Kesko Oyj

OMXH:KESKOB

Earnings Call Transcript 2022-Q1

[Mikko Helander, executive]

Ladies and gentlemen, welcome to Kesko's first quarter release call. I'm Kesko's CEO, Mikko Helander. I have together with me our business area presidents, Jorma Rauhala, Ari Akseli, Matti Virtanen; as well as CFO, Jukka Erlund; and Head of Investor Relations, Hanna Jaakkola.

Today's agenda is the following. I will first give an overview of our business performance in first quarter and our updated guidance for 2022. After the presentation, we will be happy to take questions both by phone and via chat.

Before I go deeper into Q1 results, it's good to remember, especially in current geopolitical environment that our successful strategic choices and timely execution are behind our results.

To mention examples of the strategy, we acquired both Suomen Lähikauppa and Onninen 6 years ago, we had divested in the department store and specialty food operations. We exited Russia as we divested all businesses there in 2016 and 2018, and we have expanded car trade in Finland and building a technical trade in Norway and Sweden through successful acquisitions.

Key events in first quarter. The best Q1 result in Kesko's history. Net sales grew by 6.5%. Sales growth continued strong in Building and Technical Trade. The result was a record. Also good result in grocery trade, profitability in car trade improved despite availability issues. The sustainability strategy was improved. Management compensation is now tied to sustainability targets there too.

Net sales growth continued in Q1. The net sales totaled EUR 2.7 billion. It was up comparably by 6.5%, thanks to our strong strategy execution. Net sales increased in Building and Technical Trade as well as in grocery trade.

Comparable operating profit was record high for Q1, EUR 144 million and profitability 5.3%. The rolling 12 months operating profit was over EUR 800 million for the first time ever in the company's history. The growth was especially good in Building and Technical Trade.

Return on capital employed, one of our strategic targets, continued to improve and was at the level of 17.7%. Again, it improved in all our divisions.

Kesko's financial position is strong. Cash flow from operating activities was EUR 71 million. Cash flow was impacted by the return of surplus assets paid to Kesko pension fund in the comparison period. Also, we have grown our inventories to ensure product availability and receivables have grown as sales have grown.

Capital expenditures totaled EUR 126 million. Another of our financial targets, net debt to EBITDA, was 0.1, well below the target level.

In Building and Technical Trade, sales growth continued strong and resulted in best-ever Q1 result.

Net sales grew comparably by EUR 200 million to over EUR 1.1 billion. Net sales grew in comparable terms in all operating countries. Growth in B2B trade continued strong in all operating countries. The growth has been supported by strong volume development in the construction market and continued to rise in material prices.

Comparable operating profit grew by EUR 30 million to EUR 61.5 million. The profitability improved and was high 5.5%. Comparable operating profit growth in both Onninen's technical trade and in building and home improvement trade in all operating countries.

The changes that we have carried out in recent years have had significant positive impact on the division's profitability.

Growth in B2B trade continued strong. The growth was supported by stronger-than-anticipated market volume development and rising prices in some product categories.

In Q1, good performance in all operating countries led to record results in all operating countries. Finland Onninen sales, in particular, grew clearly and profit improved further. Also in K-Rauta, good performance continued.

In Norway, Onninen sales grew and profit improved significantly, Byggmakker result improved as well. In Sweden, results improved, especially due to strong growth in K-Bygg.

In Poland, Onninen sales grew clearly and profit improved significantly. In Baltics, both Onninen and Kesko Senukai performed well and good performance continued also in sports trade.

And now let's look at the market and operating environment for Building and Technical Trade. Building renovation activity is high in Northern Europe. There are a lot of property investment debt in Northern Europe, and therefore, renovation building is steadily growing. Growth is heavily focused on B2B trade. Increased price inflation supports Building and Technical Trade market growth.

Green transition is supporting demand. In the longer term, price inflation may delay new project starts and temporarily decreased construction activity.

In Building and Technical Trade, strong country-specific actions are bringing growth. Our leading position in Northern Europe Building and Technical Trade increases our competitiveness. Our focus on the growing B2B trade maintains growth. Also, B2C trade is supporting the good performance. Our focus on Northern Europe and further strengthened position in the Nordics form a basis for good profitability. We strive to accelerate sales growth further with acquisitions.

In Building and Technical Trade, the focus on the growing B2B segment is bringing results. B2B trade now accounts for nearly 80% of the division sales. It is 4x higher than in 2014, and our B2B sales are already EUR 4 billion.

Sales growth is particularly strong in Onninen. In building and home improvement trade, the share of B2B has risen to 65% of sales. We have today more than 200,000 B2B customers. There are significant further growth potential in B2B trade.

In grocery trade, another good result. Net sales totaled EUR 1.4 billion and grew by EUR 21 million. Net sales grew in Kespro.

Comparable operating profit for Q1 was EUR 80.3 million. Profitability was 5.8%. Profitability for the comparison period was improved by the timing of Easter wholesale in Q1 in 2021.

Food trade sales growth continued and is bringing good results. Kespro's B2B sales rose to a new record. Net sales growth was 27.4%.

K-food store retail sales decreased by 0.8%. Online grocery sales were nearly at the peak pandemic record levels seen last year. The decrease was steady across the country, about 7%.

K-Citymarket town food sales were down by 4.1% since winter season was sold already in December. Cost efficiency continued to be good despite rising costs.

If we look at the Finnish food trade market in total, it consists of -- there are different parts and it's worth some EUR 20 billion. Kesko, the only operator that is strong in all 3 areas. Overall, sales are heavily focused on grocery stores, representing nearly 90% of total sales. Foodservice wholesale to companies and public operators such as restaurants is the fastest-growing area. Consumer online grocery is growing, but it accounts for just 2% of the total market.

And now let's look at the market and operating environment for grocery trade. Food inflation is supporting the market growth. As the pandemic eases, visits to grocery stores and online grocery shopping volumes are normalizing.

Online grocery is expected to settle above pre-pandemic levels. There is strong growth in the sales of good high-quality ready meals in grocery stores. At the same time, restaurant sales are growing possibly supporting foodservice market growth. Price will continue to matter, accelerating inflation to impact consumer behavior. Consumers purchasing power and trust in their own finances is good.

Our strong position in all food trade areas is yielding good results. Our food trade combination is strong. We have the most extensive network of grocery stores in Finland. Kespro's market-leading foodservice business and leading online grocery business.

In Finnish food trade, our market share is 38%. K-retailers and data-based store-specific business areas are the basis for our success of grocery stores. Sales growth through existing systems are improving operational efficiency further. Strong own brands and targeted offers based on customer data enable good price competitiveness.

Kespro is the market leader in the fast-growing foodservice wholesale. Kespro's market share is nearly 45%, with sales close to EUR 1 billion.

Digital trade accounts for some 70% of sale. Kespro has a wide customer base from private operators in the restaurant sector to public sector operators. There are significant synergies with K Group grocery stores. Strong growth in foodservice will continue and is supported by megatrends.

We are the leading operator also in online grocery. In Q1, online grocery business accounted for 3.9% of K Group's grocery trade sales.

The customer experience is the best in business with NPS of 83. We estimate that we have done well in the changing online grocery environment. There is no difference between the Helsinki region and the rest of Finland when it comes to online grocery development despite new players entering the market. We continue to proactively develop and grow our online grocery operations as part of our strong food trade.

Then to car trade. Good results despite availability issues. Net sales decreased by EUR 52 million due to availability problems and totaled EUR 208 million.

In car trade, operating profit was steady at EUR 10 million despite the difficult operating environment. Profitability improved, thanks to sales margin growth and cost savings.

Car trade transformation is bringing results. Net sales were down due to delays in new car deliveries. Profit improved thanks to sales margin growth and cost savings. Order book for new cars is record high, establishing used car business is proceeding according to plans. The service business result declined due to pandemic. Our extensive efforts to transform operations is proceeding well.

Market and operating environment for car trade, overall demand in car trade decreased for new cars and used cars. Component shortages and the impacts of the war in Ukraine caused first registrations of new cars to decline. E-mobility is moving forward fast. The need to reduce traffic emissions and improve traffic safety by updating vehicle stock increases demand.

Successful changes in car trade form the basis for growth. Thanks to our ongoing transformation efforts, Kesko's car trade has a strong position in wider sector transformation. Focus is on 3 major businesses, new cars, used cars and services. Big order book for new cars supports growth. Fast-growing used car business is improving profitability. Better competitiveness, thanks to efforts to improve customer experience make operations digital and increase process efficiency.

Used car sales is an important part of our growth strategy. We have formed a separate business unit for used cars. There is a new purchasing organization in place for Finland and abroad. We are further developing our operations to ensure better customer experience and operational efficiency. Profitability in the used car business improved significantly compared to the comparison period.

And then topical themes. Kesko updated its sustainability strategy. Management compensation is now tied to sustainability targets too. The focus areas of the sustainability strategy are climate and nature sustainable value chain, responsibility for people and good governance. Sustainability is strongly business-led.

And to the tragic war in Ukraine and its impacts. If we look at our business, we sold our operations in Russia in 2016 and 2018 for some EUR 347 million. When the war began, we discontinued the purchase of Russian products and food exports to Russia. The war and sanctions are having an impact on the global economy. We are actively monitoring the situation, and we'll adjust our management and operations as necessary, and also update our business plans when the situation so requires. We are also preparing, for example, possible cyber threats.

K Group donations to help the victims of the war in Ukraine totaled EUR 350,000.

And then the guidance. Guidance for 2022. We sent out a positive profit warning last Monday and updated our guidance due to better-than-anticipated market development in Building and Technical Trade. Now Kesko estimates that its comparable operating profit in 2022 will be in the range of EUR 730 million, EUR 840 million. Thank you.

[Hanna Jaakkola, executive]

Thank you, Mikko, for the presentation. And now let's go to the questions. First, we'll take questions from the conference call line. Operator, please.

[Operator]

[Operator Instructions] And our first question comes from the line of Fredrik Ivarsson of ABG.

[Fredrik Ivarsson, analyst]

I've got two questions. So first, on your updated guidance, what do you assume here in terms of food price inflation for the year because I guess you need to make some kind of assumption here?

[Mikko Helander, executive]

Yes. Very, very good question. We are estimating that inflation is rising; exact numbers, of course, very difficult to say. But our expectation is that all in all, food price go up and we are facing rising inflation in coming months and coming quarters.

[Fredrik Ivarsson, analyst]

Another follow-up there. Do you expect to transfer all those price increases you see from the suppliers to the customers?

[Mikko Helander, executive]

Yes. Yes. We believe that. As you can see also from Q1 numbers, our grocery trade succeeded very well also that is this inflation as well as also our Building and Technical Trade. And we are confident that we can manage also in future this challenging situation successfully.

[Fredrik Ivarsson, analyst]

Yes. And then moving on to the Building and Technical Trade then. How strong is your visibility in this area as you -- I mean are you aware? Obviously, we have a bunch of supply chain constraints in this business area at the moment. So it's difficult to judge maybe both demand and supply within Building and Technical Trade. So if you could talk around that, that would be helpful.

[Mikko Helander, executive]

Yes. All in all, we have pretty good visibility. You should remember that today, Kesko is so strongly B2B dedicated in Building and Technical Trade. And in B2B business visibility's, all in all, much better than in B2C business because when companies, professionals start construction renovation projects, normally, especially in Nordics, people also complete and -- those projects. And normally, it can take time from 6 months up to 18 months easily.

And still today, we can see everywhere in Nordics, a lot of active projects. And based on that, we feel that the visibility in our business in Building and Technical Trade is very good, thanks to very strong focus on B2B business.

[Fredrik Ivarsson, analyst]

Perfect. And then maybe a short follow-up on Building and Technical Trade because last year and also in 2020, you were a bit ahead of the curve in terms of price increases and now I suppose prices might be catching up with your hikes a little bit. So what's your expectations in terms of that?

[Mikko Helander, executive]

Difficult question because first, remember that price inflation, especially in Building and Technical Trade varies in different categories. And we can see already today also negative price development after some peaks but very difficult to estimate. All in all, we expect that also in Building and Technical Trade, this inflation continues. But how much and the numbers very difficult to estimate. But maybe Jukka, you are eager to open more those numbers.

[Jukka Erlund, executive]

Sorry, was it about the inflation?

[Mikko Helander, executive]

Inflation. Inflation.

[Jukka Erlund, executive]

Yes. Well, we do expect the B2B Building and Technical Trade inflation to continue during this year. And obviously, it's difficult to say exact numbers here, but that's pretty much what I can say that we do expect it to continue in addition to last year's fairly high inflation as well. So in that sense, that's the case, but...

[Mikko Helander, executive]

Jorma, how will you say?

[Jorma Rauhala, executive]

I think that's good to understand what are the reasons behind the price inflation. The prices started to increase a little bit more than a year ago. And it was because a high -- the DIY boom in COVID year 2020. And of course, after that, high demand, and then there were some factories closed because of COVID and some issues in supply chain, and those still continues. And also, there is a new one is energy prices. So I totally agree that prices has increased still this year. And also, we have informed to our customers also some coming price increases.

[Mikko Helander, executive]

Maybe still today, very many question marks. And of course, that is also the main reason why in our guidance, we have still this quite wide range.

[Hanna Jaakkola, executive]

[Operator Instructions] Meanwhile, we are talking to the conference call line. But back to the conference call in, please.

[Operator]

The next question comes from the line of Jutta Rahikainen of SEB.

[Jutta Rahikainen, analyst]

Great. Two questions on my behalf. First of all, going back to the Building and Technical Trade, and I think we covered the B2B part quite well. But if we talk a bit about the smaller section of it, sort of B2C, how would you describe that? Or what do you expect for the high season to come? Because now, near term, I think I would guess that the weather has been a negative thing. And then on top of that, you have the sort of COVID-doped summer from last year as a comparison number. So is there a risk in your view? Or what do you think about that in Q2 and Q3, how will it be for the Building and Technical Trade consumer side? That's my first one.

[Mikko Helander, executive]

Yes, yes. Maybe I can start. Jorma, you can then continue, but again, I repeat that we are in excellent position, thanks to such a big B2B business segment. But also in B2C, we are optimistic. We are positive. We should remember that the households in Finland, Scandinavian countries, financially in good shape. Households are still today positive. And life is getting more back to normal, but our expectation is that the people are very eager to make own domestic projects, and spend money also in DIY stores.

As you said, the spring time delayed. We have had an exceptional long winter in Northern Europe, and that has disturbed a little bit B2C business in April. But when I look out today, sun is shining here in Helsinki and not anymore snow, we are expecting that our DIY stores will be very busy today and coming weekend. We are optimistic, but Jorma, please open a little bit more.

[Jorma Rauhala, executive]

I think you answered very well. But as we know, 2020 there was a high peak in consumer demand because of COVID. And already last year, all of those consumer markets, volume started to decrease. And I would say that we are now in normal position, normal level, when it comes to volume. And I also see that, of course, we are some weeks late in spring in all of those Nordic countries, but summer will come, and we are normal level when it comes to our volumes.

[Jutta Rahikainen, analyst]

All right. Good. Then my second question links to Kespro and the restaurants. Now you're doing great in that segment. And if I understand it right, you have gained a lot of market share as well during COVID.

But a more general question, I mean, if we go into a weaker economy, how cyclical do we think that restaurants are? I mean, will people have the money to visit them if the economy gets gloomy? I mean we see already that the consumer confidence has gotten really bad. But what's your sort of thinking for the restaurant business or Kespro for the rest of the year?

[Mikko Helander, executive]

Kespro is a wonderful business. And Kesko is full of wonderful businesses. Kespro is a very good example. And also our people are doing extremely good job also in foodservice business. And thanks to that, also in Kespro, steadily, we are gaining market share. And our market share is now already 45%, and I'm very confident that we can maintain this positive development also in the future. Many beauties in Kespro. Definitely, one beauty is also a very wide customer base. We are clear #1 in restaurant business, preferred supplier. But beside of that, we are very strong also in public sector. And due to that reason, we are very confident that also in a slow economy, we are in a good position to make good business in Kespro. But definitely, Ari actually is best man to explain more detail also Kespro and Kespro's future prospects.

[Ari Akseli, executive]

Thank you, Mikko. And the situation for Kespro is actually excellent, because we have been gaining many new customers, and these customers are now opening their operations and expanding them, and we can see that in the sales of the Kespro. And also, it's same situation with the public sector. Key sector are back in the school and so on. So we can see high figures in the both side of the businesses.

[Jukka Erlund, executive]

Maybe just to add on that one that when you made the cyclicality there, the finance situation of the Finnish consumer seems to be quite good. And there is, obviously after 2 years of COVID situation, quite a bit of pent-up demand also in the market. So in that sense, also, it looks quite good for this year. So the demand is really there.

[Ari Akseli, executive]

Growth of the Kespro currently is that they need to have more workforce for the restaurants because they are expanding so fast now.

[Mikko Helander, executive]

As you hear, they are all so eager also to discuss about Kespro.

[Jutta Rahikainen, analyst]

Actually, I have a question, which doesn't link to Kespro only. But it links to your business overall. And that's the wages. I mean now we speak all about -- everyone speak about good inflation, but it's fair to assume that the wage inflation will follow. So are you seeing that already in your businesses? Or is that yet to come? What's your thinking on the wages for Kesko?

[Mikko Helander, executive]

Yes, of course, we can see that. But I can correct you that the situation very well, under control. And at the same time, also, I would like remind that we have succeeded also to modernize our -- the internal operations. We have spent money to make IT investments. We had digitalized very widely our operations, meaning that we have succeeded heavily also, reduced our operational costs and improve productivity everywhere in Kesko Corporation. And of course, in current situation, when wages are rising, that helps us very much. And I'm very confident that we are in good shape to continue this development also in future.

[Operator]

And we have one further question from the phones at this time. And that's from Nicklas Skogman at Handelsbanken.

[Nicklas Skogman, analyst]

So I have a question on the B&T division, in regards to what you are seeing in terms of new projects being started up, do you still see a good amount of new projects actually starting up? Because we've heard from some Swedish real estate companies saying that you're pausing projects now because of the high building prices as well as the uncertainty when it comes to actually getting the contractor to commit to a certain completion time.

[Mikko Helander, executive]

Yes. Yes, of course, that is a concern. But for the time being, we have not yet seen so much that kind of development. But our expectation is that in longer term, that might be the case, especially in residential projects, but then I would like to remind that everywhere in Nordics, Finland, Sweden Norway, all in all, around Baltic Sea, there is a big need for renovation work. And we have seen also earlier when new construction projects, the demand will decline, then normally people allocate more money and resources to renovate existing buildings, and that is also our expectation today. But once again, I stress that for time being, that is not the case.

[Nicklas Skogman, analyst]

Okay. But when you say in the longer term, you expect this to sort of come down? Is that, are you talking next year then?

[Mikko Helander, executive]

Yes. Definitely coming months and the coming quarters, I mean, 2022, we expect that the business will continue as planned and no expectations that something will change quickly or dramatically. Once again, I remind that when people start in Nordics construction renovation projects, normally, they finish successfully those projects, and then it takes easily from 6 to 18 months to complete those projects. Also based on that, we don't expect any dramatic changes at least in 2022.

[Nicklas Skogman, analyst]

Okay. Great. And then my second and final question is on margins in the grocery division. I mean they are outstanding, of course, but still down 15 bps year-on-year. And I understand the Easter shift impact there. But at the same time, I believe you have higher margins in your foodservice business, which is much stronger this year than last year, and the margin's still down. Is there any sort of underlying margin pressure in food retail compared to last year in the prices or costs and so on that you haven't yet passed on?

[Mikko Helander, executive]

Yes. Our grocery business is very, very strong, very, very solid, and our people are doing everywhere excellent. So they are very skilled, very professional and we can see that also in current situation when we have faced this cost inflation.

Also, I would like to stress that we are unique company in grocery business in Europe. I don't know other European grocery companies who has such a strong position in all 3 segments, in groceries, in foodservice as well as in online business. And that makes Kesko K Group, a unique player in Europe, and that is definitely also one of those reasons why also our profitability is exceptional good in food business. Jukka, please continue.

[Jukka Erlund, executive]

Yes. Maybe just very result regarding the margin of grocery trade in first quarter. So like you said, there was a slight decrease, but we have also mentioned that it was not just Easter but also actually the logistical costs, which were a bit high or a bit up from last year, and that was mostly related to the COVID situation, which was fairly difficult actually with Omicron during the January and also partially in February, and there were also some front-loaded costs on the freights and fuel side. So those had some impact as well on the margins. So no drama on that side.

[Mikko Helander, executive]

But please, Ari, you can continue and explain how you are managing this situation.

[Ari Akseli, executive]

Like Mikko mentioned earlier, we are in excellent position because we operating in all the fields. And we have synergies from each part of the business to the other parts. And we are also member of the biggest European sourcing alliance, AMS. And that's also giving us a buying power.

And because we have excellent sales mix in grocery, actually, we have the highest share of the ready meals and so on, which are the high-margin items. And the share of these items is continuing to grow. And at the same time, we have strong market position in every business areas. So we are very confident that we can pass on these price increases to the market.

[Operator]

[Operator Instructions]. There seems to be no further questions from the phones at this time.

[Hanna Jaakkola, executive]

Thank you. And I have one question here regarding car trade. There has been a couple of challenging years in car trade market. Is there any pent-up demand when it comes to new cars?

[Mikko Helander, executive]

Yes. As was mentioned, challenging years, quite many challenging years, but before Matti continues, I would like to thank our people how well they have managed those challenges. And the challenges continue how long, we don't know. But thanks to successful reengineering, we can really call that we are reengineering our car division; it's performing now better and better and performing better than many other companies in car trade business. But Matti, please continue.

[Matti Virtanen, executive]

Yes. Thank you. Thank you, Mikko. And I would say that there are fundamental trends that really impact the demand at this point of time. First of all, we can see already in March and April also because the April is ending very soon is that the market in March time frame went down about 27% in terms of the registrations in Finland, and the same trend seems to be continuing. So that's one thing that the car industry in itself is not able to provide necessary number of cars, what the customers would demand.

The other very important trend that's going on in the market is that the electrification of cars, especially in Finland because of the tax decisions made by the government last year and also in the previous times. So there are, in fact, 2 pending demands that are happening, not getting all along enough cars to the market, and at the same time, not getting enough of electric and hybrid cars to the market.

So fundamentally, what we have seen, and as Mikko mentioned in his presentation, we have, I would say, an extremely high level of order backlog. So we have seen the demand coming in, in very nice numbers. So our expectation is that when the fundamental limitation of the car supply will end, we will see a very nice growth in the market in all aspects.

[Mikko Helander, executive]

Thanks, Matti.

[Hanna Jaakkola, executive]

Good. I think that was it for the questions. Thank you, gentlemen, for your time and the answers and the presentation, Mikko. And if you have any further questions, don't hesitate contacting me. Thank you.

[Mikko Helander, executive]

Okay. Thank you for your participation. Together with my colleagues, I wish very pleasant Friday from sunny, but quite cold Helsinki. Have a nice day. Thank you. Bye-bye.