happened over the quarter across each of these. So first of all in terms of assortment, I'll come back to a bit more detail, but all in all, we do see that the growth is broad based across the categories that we have prioritized. We have done a lot of work to ensure that we can adapt quickly to changing consumer needs. We see the flexibility in the assortment as critical. And we have also launched thousands of new products this year and we do see an effect of the product new sources of driving sales growth. On our Ecom business, the online sales have grown 15% now in the second quarter. And our online business this quarter now versus end of pandemic has actually doubled. So we have seen good progress there. Still 50% of online orders are delivered via our store network. So obviously the combination of our fiscal store with our Ecom is continuously helping us to deliver great service and also enabling good profitability. We also see that we have become even more efficient in terms of having products available. And we have also as part of the product launches that we have done, we have launched a lot of new products exclusively online to try out new ideas before we roll it out more broadly or products that are more suited for a specific Ecom purchase behavior. On the store network, obviously we have a few years behind us of optimization of the store network in the quarter that we're reporting. We had one store last and last year, but already in November we opened three new stores. And we have also rebuilt or moved stores. So the optimization of the network continues. And we're on track to open the 10 stores that we've communicated for this year. We've also signed already now four stores ahead of next fiscal year. Obviously the growth drivers, the focus areas are all enabled by being very efficient in terms of how we communicate to customers. And here we have shifted most of our spend online and we do a lot of work in terms of digital marketing, both in social and paid search, etc. And it's playing out well. Also Club Class is a great enabler. Looking at Club Class this quarter versus last year, same quarter, we actually have half a million more members. So a membership group of 5.2 million members, which also allows us to communicate frequently with the most important customers. Our work with ensuring a competitive cost base has continued. And as previously announced in the last few reports, we aim to save 210 million on an annualized basis and all the plans have progressed as planned. And on sustainability, one of the key things we've done this quarter is to roll out more bigger parts of our spare parts assortment. For us at Club Solstom, it's critical that we sell high quality products at good prices that consumers can keep and use for a long time. And if something happens, that they can also repair what they bought. So having a broad spare part assortment available is critical for us. Looking then a bit more deeply into the way we work, both with assortment, but also in terms of the categories that we're prioritizing in our communication. Since our capital markets, we have talked a lot about our five consumer missions. So tied up your home, light up your home, creating a conscious home environment, connect and enjoy your home and fix your home. So those are the five big destinations where we know that customers are really thinking about Klaus Olsson when they have a problem or a need at home. And looking at this quarter, we do see growth across all five. If I compare to a year ago, we saw growth in two out of five. So that's obviously one big change. And we're really thinking about this as building out more of a all weather portfolio where we always have something that we can offer based needless of customer needs or seasons shifting. Then on an everyday basis, we are also focusing a lot on sustainability, spare parts and obviously seasons is critical for us, not least the season we're in right now, the Christmas season. So the five missions are here to drive traffic. And then we have also expanded our consumables assortment over the last couple of years to ensure that we can also complement the other categories with more consumable products. Looking a bit more into, I mentioned product news. So we have launched thousands of new products this fiscal year. And a big part of the organic sales growth comes from new products. And we have been able to identify gaps in our assortment and also identify new needs from a customer point of view. And I also believe we've been able to price these at good levels, attractive levels, which also has helped our both gross margin and value perception with customers. So looking at where we stand from a customer point of view, we do know that the consumer sentiment in our markets is still low. It's been improving slightly, but it's still far below historical levels. And we really can tell that the households and our customers are extremely price sensitive. Then obviously it's critical for us to ensure that we deliver high value for money. And we track this every quarter and we see that the customers really look at Klaus Olsson as high value for money as the discounter competitors. So we need to ensure we do everything to remain competitive from a pricing point of view. And last but not least, we also deliver outstanding customer services. So our MPS is at 57. In our store network, it's even higher. And we do see that that makes us stand out versus a lot of other retailers out there. And all the work that we've done in terms of taking out overhead costs, etc. is also to protect the customer meeting also physically in our stores because we see that that makes a big difference for our customers. And then my last point before handing over to Panila. We're also very happy that as of November 8th, we have also closed the acquisition that we announced back in October. We have acquired the group spares, which consists of two consumer facing parts, Teknikdellar.se and Batteriexperten. And two business to business parts, Spares and Zand Group. We did this acquisition first to ensure that it adds value to Klaus Olsson. We expect this to be very secretive upon closing. And we also do this to really continue our strive for delivering both on our connect mission, but also to build out in terms of our spare parts assortment. We do see this as a very big underlying trend. We're going to integrate the spares group as part of our Q3 report. So we will come back more on this in our next report. So today we do not have that much more information to share, but we're excited about the deep closing. And we believe this is a big opportunity for us both here now and longer term. So with that, I'll hand over to Panila to take us through the financial development.

Thank you, Gustafsson. Good morning, everyone. And now let's dive into the financial of Q2 and the first six months of this financial year. Looking at the sales development, I think we have shown strength and we have maintained a positive momentum from the first quarter into the second. Total sales in Q2 is up 9%, to almost 2.5 billion sales. Organic sales is up 10%. And like for like, sales in comparable units is up 10%. We strengthen our positive view on opening new stores. I also think it is important to underline that we strongly believe in the combination of physical stores and online sales. Online continue to drive a significant share of total growth, up by 15% in the quarter. When it comes to a different market, we see strong total sales growth in all markets in Q2. Organic sales growth also shows positive views for all markets. Meshed in local currency, Norway is the strongest growth market with a 13% organic sales growth in the quarter. A positive milestone that we now have reached about 1 billion second Q2 sales, both in Sweden and Norway. Before moving on and commenting on profitability, I would like to briefly remind you of the macro factors impacting our business. Firstly, it is very positive that the freight prices have stabilized on a historical more normal level. The pandemic effects on the district are now roughly one year behind us, which means that we have very small lag effects left in our inventory. This graph shows spot prices for transport as an illustration of the market conditions. And as you can see, prices have been quite stable on a reasonable level since October last year. Less encouraging is the continued weak SEC compared to the US dollar. In a three year perspective, the SEC has lost approximately 25% versus the US dollar, which impacts us a lot. When it comes to mitigating primarily the effect of the weak Swedish krona, we constantly adjust our prices, optimize sales mix and balance campaigns and share of private labels to mention a few. With those factors I mentioned in mind, we see a great uplifting gross margin in the quarter. We have shown pricing power, but also the ability to adjust the product mix in a good way. Sourcing and transportation costs have declined, which we can conclude had a major impact on gross margin. These positive factors were largely offset by currency effects with the weak Swedish krona compared to the US dollar. But in summary, we reached 3.6 percentage points higher gross margin compared to last year. Summarizing our income statement, we have improved operating profit substantially. The operating profit excluding non-recurring items in Q2 totaled to 277 million SEC. We are of course pleased with this development, but it should also be seen in the light of last year's relatively soft Q2. Share of selling expenses decreased by .3% to 28.1%, mainly thanks to increased sales and conducted cost savings. Administrative expenses was flat at 50 million SEC. Looking at the six-month summary, we see a similar pattern with increased profits and even larger non-recurring items, with disposal of IT systems and costs for white-collars reductions. All in all, we have a profit for Q2 at 173 million SEC and 147 million SEC for the six-month period. As always this time of the year, we have an increase in inventory ahead of peak season. The inventory is also affected by external factors such as the Swedish krona, US dollar exchange rate. Compared to end of October last year, the inventory level is however down with almost 200 million SEC. So last year inventory was a bit high and we believe that this is a better level. Our ability to generate cash is a strength and we saw a solid development in the quarter. Cash flow from operating activity totaled 192 million SEC compared to minus 167 million SEC last year. The improvement between the quarters is mainly due to a higher profit and a different intention working capital due to normalized inventory build-up. At the end of the quarter, our credit facilities totaled 600 million SEC, of which 100 million SEC was utilized at the end of the period. After the end of the reporting period, in connection with the acquisition of Spares Europe AB, the credit facility was increased by 510 million SEC to 1.1 billion SEC. Of this 1.1 billion SEC, 506 million SEC was utilized after the closing of that position. Net debt DVDA excluding IFRS 16 was 0.0 time, which means that the financial position is well in line with our financial targets. I hand over to Kristoffer.

Thank you Pernilla. Looking at events after the reporting period and our November sales development. We again saw solid development with organic sales growth of 7%, net sales growth of 4%, so obviously the difference is driven by the weak Norwegian krona and like for like up 6%. Again, as for Q2, we saw organic growth across the three markets and we also saw organic sales growth across the five missions, so similar to the Q2 development. Our online business in November grew 12% and in the numbers we also have included the November sales of Spares, both in terms of the total and also for online and we believe that Spares is progressing exactly as we expected, but obviously we'll come back as of Q3 closing to share a bit more detail, so here we only have the absolutes included. Moving on into summary and then Q&A. So obviously the key for us is to continue to execute on the plan that we laid out a couple of years ago and we do know and we do see that the market environment and the uncertainty around the consumer spending remains. We are still very humble when we look into the spring. We do know that Klaus Olsson is incredibly strong in the Christmas period and we are working a lot of plans to continue to deliver in the spring, but again we're also very humble in terms of the development. Also as Pernilla mentioned, we need to remember that the first half we were also meeting fairly soft comparables, whereas of course in the second half the picture is a bit different. We keep working on the key things that we believe will drive us forward. It's the relevance in our assortment, it's value for money for our customers and also remaining our high flexibilities we can adapt based on how the customer needs are adapting. Also we have some exciting store openings to look forward to in the spring and we want to continue to drive our online sales growth also in the spring. Again we of course stay very cost focused. We have executed on the programs that we laid out. So we're going to continue to be cost focused and ensure that we do not add any costs but actually do everything to become even more efficient also moving forward. So with that let's move into Q&A.

Start five on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial start five again on your telephone keypad. The next question comes from Nicholas Ekman from Carnegie. Please go ahead.

Thank you very much and congratulations on very strong results here. I have to ask this like for like of 10%. I believe that's the strongest growth you've reported in almost 20 years. Can you tell us a little bit more on how you've actually achieved this? How much of this is related to price? How much are you seeing a significant increase in football? Can you just elaborate a little bit because it's difficult to understand the magnitude of this improvement. Thank you.

Thank you and good morning, Niklas. So obviously as talked about, it's assortment is a big driver. And as you know, we do not report volume and value separated. But I can say that for the quarter we have seen also volume growth. Obviously we are coming out of a period where prices have gone up over the last year. But in this quarter we have also of course worked on pricing, but I think it's really the product mix that is also helping us. I said we have launched actually thousands of new products that is also playing out now for this for this fall. In terms of football, we do see traffic increase, but we also see that when the customers come to us both online and in our physical stores, they tend to buy a bit more. So the combination of traffic driving from the mission with also complementing sales on consumables, etc. has an effect. So those are some of the key things. I.e. assortment is a big driver, but then also we've been able to get the messages out there to drive traffic. So I think our communication and marketing is working in a good way for both channels actually. So that's some more flavor on the sales development.

Very good. And these thousands of new products you're talking about, how does that compare to a normal year? Because I guess you always do replacements every year. Is this a dramatic increase? And have you actually increased your assortment or have you replaced a similar amount of SKUs?

So these are high levels. Also looking back historically back at our capital markets, they we show the graph where we show that we had actually decreased the class also assortment with approximately 10 percent over the last years before. Since then, one of the key strategies from our end was to expand the assortment. So we have increased the number of SKUs. We also find a good way to work with our Ecom channel as a way to launch products, test products at smaller volumes. And then when we see working, we can either increase volumes online or roll out more to the fiscal store. So we have launched more, we have expanded assortment. And then, of course, we're also doing a lot of work on the tail to ensure that we also stop selling things that are not performing as well. So to your original question, looking back many years, we are at higher levels than we have been in a very long time.

OK, very clear. And store openings. You mentioned this as well at the capital markets here. And I think you have 11 new openings now before next spring. And that's also, I think, the highest pace of openings since 2017. How do you see this? Is this the beginning of a new trend where you are continuing to expand and opening 10 plus new stores per year? Or is this kind of a one off adaptation?

Obviously, we hope that store expansion is a driver also more longer term, but we want to do this in a very controlled way. So we have opened three new stores in November. We have 10 new planned, of which six will happen this fiscal year and then four are planned for next fiscal year. And obviously, we decided in the spring to start going for expansion. And this was driven by a few different factors. One, the fact that our Life for Life store network was now performing well. We have done a lot of optimization, closed a lot of stores, moved stores, etc. So Life for Life was developing positively. The second thing is with the both headcount reduction, but also overall cost reduction. Obviously, we are giving ourselves the possibility to become more profitable on a store level. And third, obviously, looking at the macro environment right now, a lot of retailers are shrinking store networks, moving out of cities, etc. Which, of course, give us a good opportunity when it comes to discussions with landlords, etc. So given that, we want to ensure that we capture this opportunity when the market is soft to find the right locations for us. That also means that there are a lot of store opportunities that have come up now in a fairly short period of time. That doesn't mean we're going to keep the exact same pace every year, but it has given us a really fast start now this year. And then, of course, we want to be very, very careful. We want to ensure that we go for quality and not quantity in terms of new stores. So for every new store that we open, it needs to deliver on the bottom line. So we're opening a lot of stores now, but we also want to carefully evaluate those store openings and then decide on how to move forward. But of course, our hope is that it plays out well so we can continue a careful expansion.

Very clear. Thank you. Just a quick final question. The 210 million in cost savings, how much of that have you delivered on by now?

So from an organization point of view, most of the 160 FDs have left. And obviously, we have reported most of the one-off costs related to that. Also, when it comes to office, shrinking office space, etc., most of that has also been executed. And also the depreciations are obviously captured now as well. So the plan has been executed and then the effect of that will obviously gradually have an effect. But I think it's important to remember is that if you look at the numbers going forward, we would have had 210 million more cost unless we did this. But then, as we also communicated when we announced these changes, we have seen, of course, cost inflation in parallel. So salary increases, rental increases, and we're going to see that also in 2024. So it's not going to be possible to find exactly 210 million line by line in terms of net net savings. It's also been down to offset. But all the changes have now, most of them have been executed. Pernilla, I don't know if you want to add anything.

So from a one-off cost perspective, we will not have much left, a couple of millions.

Very clear. Super. Thank you very much. Thank

you. The next question comes from Magnus Raman from Keplerchevro. Please go ahead.

Thank you very much. And firstly, congratulations on the results, of course. I think I will tie into two previous questions a bit, but coming back to the price increases here, we look forward. Instead of being a lot of service show that that Swedish or Nordic retailers plan to increase prices also in 2024. At the same time, you mentioned here you expect to continue to be macro environment in the next year. So in that backdrop, do you expect price increases to be possible next year? That's the first one.

I think on an overall level, we'll see less price increases than we have seen. Because, of course, over the last one and a half years, we've had huge impact from transportation, currencies, etc. So I think in general, we'll see less. And then, of course, we need to remember that as we shared in the graph here, we compare ourselves in terms of value for money with discounters. And we've also seen less price movement across the discount competitors than we have seen in some other parts of the market. So for us, it's critical to remain competitive. And then, as we always do, we work very strategically with different categories and different product items where we need to be and want to be competitive. So on some products, we're going to take down prices. On others, there might be an opportunity or the in prices might have gone up more where we need to adjust upwards. But I think as a general answer, I think the price increase expectation on the market, I think, is lower in 2024 than what we've seen in 2023.

Great. And then the second one, Paisa, I mean, you report here a good gross market development year on year, but it's still clearly down year on two years. So Q2 two years ago. And you mentioned here that you sort of constantly adjust prices to adjust for the week, second, the imported inflation that you have experienced on your sourcing. So do you expect that there is a catching up here? I mean, this relates, of course, to the first question. But do you think there's a catching up to do for Swedish retailers that they have not been able to adjust fully given the weak consumer climate? Or how do you view that also in sort of relation to you possibly getting back to your previous cross margin levels?

So I don't think I want to comment on the, you know, all other retailers. But if I look for Klaus Olsson, I think fairly, I mean, as you say, we haven't taken out all the prices to end consumers. I mean, that we can obviously tell from the gross margin of the last couple of years or one and a half years. And then we have seen improvement. But also, as you as you mentioned, it's not back to historical levels. And we also expect and aim for improvement in the coming quarters. But the year on year improvement is not going to be as much as we've seen in the first two quarters, where the base was weaker. Then I think we need to remember the gross margin two years ago that you referred to was also very high. I think it was up to 43 percent. And then historically, we have been more closer to 40, 41 in the second quarter. So net net. We also we always want to balance value for money for customers is the number one priority. And then it's about the balance in margin and growth. And we want to ensure especially that we do not discount and promote promote too much, but rather identify the correct black price point and launch new product at the correct price point from the beginning. And I think we've seen that in the second quarter. And that's a bit what we refer to when we talk about price mix. So we want to continue doing that moving forward as well. So I don't know whether that answers the question, but I think you're correct in those conclusions.

Now, that that that's all good. One final for me here on on your on your assortment changes and this mix shift of assortment. Is there any way to to give us some kind of idea here? For example, you mentioned in the presentation your different focus sort of categories where you have one you call fix your home, which I guess includes tools and building material related products and so on. If one would think of that category and its share of sales today and its share of sales for class also say a couple of years back, is there any way to to sort of describe how that makes shift the magnitude of it? How much has that that category declined as a share of your total sales?

Yes, I think looking across those five of the last couple of years, tidy up so organize your home has developed well and also parts of the light up your home mission. So those two have performed fairly well. What we saw and and I think we also shared at the capital markets today what we saw was a decline from a class awesome point of view, both on connect and fix. Those are two overall areas that consumers you know we have high what we call mental availability in those categories. You expect class also to have a strong offer across connect and fix, but that's where we saw the climb the years previously. So I think you can say without going into the exact percentage points that the share of sales was down on connect and fix. If you look at a lot of products we have launched now this both summer and fall, we have done a lot on both connect and fix. So I think we are regaining a bit share of sales on those two areas. Then the conscious home environment that's the smallest of the five, but it's also one of the ones we believe in for the longer term. So we've also launched a lot of things there, but it's much smaller than the other four. But I think it's fair to say that that we have been bringing back share of sales to connect and fix, and that is something our customers really expect us to do.

Is it a fair conclusion to draw that that sort of tools and bigger ticket items related to fix are at lower gross margins while consumables are at higher gross margins so that you have an accretion to your gross margin. If you shift out and increase consumables or is that the wrong sort

of thing to draw? I mean if we look at fix of course you know fix is a very broad based. I mean you have everything from small screws to spray paint to DC fix products, hangers etc. A lot of things with very high gross margins. Then of course if you talk about branded power tools of course they have slightly lower gross margin, but there we also have a private label assortment that is solid. So we try to balance gross margin across all five. So we're not expecting structurally gross margin to go down just because we grow fix. But then of course yeah so I think that's the overview. All right thank you very much. Thank you.

As a reminder if you wish to ask a question please dial star 5 on your telephone keypad. The next question comes from Nicholas Scogman from Handelsbanken. Please go ahead.

Yes hello good morning everyone. A couple of questions from my side please. First on the S&E cost development which seem to be broadly unchanged year on year in Q2. And I think you will basically have the same level of cost savings in Q3. So is it a fair assumption that on an underlying basis now in Q3 if we exclude the spares acquisition that you will have pretty much unchanged S&E costs again?

So obviously across what we could see was that on selling it's down and admin it was flat. And I think it will vary a little bit quarter by quarter because of course there are other things in there as well like marketing etc. that is more flexible. So of course as I said before the 210 million they will go away but then there will be other things impacting. But I don't think I can give a straight outlook on Q3 and you'll see this a little bit depending by quarter. But the 210 million and the cost saving programs have been executed so that part is happening.

Yes good. And then you mentioned the continued focus on costs and not adding any costs and so on and also mentioning rents and salaries going up next year. So do you see room for any bigger cost out actions heading into next year as well or are we talking more smaller moves?

I think we're not expecting today we're not expecting any other any more of these overall big cost programs. We have executed two in a fairly short period of time. So we believe that we are fairly competitive from a cost point of view. Then of course we want to become more efficient all the time and I think especially as we open new stores we're trying to rethink how you can operate stores in an effective way. When we source product we try to become more and more effective in the day to day in all the operations. But I'm not expecting any overall cost saving programs looking at the outlook right now. So we try to do these changes with also next year's inflation in mind.

Okay very good. And on the gross margin it looked like a rather big tailwind there from lower input costs. Is that tailwind becoming bigger now in Q3?

No I wouldn't say bigger. But then obviously if you look at the graph that Panilla shared obviously now transportation costs, the very positive tailwind from transportation is not going to be as significant obviously in the next few quarters. It's going to meet also fairly lower base. But I wouldn't say more tailwind from sourcing apart from the transportation. I don't know where do you have anything else? No

but we continue to have a pressure from the currency and we also see a development of the NOC as not being especially good lately. So that continues.

Okay perfect. And then lastly on the November sales I had some questions whether perhaps there's been some sort of a pull forward in Christmas shopping to November. I don't know if you're able to sort of discern that based on what you were selling in November or not.

I mean we did start with the Christmas season earlier and it's almost like every year we say it starts earlier and earlier. But yeah there is in November there's been some Christmas sales. I mean Christmas trees and etc have started to sell already in November. And then obviously this year Advent and Black Week were separated. They were together in the same weekend last year. But yes we saw some early Christmas sales already happening in November.

Alright excellent. Thank you very much. Thank you.

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

We do have one written question from the webcast. It's from Dani-Lovine Nouria and it's relating to spares Europe. And even if it's early days have you seen a pickup in the demand of spare parts and accessories in the consumer electronics space over the last few months?

Yes. Hi Daniel. So yeah we do see a big demand increase on anything related to spare parts and accessories. So the demand is high out there. And obviously anytime new devices are being launched you see that accessory sales, the demand is going up and then also after a while for the spare parts. But in general demand for spare parts and accessories continues to be very high.

And by that we don't have any more written questions so I hand it back to you Kristoffer.

Okay. Thank you very much everybody for calling in. And we will obviously see each other again back in Q3 when we also have a December month or we will share the December month before but then we will be able to conclude on the full quarter. So thank you very much. Now we're going to go back to pushing Christmas sales. Thank you.