Max Stock Ltd. (MAXO) Earnings Call Transcript

Hello, everyone. Thank you. Good morning, and good afternoon, everyone, and thank you for joining us today to discuss Max Stock's Second Quarter 2022 Results. On the call today are Nir Dagan, our Chief Financial Officer; and myself, Talia Sessler, Chief Corporate Development and Investor Relations Officer. Before we start, as a reminder, there is a presentation accompanying today's prepared remarks. The slides are available on our website on our IR site at ir.maxstock.co.il [Operator Instructions] As in the past quarters, earlier today, we had an earnings call with our Israeli investors and Ori, our CEO presented a meaningful amount of the call. The call will be available on our website starting tomorrow, in case you wish to listen to it. It is in Hebrew. Here, due to language barriers, I will be doing the first part of the presentation, and Nir will be presenting a deeper dive on our financials. So on Slide #2, you see our standard disclaimer language. I think everyone is familiar with it. But I will still emphasize that during this call, we will present the second quarter 2022 results and other information as presented in the investor presentation, and that information includes forward-looking information as defined under the Israeli Securities Law 1968. So Slide #3. Max Stock, as you know, is Israel's leading extreme value retailer. With our strong second quarter results, the business has generated over ILS 1 billion in revenue on a trailing 12-month basis for the first time ever. For those of you who are not familiar with us and our position in the marketplace, think Dollar General in the U.S. or B&M in the U.K. We have 55 branches across Israel, where we offer a broad assortment of quality products for customers every day needs at affordable prices. 39 of these 55 branches are Big Box stores under the Max brand name. They have full assortment of merchandise. There are destination stores, will normally be in suburban areas where there's plenty of parking. And 31 of these 39 stores are owned. Our other 16 stores are in a city, smaller stores that you know as Max20, where customers come in with no car and items that are currently priced below ILS 20 or about $6. These inner-city stores are currently being rebranded into the Mini Max brand and 15 of these 16 brands are franchised. Hence, overall, we have 32 owned stores and 23 stores that are franchised. As most of you know, we provide a mix of private and Max-labeled product at prices up to 50% below conventional retailers in 6 primary categories: Housewares, Toys & Baby, Consumables, Arts & Crafts, Apparel Basics and Office and School Supplies. Our mix allow us to benefit from stable, relatively high gross margins with nearly 2/3 of our sales generated from nondiscretionary everyday needs. This attribute actually makes us well positioned to thrive even in a challenging economic environment. On Slide #4, we have established our leading market position in Israel through what we call our secret sauce. We maintain an intense focus on the right product at the right price at a highly enjoyable shopping experience. We facilitate that exciting experience with the treasure hunt in-store experience and easy to navigate layout, featuring the first aisle of the store, which always has the seasonal item rotations such that you always see something new, something fresh in our stores and always, always at great prices. On Slide #5, turning now to the highlights of our second quarter results. We achieved double-digit year-over-year revenue growth driven by contributions from 3 net new stores opened over the past year, combined with positive same-store sales. You'll recall last quarter, we mentioned that passover, which is big in Israel, the passover sales moved from the first quarter into the second quarter this year, and that is obviously reflected in our results, and we benefited from this shift this quarter. The second quarter was also highlighted by 100 basis points increase in gross margins and very strong cash generation from operations which was driven primarily by planned reductions in our inventory, which Nir will discuss later on in greater detail, to more normalized levels, following the intentional buildup of inventory we did last year to avoid supply chain bottlenecks. Based on our strong cash position and positive outlook for the business, the Board recently declared a dividend of ILS 40 million or ILS 0.28 per share to be paid on September 6. The record date is August 22. We also returned approximately ILS 5 million to shareholders through the repurchase of approximately 700,000 of our ordinary shares since we announced the ILS 40 million buyback plan that was authorized in June. Next, on Slide #6, we have the first half of 2022 compared to the first half last year, which eliminates the impact of the passover timing. You can see that year-over-year, we grew top line by 5.9%, largely reflecting new store expansions, partially offset by a 3.8% decline in same-store sales. Gross margin slightly expanded year-over-year by 10 basis points. And while we were able to protect top line margins similar to Q2, higher operating expenses also associated with the new stores weighed on EBITDA and on EPS during this period. We expect this impact to lessen to a certain extent in the coming quarters as store continue ramping up to maturity. On the next slide, Slide #7. As you can see, our top line -- we saw top line expansion across 5 of our 6 categories in the first half of this year. This is a 6-month chart. We were particularly pleased to see double-digit year-over-year growth in 4 out of our 6 largest categories in Consumables, in Arts & Crafts, Apparel Basics and in Office and School Supplies. Next, on Slide #8. The slide shows you how we continue to provide our customers with the right product at the right price. What you see is a screen shot from Channel 13 on Israeli TV that presented an independent survey comparing a basket composed of 14 high-quality back-to-school products and 1 among 7 retail chains. We came in first offering the lowest price on the basket and being about 40% cheaper versus the most expensive chain. I'd like to take this opportunity to invite you all to follow us on our LinkedIn page, where you would be able to get similar updates and exposures to various initiatives we take at Max Stock. Next, Slide #9. Turning to our growth strategy. You know this slide. Our goal is to double our square meter of our Israeli footprint versus our year-end 2019 figure of approximately 40,000 square meters -- net square meters over the next 2 to 3 years. Today, we are at approximately 55,000 square meter, and we expect to end this year with 58,000 square meters. Previously, we said 60,000, so we slightly adjust that. However, I'll speak later on, on our pipeline, and you'll see that we will be able to quickly catch up going forward. There remains a significant whitespace opportunity in Israel for continued penetration as we move towards our 80,000 square meter target over the next 2 to 3 years. Turning to Slide #10. Here, you can see our near-term store pipeline. The first one you are familiar with Kfar Saba in the Central District of Israel. Population of roughly 110,000 people. This store will replace an existing store at Oshiland Mall and will add net 2,900 square meters, expected to be opened in the second half of this year. And looking into 2023, we expect to open 2 new stores in the first half of the year. The first one, Be'erot Yitzhak will serve a total population of over 70,000 people and is expected to be roughly 3,300 gross square meters. Here, we do not have the net square meter yet. We will let you know once we do have the final plan. The second one, which we recently signed is Mishor Adumim. This store will serve a population of over 38,000 and will be roughly 2,000 gross square meters. Next, on Slide #11. Here, just a brief update on our ESG initiatives. We made some progress on this front as well. And today, our focus on our CSR initiatives that are based on 4 primary efforts: branch accessibility, employment, volunteering and donations. So starting with brand accessibility. We strive to make our branches accessible to all members of our community, including those with disabilities. We have recently taken the next step beyond standard accessibility and have partnered with an Israeli company called RightHear, a digital solution that makes business accessible to blind consumer through innovative technology. Our efforts are not limited to our customers with disability. We actively work to employ those with disabilities as well. And today, more than 3% of our workforce is disabled and belong to various associations that support their social integration. Our organization also strive to help communities -- the communities we serve, both through volunteer efforts and financial donations with our employees lending a helping hand through several company-sponsored volunteer events throughout the year. Next, on Slide 12, turning now into an exciting update on our growth strategy. While expansion within Israel has been a key part of our strategy to date, as we mentioned last quarter, we are evaluating various growth engines and one of them is entering into new countries within Europe. So on Slide #13. We are excited to announce today that we have executed a binding agreement with Fortera, our local partner in Portugal, to establish and manage the Max Stock chain in Portugal. The parties will establish a company in Portugal to operate the joint activities. It will initially operate in Portugal and may subsequently also expand into Spain at the party's discretion. The initial financing required as we mentioned in the past, for the establishment, for the maintenance, for the development and for the operation of the joint company, including for the purchase of initial inventory and to establish the stores is up to EUR 5 million; and Mr. Roy Ben-Nun who serves as the company's Chief Overseas Operation is anticipated to serve as General Manager of the jointly-owned company. Next, on Slide #14. We saw several elements in Portugal that made us decide that it is an attractive market for us. We've discussed some of this highlights before repeat and extend, expand on some of them. First, Portugal is a large enough market. We estimate it to be USD 12 billion -- actually EUR 12 billion, sorry, which is almost the same with the same now with the depreciation of the euro. Additionally, when you look at the discount market competitive landscape, it's relatively underpenetrated. It really is like Israel 20 years ago. And particularly when you compare Portugal to other states or countries in Europe, the U.K., Germany, Netherlands, these countries are way more advanced in terms of discount penetration. Also, the wages in Portugal are lower compared to the rest of Europe and also compared to Israel, by the way. This is attractive from a cost perspective as an employer, but also from a consumer perspective because people are really, really price sensitive and they are really looking for good promotions and discount offerings. These factors present an excellent opportunity to be one of the first entrants into this market and to satisfy discount product demand. Another point is that the sourcing model is expected to be highly synergetic. And by the way, both ways, we have strong relationships with leading European and Chinese suppliers that we can leverage from day 1. Also, in the opposite direction, we now get further exposure to European suppliers that we can leverage into our Israeli operations. Logistic costs are very low in Portugal. They're actually very advanced in terms of logistics centers. And for us, as you know, it's a great advantage having a strong supply chain from China. Our local partner in Portugal, Fortera, is a leading real estate company that is helping us in terms of door openings and reducing time to market. And another point to highlight is that the Portuguese consumer is still primarily shopping off-line. This is positive for us as we primarily, as you know, exclusively focus on physical stores. Looking ahead, our success in Portugal can be leveraged also in Spain. I know Portugal and Spain can share the same supply chain. We can easily reach an additional 47 million people by making this dual expansion. And when we also think about the number of tourists that visit Spain, it's one of the most visited countries in the world, almost 100 million people visit the area in a year. You can understand that the potential is enormous for us. With that, I'll turn over the floor to Nir to go through Q2 and first half of 2022 numbers in details. Nir, please.

Thanks, Talia. It's pleasure to be speaking with you all today. Slide 16. Starting with our second quarter results. Total revenue was up 13%, driven by the opening of 3 stores net and the positive impact on same-store sales from shift of passover holiday sales into the second quarter this year. Gross margin was 39.3%, up 100 basis points versus the second quarter of 2021. Adjusted EBITDA, which excluded the impact of IFRS 16 and the onetime sales, was down 4.5%. This was driven by higher operation expenses in the quarter, which I will review in detail shortly. Adjusted EPS share was ILS 0.11, a decrease of 19% compared to last year, largely due to an increase in OpEx, but also due to higher D&A. Slide 17. Next is the bridge for the changes in revenue that I just described, growth from new stores, same-store sales growth and royalties was slightly offset by lower franchise refills leading to a 13% increase in revenue when compared to a year ago. Slide 18. On Slide 18, you can see a similar bridge for adjusted EBITDA. Operating expenses were up primarily due to increase in salary, marketing and other G&A expenses and costs associated with the ramp-up of new stores that were the primary driver of the decline in adjusted EBITDA this quarter. The increase in OpEx fully set off our revenue growth and decline in logistic costs this quarter. We believe this impact will moderate in the coming quarters and allow us to better translate our growth into improved profitability. Slide 19. Here, you can see the result of a process that we started about a year and half ago in which we brought in additional inventory early in order to avoid supply chain delays and meet demand. And currently, we are reversing this trend and while many retailers are now overstocked with inventory, we have generated strong cash flow from operating activities, as we intentionally reduced inventory to more normalized level. Slide 20. Now turning to the first half of 2022 results. Total revenue was up almost 6% from the first half of 2021, driven primarily by the addition of 3 new -- net new stores, offset by about 4% decrease in same-store sales. Gross margin was 39.1, up 100 -- sorry, up 10 basis points versus 2021. Adjusted EBITDA was down 16.4% compared to the first half of 2021. Adjusted EPS share was about ILS 0.23, a decrease of 26.7% compared to the first half of last year, largely due to an increase in OpEx, but also due to higher D&A and slightly higher interest expenses. On Slide 21. Next is the bridge for the changes in revenue that I just described. Growth from new stores and royalties was offset by lower franchise fees and decline in same-store sales growth leading to a year-over-year increase of almost 6%. On Slide 22, in the similar bridge, for adjusted EBITDA, showing similar trends that we had just described in the second quarter. Slide 23. Turning to Slide 23. We can compare our trailing 12 months results to the 2019 pre-COVID period. As you can see, revenue has grown 35.4% versus 2019, bringing total revenue to over ILS 1 billion in 12-month period in the first time in our company's history. We've also grown gross profit by 33.2% and adjusted EBITDA by 30.2% and adjusted EPS by 21.7% versus the 2019 period. This long-term performance through an incredibly difficult period highlights the progress we have made expanding our market share as Israel leading discounter retailer. Now I'll turn back to Talia.

Thank you, Nir. Before we move into the question-and-answer session, I wanted to iterate that the current environment with its operating cost headwinds also creates new opportunities for us in procuring inventory at lower prices. We continue to see some moderation in shipping costs and currently some depreciation of the U.S. dollar versus the Israeli shekel, which is beneficial for us. As you may recall from the previous quarter, the Israeli government announced a plan to address the rising cost of living, which included a reduction of tariffs on multiple imported products effective June 1 through the end of this year. Products included our various types of imported household goods, FMCG and furniture on which the typical custom is 12%. About 50% of our products are imported and most of them are subject to this reform. We are now ready to take your question.

Okay. So I see a question on Portugal in terms of the timetable and the impact on our financials and how do we see that? So again, I mean, I cannot speak about the full business plan. But overall, when we announced the nonbinding MOU, we said that the first store is expected to be within 12 months, that was back in March. So we think we're going to meet that. The EUR 5 million is enough or is expected to be sufficient for several stores. And then potentially if this is successful, we will evaluate our next steps and move to the second phase of the product -- the project, sorry. Yes, and then another question was regarding inventory levels and the reduction that we've done in inventory. So as Nir mentioned, we were really able to be ahead of the curve. And while initially, we saw retailers having insufficient inventory levels when COVID was strong, we had all the inventory required. And now when many retailers, particularly outside of Israel, are stuck with excessive inventory levels, we are reducing our inventory levels and actually benefiting from a positive cash flow. I think that was it. Maybe here -- yes, yes, actually, I see 2 more questions. So how should we think about the pace of new stores opening over the next few years or so? I actually answered. I think in terms of Portugal, Portugal is in the next 2 to 3 years and there will be several stores only in the first phase. In terms of Israel, Israel is the same -- is really the same pace as Nir mentioned, so between 3 to 5 net openings, right? That is -- our strategy has been in the past few years.

It's going to be for the next 3 to 5...

Exactly. At least 3 to 5 stores, this is what we see next. Okay. Please discuss Max20 rebranding and why that was decided? That's a great question. So the Max20 brand was related, obviously, to the cap of ILS 20 or $6. We wanted to eliminate the cap and be able to charge -- not to charge, but you actually sell products that are also priced above ILS 20. This is why we are doing the rebranding initiative. We have no issue with the brand itself. People love Max20, they see it as part of the Max family. But the Mini Max will also imply in all the smaller inner city stores and at the same time, will not limit us in terms of pricing. Another question. Please further highlight drivers of gross margins this quarter? Do you want to speak or should I? Okay. So a few things that should positively impact gross margins. I guess this is related to the third quarter going forward. So we see a few drivers that can potentially benefit our gross margins. The first one is the tariff reductions that I was discussing. The second one is a reduction in shipping costs, which we've seen in the past few quarters or at least the 2 quarters and it is continuing. Also, we are doing a lot of work in terms of logistics and are now seeing some improvement in logistic costs. If you recall, in the past -- in the previous quarter, I mentioned that we had too many SKUs and now we are optimizing it. There is still a way to go. We have not seen all the benefit, but we have started to see some initial puts. Also, we have the depreciation of the U.S. dollar, which is another benefit. Yes, and I would say, also the ability to procure inventory at good prices, given that some retailers are now stuck with inventory and we are exactly the right party to buy from them, obviously, if this fits the right product at the right price for us. Anything else? Okay. And are you seeing shift to needs versus want-based spend? Not sure we see that much. Maybe I'll use that to say a few words on the health of the Israeli consumer. Overall, in Israel, inflation now, is it an annual rate of 5.2% that was actually announced yesterday and it was above the expectations of analysts in Israel. So we are expected to see a raise inflation. But the market is actually growing, just showed me a current article showing that our GDP is going up even with 5.2% inflation, which is a record high in the past 2 decades, I think. We are way below what we see in terms of inflation in the U.S. and in other developed economies. So overall, the situation is still under control. Don't see that shift. At the same time, people are more careful with what they spend. And as we have 60% of our products based on -- related to nondiscretionary basic stuff that are priced below ILS 20, people continue to buy that. And we see people trading down and people showing in our stores and hopefully, will continue to do so going forward. I think that's pretty much it. All right. So thank you all for joining us today. We'll be happy to speak with you over the phone via Zoom. If you have any questions, do call us, e-mail us and myself or Nir will be happy to be in touch. And I hope to see you next quarter as well. Thank you very much.