Meko AB

STO:MEKO

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, and welcome to the Mekonomen Quarter 1 Presentation 2019. 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, your host for this call. Thank you.

[Pehr Oscarson, President & CEO]

Thank you. Welcome everybody to this presentation of the first quarter of 2019. We have record sales and improved EBIT, and that's, of course, both due to the acquisitions which was made last year but also good improvement in the core business, so to say. We have been the last quarter and will be in the future as well focused very much on profitable growth. We have an ongoing cost saving program, which will give a saving of SEK 65 million annually as from the fourth quarter this year. SEK 30 million of that will come over in the third quarter. And of course, we will act on profitable businesses, streamlining our organization and very high prioritization of our projects.We felt that during the first quarter the market was stabilized. We did not have that cold winter as last year, of course, but still stable markets. But we also have positive effect that the Easter holiday did not take place in the first quarter and will be in the second quarter this year. And then we also have the 2 big projects, central warehouse and the catalog, which was launched according to plan. And also the integration of the acquired companies, FTZ and Inter-Team, are doing well according to plan.And with that, I would hand over to Åsa Källenius, CFO, who will start on Page 3.

[Åsa Källenius, Chief Financial Officer]

Yes. Hello, everybody. And on Page 3, we have some changes in our reporting. From Q1, we have new business structure. We have some new key figures and also, of course, the IFRS 16 implementation that affects [indiscernible] and balance sheet. First, reporting segment. We will from the first quarter this year, Q1, report in 4 business areas. And the reason is that we in Q1 in Mekonomen Group implemented new organization and governance structure. So to better reflect that, we are now also reporting in those 4 business areas. And those will be FTZ, Inter-Team, MECA/Mekonomen business area and Sørensen og Balchen.We also have some new key figures in our reporting to be more transparent and better reflect our figures. The first one is organic growth that will be presented both by business unit and our group level. And with organic growth, we mean group net sales -- net sales adjusted for number of workdays, acquisitions, divestments and currency effects. I will come back with that a little bit later. We are also adding a key figure, adjusted EBIT and also adjusted EBIT margin. And by adjusted EBIT, we mean EBIT adjusted for any items affecting comparability and also amortization for material acquired intangible assets, in this case, FTZ, Inter-Team, MECA and Sørensen og Balchen, to better reflect how Mekonomen really is performing. I will come back to that as well.Looking at IFRS 16 primarily affecting leasing contracts pertaining to premises and vehicles. Net debt is not affected at Mekonomen by this. Our definition of net debt has always been without leasing liabilities.Looking at the P&L first, the effect IFRS 16 has on the P&L. EBITDA is very much affected. We have a plus effect in EBITDA of SEK 130 million. Excluding, we have SEK 245 million; and including, SEK 375 million. Coming down to EBIT and adjusted EBIT, the effect is plus SEK 4 million. So adjusted EBIT is SEK 214 million with IFRS 16 and SEK 210 million without. Then we have financial items. Financial net affected by SEK 11 million negative, making profit after financial items minus SEK 7 million. Cash flow is not affected at all, just movements between different rows. Net debt is not affected at all. Equity to assets is affected. Excluding, we have 36%; and including, 31%.So to the next page, Page 4, our first quarter in the group. As Pehr said, we had a very good sales in the quarter amounting to SEK 2.909 billion; so the change, growth of 103%. 103% of that acquisition and divestment is 98.5%; organic growth, 2%; currency, 1.5%; on number of workdays, 0.8%. It was the same number of workdays in the group except for Norway that had one more and due to Easter last year. Adjusted EBIT, SEK 214 million, to be compared with last year SEK 99 million; and EBIT, SEK 170 million compared to SEK 60 million last year.I will now go to the next page, showing our EBIT development by business area. We had a bad quarter last year. As you remember, we had the write-down of DAB stock, making EBIT in Q1 last year amounting to SEK 60 million. This year, we added EBIT from FTZ and Inter-Team amounting to SEK 92 million; MECA/Mekonomen improved their EBIT with SEK 30 million; and also Sørensen og Balchen, with SEK 10 million. And we added some amortization from the acquired FTZ and Inter-Team, summing up to an EBIT of SEK 170 million this quarter.Next page, a simple explanation regarding adjusted EBIT. We have EBIT of SEK 170 million. We have in this quarter SEK 5 million in integration costs, adjusting our organization to the new setup of the acquisitions we did last year, and that amounts to SEK 5 million. And we also have amortization of SEK 39 million, summing up to an adjusted EBIT of SEK 214 million. Last year, we had SEK 60 million in EBIT. We had SEK 20 million in items affecting comparability, and we had SEK 90 million in amortization, summing up to SEK 99 million.So to the sales and results in our business areas. First, FTZ, our Spanish operation. FTZ now includes 7 months in the group since September last year. Net sales increased with approximately 5%, positively driven by favorable sales growth to affiliated workshops and larger customers. EBIT is in line with last year. And as you know, we have now exact figures from Q1 in FTZ last year since it's before we bought the company and they had different financial quarters than Mekonomen had. But a good month for FTZ. EBIT margin of 11%, as we expect FTZ to have.

[Pehr Oscarson, President & CEO]

Yes. And then we move to Page #9. And Inter-Team, that's our Polish business, also included 6 months -- 7 months in this -- in the group. Very strong sales development; it was up 19%. That's both export sales to neighboring countries, but it's also good sales developed in the Polish markets. However, as we had said, Poland is a very high-competition market and extremely price pressured. And they are doing an EBIT of minus SEK 1 million, which is, of course, not satisfying, but I would say that this is also in line with our expectations for this business. So it's not a surprise in that way.On the next page a bit more about the Polish market. We have a market which annually has a growth of around 4% to 5%. So I would say that this first quarter we are -- even on the domestic Polish market, we are better than the yearly market growth. If that is thanks to market shares or if the market is -- this couple of months has been stronger, that I'm not in a position to say. We don't have that kind of statistics. But we -- the EBIT margin also is an effect of all the, of course, of the investments done to be able to grow more in the future. There is a very interesting long-term potential in this market because we believe in consolidation to be happening in the next coming years. There's also a lot of other things which we can do in order to improve the business efficiency. And of course, also we have some of the purchasing synergies which we announced earlier will help the Polish market as well when that starts to be coming into the products and into the stores and out to market.Private label is very important in Poland and -- because that's -- it's one way to differentiate us from the competitors and being able to get some better market. We have 2 private labels, Kraft and Sakura, who has -- who Inter-Team has been working with for some years now, which is very successful in rural market. Also just recently launched a new private label when it comes to products within workshop equipment. And even though there is a huge market of old cars in Poland and even though there's very few electrical/hybrids car, it's very interesting to see that our company Inter-Team are already doing training for mechanics into electric and hybrid. So that means that we are very early in the Polish market when it comes to innovation around this, the upcoming car fleet. And as I have said before, we have a lots of learnings from Norway, which is far ahead in this development, which we can use in the other markets.

[Åsa Källenius, Chief Financial Officer]

And business area MECA/Mekonomen had a good sales quarter, a favorable sales trend. And that is, of course, compared with the weak first quarter 2018. We had a record good sales growth to our affiliated workshops. As Pehr said in the beginning, our central warehouse project is proceeding as planned. EBIT is positively affected by the higher sales. We have an increase in gross margin and improved profitability in smaller operations that could, for instance, be precast, as an example.Net sales is up 9%. Adjusted EBIT is up from SEK 86 million to SEK 106 million in the quarter. And EBIT is SEK 103 million compared to SEK 73 million last year, with an EBIT margin of 7%.

[Pehr Oscarson, President & CEO]

Yes. And then we move on to Sørensen og Balchen. They actually had some gross sales of DAB products last year, which we, of course, don't have this year, so they are negatively impacted by lower sales in DAB products but have made also one acquisition which contributes positives. And also thanks to lower DAB sales and another product mix, the gross margin has improved with this company which as always had very efficient cost control, leading to a net sales which is on -- pretty much on the same level as last year; an EBIT of SEK 24 million, which is much better, of course; and EBIT margin of 13% in this quarter.Then we'll move on to the market and the footprint. The first slide is Page 14, where we tried to explain a little bit about the markets -- main market and trends. I will not go through all the figures. But the trend is, of course, that we have changing customer expectation. That goes to digitalization, it's online booking and other future things; and then also a trend with another car fleet running on the roads. The next generation of cars, of course, electric cars and also higher share of software and more electronics and more onboard diagnosis and so on, which makes the cars continue to be more and more advanced. When it come to competitiveness, we see, of course, connected cars as one thing which is important to -- for older actors in the market to be able to use that data. We believe that there's still room for new actors to move into this area in different levels but also continuously consolidation and integration. We can say that Sweden, Norway and Denmark is quite high consolidated, but there's still room for more consolidation. Then as I mentioned about Poland, there's almost everything still yet to be happening.I move on to the next page, which describes our footprint at the moment, where you can see that 47% of the business comes from MECA/Mekonomen. The second largest is FTZ with 29%. And then we have Inter-Team and Sørensen og Balchen. We have no big changes in number of stores or number of workshops. Focus when it comes to number of stores or branches is that we should have a good footprint to be able to distribute to the workshops locally at least a couple of times a day. That's the main purpose of that network. When it comes to affiliate workshops, it's most important to have the -- to recruit new ones which are bigger because we sometimes see that the smaller workshops has more difficulties in the challenges for the future. But of course, we have concept for and very good offers for small ones as well. But when it comes to this footprint, it's most important that we have the right number of mechanics to be able to serve our consumers.We have some strategic market positions. And one which I think that we don't talk enough about is the advanced training academies which we have in all the 4 main markets. We had it by tradition and history in Sweden and Norway, but that's also a very strong part of the DNA for the acquired companies in Poland and in Denmark. So this is something where we are very well developed and are very good prepared for the future. And of course, the results of potential synergies when it comes to best practice and so on, there's already a lot of projects which is going on cross border between all these -- in all the markets. As I said before, Norway will -- since they are so -- had such a high share of electric vehicle and hybrids, they will be a good teaching markets for the other markets. And we are also proud that in Norway we are launching training for second-degree autonomous cars. Autonomous is degreed from 1 to 5, and the level 2 is actually the most advanced level which we have in regular traffic today where they are doing training for that. And being still in Norway, we can talk about the -- that MECA Norway has been an exclusive distributor of Sharebox. Sharebox is a new system for leaving and picking up cars through a box where you pick up the key. But this is also connected to the mobile payment systems which we have, and it's connected to the ERP systems which workshop uses. So this is a very convenient way for the consumer to leave the car but especially to pick up the car whenever it's suitable during the day or night.We just recently have announced and out in the press release about B2B car fleets. We have had very positive trends, signing agreements with a lot of company and fleet -- fleet companies. We have Avis, LeasePlan, PostNord, Halmstad Kommun. And we also have quite recently made a nationwide agreement with Uber in Sweden. And that is, of course, very good for our workshop because of the sales and services. But we believe that with our very, very wide and big network, we are actually a very good partner for these companies because we are located in very many places, and that gives very high flexibility. And as always, the workshop concepts offers availability quality (sic) [ available quality ] with maintained new car warranty, resale value and as well as all quality guarantee on work and parts.In Denmark, our Danish company FTZ, they have launched a new workshop concept, which is the first sustainability workshop concept. AutoMester is an already existing concept, but now they are launching AutoMester E+ which -- to selected workshop within AutoMester. They offer extended focus on environment, sustainability, recycling. They are also specialized on service repairs on electric/hybrid vehicles. And all -- every of this workshop has charging stations and so on. So that's also a concept which is well positioned in the -- for the future.And then lastly, focus for 2019 rest of the year. We'll continue with the focus on profitability, improved sales, efficiency and cost control. We have the cost saving program which we announced in February, which we are working on, and that will give effects in the third and fourth quarter. And we are still acting on the unprofitable business to -- either to get them profitable or find some other solution for that. We will continue to focus on customer value, and that's how -- where we develop our concepts to affiliated workshops and other B2B customers but always with a consistent consumer insight, so we know what kind of markets they will operate now and in the future. And we will also focus on growth and to develop our core and venture businesses, mainly organic growth but also to leverage on the initiated strategic investment which we are doing.That was the last slide of the presentation, and then we will hand over for questions.

[Operator]

[Operator Instructions] And the first question comes from Nicklas Fhärm from SEB Equities.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

My first question would be on the price adjustments that you made. It will just be very interesting to understand how much of the organic growth is actually being generated from changes of price mix. And follow-up question, would actually be have you also changed pricing in Denmark? Obviously, the Danish krone is more than to the euro, but still have you actually changed pricing in Denmark on…

[Pehr Oscarson, President & CEO]

Well, I can start with Denmark. They are doing price adjustments more on a regular basis, and it's mostly to compensate for higher costs for personnel and such things. But there hasn't been any extra price increase in Denmark. And -- actually I should say the Danish krone is not affected by the currency problem which we have in Sweden. We don't have the numbers from how much of the organic growth comes from the price adjustment. That was done in the beginning of the year, and we -- it was done to compensate for higher purchasing prices from the suppliers where we buy in euro. So I don't have that number.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

But as a fair assumption, would it be correct to say that you tried at least to increase prices by just as much as you lost on the sourcing costs? Or have you actually tried to add some more into your own margins?

[Pehr Oscarson, President & CEO]

It's not to increase the margins. Of course, we would like it to be that way, but we have quite strong competition as well. So we can compensate for purchasing prices but not increase margins.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

And then my second question would be just on the final page of the presentation you highlight, obviously, a few company-specific factors that will drive earnings going forward. And I just note the -- sort of your comments on operating leverage throughout the summer now as you've increased the number of directly owned stores. Would you care to elaborate a little bit of that? Have we -- shall we change sort of our operating leverage assumptions sort of as of now going forward? Or do we still look at Q2 and Q3 last year? Or have you actually increased your own number of workshops that much that we really need to take a second look at how we're forecasting the summer period this year onwards, please?

[Pehr Oscarson, President & CEO]

No, we have not increased the number of company-owned workshops since. I would say that the last acquisitions was in the end of last year. Now it's more, I would say, organically that we sell one by one, so it's not that you should be taking -- it will be looking a bit much like last year in that perspective.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay, that's very clear. And final question, if I may. We discussed I think towards the end of last year that awaiting the strategy for Inter-Team you would like to come back to us discussing sort of growth versus profitability in Inter-Team specifically. Have you sort of come to a sort of plan now that you would like to communicate on where focus will be? Will it be to sort of grow faster than the market and take market share? Or will you prioritize profitability in Inter-Team in 2019, please?

[Pehr Oscarson, President & CEO]

It's too early to ask that question, but it's work which is ongoing. But I can't -- I don't think that we will -- as we said already when we made the acquisition, I don't think that we will do rapid growth which includes opening a lot of new branches in greenfield, which was part of that strategy before. But that is [ nothing ] -- but we can increase sales in a lot of other ways. But it will be -- that strategic focus I would like to come back when we have finished the work which we need to do.

[Operator]

[Operator Instructions] We do have a question from Mr. Stellan Hellström from Nordea.

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

Yes. I'd like to ask about the gross margin improvement in Mekonomen and MECA, what this is was due to, and also if you can comment maybe on how we should think about it going forward given also that we've seen some strengthening of the -- or the weakening of the Swedish krona.

[Pehr Oscarson, President & CEO]

I think the main reason for the improvement is product mix, which is better. And of course, we have in that business area also last year we had down sales with a lower margin, which we don't have now. So that's one factor. But it's, I would say, product mix in general. We follow the currency development, of course, every day and every week. And as it is right now, it gives -- needs us to have some discussions about further price increases, but we haven't taken any decision about that at the moment. But this level [ 10 65, 10 70 ], that's a little bit too high just not to act on it.

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

And maybe a follow-up just on the improved mix. Is that something that is sustainable? Or is it -- I mean I understand that. But besides from that, is there -- is it seasonal for Q1 and winter-related product? Or is it something that potentially could continue into coming quarters and improve mix?

[Pehr Oscarson, President & CEO]

I don't want to speculate on that but -- because -- maybe just to give you a hint to what it can be except for DAB. For example, when it's colder winter, we sell more batteries. And batteries have a little bit lower margin than if we sell other products. And so yes, if it will be cold, hot weather, it can -- changes also. So I would be -- I don't think I would like to speculate how this was developed in the future but with -- yes, it's a lot of different components.

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

All right. Also, a question on -- another question on Mekonomen/MECA. The precast business has been very -- so cyclical in the past with 13 quarters with the exhibitions perhaps selling a lot. And then it's quite calm for a long period. Is this quarter in any way unusual in that respect?

[Pehr Oscarson, President & CEO]

No, it's not that unusual. But I would say compared to last year they have made a huge improvement when it comes to both sales and EBIT, which has nothing to do with fluctuations depending on the exhibitions and so on. But it has been -- during the last year, it was more or less of a turnaround case where we have changed a lot of things both in the assortments, in the distribution, in the sales organization and so on. And it seems to be on the right way at the moment, so that's good.

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

Right. Very good. I saw that you also exclude the lease obligations from the net debt, and is this also how the banks view your indebtedness? And should we compare then that to the sort of new way of accounting for EBITDA? Or did you make an adjusted EBITDA as well?

[Åsa Källenius, Chief Financial Officer]

Yes. The net debt is calculated towards the bank as we do without the leasing and IFRS 16. But it's also excluded in the EBITDA, the way put it only the bank.

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

All right. So that means that your indebtedness, the way bank -- the banks view this, it hasn't changed really. And...

[Åsa Källenius, Chief Financial Officer]

It hasn't.

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

Yes. Good. Is there -- would you have any -- could you explain where or how far we are from your covenants under that?

[Åsa Källenius, Chief Financial Officer]

We -- as you've perhaps seen in the report, we are not writing the exact figures, but we are well under the max covenants.

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

Yes. And the max, is that a number that is changing over time? Or is it something that you have agreed of a fixed number?

[Åsa Källenius, Chief Financial Officer]

It will change over time, but we're well under.

[Operator]

And the next question comes from Mika Karppinen from Handelsbanken.

[Mika Karppinen, Research Analyst]

This is Mika from Handelsbanken. A small housekeeping question concerning this adjusted EBIT and bridge reporting on Slide 6. So is this amortization SEK 39 million, is that the sort of normal amortization of intangible assets which you have been booking also earlier in the previous years but now you are treating them as, how to say, nonrecurring item and extraordinary from the adjusted EBIT? So is this figure going to be the same also in the coming quarters?

[Åsa Källenius, Chief Financial Officer]

Yes. But you mean the certain lines from the amortization?

[Mika Karppinen, Research Analyst]

Yes.

[Åsa Källenius, Chief Financial Officer]

Yes, it will be the same. And an additional SEK 20 million from the acquisition of FTZ and Inter-Team. And we had before SEK 90 million a quarter from Sørensen og Balchen and MECA. So it will stay the same as long as we are having amortizations to do. MECA, Sørensen og Balchen will end in 4 or 5 years, I think. But otherwise, it is central.

[Operator]

[Operator Instructions] The next question comes from Mats Liss from Kepler Cheuvreux.

[Mats Liss, Former Equity Research Analyst]

Congrats on a good set of numbers this quarter. And just a question here regarding the synergies you mentioned when you acquired the 2 companies, [ your thought and ] -- well, if you see them as more, well, more or less conservative today than you did last autumn, the SEK 100 million I was thinking about.

[Pehr Oscarson, President & CEO]

Again, we confirm what we said last time that we are confident that we will deliver that SEK 100 million. We still don't see it in the P&L because it's bonuses which will be recalculated when we are closer to the year, and it's also better prices which should be transferred to the stock or the inventory until we get the full margin. But the negotiations with the supplier has been successful, so we are confident.

[Mats Liss, Former Equity Research Analyst]

And the other part of the potential synergies there with your main shareholder, LKQ, is there anything to say about that?

[Pehr Oscarson, President & CEO]

We'd say pretty much the same thing. We have within the purchasing agreement with LKQ we -- it's also done as we expected. And of course, some of the synergies which we get on FTZ and Inter-Team will be helped out that we have a good supplier relations through LKQ.

[Mats Liss, Former Equity Research Analyst]

Yes, good. And finally, just about the seasonality of FTZ. I know you have been talking about that before. But I guess the first quarter compared to the, well, remaining quarters of the year, is there any sort of, well, seasonality? Is the first quarter slowest of the year or going to be better?

[Pehr Oscarson, President & CEO]

Since we don't have -- we've only had them 7 months, as you know, books, so -- and then I don't know how is it to compare it. So we have actually didn't -- we didn't do that calculation. But I don't see that FTZ should have any big difference in seasonality compared to Sweden and Norway. But we haven't done the math, no.

[Åsa Källenius, Chief Financial Officer]

This should be affected by the same as on Mekonomen Group, and that is number of workdays, the weather, holidays, et cetera.

[Mats Liss, Former Equity Research Analyst]

Okay. And well, finally, just about the first and second quarter. I guess normally the second quarter is a pretty good quarter out of the earning seasons [indiscernible]. And then again, we had the Easter impact now. And I guess in Norway they celebrate a lot of Easter.

[Åsa Källenius, Chief Financial Officer]

Yes.

[Mats Liss, Former Equity Research Analyst]

So could -- well, how should we see that is the -- well, could you say something about the 2 quarters there in the first half?

[Pehr Oscarson, President & CEO]

Yes. And I think it's important to, as we said, that we have a positive effect of the Easter in the first quarter. And of course, that will have a negative effect in the second quarter. And to you, what...

[Åsa Källenius, Chief Financial Officer]

Yes. The number of workdays it is the same in Sweden and one more in Norway. But there is, as you said, much effect of Easter, especially in Norway when they take a day off the week before Easter. And we done some calculation and compared the week before Easter this year with 2018. And we can see that it's an effect of approximately half of the organic growth, you can say, comes from some kind of Easter effect. But it's very hard to say because it's dependent on so many things, the weather, et cetera, et cetera. But there is an effect. And as we see, you could see 1/2 of the organic growth, and that would equate SEK 15 million to SEK 20 million in sales in old Mekonomen Group.

[Operator]

[Operator Instructions] There's nobody at the queue at the moment. [Operator Instructions] And we do have another one from Nicklas Fhärm from SEB Equities.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Just a follow-up question just to make sure on the net debt calculation. I'm referring to the table on Page 20 in the interim report. Would it be fair -- is it correct that the sort of actual net debt including IFRS 16 would be the same as not deducting what you deduct in that table? Is that the IFRS net debt?

[Åsa Källenius, Chief Financial Officer]

I am not sure. This is the way our net debt is calculated, so I'm not sure I understand what you mean.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay. Let me make it very, very simple. I -- the way I understand it is that the SEK 4.185 billion in net debt that's reported is not including the IFRS 16 adjustments. Is that correct?

[Åsa Källenius, Chief Financial Officer]

That's correct.

[Nicklas Fhärm, Country Head of Sweden Research & Analyst]

Okay. And if you would include the IFRS 16 adjustment, what would the net debt be then?

[Åsa Källenius, Chief Financial Officer]

Yes. You can check -- if you look at the balance sheet on Page 12, you can see that we have added SEK 1.449 billion in long lease liabilities. And we added SEK 511 million in short lease liabilities. So the additional liabilities from leasing is approximately SEK 2 billion.

[Operator]

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

[Pehr Oscarson, President & CEO]

Thank you. Then we will end up here. We have an AGM in a couple of hours to attend to as well. So thank you very much for listening. Bye-bye.

[Åsa Källenius, Chief Financial Officer]

Thank you.

[Operator]

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