Edited Transcript of AXFO.ST earnings conference call or presentation 22-Apr-20 7:30am GMT

Please turn to Page #6. And before we get into the numbers, I just want to provide with some background slides. It feels now as a very long time ago, but the challenges we have faced is actually just in the last month of the quarter as March was a very turbulent month. We noted, first of all, a healthy Jan and February. And then after the winter holiday, week 9, at least the holiday was for parts of Sweden, we started to see some hoarding effects in our stores. This then escalated a week after, something that put tremendous effects on our logistics. And when it was declared a global pandemic by the World Health Organization on March 11, we noted some additional effects. We see an increased effect on café and restaurant market with less people eating out. We noted clearly less traffic in our city centers due to the people working home in an increasing degree. And in mid-March, Norway imposed travel restrictions and a sudden dramatic drop in visits to the cross-border trade, with sales for the Eurocash was more or less vanished. We’re pleased, though, to note that in the end of the month, the hoarding has more or less stopped.

Please go to the next page, Page #7. So the impact on this, if you look at the total Swedish food market, it is clear that we noted some hoarding that resulted in a tremendous growth in March for total food retail.

If you go to the next page, Page #8. The effect was then even larger online, a strong increase despite that more or less all players in the market was not able to manage the fast increase in demand.

Let’s go now to Page #9. And just to provide some perspective on the hoarding effects, and I must state, we didn’t have any major issues with supply from our manufacturers. However, a peak like this put tremendous pressure on our system and organization. Clearly, it’s been an intense month just to keep the shelves filled. And just to give you a number, we have handled over 2.5 million more parcels this March compared to March last year. And the chart that you see on the slide shows hoarding and shelf availability during this period. And you see the dramatic and sudden impact, something that resulted in some low shelf availability, an effect that, with some exceptions, we now have sorted out. And I must state that it’s been a fantastic job done by the organization to handle this special situation.

Let’s got no — now go to next page, Page #10. And with this, I would like to go into our numbers, and we’ll start with sales. Once again, we report a very strong growth across all segments. Overall sales has increased by 9.5% to more than SEK 13 billion. And the hoarding that I mentioned contributed with 4 percentage points to our store growth. We also had a calendar effect with a leap day that added another percentage point. Hence, even excluding these extraordinary effects, we have a positive sales momentum. Clearly, a very strong like-for-like for Willys, who outperformed the market. We also noted a strong Hemköp franchise sales, and the sales for the group-owned stores was also impacted by less traffic in the city centers. We have a good quarter for Axfood Snabbgross, but a challenging situation in the end of the quarter due to the weak restaurant market. And as mentioned on the previous slides, an intense quarter for Dagab, where sales primarily was driven by Willys and Hemköp.

Please go to next page, Page #11. And if we take a view at our store sales, it is clear that we continued to gain market shares. Our growth amounted to 11.7% in the quarter and should be compared then with 9.1% for the market. And even if our system experienced a very challenging time during March, I think it’s clear that we, compared to the market, have handled this situation fairly well.

If we now go to next page, Page #12. And in terms then if you look at the online, the online growth was 39%, where we also outperformed the market. The growth compared to 27% for the market is clearly something that we’ve outperformed. And as shared, we have had some clear capacity constraints online. We will obviously follow the developments closely and take required actions. And I will come back a little bit later on in this presentation regarding our plans to further increase our capacity in this sales channel.

Let’s now turn to next page, Page #13. And let’s now go into our operating profit. Behind the strong like-for-like growth, we report an increased profit and higher margin. And it’s particularly been strong development in Willys and Axfood Snabbgross. And the effects that we see from the positive like-for-like are, must be stated, partially offset by effects related to COVID-19, such as lower gross margin due to sales mix and clearly some increased costs. But we also have had extra costs related to the dark stores. And some of our businesses experienced a challenging time and required some extra support like Urban Deli and Eurocash. And our operating profit came in at SEK 544 million, which is up 12% versus last year.

Let’s now go to next page, Page #14. And I will now move into our various segments and give you an overview of them. And let me start by our largest, Willys. And it must be stated that Willys have handled the situation in an outstanding way. We reported a strong quarter with strong sales growth of almost 13% and like-for-like growth of 11%. We started the year in a positive way and noted a significant hoarding effects in the end of the quarter. We also have a strong growth online, and we continue with our efforts to roll out more Click & Collect stores. Our operating profit had a growth of 18.3%, and we reported a higher margin at 4.5%. And our operating profit is clearly then driven by the strong like-for-like, which is, again, is partly offset by costs associated with the hoarding and somewhat lower results from Eurocash due to the situation in the cross-border trade. But it must be stated that Eurocash effect in this quarter has been fairly limited as the border closed in mid-March.

Let’s now go to next page, #15. And then moving into Hemköp. Total sales increased 9.2%, slightly above the overall market. Our franchise stores continued to do well, and we’re pleased to see that the group on like-for-like take steps in the right direction as we have seen somewhat less hoarding in Hemköp but we also have some group-owned stores that has been hampered by the less traffic in city centers due to the effect of the COVID-19. And in this perspective, it’s obviously a positive effort by Hemköp to grow more or less or slightly above the market. We report a higher profit for Hemköp at SEK 61 million, which is a flat margin versus last year.

Let’s go now to next page, Page #16. Looking then at Snabbgross, that clearly faced a volatile quarter. We started the year in a very positive way. And also first week of March, we did actually not see any effect from the COVID-19. So in total, Axfood Snabbgross had a strong quarter. Sales were up 6.5%. We noted a like-for-like growth of 6%. We also had a new store opening just in — outside Jönköping. Now our operating profit is higher at SEK 24 million, and we note a higher margin and a clear improvement versus last year. That is though a challenging and uncertain situation moving forward for Axfood Snabbgross due to the weak market for restaurants as sales is now in the end of March, approximately 25% down versus last year. The restaurant market is, as you know, down significantly more. So in that perspective, we are at a better pace. And this is mainly due to Snabbgross also supports, as an example, local pizzas and fast foods, which have — who have a high share of takeaway meals.

Let’s get — now go to next page, Page #17. So the last segment that I will cover is Dagab. And as shared initially, it has been a very intense quarter for Dagab, and I must state that despite all the workload and increased sick leave, Dagab has managed to handle the situation in a very good way. We reported strong sales growth of 10%, driven by strong performance for Willys and Hemköp. And at the same time, we have a clear slowdown in sales to our convenience sector. We have a slightly lower profit at SEK 164 million and a lower margin, mainly due to additional costs related in this period to transports and warehouses where we had significantly overtime and extra shifts. We also have costs related to the dark stores as well as costs related to closing down our dark store in Malmö as shared last quarter. And as mentioned earlier, we had extra support and costs related to support our restaurant business, Urban Deli.

Let’s now go to next page, Page #18. Now let me end this part of the presentation by providing some additional information in this exceptional and difficult time due to COVID-19. The quarter was characterized by high activity and creativity in dealing with everything this new situation has given rise to. We’ve seen a higher stream of customers with higher demand for our products and challenging in terms of how we are dealing with a large number of employees home on sick leave, how we are supporting the business that are having a tough time, and how we can come up with various ways to help people in risk categories to shop and get their groceries home to them in a safely and securely manner. And I would like to highlight some examples that we executed in this period. As an example, Hemköp launched early on something called Seniortimmen, which is a special shopping hours for elderly. Matjouren was launched by Mat.se, which is a dedicated online store for people at the most risk. And Axfood Snabbgross opened up its Stockholm Gärdet store for consumers, giving people in the area an option to avoid crowding in other stores.

Let’s go to next page, Page #19. And at the same time as we’ve managed to secure food to Swedish consumers, we’ve also dealt with safety as safety and well-being of employees and customers always comes first. We have, in this time, implemented several initiatives to protect employees and customers and to prevent spread of the virus. We were early on launching plexiglass shields and protective screens at checkouts. We have our floor markets — markings to help keep safe distance. We have hand sanitizer placed around the stores. We’ve communicated a lot to encourage spreading out store visits, such as — which was very important now ahead of the big Easter period. And pleased to note that our own data shows that some of these efforts have really given positive results as we now see a much larger spread of the store visits versus before this period.

Let’s now go to next page, Page #20. And finally, another initiative in light of the COVID-19 has been to support small suppliers. And in March, we opened up a fast track for small-scale producers, many of which ordinarily supply restaurants, to give them exposure for their local food products via some of our sales channels. And so far, of about 150 applicants, about 120 suppliers have been approved as they meet our quality requirements, and 20 suppliers have already delivered products to our stores.

With this, please turn to Page #21. And with that, I hand over to our CFO, Mr. Anders Lexmon, who will present our financial position. Anders?

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Anders Lexmon, Axfood AB (publ) – CFO [4]

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Thank you, Klaus. And let me then first get into the cash flow for the period and then turn to Page 22. And as you can see here in the chart, we have a very strong cash flow in the first quarter, SEK 80 million compared to minus — approximately minus SEK 1.1 million last quarter, and that is mainly explained by 2 things. We have a strong net working capital effect this quarter. And — but it’s explained by the increased sales due to the hoarding, and that’s also increased the accounts payable from mid- to end of March.

Secondly, the Annual Meeting in March decided to divide the dividend into 2 this year. And from this, we had a positive effect in the first quarter with approximately SEK 730 million. On the negative side, we have some higher investments this quarter compared to last year, and that is partially explained by a divestment of an asset hold-for-sale last year of approximately SEK 100 million. Otherwise, we have small differences in the cash flow and, of course, a strong cash flow from our operating profit. We now also have full effect of IFRS 16 and no differences compared to last year, in that case.

And then turn to the next page, 23. The investments amounted to SEK 267 million (sic – see slide 23, “SEK 276 million”) this quarter, and that’s approximately SEK 30 million higher than last year. We see higher investments in our retail operation, both due to more store establishments but also higher — some higher pace in refurbishments in our stores. We also had higher investments in IT, and that is also according to the higher pace in the store establishments. And we had a little bit lower investments in our wholesale operation, and that’s due to our investment last year in our warehouse in Hemköp.

Let me then turn to next page, 24. And we go back to the development of our working capital, and we see that we have a stable development. In this quarter also, we have approximately minus 3% in net working capital compared to sales. And despite that, we saw improvements both in accounts payable, receivables and inventory. The strong growth pushed the ratio somewhat up in the first quarter.

Then turn page to #25 and look at our financial position. We — as you can see in the chart, in the blue color there, we have a net receivable position actually at the end of March, and that — for the first time in the long period, that we have a receivable position at the end of March. And that’s, of course, also explained by the dividend that is lower in this quarter, and also the positive effect in our net working capital. We have a stable ratio of the net debt compared to EBITDA of 1.2. And the equity ratio is approximately 18% in the same level as the — at last year. And that is explained by that we now — we have half of the dividend is paid out now and half in September, but the full dividend is — have impacted the equity, and the dividend that we will pay out in September is recognized as liability at the end of March.

If we then turn page to #26 and look at our capital employed have decreased somewhat, also due to the dividend at the end of the quarter. And as you can see here, we now have the full effect of our return on capital deployed. In 2018, it was approximately 40%, and now it’s down to approximately 25%, and that is fully explained by IFRS 16.

So finally, we can — I mean can conclude that Axfood is — continues to have a very solid financial position. And with that, I hand over to you again, Klas.

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Klas Balkow, Axfood AB (publ) – President & CEO [5]

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Thank you, Anders, and please turn to Page #27. And let me now provide a quick update on our strategic agenda. And again, even if the main focus in this quarter has been on handling the current situation, we have also continued to invest for future growth.

Please turn to Page #28. And just a reminder here of our strategic focus areas, and today, I will only focus on 2 of them, expansion and supply chain.

So please turn to Page #29. And we look at the expansion online, and we continue to, as you’ve seen in the report, outpace the market in terms of online growth, and we continue also to invest in our e-commerce channel. Willys is offering online shopping in more stores. And we now have 86 stores in 51 locations. For Hemköp, we are increasing the pace of the rollout, and we’re also expanding Click & Collect to our Hemköp franchise stores. I’m also pleased that we now have a new management from Mat.se, which is now executing plans to further strengthen Mat.se’s position in the market.

Please turn to the next page, Page #30. I also would like to comment a little bit about our online pharmacy, Apohem. It is, as you can imagine, been a hectic quarter also for them with their higher demand, and they’ve done a great job to cope with this new situation. We’ve seen an increased awareness for Apohem. We have more site visits and significantly more customers, consequently leading to also a stronger sales.

Let’s go to next page, Page #31. I will go into the supply chain. So I would like to comment on our supply chain and the exciting plans we have here for the future. We continue to make good progress with our new automated logistics center outside Stockholm. As you can see on the picture, the groundwork is almost finished, and the overall project continue according to plan. We have now also signed a service agreement with WITRON to secure full functionality of this large facility. And in the quarter, we have integrated also our dark store operation in Gothenburg to cover also volumes from Hemköp and Willys together with Mat.se. And we also signed an agreement in Stockholm to double the warehouse space for our dark stores to secure the additional capacity that we clearly see a need of, particularly now in this quarter.

Let’s now turn to Page 32. And let me end the presentation with our outlook for 2020, so please go ahead and turn next page to Page #33. And first, some comments and thoughts on long and short-term business impact of COVID-19, as I understand this is of highly interest. But I also have to admit, it is also very difficult to assess in this early situation.

Well, first of all, overall, we are — currently do not see any major issues in our supply. We may have shortage on single items and some longer lead times of imported goods. But overall, I think it is in control. How COVID-19 then will impact our business is obviously dependent on the situation and how that will evolve. As it looks today, we have some areas that goes in a positive direction and some areas in a negative.

On the plus side, obviously, food retail market is relatively insensitive to economic swings. So we also see a positive side, obviously, of a less eating out is favorable for our food retail and our stores. Price/value is more important, obviously, in a weaker economy, and Willys is here in a very good position.

On the negative side, we virtually have no activity on the border trade, which has a large impact on our Eurocash chain. We have a decline in restaurant market that affects Urban Deli and also as shared partly Axfood Snabbgross. We have less consumer traffic in city centers at the moment, which has a negative impact on some of our larger group-owned Hemköp stores. And obviously, it is an uncertainty around the overall consumption if we face a very high unemployment.

But then looking at food retail online, we’ll most likely continue to have a high-growth rate. Yet, the model is still not profitable. But with the increased volumes and more and more Click & Collect, we see a clear efficiency improvement in our system. So the conclusion, all in all, it is early days and how all of this will play out is very difficult to assess at this stage.

Let’s now turn to next page, Page #34. And finally, just a reminder of our 2020 outlook, we have no changes. We plan to invest SEK 900 million to SEK 1 billion this year with no major investments in our automation project. We plan to open up 5 to 10 new stores, with 3 new stores in the quarter. We are confident to reach this year’s target.

Please turn to next page, Page 35. So let me sum up this presentation. It’s clearly been a very exceptional quarter with a lot of pressure just to handle the day-to-day operation. And with that, I’m obviously pleased that we’ve been able to meet the increased customer demand and, in fact, better than the overall market. I think it’s a clear sign on the strength in the whole organization in a very challenging time. Our sales and profit shows a clear improvement versus last year, well supported by the hoarding effects. And looking forward, we are really well positioned, but we also have some challenges, particularly in Eurocash and Urban Deli. Our financial position is strong, and we also have sights set on a long term to further strengthen Axfood.

With that, please ask you to turn next page to Page #36 and hand over to the operator to open up for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Daniel Schmidt of Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research – Research Analyst [2]

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(technical difficulty) and I fully understand that this (technical difficulty)

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Operator [3]

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I guess, we seem to have a brief technical issue. While I bring Daniel back, can we go to a question from Gustav Sandström of SEB.

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Gustav Sandström, SEB, Research Division – Research Analyst [4]

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(technical difficulty) Willys in Q1 on the assumption that perhaps a little bit less favorable mix from typical hoarding products, now that didn’t seem to fall through, given that you had some 20 bps year-over-year impact?

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Klas Balkow, Axfood AB (publ) – President & CEO [5]

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Gustav, can I just say, we — I didn’t hear the first part of you. Can you start all over again, please?

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Gustav Sandström, SEB, Research Division – Research Analyst [6]

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Sure. Can you hear me now?

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Klas Balkow, Axfood AB (publ) – President & CEO [7]

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Yes. Yes. We’re good. Very good.

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Gustav Sandström, SEB, Research Division – Research Analyst [8]

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It relates to Willys. I think it was a better EBIT margin than most of us had modeled. So you had a 20 basis points expansion year-over-year despite probably some negative mix given that hoarding products, I guess, are carrying lower gross margins in totality. So my question is whether or not that margin expansion we saw in Q1 was more of a one-off effect related to the big surge in Q1 of volume? Or whether it’s more sustainable such as pricing? And perhaps if you can comment a little bit on the competitive landscape thus far in April, I believe campaign levels were down quite significantly in March.

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Klas Balkow, Axfood AB (publ) – President & CEO [9]

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Yes. But if I try to answer your — as you well point out, obviously, Willys with the exceptional strong like-for-like sales, obviously, that has a positive impact on the scale in the operation. Now as I shared as well, we have some negative mix effects, particularly on the hoarding products, but also some extra costs just to handle the situation. We’ve more or less added as much staff we could at some time and also have increased sick leave costs. But obviously, with the positive like-for-like, we have some expectations to also get scale on the operation even if the scale is not as high as one could expect if we wouldn’t have the extra cost. So it’s more or less driven out of that more than anything else, I would say.

Regarding the competitive landscape, it’s obviously we have seen the market data and — as much as we can relate to. And Willys has clearly been outperforming the market, Axfood as a whole has done that during this quarter, but Willys has done it even further.

And regarding how this has evolved after the quarter, and I have to say, we moved fast after the quarter into the Easter. And as you know, Easter is a large period for food retail. And now we just moved out of the comparison week last year as we had Easter in more or less last week last year. So it is difficult to assess at this stage what is the impact after the quarter. And I can’t give you any guidance on that. We have to wait some more weeks to see how this will evolve and how this will sort out.

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Gustav Sandström, SEB, Research Division – Research Analyst [10]

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Okay. If I turn to the cost side, mainly for Dagab, you mentioned sick leaves and whatnot. Could you perhaps try to quantify a little bit what the new government subsidies regarding sick leaves and similar initiatives will do to your cost base going into Q2? Am I right in thinking that that impact would be most pronounced in Dagab for your sake?

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Klas Balkow, Axfood AB (publ) – President & CEO [11]

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Well, the support on sick leaves will cover the whole organization, obviously. So — and to give you a number there, I can’t really do because, obviously, it depends on the rate of sick leave. We are pleased to see that in the last days or week, we’ve seen the sick leave go down, which is — I think I’ve seen reports from several other companies as well that we started to see that, which is obviously positive. So we can’t really say how that will — would sort out. The government support, in general, for us, is not that much. I must say we have some said that it’s not really a large part of our operation at this stage. It’s more related and supported, obviously, to the businesses that have a significantly more challenging situation than we have.

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Gustav Sandström, SEB, Research Division – Research Analyst [12]

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Clear. And then I have a question related to the declining Norwegian krona. To what extent do you feel that this will be a disadvantage in your competitive position with your border trade once the Norwegian border opens at Gävle? And perhaps if you could quantify a little bit what were the savings for a typical Norwegian customer doing cross-border to Eurocash last year? And what would it be this year, given that — the fluctuation in the FX?

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Klas Balkow, Axfood AB (publ) – President & CEO [13]

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I’m not sure I understand the last part. But the first part, obviously, is — I think the effects, obviously, of the Norwegian krona, we expect that that will not have a major impact. And we are still having a large advantage, so to say, for Norwegians to shop on the Swedish side. If you look at the price levels on comparable items across the various countries. So we’re still a lot of — there’s still a healthy business model despite some now changes on the Norwegian krona. The Eurocash, I don’t know if that was what you were referring to, is obviously impacted now with — but we are eager to see and to follow this how soon they will open up the border again so we can get back into business. But at this stage, obviously, we are more or less seeing a full stop in the operation, and that has an impact for us. Maybe if you want to — your end question, what was that?

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Gustav Sandström, SEB, Research Division – Research Analyst [14]

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It’s more related to your competitive position versus local Norwegian competitors. I assume that the sort of business case for Eurocash is that you have a more — a lower price point compared to Norwegian locals, but since the Norwegian krona has depreciated, I would assume that the competitive strategy is somewhat smaller to you.

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Klas Balkow, Axfood AB (publ) – President & CEO [15]

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No. But that’s why — what I think the — in terms if I look at the price differences for Norwegian, if I look at the consumers, Norwegian consumers, they still — even if you’ve seen a somewhat changes on the currency, they — it’s still a large advantage for the consumers to come and shop in Eurocash.

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Gustav Sandström, SEB, Research Division – Research Analyst [16]

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Great. And then 2 quick questions, if I may. First one to online. Have you been able to go through your data and sort of dig out to what extent you’ve been able to recruit new customers to your online shopping, perhaps senior citizens who previously haven’t been shopping online? And I’m primarily looking at sort of the special Matjouren initiatives now that’s sort of your base but — and what…

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Klas Balkow, Axfood AB (publ) – President & CEO [17]

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No, I understand. No, I understand it. Yes. Now the Matjouren is a special one. But if you look at the overall part, if you look at the shopper that has started to shop that we have not seen at high levels before is people above 63 years old. We’ve seen a significantly lift-up of these new customers coming in and shop online. It’s clearly been an uplift, which also has been somewhat expected. The challenges, I think, we have thought — in fact, don’t think — we have had, but I think the rest of the market has as well is to handle this uplift in terms of capacity because, obviously, we’ve seen some capacity constraints, particularly in our dark stores.

And I can also comment on that, that when we saw this fast uplift and also hoarding in some of our stores, we had to — we were forced to close down some of our Click & Collect operations in some of our stores, just to handle the day-to-day operation in our stores, just to handle the situation. So that has forced us to basically reduce capacity in March. We’re now back on track again. And as I reported in the material here, we’re also seeing how we can improve — increase capacity, particularly now in the Stockholm area.

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Gustav Sandström, SEB, Research Division – Research Analyst [18]

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Okay. One quick last question. You’d mentioned 25% decline in sales the 2 last weeks for Snabbgross, is there any reason to believe that is not a reasonable assumption to the sales drop thus far in April?

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Klas Balkow, Axfood AB (publ) – President & CEO [19]

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No. I think it’s — we wanted to give that indication just to see what levels we have leveled out on so far. Now obviously, how this will sort out going forward, we don’t know. But I think it’s important to state that, as you know, Snabbgross supports restaurants and cafés. And if you look at the many other restaurants, they have a significantly higher drop while we are, I think, handling it somewhat better even if obviously 25% is a large decline, but it’s not dramatic as we’ve seen in some other areas. And that is obviously due to that we are also supporting a large part of the restaurant business that is still having an okay business.

We’re also looking at, as is noted in the material, to see if we can support the Snabbgross by opening up for consumers. As an example, we’ve already done that in one of our Stockholm stores to see how to improve the situation going forward. And then obviously, everything — now the spring comes, the summer comes, and then we’ll see how that will impact the café and restaurants if — and have the old situation if it will start to get back some of the business going forward.

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Operator [20]

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Our next question comes from the line of Daniel Schmidt of Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research – Research Analyst [21]

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Do you hear me now?

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Klas Balkow, Axfood AB (publ) – President & CEO [22]

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Yes.

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Daniel Schmidt, Danske Bank Markets Equity Research – Research Analyst [23]

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Okay. Good. And a follow-up question. On the hoarding, you quantified it to 400 basis points in Q1, and clearly, we’re leaving that behind us maybe, but we still have the working-from-home effect. Would you care to try to quantify the whole working-from-home effect?

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Klas Balkow, Axfood AB (publ) – President & CEO [24]

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No. But I — what we’re seeing, and I think if we’re clear around that, we have, I’d say, a handful of stores, in particular then Hemköp, that is impacted by — located very much in city centers, particularly in the larger cities we have, mainly Stockholm, Gothenburg is the largest impact that we see significantly a drop in traffic obviously impacting. And that is mainly group-owned stores that is in that area. Now again, that’s difficult to assess how do we go for the future, but it’s clearly an impact on these stores. So — and then we have stores that is as everyone else is doing really, really good. So — but clearly, the less traffic in some of the city centers has impacted some Hemköp stores.

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Daniel Schmidt, Danske Bank Markets Equity Research – Research Analyst [25]

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Okay. So basically, you’re saying that the wholly-owned stores in Hemköp were — is seeing sort of a net negative effect on sales in sort of end of March, maybe start of April. And then on the other hand, still positive, of course, for Willys, so that’s at least my interpretation.

And then sort of you also — I think we touched upon it in the previous question, you’re also saying that there were some negative effects on mix due to the hoarding. But if we start to leave the hoarding behind us now, and we have still the working-from-home in Willys effect, is the mix turning?

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Klas Balkow, Axfood AB (publ) – President & CEO [26]

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Yes. It was very much — the negative part that we related to was very much when we saw the massive increase of some hoarding — classic hoarding products. I think it’s been all over the news about toilet paper as an example, but also other rice and pastas and so forth.

I’m pleased to say that, I think, not only for us, but from the market in total, we don’t see that effect at much any longer, which is positive. It’s positive for everyone. I think it’s positive for our processes. It is positive for the consumers as well. So then we’ll get back to more leveling out. We — when you had the massive hoarding, you didn’t have same as you have some items that didn’t sell as much either and that we’re now back to more normal levels, so to speak, in that perspective. And then commenting on working from home, just for Willys, I think, that partly working from home, but also obviously, the less eating out, I would say, is how I would call the positive effects for us.

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Daniel Schmidt, Danske Bank Markets Equity Research – Research Analyst [27]

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Yes, that’s what I mean. Yes. Yes. Good. And then just finally on — you also write in the report and you said it on the presentation that you’ve signed a service agreement with WITRON. Is that agreement aligned with your sort of previous statements in terms of how the sort of profile should look when it comes to the design, yes?

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Klas Balkow, Axfood AB (publ) – President & CEO [28]

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No. There’s no changes in that. It’s very much in line with the plans. It’s in line with the business plan in terms of also the earlier guidance, in terms of share of cost and so forth. So we are pleased that we have a strong partner now that will secure and guarantee, so to say, the full operation when we start up here because it will be a very technical platform.

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Operator [29]

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Our next question comes from the line of Niklas Ekman of Carnegie.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division – Head of Consumer Discretionary & Staples and Financial Analyst [30]

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A couple of follow-ups. Firstly, is there any impact here on food inflation to expect as a result of the COVID-19? I saw food inflation has fell a bit here in this quarter compared to previous, but do you anticipate any dramatic changes here in coming months or coming quarters?

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Klas Balkow, Axfood AB (publ) – President & CEO [31]

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No. I think we made the same comment. It fell a bit. We now do the same thing. And I think for the future, it’s — we’ll have to track and follow. Obviously, we — I think some of the interesting part will be some fruits and vegetables and for season workers and how we will handle some of these products. There may be some inflation in these areas. Early days. But that may come because of the capacity for the producers and higher cost for the producers to handle this situation. So we’ll see. But regarding in this quarter, very much in line with what you commented around that as well, and we’ll see and we’ll track the currencies as well and see how the — particularly on the imported goods, how the euro will develop. That will — may also influence, obviously, as you’re well aware of.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division – Head of Consumer Discretionary & Staples and Financial Analyst [32]

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Okay. Excellent. And you did mention here that you had supply issues initially here, but you have solved these. So going forward here, you don’t really see — I mean, you mentioned now fruits and vegetables, for instance, where there could be some food inflation. But in general, you’re not expecting shortage of anything. There are no import restrictions that will affect you in any material way that you see in the months ahead?

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Klas Balkow, Axfood AB (publ) – President & CEO [33]

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No. I think we will take it day-by-day here. And I just — when you said supply issues, I think, overall, I must say the suppliers and manufacturers have been very, very supportive or handled the situation in a good way. And so overall, we haven’t seen really any large supply. We have seen any issues to handle it through our system, so to speak, that has been the bottleneck.

Now, looking forward, I think it is still a challenging situation for many, but I think in control. So overall, we may see some single items. And we still — we have some single items today that is clearly a supply issue. But overall, it is in control at this stage. As I mentioned in the report, we may — I mean, we don’t see any larger issues at this stage regarding borders and so forth, despite, obviously, or we have some longer lead times in certain areas that is — that we are handling.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division – Head of Consumer Discretionary & Staples and Financial Analyst [34]

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Okay. Excellent. And then we’ve talked a bit here about hoarding and eat-from-home trend. I’m just trying to think here over the coming months here. If you net the effect here, hoarding is now fading, and I assume that you will see — you might see some destocking here going forward. Is that effect going to be material, do you think? And could it be more than well-mitigated by the eat-from-home trend? Just your thoughts here. I know we’ve covered this topic before, but just for the coming quarter there.

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Klas Balkow, Axfood AB (publ) – President & CEO [35]

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Yes. No — and it’s obviously — your guess is as good as my guess in that perspective. But I think in terms of any destocking, I’m not sure the — I think it’s been a guidelines from the government also to ask the consumers to stock up a little bit. So you have some stock at home. And I think consumers have reacted partly on that and that maybe so that they will continue to have that. So I’m not sure we will see any larger destocking effects. We’ll see. So then obviously, as I tried to point out here in the presentation, we have some clear positive moving forward, food — our food retail situation with less eating out is obviously on the positive side. And then we have some individual challenges in some of our brands clearly affected by, as example, cross-border or the Norwegian border closed.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division – Head of Consumer Discretionary & Staples and Financial Analyst [36]

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Okay. And finally, on the online sales, I was surprised here that the sales growth — I mean, it picked up slightly from previous quarters, but not materially. But I assume that if you broke it down and looked at kind of the last 3 weeks of March, you would have seen a very different number. Is that a number you could share with us? What kind of growth rates you’ve seen in the online business kind of in the last 3 weeks?

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Klas Balkow, Axfood AB (publ) – President & CEO [37]

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No. I think it’s out there in — when the reports came this morning from the market in terms of March. That was up, I think, 50% online in the overall market. We are growing significantly faster than the overall market. And yes, I think you should — when you’re looking at growth rates and so forth, you should have to look at — compare that to the market versus last year. And I think it’s clear that we are growing faster.

Now again, as I pointed out, we — in this period, particularly then in Willys, we had to close some of our Click & Collect operations just to handle the physical stores. So that has a negative impact on that part just to handle the situation. So I think when you look at the numbers, you have to compare it towards the total market then because it varies over time, so on.

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Operator [38]

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Our next question comes from the line of Fredrik Ivarsson of ABG Sundal Collier.

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Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division – Research Analyst [39]

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A few follow-ups from me as well. First, on the online channel. Obviously, you’re still in sort of a start-up phase here, implying some losses over the last year. I’m curious on what you saw in terms of profitability in the quarter, and probably, in particular, in March, can you say anything on this? Did you see lower losses, for instance?

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Klas Balkow, Axfood AB (publ) – President & CEO [40]

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Well, obviously, as you know, the model is, as I also stated in the presentation, is not profitable, but with increased volumes and also when we’re getting — I mean, when we are getting — but then we are getting higher and better efficiencies. So that is something we are noting. I have though had to admit, obviously, that when you get these sudden peaks, everything is about forecasting and forecasting the demand. And when you’re getting these peaks, it is difficult to really run a smooth, efficient operation. You just shove in everything you have and try to find transports and try to find staff to run the operation, which is — and then to sort out the consumer demand. So obviously, that is not an optimal situation. Optimal situation for us is to be able to plan and to forecast the volumes ahead, and that gives us an opportunity to be more efficient versus what we saw now, particularly some weeks in March.

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Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division – Research Analyst [41]

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Okay. Understood. And second one, to get back to the gross margin and the mix effect you saw. Obviously, the gross margin was down 10 basis points. Was the mix effect even greater than those 10 basis points? That’s my question.

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Klas Balkow, Axfood AB (publ) – President & CEO [42]

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Not sure I understand. But our mix effect was what’s — I mean, you have several mix effects, obviously, when it comes to reported part. And the margins you see in the report is also a more theoretical part, but we are very open around it that we had some mix effects due to — in the hoarding part, which then you have other effects when it comes to how we are consolidating the numbers, which is also dependent on how the various concepts is developing and doing.

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Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division – Research Analyst [43]

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Yes. I’m just after what your sort of underlying development in the gross margin is whether that could actually be positive cleaning for those negative mix effects you saw?

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Klas Balkow, Axfood AB (publ) – President & CEO [44]

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Everything equals, and obviously, that’s why we are stating it, that the hoarding had a negative mix effect versus normal operation.

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Operator [45]

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(Operator Instructions) And we have no further questions. Please go ahead, speakers.

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Klas Balkow, Axfood AB (publ) – President & CEO [46]

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Well, then I’ve seen, I don’t think we have any other questions from the webcast. So I then thank you for listening, and wish you a safe and healthy day, weeks going forward. Thank you.

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Operator [47]

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This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.