Kesko Oyj
OMXH:KESKOB
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Kesko Oyj
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Ladies and gentlemen, welcome to our third quarter 2020 release call. I'm Kesko CEO, Mikko Helander. Together with me, I have our CFO, Jukka Erlund; and Vice President, Investor Relations, Hanna Jaakkola. We celebrate our 80th anniversary with all-time record results. The performance of all the 3 divisions was very good. I will first give an overview of our business performance in third quarter. And thereafter, we will be happy to take questions, both by phone and via chat. Key events in third quarter, record result and very strong cash flow. We achieved our financial targets. In the grocery trade, good performance continued. Building and technical trade division had strong performance in all the operating countries. There was a clear positive turnaround in the car trade division. The net sales forecast was continuing operations in third quarter totaled EUR 2.652 billion. It was up comparably by 4.6%, which equals EUR 83 million. Rolling 12 months, net sales were EUR 10.09 billion, these numbers are excluding Kesko Senukai. Comparable operating profit for third quarter was record high EUR 182 million, and it increased by over EUR 38 million. It increased due to good sales development in all divisions. These numbers include Kesko Senukai as a joint venture instead of subsidiary. Kesko Senukai had EUR 23 million impact on the group's comparable operating profit. Rolling 12 month operating profit was all-time based, EUR 509 million. Return on capital employed, one of our strategic targets improved and was at the target level, 11%. It improved in the grocery trade and in the building and technical trade. Kesko's financial position is strong. Cash flow from operating activities continued to strengthen, and it was EUR 287 million, and our liquid assets were over EUR 300 million. As I mentioned in the beginning, the company's financial targets were achieved and actually sooner than anticipated. Both comparable operating margin and return on capital employed reached their recent target levels. We can be proud of this great achievement reached, thanks to hard work. Also, another great achievement is that our K brand was recognized as the fastest-growing brand in Finland and in the Nordic countries. K is the #5 among the top 10 most valuable brands in Finland. Also, K Group's reputation has improved clearly during the past 6 years. And K is now one of the most trusted corporate brands in Finland. And now to grocery trade. In grocery trade, modernized stores and customer-oriented services are bringing results. Net sales for the third quarter totaled EUR 1.462 billion and grew by 4.2%. Net sales grown at all food store chains. Comparable operating profit for third quarter was record high, nearly EUR 109 million, and it increased by EUR 15 million. Profitability was 7.4%, and it increased due to good sales development in food store chains and improved operational efficiency. Rolling 12 months operating profit exceeded 6% and was 6.2%. During the quarter, retail sales market grew by 7%, while K-food stores were up by 7.2%. Sales grew in all K-food store chains. We saw also good development in K-Citymarket, home and specialty goods trade, which was up by 3.5%. Also, online grocery sales continued to grow. Our B2B business, Kespro, has been suffering during the corona epidemic and is still below normal levels. However, during the third quarter, the sales grew from the spring levels. Of course, the safety of customers and personnel is #1 priority. One of our key strategic focus areas is to improve the customer experience, and we do it by utilizing data and new technologies. Store-specific business ideas based on data are resulting in higher customer numbers, sales and also market share growth. Data and new digital tools used in stores enable us to offer correct and quickly updated product selections for customers. Tools in customers' own pockets help them to make more sustainable and, for example, locally produced choices. Customers also receive inspiring and personalized marketing communications. Online grocery sales have grown this year by nearly 400%, and at the end of third quarter, 456 K-food stores offered online services. NPS is high at 80%, and our market share in online grocery is over 55%. Still, I want to highlight that online represents 2.2% of our total grocery sales and physical store share is 97.8%. Kespro's strategy is working also under exceptional circumstances. The market has contracted due to the epidemic and the restrictions imposed on restaurants. On the other hand, Kespro's sales performance has clearly outperformed competitors in a challenging market. We have managed to maintain a good level in services, availability and reliability of deliveries. Thanks to our first response and adjustment measures, our operations have stayed profitable. Also, new innovations, such as restaurants and restaurant meals in K-stores have supported the performance. In general, clear guidelines and more targeted restaurant-specific restrictions are positive for the market during these challenging times. And now to building a technical trade division, where we saw strong profit development, thanks to good performance in all countries. Net sales, excluding the specialty good freight and Kesko Senukai grew comparably by 4.4% to EUR 951 million. Net sales grew in Finland, Sweden, Norway. Net sales increase in both B2B and B2C trade. Comparable operating profit, including Kesko Senukai, as a joint venture and excluding specialty goods trade increased by EUR 21 million to EUR 73 million. The profitability improved and was a record high 7.7%. In the building and technical trade, comparable operating profit grew in the building and home improvement trade in Finland, Sweden and Norway. Onninen's comparable operating profit grew in Finland, Sweden, Norway and Poland. In the Baltics Onninen's comparable operating profit remained at level of the previous year. The acquisitions carried out in Norway and Sweden, in recent years, accounted for EUR 15 million of the comparable operating profit in the third quarter. Construction activity has stayed at a good level in Northern Europe and B2C trade has remained active. Growth in B2B trade is flattering in both building and home improvement trade and technical wholesale. It remains difficult to estimate how demand will develop during the final months of 2020. For K Group, in third quarter net sales and profit grew, B2B trade continued to be good in both building and home improvement stores and also Onninen B2C sales grew. We acquired Carlsen Fritzøe in Norway and Bygg & Interiör in Sweden. And these acquisitions as well as MIAB acquisition earlier this year helped to boost the sales. In Finland, good profitable growth continues for both K-rauta and Onninen. For K-rauta market share has clearly strengthened retail sales for the first 9 months of the year were up by nearly 10%, with strong growth in both B2B and B2C sales. We continue to modernization of stores and online services, we offer a wide range on brands in K-rauta, and this year, sales of our own brands were up by 42%. Onninen has also gained market share and sales have been good. We have strengthened Onninen store network further, also selections has been expanded. The development of Onninen digital service is continued. And now an update of our Swedish business that are on a good growth track. Both K-rauta's B2C sales and CapEx and Onninen's B2B sales has grown strongly. We have successfully made changes in management and management procedures. We have also achieved significant synergies, for example, in purchasing and centralised logistics. Strategic acquisitions continue during the year. MIAB was included into Onninen and Bygg & Interiör is now part of K-Bygg. Also going forward, we see further growth, both organically as well as via acquisitions. Good sales and profitability development in Norway. Sales in Norway grew in both bookmakers Building and home improvement trade and Onninen's technical wholesale. Profitability improved thanks to new customers, cost adjustment measures carried out synergies and the acquisition of Carlsen Fritzøe. Following the acquisition of Carlsen Fritzøe the share of our own retailing in building and home improvement in Norway is now some 70%. We are welcoming Hilde Kristoffersen to join Kesko Norway as a new Country Director. She has extensive experience and was a division Director for Ahlsell, Nordea and Managing Director for Staples, Nordea. We believe this is a very good fit for both of us. Also in Norway, we see further growth, both organically as well as via acquisitions. Strategic review in the Baltics and Belarus continues. Kesko Senukai sales have grown, and profitability has improved as expected. Kesko Senukai is reported as a joint venture instead of a subsidiary as of July 1, 2020. Operations in the Baltics do not have material impact on Kesko's result or cash flow. The difficult political situation in Belarus has reduced the sales and profitability of Kesko Senukai's OMA chain. This does not, however, have a significant impact on Kesko. Negotiations to resolve differences of opinion concerning the management and development of Kesko Senukai continue. And to car trade where we saw a positive turnaround. Net sales for the third quarter totaled EUR 244 million and grew by 9.6%. Net sales increased as demand strengthened clearly for both new and used cars. The rolling 12 months net sales were nearly EUR 890 million. Comparable operating profit for third quarter in car trade was EUR 7.4 million and it increased by EUR 2.4 million. Profitability was 3%. In the market, the first registrations of passenger cars and vans in Finland were down by 7.5%. Demand for used cars is growing. People increasingly prefer private cars or public transport due to the EBITDA mix. Changes considered for car taxation, aim is to update the Finnish vehicle stock and meet climate targets. Our car trade sales were up by 10.1%. Availability of new cars improved, used car sales grew by 24%. Porsche's sales grew clearly and was up by 123.4%. Thanks to updated range, especially Porsche Taycan. We see an increase of interest towards other all-electric cars as well. Our own leasing fleet is nearly 2,900 cars after-sale demand and sales remained good. Outlook for car trade has improved. The car range we offer is the most extensive and with lots of alternatives. We offer many new plug-in hybrids and all-electric cars as well as combust engine models. The availability of cars from Volkswagen Group's factories is constantly improving. In general, new car sales are expected to grow by approximately 10% in 2021 also changes to taxation is under consideration and the first decision support car sales. Guidance for 2020. Kesko specifies its profit guidance for 2020. The company now estimates that the comparable operating profit for its continuing operations will be in the range of EUR 530 million, EUR 570 million in 2020. Before the company estimated that the comparable operating profit for continuing operations would be in the range of EUR 510 million, EUR 570 million. Ladies and gentlemen, Kesko celebrates its 80th anniversary this year. The company was founded under exceptional circumstances back in October 1940. And since then, Kesko and K Group have grown into a leading retail operator in Northern Europe. I want to thank our customers, K retailers, all K Group personnel, Kesko shareholders and all other stakeholders for these past 80 years. Thank you. And now we are ready for questions. First, we will take questions from the conference call lines, please.
[Operator Instructions]Our first question is from Fredrik Ivarsson from ABG.
A few questions from me. Starting with the new guidance. What exactly made you raise it? Any particular parts of the business that's performing above your expectations? Or is it just a general strong performance across the board?
Yes. Absolutely. At the moment, businesses, all in all, are performing very, very strongly, especially grocery trade, building and technical trade and building and technical trade in all countries performing very well. And due to do that reason, we were in position to update also our guidance.
Okay. And second one on the margin expansion in the grocery trade division. How much of that expansion came from cost reductions in, I guess, especially Kespro? And also, if you could elaborate a little bit on what you saw in terms of gross margin within the grocery business?
Main drivers are in sales and in the fact that we have succeeded to implement very well, I would like to say successfully our growth strategy also in grocery trade. We have succeeded to improve customer experience everywhere but at the same time, I would like to remind that we have still a lot of potential, further improve customer experience and that way to increase our sales and strengthen our market share. Of course, at the same time, we have reacted also very quickly when we faced this exceptional situation what we have worldwide due to COVID. But main drivers are coming from business side, coming from the fact that our growth strategy works very well.
Right. Can I just follow-up on that? Because you mentioned cost reductions in the report. And I'm just curious to get a feeling of the size of those? And also, if it's something that's more sustainable or is it temporary due to COVID?
Yes, Jukka Erlund here. I would say that during the second quarter, we had somewhat sort of extra sort of temporary lay of cost reductions that impacted the sort of cost reductions during that time. But during the third quarter, the temporary layers were very minimal. Actually, they didn't play a role here. So the cost reductions came from just operational efficiency, and we have done those in pretty much every category, of course, that we have and being just efficient in different lines there. So in that sense, sort of they are something that we can go further as well.
Excellent. That's very clear. One last question before I jump back in the queue. What's your outlook for the DIY market looking into next year? Do you expect the growth there? Or is it fair to assume that, that market might contract on the back of difficult comps, obviously?
No, as you know, outlook is very limited and definitely also next year, still quite challenging to make those estimates. But at the moment, we believe that market will remain at least quite a stable, let's say, if this pandemia will continue next year, how badly pandemia hurts global economy in EU and Finland, if that will happen, how big negative impact, those things have Northern European construction business and DIY market. But at the moment, we are -- let's say, a little bit more optimistic than pessimistic. Let's say it this way.
[Operator Instructions]We have a question from Fredrik Ivarsson from ABG.
So one additional one for me then. We've seen a lot of retailers investing in fully automated TCs to cope with a strong transition to online. And I appreciate that the total share of online sales is low in Finland. But I'm just curious to hear what your internal discussion sounds like in that regard?
Sorry, Fredrik. Regard what?
Regarding potential investments into fully automated distribution centers or warehouses?
Yes, yes. Very good question. And we have great development, as you know, and close to 400% growth 2020. And beside that strong growth, we are working very hard to develop new technologies to improve services and productivity in grocery trade e-com and online business. I believe that very soon, again, some new innovations, we will pilot and collect experience from those pilots and definitely very important now utilize new innovations and technologies to improve services and productivity on that side. But at the moment, we are not yet ready to publish those ideas and developments.
And we have a question from Magnus Raman from Kepler Cheuvreux.
Yes. I'm sorry, I came in a little bit late in the call, so perhaps these questions have already been asked. But I'd like to ask you about the current development of the pandemic and new imposed social distancing rules and so on? And to what extent do you think about this when you plan for the important Christmas trading season, especially in the go-through business? Are you expecting these measures to affect the way people socialize and thereby potentially affecting the consumption of food during this important period? That's my first one.
Yes. The first, I must say that for the time being, we have succeeded very well those measures to keep our business safe. We have, in 8 countries, 1,800 stores. We have 43,000 employees, and normal work day we have 1.9 million customer contacts, mainly at the stores. And since last spring, we have in K Group, 100 cases, just 100 cases. And I feel that a strong message that we have succeeded very well to keep our stores and our services safe. We continue those measures and we are pretty confident that we can keep safe our business also in the future. Absolutely, you are right that Christmas time will be very important: first, from a business point of view, but also we are working very hard also to offer safe services to our customers also Christmas days when we know already that our stores will be very busy. Very important, also remember that we have succeeded to develop and improve our online services. And we know already that also online services -- demand of online services will rocket also at Christmas time. But also on that side, we are working very hard to be in even better position to serve customers and meet this growing demand.
Maybe worth mentioning also that, obviously, quite a bit of household consumption has been focusing in the domestic market this year, and we do expect that, that sort of trend to continue for the rest of the year as well.
Yes. The domestication, of course, is there given that sort of eating trend. But I was just curious about, I think, like a major driver to the large grocery shopping over this period is related to gathering our families in large groups, so to speak. And if that will not happen at the same magnitude, if that -- if you believe that, that might affect the overall market growth speaking of the overall market volumes with this period? Well, anyhow, if you don't have any further thinking about that, I'll just move on to the second one and it relates to your continuous expansion strategy and building a technical division, would you say that you deem that the pandemic has: a, made it harder for you to engage your bolt-on acquisition strategy due to higher prices, given that sales has been very, very positive in this category? Or is it so that you see more opportunities and that price points perhaps are attractive that there are more sellers due to the situation, what's your take there?
All in all, current situation for a company like Kesko, great opportunities, great opportunities to accelerate organic growth but also opportunities on acquisition side in building a technical trade. And we have growth strategy. We have successfully followed and implemented our growth strategy last 6 years. And in current circumstances, we feel strongly that we have even bigger opportunities now to increase market share and make successful acquisitions in Northern Europe in future.
Maybe to add on that one, in M&A always, it sort of varies always situation by situation, and we've done quite a few acquisitions during the past and so on. So there's still room for consolidation in the overall markets in the Nordic countries, for example, and for us, it's always a matter of right strategic fit in a way that it fits to our strategy and that the valuations are right and so on. So it's a case-by-case type of thing always.
Right. And just finally, you mentioned here on the online side that you expect a surge in demand here on the Christmas selling period. And you're preparing for that. But when preparing for that, is it still the strategy only to deliver out of major hypers? Or are you considering any other investments in to stores or other type of fulfillment capabilities?
Well, currently, we are sort of happy with our online offering and the platform that's -- if you ask that one. So how that is sort of getting the customer experience good when it comes to the selection and the delivery times and so on. So we are currently happy with that one. But like Mikko said earlier, obviously, we do follow the technologies and different kind of methods very closely and so on. But like I said, we don't have anything to sort of open up at this point more, but are happy with the current setup for the current needs of the customers.
[Operator Instructions]And we seem to have no further audio question, I hand back to the speakers.
Thanks, Magnus and Fredrik, for good questions. And now I have a couple of questions from the chat. First is, can you talk a little bit more about the mix of products that you are sell -- doing so well in DIY and Building division? Is it just more seasonal, like gardening and barbecues? Or is it the strong sales across all product lines?
More or less, it's from sales growth. All main product lines. But many, many positive things and developments. I would like to pinpoint, for example, strong sales development of our own private labels. In Finland alone, K-rauta a 45% increase of our own private-label was, of course, excellent achievement. But all in all, strong developments in all categories at least -- Jukka, that is my understanding. Or do you have more detailed information?
Maybe just a little add up on that one, that obviously, the garden products, for example, in the second quarter were at a strong level, but obviously, coming towards the end of third quarter, obviously, the garden doesn't play that big roll, and still our sales were at really good levels. So that sort of the home decoration products, for example, grew nicely and so on. So there is quite a bit of renovation, for example, both in homes but also in summer cottages and so on. So like Mikko said, widespread type of increase in the different categories.
Very good. Thanks. And then about government support. Has there been any government support this year? And in the last quarter, meaning support for wages, et cetera?
No. Not for us, not for us. Not for us, but in Finland, and my understanding most of European countries, governments are supporting businesses and companies who has barely suffered due to pandemia. But we are not that kind of case. No subsidies, no support from the government side.
Thank you. Actually, no further questions here. And no further questions on the conference call line either. So if you have any further questions, don't hesitate to contact me. Thank you, gentlemen.
Yes. Thank you, everybody. Hanna, Jukka, myself, we wish very pleasant afternoon, evening from surprise, surprise sunny hazing.
Good. Thanks.
Thanks, everybody.
Bye-bye.
Bye.