Meko AB

STO:MEKO

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Interim Report January to March 2018. My name is Anna, and I will be your coordinator for today's conference. [Operator Instructions] I will now hand you over to CEO, Pehr Oscarson, to begin today's conference. Thank you.

[Pehr Oscarson, President & CEO]

Thank you, and welcome, everybody, to this phone conference about the first quarter of the Mekonomen Group. Just very shortly, we had a stable sales in the core business but poor EBIT and which we will explain a little bit about. I'll go through the presentation and try to name the pages. And we'll start at Page 2 with some numbers of the quarters, and as you can see, we have slightly reduced sales or will be back on that because it's mainly due to some specific FX. But then, of course, a very poor result almost -- or more than half of the quarter last year. If we switch to Page 3, we have -- we'll try to explain how this differs. So we start with the SEK 126 million, which we had in Q1 2017. We have estimated impact from fewer workdays for about SEK 20 million in EBIT effect. We also had the reduced sales of the DAB products. For those who're not informed about that, very shortly, DAB is the Norwegian digital radio system, which we started to change during last year and we had a very good sales of this product. It's adapters and it's car radios, but which has slowed down significantly during the end of last year and especially during the first quarter. The effect of the lower sales is estimated to be about SEK 10 million. Then because of this rapid slowdown, we also ended up with too high inventories. So we have done a write-down of the value of the products, which amounts to SEK 20 million. Then also have exchange losses, which is really since the weakness of the Swedish crone versus euro, which costs us at revaluation for the balance sheet items of SEK 9 million. And then we have some other effects of SEK 7 million, which we will try to explain a little bit later. But all that sums up to the SEK 60 million which we are reporting today.Then we will move on to Page 5 and the new segments reporting. I hand over to Åsa.

[Åsa Källenius, Chief Financial Officer]

Yes. As announced in Q4, we will from [Q1] and ongoing start to report in new segments. It's not a very big difference, but we changed to be compliant as our regulation and the segments will contain MECA, that is MECA Sweden and MECA Norway, as before. We will have one segment for Mekonomen, with Mekonomen Sweden and Mekonomen Norway, and Sørensen og Balchen will be unchanged segment. This will mean that some of our smaller operations like Tunga Fordon, ProMeister Solutions, Preqas, that used to belong to MECA Scandinavia now is reported under other segments or Other. And under Other, we will also have like Mekonomen Finland, Marinshopen, et cetera.So that's the new structure for our reporting.

[Pehr Oscarson, President & CEO]

Yes, thank you. And then we'll move on to Page 6 and look at the first segment, which is MECA. The first quarter, we had underlying, when we compare without effects from working days and currency, a small growth, about 4%. We have done a good sales to MECA Car Service workshops that are affiliated, while on the other hand, we lose some sales to the other customer groups. And we'll be back on that when we talk about customer groups for the group.MECA has also suffered from the lower sales of DAB products because there, of course, in the Norwegian operation, that affected the sales negative with SEK 8 million. And due to the currency and the lower DAB, we also see a lower EBIT in MECA.Then we move on to Page #7 in Mekonomen first quarter. In Sweden, we have a stable sales, not a very significant change from last year. We, however, than in Mekonomen also the Norwegian operation is, of course, suffered by the lower DAB sales where it's affected the sales with SEK 9 million. And also here, we have a write-down of the inventory of SEK 13 million, which is explained into the EBIT in the quarter. I would say that this is the second -- maybe the third quarter where we have stable development in Mekonomen Sweden, which is very good for us because that's the largest part of the business and who had a very tough 2016 and beginning of '17. So I'm very happy that we have a stable operation back in Sweden.Then moving on to Page 8, it's Sørensen og Balchen in Norway, and that is the company who has the absolutely most effect of the DAB products because there was both selling to consumers through the stores but they also had a large wholesaling business, selling DAB products to other companies in the market, car importers, for example. So they have a very large effect. The sales is down SEK 32 million, and then they have also have to write down the inventory of approximately SEK 7 million.Except for the DAB sales in Sørensen og Balchen, the sales is quite stable. They are suffering from a slower retail market in general in Norway, but that doesn't affect too much. So I would say that it's mainly the DAB sales who affects Sørensen og Balchen.

[Åsa Källenius, Chief Financial Officer]

Moving on to Page #9, it's an EBIT bridge. It's the same bridge as Pehr just spoke about but broke a little more on the different segments. So if we first look at Mekonomen containing both Mekonomen Sweden and Norway, we can see we have a division on gross profit of SEK 22 million. Out of SEK 22 million, SEK 13 million comes from the impairment of the DAB products we did this month, and the rest is a combination of lost sales due to DAB, less number of working days, et cetera. So it's a combination of different things. SEK 7 million is exchange losses in the revaluation of the balance sheet items. And altogether, it's SEK 9 million. So it's SEK 7 million from Mekonomen and SEK 2 million from MECA in the quarter. We see cost savings from the cost-savings program we launched and implemented last year of SEK 6 million in the Mekonomen segment.Moving on to MECA segment. We have a slight positive effect on gross profit, and that comes from the larger workshops we acquired late in 2017, adding sales and gross profit to MECA. But if we exclude those workshops, we have the same effects in MECA as in the Other segment due to the lost working days, DAB, et cetera. We also have higher cost, and those are mainly related also to higher sales through the workshops.Moving on to Sørensen og Balchen. We had the most impact from DAB. We lost sale and we also did write-downs in the stock of DAB products amounting to SEK 7 million. Gross profit is down SEK 16 million. And the same as in Mekonomen, it's a combination of impairment of DAB, lost sales in DAB working days, et cetera.Other, we have also this month a negative impact on EBIT from Other. This is a combination of smaller companies within our group underperforming in the quarter and also some of costs comes from different IT projects we had during Q1. So it's a combination of many things in that item. So over to Pehr on the markets.

[Pehr Oscarson, President & CEO]

Yes, we'll talk about the market trends. So -- and I'm on Page 11, where we can see that we have still growing fleet of cars in our markets. The total mileage car driven is also stable and slightly increasing. And we have had a couple of years now, it will be more than 3 years with very good sales of newer cars. And when those cars hit the sweet spot, which is, in our case, aged over 7 to 10 years old, then we believe that there's a good potential for an increasing overall market.Of course, provided that scrapping and export doesn't increase from the current level. We can -- I can also add some learnings which we have when we look at what kind of cost because we have an increased sales especially of electrical and hybrids. We know that the electrical cars have a little bit lower maintenance costs because of fewer moving parts. But we also have learned that the hybrids has the same or maybe sometimes even higher maintenance or aftermarket value. So we don't see any big shift in the trends for the future. And still, we have a very old and a lot of older cars out on the street, which should be taken care of for many years onward.Then on Page 12, as I mentioned before, it's a little bit about our customer groups. We have an increased sales to affiliated workshops. Affiliated workshops is those who carry out our brand names Mekonomen, MECA and so on. This is very good that we have good sales development there, and it's very strategically important because they are the workshop which actually also gain market shares in the local markets. We see a clear trend that the very small workshops, they lose market shares or they stop to exist. And the win of the market is affiliated workshops and maybe they're authorized, those 2 groups. So it's very important part for us to have a high focus on this one.The challenge and the, say, the problems with increasing this more is mostly depending on that we have 2 -- that we need more mechanics. We could easily hire about 500 mechanics on Monday if there was a possibility. So that was stopping that increase.On the consumers and other B2B, this is areas which is affected by lower DAB sales. Consumers is where we, from our stores, have sold these products and also Sørensen og Balchen had very good part of the DAB sales, both as a wholesaler to other business-to-business customers, car importers and car dealers and so on. Otherwise, under the DAB sales, it's quite stable in those 2 groups. We're losing a little bit more in other B2B consumers, quite stable. Then we have the partner stores, which is less than 6% of our sales where we have a decline, mostly driven by that we have bought some of these stores so they are now spread out into the other customer groups. So that's the main reason for that decline.Then I move over to Page 13 and we can see how we developed the stores and affiliated workshops. And as you can see, we have somewhat fewer stores now compared to before and that's mainly because that we have some which we have closed down but we have also where we have merged stores, especially in Norway. We had some of those projects where we have closed down one stores and moved the people inventory and the sales to a neighbor store. The number of stores will, in the future, be quite stable. I think that we might see a small decline in the future, but we still have some white spots to cover. But there are also possibilities where we can merge stores in the future.When we look at the number of workshops, that's where we have a small [increase] and this is, of course, very important because this is affiliated. What's even more important is the number of mechanics working in this. And we have -- even if it looks quite stable, we have a quite high turnover of workshops in this. So there is -- and the trend is that very, very small workshops, they either stops to be a member of this chain. Sometimes, we ask them to leave. Sometimes, they leave by themselves. Sometimes, they stop their business. But we always try to cover up with larger workshops, has more mechanics and better capacity.And over on to Page 14, just the status of ProMeister, our private label, which have a small increase from last quarter. The most important, when we talk about ProMeister, is the quality and the testing of the products. We have some new categories which have been launched during the quarter. So we'll see the higher sales of this in the future. We also have some categories where we added more references during this quarter. But the absolutely most important is this is a premium private-label brand. Not the price cycle, the quality is extremely important [in that matter]. Moving on to Page 15 about our central warehouse. It's proceeding according to plan. And during the summer here, we will start to test the new -- the warehouse. We have -- the software is actually installed already before, but now -- and the hardware is under installation, and now it's testing how these work together during the summer and then we'll hopefully be ready to start using this. We have also changed all the lighting in the central warehouse, meaning that we have a lower energy consumption, of course, some -- and better work environment.The other big strategic project is the parts catalog, and that has been now tested in Mekonomen Norway. And we have started implementation in the -- in Mekonomen Norway. That means that we also started up tests for Mekonomen Sweden. And this is a different market. This probably needs some tweaks to be done before we can be ready to launch it in Sweden as well. The benefit from this is, of course, for the workshop to have a wider assortment and more accurate search precision, which also leads to lower return rates and other benefits out of that.Then I will move to Page 17. We have 2 big things happening in the market. GDPR is, of course, affecting all business and in a company like Mekonomen Group, with a lot of different sub -- different brands and consumer clubs and so on. It's quite complicated. So we started with the project already 1 year ago and we have done a lot of work to make sure that we have the right compliance towards GDPR now when the radio station starts to be valid.There's also a project for the industry in Sweden, something called Godkänd Bilverkstad, which hopefully all the workshop will in the end can be certified for. We are in the group have made all the preparations and are ready to start certifying our workshop in that area as well.Then, little bit about the focus for this year. We have the 2 big strategic projects, which the catalog and the central warehouse. We will continue to work with the workshop quality, both the quality towards the consumer from the concept but also to help the workshops to increase their quality. We had the Godkänd Bilverkstad I talked about. We will focus a lot on recruitment to get the right number on mechanics and education in the future. And then, of course, try to increase the organic growth through our core business and that should be done by all the time improving the customer offerings, both the offer from us to the workshop but also, of course, the workshop offers to the consumers. I believe a lot about retaining and develop the entrepreneurship in the group, and we will continue to focus on new business and, of course, always look for interesting acquisitions.I would like to add here also as one focus can be -- not the focus that we have, we have had a small business in Mekonomen Group called Marinshopen who was offering parts and accessories for boats. And that has not been core business for many years and now we've finally find the solution. And we have sold that company to someone who will take much better care of that in the future. So that's also a sign of the focus on our core business.Well, that's what we had to speak about now. So I suppose that we will open up for questions.

[Operator]

[Operator Instructions] And we do have questions coming through and that's from Stellan Hellström from Nordea.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

Stellan Hellström here. I'll start just on the Other division here or the Other segments. The results were significantly lower than last year, I think SEK 37 million loss compared to SEK 24 million. And I guess you mentioned IT costs or is there anything else that is sort of a temporary nature or is this a level that we should expect going forward?

[Åsa Källenius, Chief Financial Officer]

Well, the great deviation we have is in the smaller company group companies, especially in one, that's in Preqas. And last year, we had a...

[Pehr Oscarson, President & CEO]

Trade fair.

[Åsa Källenius, Chief Financial Officer]

A trade fair making the turnover increase in the first quarters. And this year, the sales is lower. So we do expect the sales and margin to be lower this year than last year, but not this great deviation as we had in Q1. But there are also some smaller companies also underperforming, but it's mainly Preqas.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

All right. And then I also asking on the lower sales from the B2B segment. I guess that has been ongoing for some time now, but it seems that the numbers that you're presenting might be bigger than what you see in the market. I understand that's more the workshops have a tough time. But is there something else happening here or you think you're losing market share to someone? Are there other chains that are recruiting more aggressively?

[Pehr Oscarson, President & CEO]

I would say that there is some probably combination. Why it's much higher this quarter is mainly because of in that group, other B2B customers, is also car importers and car dealers who was very big customers to Sørensen og Balchen for DAB products last year. So that's a big deviation. But you're also right that we lose sales to other workshops and other B2B customers. If we lose market shares and don't [ gain ] somewhat, but that's the smaller explanation. The bigger explanation is that the biggest customers lose market shares in their local market. The consumer doesn't go to this kind of workshops in the same amount as before. So that's the bigger reason that that's there somewhat. Because when our competitors is recruiting from us, they are often pretty much the same. So it's -- and in that case, we should have seen it more on the affiliated.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

All right. I don't know, maybe we have talked about this before, but you have lost some franchise stores in the Sørensen og Balchen concept. Any particular reason for this and anything you see changing going forward?

[Pehr Oscarson, President & CEO]

No, not any particular reason. I think it's some of the smaller which actually closed down, and we have still good interest from stores who wants to join the lifestyle concept. So I don't see any dramatic trend in that.

[Stellan Hellström, Senior Analyst of Retail and Consumer Goods]

All right. And the slow market that you saw this year, just wanted to see your reflections on that. Is there an effect of a late tire changing season or something else?

[Pehr Oscarson, President & CEO]

Yes, it would be easy to blame the weather, but I'm not sure if it's possible when you look at the quarter because we did have a good start of the year because the winter was in our favor in January, definitely. So we had good sales in batteries and those typical winter products. But then you're completely right that March as a month was very slow due to that it was [cold] too long time. So we didn't get the spring sales with the tires and so on. But that usually comes later then, so it's not lost sales.

[Operator]

[Operator Instructions] There is no questions coming through. So I will hand the call back to you. Thank you.

[Pehr Oscarson, President & CEO]

All right. Thank you all for listening and hope you'll have a good rest of the day. We are going to our AGM this afternoon, so we have full schedule. Thank you, and bye-bye.

[Operator]

Thank you for joining today's conference. You may now replace your handsets to end the call. Thank you.