Meko AB

STO:MEKO

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to the Mekonomen Group conference for the Q1 2021 report. My name is Rosy, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]I will now hand you over to Pehr Oscarson, CEO, to begin today's conference. Thank you.

[Pehr Oscarson, President & CEO]

Thank you, and good morning, and welcome to the presentation of the first quarter 2021. With me here today, I have our CFO, Åsa Källenius, and we will guide you through the result of the quarter. I'm very glad to say that we have had a very strong start of the year. This is now the fourth quarter in a row where we deliver on high level. And actually, this is the best Q1 ever. We saw sharply increased growth, better profitability and a strong cash flow in the first quarter. As you all remember, we have had some challenges in the same period last year, making the comparison a little bit complicated.But a positive trend is very clear. There is a stable demand for our products and services. And we estimate that we had gained market shares in several markets during the past quarter. On top of that, we have taken important strategic steps with launches of several innovative services, for example, the new standard for electric car service in all our markets. During the quarter, we issued a bond to secure future financing and to extend our debt maturity structure. This, together with our strong result in the past 4 quarters, has contributed to our current very strong financial position. And all in all, we continue to deliver on our strategy on profitable growth and have a strong position. So Åsa, please take it from here and give us some more details of the result.

[Asa Kallenius, Chief Financial Officer]

Thank you, Pehr. I'm happy to do that. Hello, everyone.We had a strong organic growth of 10% in the first quarter. Adjusting for currency effects and number of workdays in the quarter, we end up on 4%. We are still affected by the ongoing pandemic. For example, we had 45 branches closed for some periods in Norway during the quarter due to governmental restrictions. Most of them are now open again.We stand strong with high underlying demand with a direct effect on our adjusted EBIT and cash flow. With this said, we are developing towards our long-term financial goals. Our strong financial position is a result of dedicated work with structural and efficiency efforts the past year, for example, the successful central warehouse project in Sweden that was finalized last year. Looking at Page 4, EBIT. We can conclude a great recovery in all business areas, not least in MECA/Mekonomen. Despite difficult comparative figures, as also Pehr mentioned, we see fundamental improvements in both organic growth and profitability. And this is mainly thanks to earlier implemented cost efficiency measures and successful market activities. Now looking at Page 5, gross margin. Gross margin has increased from already high levels. Adjustment in sales prices and purchasing prices are contributing positively and are balancing out the product mix effect we have due to higher sales of seasonal-related products with somewhat lower margins. Moving on to Page 7 and the result per business area. FTZ continues to be the undisputed leader in Denmark. We have strengthened our position even further. The profitability is improving, and we estimate that FTZ has gained market shares during the quarter. The EBIT margin rose to 11% compared to 10% last year. We now see that this has been a successful acquisition where the delivery from FTZ is in line with our expectations. FTZ is a stable and robust business with a very good resilience despite economic cycles. We know first-hand that Denmark is a difficult market to operate in. Due to FTZ's strong market-leading position, this makes us confident that FTZ's dominant position will remain, regardless of future competition in the market. Turning to next page, Inter-Team. In Inter-Team, we have had a stable development despite strong competition and the challenges with the pandemic. The organic growth is negative in the quarter, and this is mainly a result of weak Polish market due to COVID-19 restrictions and lower export sales. But the EBIT margin increased to 1% compared to 0 last year. However, in March, we did notice an increase of the demand. And going forward, we will continue to focus on profitable sales. We are convinced this will be positive for us when the market stabilizes. And as we pointed out in the last quarter, the Polish strategy is long term, and it will take some more time before we reach our long-term goal and have a stable margin at higher levels.I now turn to Page 9, MECA/Mekonomen. In MECA/Mekonomen, as you saw before, we have had a sharply improved organic growth of 12% compared to minus 2% last year. The high demand for seasonal products, such as batteries and accessories, have been beneficial to us, but lowered the margin somewhat. We see a stable increased EBIT margin of 6% compared with 0 last year.The business area has also been negatively affected by temporary closed branches due to the pandemic restriction in Norway. In Sweden, we are not as directly affected from restrictions. In Sweden, EBIT has improved as a result of the structural initiatives we made in 2020. All in all, MECA/Mekonomen is improving and moving in the right direction, even adjusted for the special challenges we had in Q1 last year. Turning to next page, Page 10, Sørensen og Balchen. In Sørensen og Balchen, we delivered another all-time high result with impressing 32% organic growth and 20% EBIT margin compared to 13% last year. We are benefited from being a sharp niche player in a continued highly active Norwegian market. At the same time, the consumer market within accessories is strong in Norway. 40% of Sørensen og Balchen sales come from consumer sales. Consumers now prioritize their homes and cars instead of traveling and other activities that are restricted, and that is positive for Sørensen og Balchen. The strong performance is a combination of click and collect and other consumer offers. And at the same time, Sørensen og Balchen also have succeeded in attracting other type of customers within B2B, for example, car importers and workshops from competitive concepts outside our group. I will now hand over back to you, Pehr.

[Pehr Oscarson, President & CEO]

Thank you, Åsa. We're very proud that we have delivered another strong result and taking further steps towards our long-term financial targets. On Page 12, we take a look at our strong footprint in the market. And we will continue to optimize the network of branches to secure profitability. We increased the number of workshop customers in almost all markets. The numbers will change from time to time with little short-term effect on the group's results. We have a very clear idea of which workshops that are to be included in our concepts. They must have the right quality ambitions, customer focus and size. On Page 13, we see an overview of the competition. We are #1 and 2 in Sweden; #1, 2 and 3 in Norway; and by far the #1 in Denmark. We're on the right track in Poland, and these strong positions will benefit us going forward. Moving on to Page 14. We have a high ambition to develop new solutions, services and offers to our customers. The purpose is clear: to always be relevant and meet the future customer needs. This enable us to grow and broaden our business. As we see on Page 15, during the first quarter, Mekonomen Sweden launched a new unique service agreement for Swedish car owners that challenges the often expensive and complicated solutions that exists today. On Page 16, we also have taken the leading position in the aftermarket for electrical cars where there have been, so far, lack of clear industry standards. In response, we launched a new standard for electrical car service, E+, which guarantees that the workshops have the right skills and equipment. Shortly, 1,500 of our workshops will meet those requirements. Looking at Page 17, we present a forecast analysis of the electric vehicle market for 2030. We focus on pure electric cars since hybrids has the same demand as cars with combustion engines. Norway is the world-leading market on electric cars with 300,000 pure electric cars on the roads today. In 2030, we estimate that there will be 2 million fully electric cars on the roads in Norway. In Norway, the political target is to reach a full car fleet of zero-emission vehicles. In Denmark, there are 30,000 fully electric cars on the roads today, and we estimate that there will be around 600,000 pure electric cars 2030. And in Denmark, the political target is, today, is to -- you can read it, that's low-emission vehicles, which also includes hybrids. And it's hard to forecast the numbers between fully electrics and hybrids. In Sweden, there are 60,000 pure electric cars today. Here, we estimate 1 million pure electric cars in 2030. Also in Sweden, the political targets are not completely focused on electric cars, but a decrease of carbon emission of 70% compared to 2010. We will keep monitoring the electric car development in all our markets since things could change rapidly due to new political decisions in the market or on EU level. We see a large potential due to that we are an enabler of mobility, regardless of which vehicle driving on our roads. With our size and innovating power, we have the ability to meet the future demand. Okay, moving on. During the Capital Markets Day in February, we presented our updated strategy that will make us more profitable and make us grow in a sustainable way going forward. In short, we are an enabler of mobility today, tomorrow and in the future. This is our vision that our strategy is based on, and that will take us to SEK 15 billion in revenue no later than 2025. Our enabling mobility strategy consists of 4 focus areas. The first is operational excellence. That means that we will increase focus on efficiency, synergies and collaboration in our core business. That is absolutely crucial. Second, we will accelerate our concept development for workshops to increase loyalty and revenues, an area where we have a large potential going forward. Third, we will create new customer solutions and make the customer journey easier. We will forcefully use all the opportunities that comes with digitalization, data and customer insights. And fourth, we will create new revenue streams through a broad range of actions, for example, by entering new segments and developing new business models.Everything we do within these 4 focus areas will be done with a sustainable mindset. As we have seen in our results, we stand strong and efficient even if circumstances are difficult. And we are well on our way, in line with our strategy and long-term financial goals. So this concludes our report for the first quarter, and we now look forward to your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Mats Liss from Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

Congrats on a good quarter then. And first, I just want to ask a bit about -- I mean we see all these headings of lack of semiconductors and so on. Do you expect to see any sort of shortage of spare parts going forward?

[Pehr Oscarson, President & CEO]

No. Yes, no, not by that reason. We're with the -- there is some -- there is a couple of trends. We have increased prices due to high demand of raw materials, steel. There is transportations that are more expensive from Asia. And there's also this -- the problems with the semiconductors and so on. But all in all, it doesn't affect us in any specific matter. We have some simple product numbers that we are short term, but it's not that we can see in our numbers. And we don't expect that to be a problem in the future either.

[Mats Liss, Equity Research Analyst]

As the price increase is implemented, you -- well, could you say something there? Have they been sort of gradually implemented during the quarter? Or is it -- well, yes.

[Pehr Oscarson, President & CEO]

Yes, we adjust the prices, and this is different in the different markets, of course. But we follow the market, and we price accordingly. So that's an ongoing process.

[Mats Liss, Equity Research Analyst]

Yes. Okay. And I guess you are well into the second quarter now, and I guess you sound quite confident about the development in the first quarter. And I mean it seems things are improving in Poland, at least in the second quarter. So -- and now we are approaching driving season. I guess holidays will be more domestic this year as well maybe. And so do you experience an increased service demand ahead of this driving season as you normally do?

[Pehr Oscarson, President & CEO]

Well, we usually don't comment future. But as you mentioned, I mean we are heavily demanding on miles driven. And if restrictions will easen up, that will be more traffic on the road, which is, of course, is positive for us. So going back to normal society should be good for us as well as for any other.

[Mats Liss, Equity Research Analyst]

Yes. And just looking at the P&L a bit closer, the financial net was affected by some one-offs there regarding the refinancing. Should we see those as one-offs? Or are they sort of-- yes.

[Asa Kallenius, Chief Financial Officer]

Yes, you should. It's connected with the refinancing of the bond and the new RCF. So it's just in this quarter.

[Mats Liss, Equity Research Analyst]

Okay. Great. And you also delayed some amortizations of VAT taxes last year. Have they -- well, do they sort of affect your cash flow gradually now up until the second quarter?

[Asa Kallenius, Chief Financial Officer]

No -- yes, but second quarter 2022 because during the quarter, we repaid some of the pushed VAT and taxes. And we got some new ones also in Denmark, and they are to be repaid next year. So it will be repayments during all quarters and to the end of Q2 next year. So it's smaller amount every quarter. And we are not sure if they're going to be new pushed payments or not, but the status right now is that we have payments coming until Q2 next year. And we have SEK 160 million in pushed VAT and taxes at the moment.

[Operator]

The next question comes from the line of Andreas Lundberg from SEB.

[Andreas Lundberg, Analyst]

First one, on the cash flow statement or the increase in receivables or the drag on the cash flow, what was that? You are familiar, right?

[Asa Kallenius, Chief Financial Officer]

Well -- yes, but that's connected to that -- this is a normal effect we had in Q1. We didn't have it last year due to the data breach when we couldn't send out any invoices in the end of Q1. But it's an effect of higher sales in Q1 compared to December, the Q4 quarter. So it's normal. It always looks like that. And it's also connected with the customer bonuses, et cetera. So if you look at 2019, we had exactly the same.

[Andreas Lundberg, Analyst]

Okay. And then on the margin, on a segment level, can you describe, is there any structural differences versus your Danish operation versus MECA/Mekonomen, for instance? Given that both these -- I mean your positions in both countries are extremely strong.

[Pehr Oscarson, President & CEO]

Yes. Can you -- I mean there is -- but there are still differences in the -- both in the competitive landscape. It's differences in -- if you compare, for example, Denmark and Norway is a completely different setup within logistics and transport costs and so on. So there is -- one way you can read the potential in Sweden and Norway, but it's also other circumstances, which makes it a little bit more expensive to run businesses in Sweden and Norway.

[Andreas Lundberg, Analyst]

Okay. So it's structurally a little bit lower in Sweden and Norway?

[Pehr Oscarson, President & CEO]

Yes. Yes.

[Andreas Lundberg, Analyst]

Okay. And then you talked about your long-term agenda on Inter-Team in Poland. What's your sort of margin ambitions in that country a few years out?

[Asa Kallenius, Chief Financial Officer]

I think we usually communicate 4% to 5% EBIT margin in Poland, and it's reachable. It's what some of the competition has. And we see that we are able to make improvements to that level in the strategic period we have at the moment until 2025. And we see good signs in our work to focus on profitable customers and sales.

[Andreas Lundberg, Analyst]

And when it comes to reopenings, maybe it's early days in your markets, but have you any kind of indications of trends in a reopened market?

[Asa Kallenius, Chief Financial Officer]

Andreas, was that a question regarding the opening of our markets?

[Andreas Lundberg, Analyst]

Yes. I mean, if you have seen any indications or what's happening in a reopened market?

[Pehr Oscarson, President & CEO]

But during the quarter, we saw improvement in Poland, for example. Poland was very closed in January, February. But in March, that easened up. And that, we also could see in our numbers. In the other markets, it should be positive, as I said to Mats as well that reopening, and we can follow that. The restrictions which is hurting us is when people are not driving to the job. So it's less miles driven. And the other one is when it's really these closedowns, for example, in Norway, when we can't operate our stores and branches. Those are the 2 main things to look for when you're looking at the pandemic effects.

[Asa Kallenius, Chief Financial Officer]

Yes. And as we said, we, part of the quarter, had 45 branches closed in Norway. Oslo area, Bergen and other larger cities were totally closed. So they are now -- I think we have like 5 branches today not open, but otherwise they all operate again. And of course, that has hurt the sales in Norway during the quarter.

[Operator]

Our next question comes from the line of Mika Karppinen from Handelsbanken.

[Mika Karppinen, Research Analyst]

This is Mika from Handelsbanken. A question concerning this new service agreement in Sweden, the monthly fee-based contract. So could you comment on the sort of the start for the sales activities, how it just started and then generally customer feedback for the new product? And how to sort of -- how the customers see the sort of the pricing of the product? Is it sort of opening up the sort of pricing environment for that kind of product?

[Pehr Oscarson, President & CEO]

Well, it's a bit early to say, and we don't communicate any numbers yet. But so far, the reception from the customers is very good. And I think the product is well received in the market.

[Operator]

We have no further questions coming through. So I will now hand back to Pehr for any closing remarks.

[Pehr Oscarson, President & CEO]

Okay. Again, it's a good day at the office to be presenting another good quarter. Thank you all for listening, and wish you a great day. Bye.

[Asa Kallenius, Chief Financial Officer]

Bye-bye.

[Operator]

Thank you, everyone, for joining today's conference. You may now disconnect your lines. Hosts, please stay connected momentarily. Thank you.