Kesko Oyj
OMXH:KESKOB

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Kesko Oyj
OMXH:KESKOB
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Earnings Call Analysis

Q3-2023 Analysis
Kesko Oyj

Kesko Revises 2023 Profit Guidance, 2024 Outlook

Kesko has revised its 2023 profit guidance, now estimating the comparable operating profit to be between EUR 680 million and EUR 730 million, a decrease from the previous upper range of EUR 760 million. The operating environment in 2024 is expected to remain challenging, but Kesko predicts its operating profit will still be good. Grocery trade is anticipated to be stable, with good profitability persisting into 2024. While the building and technical trade market is expected to decline further in 2024, profitability should nonetheless stay reasonably good, with an upturn forecasted for 2025.

Overview of Kesko's Business Performance in the Third Quarter

Kesko exhibited a mixed performance across its segments in the third quarter, illustrating resilience and adaptability in a variable economic landscape. The company, notable for its presence in grocery, building, technical, and car trade businesses, saw good sales levels in the grocery trade and a notable increase in both sales and profits in the car trade segment. However, the building and technical trade division experienced a decline in profit due to weakened construction volumes.

Strategic Acquisitions and Cost Management

Kesko's strategic decision to acquire the Danish company Davidsen reflects its ambition to expand into Denmark and strengthen its footprint in Northern Europe. Additionally, a result of proactive measures, the company improved its cost efficiency during the quarter, which, coupled with effective working capital management, led to an enhanced cash flow from operating activities.

Financial Highlights and Profitability Analysis

The net sales for Kesko reached EUR 2.9 billion for the quarter, with a moderate decrease compared to the previous year but showing an uptrend in both the grocery and car trades. The comparable operating profit was reported at EUR 208.1 million. The operating margin stood at 7.1%, and the return on capital employed—a key strategic metric—was at 14.1%, indicating a healthy return on investments. Despite the challenges, Kesko maintained a strong financial position, reducing its interest-bearing net debt and controlling fixed costs effectively amidst high inflation.

Grocery Trade: Performance Amid Price Sensitivities

In the grocery trade, Kesko's strong position in the Finnish market led to increased sales and retail growth, although comparable operating profit saw a reduction. The company also noted a shift in consumer behavior towards premium products and a successful response to market dynamics through targeted campaigns and marketing efforts. Profits within this segment remained among the highest in Europe, despite rental cost inflation and competitive challenges.

Building and Technical Trade: Navigating a Downcycle

The building and technical trade division faced a sales decline mirroring the construction market downturn. Nonetheless, Kesko managed to uphold good profitability, specifically in Finland, where the operating margin was notably strong. The company effectively controlled working capital and cost, even as solar power products sales—high in the comparison period—saw a significant decrease.

Automotive Excellence Amid Market Shifts

Kesko's car trade division flourished with growth in net sales and a substantial increase in operating profit. The growth was driven by significant new car deliveries and a boost in used car sales. While there was robust demand for new cars, there is anticipation of normalized levels of demand moving forward. The expansion of the company's electric vehicle charging network also underscored its commitment to adapting to industry advancements.

Position in Finnish Grocery Trade and Northern European Building & Technical Trade

Kesko, along with S Group and Lidl, remains a dominant and profitable player in the Finnish grocery landscape, characterized by stability and good profitability at the European level. The company's leading position in building and technical trade, which spans across Northern Europe, coupled with strategic choices including focus on B2B trade and geographic expansion, positions it favorably amidst cyclical market fluctuations. Kesko is poised to continue its consolidation efforts in this sector.

Guidance and Outlook for 2023-2024

Kesko adjusted its guidance for 2023 with an estimated comparable operating profit range of EUR 680 million to EUR 730 million, marginally lower than previously projected. Looking ahead to 2024, the company expects to maintain good profitability amid an anticipated challenging market environment. While the grocery trade is predicted to remain stable with good profitability, the building and technical trade may experience a continued decline, with a potential market turnaround in 2025. Car trade profitability is also expected to see a modest decrease from 2023's high level, although it should still remain robust.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
M
Mikko Helander
executive

Ladies and gentlemen, welcome to Kesko's Third Quarter 2023 Release Call. I'm Kesko's CEO, Mikko Helander. I have together with me our Business Division Presidents, Jorma Rauhala, Ari Akseli and Sami Kiiski; as well as CFO, Jukka Erlund; and Investor Relations, Hanna Jaakkola.

Today's headline is a fine performance in a weak market. And it describes well our third quarter. Now I will first give an overview of our business performance in the third quarter. After the presentation, we will be happy to take questions both by phone and via chat.

Key events in third quarter. In grocery trade, sales were at a good level. In building and technical trade, profit decreased as construction volumes weakened. In car trade, sales and profit grew clearly in all car trade business segments.

In August, we announced that Kesko will acquire the Danish builders' merchant, Davidsen, and enter Denmark once the acquisition is completed. During the third quarter, cost efficiency improved, thanks to implemented measures. Also, a good cash flow from operating activities as efficient working capital management strengthened the cash flow.

The net sales totaled EUR 2.9 billion. And it decreased by EUR 61 million. Net sales increased in grocery trade as well as in car trade. Rolling 12 months, net sales were nearly EUR 12 billion.

Comparable operating profit for third quarter was EUR 208.1 million. It decreased by EUR 34.7 million. Operating margin for the third quarter was 7.1%. Return on capital employed, one of our strategic targets, was 14.1%. Return on capital employed increased in car trade year-on-year and decreased in building and technical trade as well as grocery trade.

Our financial position is strong. Cash flow strengthened on the comparison period, thanks to further improvement in working capital management in all divisions. Interest-bearing net debt was down on the previous quarter year-on-year. Net debt increased as a result of investments in store sites and logistics, acquisitions and growth in working capital.

We have succeeded well in further improving cost efficiency. Fixed costs were down by EUR 9 million despite high inflation. We have cut costs in all divisions and group common operations. There is a 2.6% reduction in personnel expenses despite significant wage inflation.

In grocery trade, strong position in Finnish food trade is yielding good results. Net sales totaled EUR 1.6 billion and grew by EUR 20 million. At the same time, retail sales grew by 3.6%. In grocery trade, comparable operating profit for third quarter was EUR 118.2 million. And it decreased by EUR 15.2 million. Profitability was 7.4%.

Grocery trade key topics in third quarter. Price continues to be important, but also demand for premium products has started to recover. Campaigns and other marketing efforts worked well. Customer visits and sales in K stores increased. Grocery sales in K stores grew by 3.6%. Loss of market share for food store chains slowed down further, the positive trend continued.

Kespro sales were up by 4.7%, clearly exceeding market growth again. The profitability was good in the foodservice business. And the operating margin was 7.3%. During third quarter, real estate costs were up due to inflation and made investments. Grocery price inflation stood at 6.7% and continued to slow down during the quarter. K-Citymarket's non-food sales were up by 2%. Growth in consumer online grocery sales strengthened and grew by 15.4%.

Building and technical trade, a good result in a bad economic cycle. Net sales decreased by EUR 99.4 million to EUR 1.050 billion as the construction market was down on the comparison period. Comparable operating profit for the building and technical trade division totaled EUR 70 million. And operating margin was 6.6%. In this current operating environment, this is a good result.

Building and technical trade third quarter key topics for building and home improvement trade. Construction activity has clearly decreased in Northern Europe as a result of rising inflation and interest rates, especially in residential building. Despite the weakening market, the profitability was good.

Operating profit was at a good level, EUR 27.4 million. Operating margin in the biggest market, Finland, was strong, 8.3%. Market share continued to strengthen further. Net sales for building and home improvement trade was down in all operating countries and in both B2B and B2C trade. Working capital and cost management was successful. Also, credit losses were at a low level.

Building and technical trade third quarter key topics for technical wholesale. Net sales were down by 0.5%. In comparable terms, net sales were down by 9.4%. A significant part of the decrease in comparable sales came from solar power products. In solar power products, sales in the comparison period were exceptionally high due to a fast rise in electricity prices at the same time.

Excluding the impact of solar power products, sales for technical trade decreased in comparable terms by 5.5%. Operating margin was at a good level, EUR 37.7 million. Operating margin in Onninen's biggest market, Finland, was at a strong level of 8.6%. Also, in technical trade, cost management was successful and credit losses were at a low level.

In car trade, another good result in car trade. In car trade, net sales for third quarter grew by EUR 15.2 million and were EUR 311 million. The comparable operating profit totaled EUR 24.3 million, exactly the same as in the second quarter and increased by EUR 8 million year-on-year. Operating margin was 7.8%.

Car trade key topics in third quarter. New car deliveries increased significantly year-on-year. And especially thanks to that, net sales and operating profit increased. Used car sales grew clearly and market share in used cars strengthened. Also, services developed well.

Order book for new cars was still at a good level, but it is coming down. Demand for new cars and orders are clearly below normal levels. We are expanding the K-Lataus electric vehicle charging network. Currently, there are some 1,500 charging points and utilization rate is high. Sports trade net sales was down by 16.2% due to weakened consumer demand.

In food trade, cash cost position is strong and profitability among the best in Europe. Kesko has a strong position in all areas of food trade. This is quite unique and also unlike other operators in Europe. Kesko retail and B2B sales in food trade are over EUR 8 billion. And the market share in total Finnish food trade is 37.3%.

If we look at the Finnish grocery store and restaurant market in Finland, it is over EUR 30 billion business in total. Grocery store sales represent some EUR 22 billion, of which 3% online sales. Foodservice, industry and restaurant sales are approximately EUR 10 billion. Market size in euro terms is up. It is good to note that volumes declined in the market during the first half but have now returned to the last year's level.

K-food store network is Finland's most extensive network of grocery stores with 1,200. K store retail sales were EUR 7.2 billion. Market share is over 35%. And it is up by some 3 percentage points since 2015. There are some 1.2 million customer visits in the stores every day. And customer flows are increasing.

K is the market leader in online grocery with over 40% market share. Decline in market share is mainly due to the fact that competitors have opened exceptionally many new stores in recent years. Market share decline slowed down further in the third quarter. K store openings will increase from 2024 onwards.

There will be several hypermarket openings in Finland growth centers and also new neighborhood stores across the country. K-Supermarket Columbus in Eastern Helsinki will be converted into a K-Citymarket hypermarket in 2024. A new K-Citymarket will be opened in Kivistö, Vantaa in Helsinki metropolitan area in 2026. Planning and permits for new K-Citymarket stores in Kuopio and Porvoo are close to completion. Also, a bigger grocery store is under planning for Espoo center in Finland's second biggest city, also Helsinki metropolitan area.

In addition, to the hypermarkets, there will be nearly 50 grocery store updates and over 10 new stores that will be opened in 2024. Store size CapEx is, at the long term, average level. The investments in store upgrades and new stores will total some EUR 200 million to EUR 250 million in 2023. And the same level will continue in upcoming years.

If we look at the foodservice business in Finland, Kesko is the only operator in the foodservice business with countrywide network. In addition to the major B2C grocery business, Kesko is the leading operator in Finnish foodservice business, which is exceptional on a European scale. This gives significant efficiency and synergy benefits in purchasing, logistics and IT.

Foodservice sales are already over EUR 1.1 billion, of which 70% are now done via digital channels. Our foodservice operator, Kespro, is a clear market leader with a 46% market share and growing sales. The customer base is wide. And it ranges from private restaurants to public sector operators. Some 70% of sales come from lunch sales, cafeterias and the public sector.

If we look at grocery store market in Finland, I would like to underline that the foundation for Finnish grocery trade is healthy. All operators enjoy good profitability. And there has been only minor changes in market shares since 2010.

There are three players in Finnish grocery trade. And the profits generated by these three players, Kesko, S Group and Lidl, are at a good European level. This is a stable business. As you can see in the graph, there are no significant changes in K Group and S Group market shares since 2010. Lidl opened first stores in Finland in 2002. And its market share has settled below 10%.

The challenging building and technical trade market also presents opportunities. Kesko is a leading operator in B2B building and technical trade in Northern Europe. The total market is nearly EUR 40 billion. In technical trade, the market size in Northern Europe is some EUR 23 billion. Kesko is the market leader in Finland and also in electro-technical trade in Norway. We have a strong position in Poland and the Baltics. Other key players in the market are Ahlsell, Dahl, Sonepar, to mention some.

In building and home improvement trade, the market size in B2B is some EUR 16 billion in Northern Europe. Kesko is the market leader in Finland. We have a strong position in Norway and Sweden. And we are expanding to Denmark via the Davidsen acquisition. Other key players in this business are, among others, Stark Group, Optimera and Mestergruppen.

Cyclical fluctuations are natural for the construction sector. Downcycle is impacting new residential construction the most, which accounts for 20% to 30% of all construction, depending on the country. Decline in other building contraction, renovation building and infrastructure construction is smaller. It is good to remember that urbanization, renovation and investment debt, infrastructure projects and the green transition uphold construction in longer term. In general, the turnaround in construction is expected in 2025.

K Group is a leading operator in building and technical trade in Northern Europe. Our retail and B2B sales are some EUR 7 billion after Davidsen acquisition. Our profitability in building and technical trade is at the same level as the best European peers. The right strategic choices are behind the strong position and good profitability. Choices include: focus on B2B trade; expansion to technical trade; growth in Scandinavia and market consolidation; and country-specific approach to manage the business and strategy implementation.

Kesko continues the growth in building and technical trade. Slowdown in economic growth is accelerating the market consolidation. Kesko intends to continue the consolidation of the building and technical trade B2B market in Northern Europe also going forward.

Our objective is to be among the leading operators, not only in Finland and Norway but also in Sweden and Denmark. Growth in technical trade in Poland and the Baltics is also important. The joint venture, Kesko Senukai, a leading operator in building and home improvement trade in the Baltics.

Guidance and outlook. Strong performance also in a weaker market, as you can see in the graph right. Kesko specifies its profit guidance for 2023. Comparable operating profit in 2023 is estimated to be in the range of EUR 680 million to EUR 730 million. Before, comparable operating profit was estimated to be in the range of EUR 680 million to EUR 760 million.

Outlook for 2024. Kesko's operating environment is estimated to remain challenging in 2024. Kesko's operating profit is expected to remain at a good level also in 2024, despite the challenges in the company's operating environment. In grocery trade, B2C trade and the foodservice market are expected to remain stable and inflation is expected to slow down in 2024. Profitability in grocery trade is estimated to remain good also in 2024.

In building and technical trade, the market is expected to continue to decline in 2024. The economic cycle will have the biggest impact on new residential building while the decline in other building construction, renovation building and infrastructure construction is expected to be smaller. The cycle is expected to turn in 2025. Profitability in building and technical trade is estimated to fall short of the 2023 level but still remain at a reasonable good level in 2024.

In car trade, orders for new cars are expected to fall short of the 2023 level. Demand for used cars and services is estimated to stay at a good level. Profitability in car trade is estimated to decrease from the excellent level of 2023 but to continue to remain at a good level in 2024.

Ladies and gentlemen, thank you for your time.

H
Hanna Jaakkola
executive

Thank you, Mikko. And now it's time for questions. We will, as usual, take the calls first and then I will read the chat questions. [Operator Instructions] But now we will turn to the conference call line.

Operator

[Operator Instructions] The next question comes from Anna Schumacher from BNP Paribas Exane.

A
Anna Schumacher
analyst

I have two if that's okay. So the first one, what factors made you realize that you have to reduce your comparable operating profit range for the year?

M
Mikko Helander
executive

Matter of the fact is that we are more or less in the middle of downturn and the slow economy, we expect, will continue a while. And that's the main reason why we expect that the 2024 business environment will remain quite challenging. But at the same time, I see that it is necessary to recognize that despite a challenging business environment. We are very confident that we can maintain good profitability also in the middle of those challenges, what the market brings to the business.

A
Anna Schumacher
analyst

Okay, great. And then the second question is on grocery. The market share momentum has been slightly disappointing in grocery. But I noticed in the release, you mentioned that you've increased your campaigns and marketing. Should we expect that this will continue and potentially reduce margins slightly but ultimately increase sales?

M
Mikko Helander
executive

Yes, absolutely. And we are extremely happy how it's performing, our grocery trade division, in the middle of a challenging business environment. Customer flows have increased. We have succeeded to maintain good profitability. Our profitability is still based in Europe, I believe. And even when we look at future, we are very confident that we can maintain unusual high profitability in grocery trade business also in future.

If based on actions, we have completed successfully many measures to satisfy customers, to get customers to visit more K stores. And definitely, we will continue those measures also in future. But Ari, maybe you are more than eager to continue and open more detailed activities, what we have in the process?

A
Ari Akseli
executive

Thank you, Mikko. So the customers are looking at value for money and good deals. And we are offering them that. We have been boosting the campaigns and also targeted marketing via Plussa, Plussa tools. And based on that, we have been able to increase the customer flows, and we have much better market situation currently. And I think that's all. Other challenge has been that there has been increases in the rents based on indexes.

M
Mikko Helander
executive

Plus, of course, we should remember that our foodservice business is also performing very well. And the profitability in B2B, B2C business is very good, over 7% operating profit.

A
Ari Akseli
executive

They are both in high level. And Kespro has been gaining market share heavily.

M
Mikko Helander
executive

Yes.

Operator

The next question comes from Calle Loikkanen from Danske Bank.

C
Calle Loikkanen
analyst

I had a question about the grocery trade and more specifically about the EBIT margin. The margin decreased quite a lot from the comparison period in Q3. Can you elaborate a bit more on the reasons for this quite sizable drop? You mentioned rents have increased. But was there something else that impacted the margins this much?

M
Mikko Helander
executive

The first we should remember that last year, third quarter was unbelievable. Operating margin was over 8% in grocery trade. And now economy is, as everybody knows, challenging, not just in Finland but everywhere in Western world. And as we explained already, we have put a lot of efforts to implement measures to succeed in a tough market situation. And we have succeeded.

Of course, it means also that we have spent more money on campaigns. We have spent more money on marketing. And we will continue those activities. But despite those investments, we have succeeded to maintain profitability still over 7%. Ari, do you need to add something more?

A
Ari Akseli
executive

I think that was the big picture. And we keep on doing that. And it seems to work very well.

M
Mikko Helander
executive

Yes, exactly. And I would like to underline once again that our operating margin is over 7% in B2C as well as in B2B. In Europe, good grocery trade companies, they report operating margin in range between 3% and 4%, good companies.

C
Calle Loikkanen
analyst

Yes, absolutely. I mean, your margins, obviously, much better than the others, but you're a better company as well, I guess. The -- how about then going forward in the coming quarters? I mean, should I read this answer that the kind of delta in margins should be a bit smaller in Q4 and the coming quarters as the comparison for Q3 was very strong?

M
Mikko Helander
executive

Once again, I repeat what we have stated many times earlier, Kesko is a unique company also in grocery trade. We don't see anybody else in European grocery trade business who has such a strong position in all fields of grocery trade in one market as well as we should remember that our market share, 37%, more or less 37% of Finnish food market, is unusually high.

And well, we remember that we are also in digitalization, in utilization of new technology, definitely one of the most advanced company at least in Europe. We are in excellent position to maintain good profitability despite the challenges coming from the economy and market. And due to that reason, our outlook for 2024 was very positive. We are saying that we can maintain good profitability in grocery trade also in next year despite heavy investments, what we are doing.

Operator

The next question comes from Maria Wikstrom.

M
Maria Wikstrom
analyst

This is Maria Wikstrom from SEB. So a few questions on my side. Firstly, I'd like to discuss a bit that what are the measures, I mean, you expect or you can take in order to defend the profitability in the building and technical trade as we clearly noted that there will be a bit more difficult market conditions next -- also next year?

M
Mikko Helander
executive

Yes. First, I stress that also in building and technical trade in Finland, in Scandinavia, all in all, in Northern Europe as the market leader, we have a very strong position on the market. And it helps as we can see also from third quarter numbers. Please remember that in the third quarter, despite a very challenging business environment, we reported in Onninen in Finland more than 8% operating profit. K-Rauta, a builders' merchant player, reported more than 7% operating profit. I see that this is extremely strong message from our building and technical trade division that business is in a good shape.

And despite a very challenging business environment, we are doing amazing, good job. And that will definitely help us also in next year, we expect that 2025 business environment start to normalize, '24 definitely will be still challenging. But it does not mean that we are not in a position to report reasonable numbers and profit in building and technical trade, thanks to our strong position, thanks to well-performing daily operations. But maybe, Jorma, you are eager to open more detailed activities, what you have on pipeline.

J
Jorma Rauhala
executive

Yes, thank you. Yes, as Mikko mentioned, the market has been a little bit challenging this year, so most probably also next year. But also, there can be some differences between countries. And we have to remember that more than 50% of our business comes abroad. But about those measures, what we are doing and what we will do, I would mention three of them.

Of course, customer work, we have to be very active with current and potential customers. And in most markets, we have gained market shares. And we will continue with that path. Also, it's very important to keep our gross margin in a good level. And the third one is cut costs. And we have managed quite nicely last quarter and quarter before that one. And we will continue with that one and the cost-cutting also. Those, we will continue to implement our strategy, but we highlight those three topics.

M
Maria Wikstrom
analyst

And then the other question, coming to the grocery trade profitability, I mean, you say that you expect that to remain on a good level next year. Just a little bit like if we talk about the components, and you will have some new hypermarket openings in the coming years, and if you would help us to understand that how should we look at the impact of the hypermarket expansion, I mean, on the profitability.

And then also that, I mean, now if you need to invest more in new offers, how that will impact on the profitability. I mean, such good profitability, it's kind of relative, I mean, compared to your own history or what we observe in the market. So if we could get a little bit more tools to work around the profitability on the grocery trade for the coming years.

M
Mikko Helander
executive

Yes, Maria, exactly. Our priority is very clear. Priority number one in all businesses is good profitability. And definitely, that is one reason why we are reporting such good numbers quarter-after-quarter as well as we are reporting good numbers despite challenging business environment. When we look at our grocery trade, we follow our strategy as we have done already in many years, all investments. But what we are doing, what we will do are 100% in line with our long-term business plans, meaning that also investments on hypermarkets, investments on renovation of existing stores are not unusual, planned already long time ago.

Permit is always a big challenge also in Finland. And in previous years, we have had little bit less investments because we have had some challenges to get permits. Because our priority number one on that side is to build new stores, especially to the metropolitan areas. But now it looks very positive because we have received those permits, and we are very confident that we will get also new permits. And that will open window to make also massive store openings. But once again, I repeat that all those investments are planned and in line with our long-term strategy.

M
Maria Wikstrom
analyst

And then finally, when we talk about the cycle, I mean, if we -- I think this is more a question on the building and technical trade that what would be the indicators that, I mean, you are following in order to see that where we are going in the cycle? And now I mean, it looks like that it will improve in 2025. But what -- I mean, what would be something for -- I mean, for an analyst and what you would be looking at, I mean, when you determine that now we actually see the bottom and we start growing again?

M
Mikko Helander
executive

Yes. No, of course, we review continuously estimates and comments coming from different estimation bodies, economies. But always, at the end of the day, we take outlook as we have done also today. And my understanding is that we might be a little bit more pessimistic than many independent estimation houses. But I see that we are also very realistic. Once again, I repeat that we are very confident that the economy will turn. We are very confident that construction activities will turn sooner or later, we expect latest 2025. Of course, it is possible that we will see some kind of a turning point already next year. Hopefully, that will happen.

But despite those speculations, once again, I repeat that we are very confident that our building and technical trade can report reasonable profit figures, numbers also next year, when we are in the middle of a weak economy. And of course, our expectation is that when construction activities will increase in Northern Europe in the future, Kesko is in an amazing, good position to report wonderful numbers and at the same time, continue expansion of our building and technical trade operations and further consolidate market in Northern Europe.

Operator

The next question comes from Svante Krokfors from Nordea.

S
Svante Krokfors
analyst

Svante Krokfors from Nordea. A couple of questions, first one on the grocery trade and foodservice. You have clearly taken market share during the past years quite significantly. And could you tell a bit about the competitive landscape there? And do you think you will be able to continue to take market share on that side?

M
Mikko Helander
executive

Yes. We believe that we can, especially because all in all, in grocery trade, we have unusual strong market position in Finland in B2C, in B2B as well as in online business. And thanks to that unusual strong position, thanks to new technology, where we are definitely one of the most advanced grocery trade company, not just in Europe but also globally, that helps us further strengthen our business and position in the Finnish market.

When we look at foodservice, we are only one in Finland who can offer nationwide services. We are only one who has nationwide service networks, very efficient logistics. And we are only one who can satisfy public sector customers, private customers everywhere in Finland. And that helps us, I believe, strongly increase further our market share and business in foodservice as well as our position is unusual in B2C business, 1,200 K stores. Nobody has such a wide store network as we have as well as we are a market leader also in online business, also in B2C. We are in a unique position. And that helps us to succeed also in the future.

S
Svante Krokfors
analyst

And on the online grocery side, do you have any updates on the concept that you introduced in Ruoholahti? How has that developed? And how is the expansion of that looking?

M
Mikko Helander
executive

Amazing development, system works now very well. And when Oda left Finland, we have succeeded to harvest heavily from Helsinki metropolitan area Oda's customers. And that has dramatically increased also utilization rate of Ruoholahti system. And we are today even more confident that multi-fulfillment center technology, combined to existing stores, is a winning concept.

Especially also because it works very well, but it helps us also to make money in online business. We are extremely happy and satisfied and very confident that also in online business, we are on the right track. But Ari, maybe you can open even more detail how it's performing, this Ruoholahti setup?

A
Ari Akseli
executive

Yes. The setup is working very well. We have to be very happy with the results because we have been able to scale it up very fast. And there is still a lot of potential in Ruoholahti, even we have doubled the same during the recent months in that location. And now we have the blueprint of the concept. So whenever we make decisions, we have all the integration for the IT systems, SIP and so on ready. So it's very easy to copy that concept everywhere.

And we have been also very happy that big international players coming from U.K. and United States have visited there. And they have been giving very positive concept at, "How the hell you have invented this and put it in action in such an efficient way?" And it's very cost-efficient model. That's the big thing, that if you compare it with some other technology, it's much cheaper and very easy to put in new locations with a lower cost.

S
Svante Krokfors
analyst

That's very helpful insights. Then perhaps a question to Jorma on the BTT side, what kind of visibility do you have currently? And also, perhaps follow-up on that, how do you see that the renovation market has developed now, given, I guess, the biggest negative impact factor there is the high interest rate and the situation of both private and institutional investors owning real estate?

J
Jorma Rauhala
executive

Well, to be honest, this forecast is so difficult as we know from this year, for example, Forecon, they forecast, all in all, Finnish construction business to decrease 3.5% this year. On summertime, they forecast it 5.5% and now it's 10%, so really difficult to forecast what comes to, for example, next year.

But it's important to remember that when we divide, for example, a Finnish construction business, it's worth of EUR 41 billion. And one part is these new residential buildings. The share of that is 21%. And they forecast and also we forecast that it will decrease also somewhat next year. And then the second part is nonresidential new buildings. And the share of that is 24%. And on that area, they're forecasting that it could even increase next year.

Then comes the renovation, especially what you asked, the share is 37% forecast for next year and also, we believe, kind of flat. It would be kind of flat down. And then the fourth part is 18%, what comes to civil engineering, and a little bit decrease there. But as you can see, that there most probably will be differences between those categories and between our countries. So it's quite difficult to forecast. But all in all, we have summarized our forecast, what we have mentioned.

M
Mikko Helander
executive

Jorma, maybe necessary to remind that in many of those segments, we have seen already a big drop.

J
Jorma Rauhala
executive

Yes, that's true. And what comes -- we know that, for example, consumer business started to decrease already 2 years ago. And then building and home improvement sector, B2B sector, started to decrease 1 year ago. And technical trade started to decrease 6 months ago. So there, the comparison figures start to be also lower.

M
Mikko Helander
executive

And despite heavily dropped volumes, we reported in the third quarter almost EUR 70 million operating profit.

Operator

The next question comes from Miika Ihamaki from DNB Markets.

M
Miika Ihamaki
analyst

It's Miika. Just can I get a little bit more color on your market share organic development in your key countries in building and technical trade?

J
Jorma Rauhala
executive

Maybe on the technical trade, in Finland, we have gained -- both Onninen and K-Rauta has gained market share this year quite clearly, so quite many years now. And then in Norway, Byggmakker, what comes to B2B side, we are exactly on the same level as market. In Sweden, we have lost a little bit, not so much, a little bit in building and home improvement. And in Baltics and Poland, we have gained market share. So mostly of our countries, we have gained market share. And definitely, the biggest market in Finland, we have quite a lot of market share.

M
Mikko Helander
executive

With K-Rauta's market share, more or less 46%.

J
Jorma Rauhala
executive

Yes, even more.

M
Mikko Helander
executive

Even more. And Onninen in Finland, also clearly over 40%.

J
Jorma Rauhala
executive

Yes.

H
Hanna Jaakkola
executive

Thank you for the lively questions from the conference call line. I have a couple from the chat function.

Arttu Heikura from Inderes is asking, in Q2 report, market outlook for foodservice business implied growth in 2023. But now in Q3 report, the expectation of growth was downgraded to stable development in 2024. What are the drivers in the change of the Kespro's outlook?

M
Mikko Helander
executive

Kespro's outlook, all in all, I repeat what we stated already that the outlook for 2024, when we discuss about the market outlook, is pessimistic. Because economy is weak, not just in Finland but everywhere in Western Europe. And of course, that weak economy has, of course, also impact on foodservice business but not such a massive impact. Because a big share of our foodservice business is related to public sector, related to the restaurants, which serve lunches and not just the fine dining places. I don't see -- I don't feel that our outlook is such a negative in foodservice. But Jukka, do we have stated...

J
Jukka Erlund
executive

No, we have not really changed that outlook. And it's the first time we talk about '24 actually this time. And the market overall is expected to remain stable. But that doesn't mean that it couldn't grow on the top line, inflation is still there and so on. And we have...

M
Mikko Helander
executive

But when market is stable in the middle of those challenges, what everybody has in economy, I would like to say that our outlook is very positive. Ari?

A
Ari Akseli
executive

Yes. And I think the biggest channel as is generally is the buying power of the consumers. But at the same time, megatrends are supporting eating outside the homes. Especially younger people, they seem to eat all the time. And the share of the lunches in Kespro sales is about 70%. And also, we are offering new services for the customers of the Kespro. And that is boosting sales in the coming years.

M
Mikko Helander
executive

And of course, it helps that steadily, we are gaining market share.

A
Ari Akseli
executive

Yes, that's the most important factor.

H
Hanna Jaakkola
executive

Very good. And then he continues, could you give me some light on the new car orders' order backlog? Is it enough to boost Q4 new car sales?

M
Mikko Helander
executive

As we have reported today, our new car order backlog is very close to normal level. It was unusual big at this backlog a long time. And now Sami, we are very close to normal situation. But as we have reported, backlog will decrease if order inflows will remain on unusual low level. But Sami, would you like to open more detail?

S
Sami Kiiski
executive

Yes, thank you. Yes, Q4 order book still good, normal level, coming down, as Mikko mentioned. But yes, of course, depending on the deliveries from the factories and also the delivery dates of our customers, we believe that we can generate good sales during quarter 4 also.

M
Mikko Helander
executive

Exactly.

H
Hanna Jaakkola
executive

Very good. There are some questions about the grocery trade margin in Q3, but we have discussed it quite thoroughly, so I'll jump that over. If any further questions, please come back to me after the call.

But one more here. Kesko expects B2B building and technical trade market to turn in 2025. Could you elaborate your expectations of how each building and technical trade division could perform in 2024? Builders' merchant will face quite low comparison figures in 2024.

M
Mikko Helander
executive

When economy and construction activities were more or less closer to normal, we reported operating profit clearly over 7% in building and technical trade division, meaning that we were also at that time among the best players in Europe. And Jorma and his people, they are steadily improving and developing operating activities, improving cost efficiency utilizing more and more new technologies as well as harvesting synergies related to acquired companies, meaning that we are in excellent position to report amazing numbers and figures in the future, when demand will get sooner or later back to normal. Or Jorma, would you like to add something?

J
Jorma Rauhala
executive

I think I already opened that question also now. We see the different customer segments next year.

M
Mikko Helander
executive

Yes, exactly.

H
Hanna Jaakkola
executive

Very good. In that case, I would like to thank you all for the very lively discussion and good questions, and have a beautiful autumn day. Any last comments, Mikko?

M
Mikko Helander
executive

No, you state it very well. Thank you for everybody. Have a nice day.

H
Hanna Jaakkola
executive

Have a nice day.