Meko AB

STO:MEKO

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Mekonomen Q1 2022 Financial Results. [Operator Instructions]

Today, I am pleased to present Pehr Oscarson, CEO; Asa Kallenius, CFO. Mr. Oscarson, please go ahead.

[Pehr Oscarson, executive]

Thank you. Good morning, and welcome to the presentation of the first quarter 2022. Together with the CFO, Asa Kallenius, I will guide you through the results.

We have had continued solid development in the first quarter, the most profitable Q1 so far in the history for the group. This, despite challenges from pandemic-related restrictions in the beginning of the year, where sick leaves and quarantine regulation, in foremost in Nordics, have had a negative impact. Apart from that, Russia's invasion of Ukraine has caused huge worries all around the world.

At the same time, our strong financial position gives us the possibility to continue focusing on further development of the business according to our strategy. This includes strategic core business investments, expansion through larger acquisitions in parallel to a proposed reintroduced of dividend to the AGM of SEK 3 per share.

We have the strength to continue our projects with full speed, and we have also taken security measures by increasing our inventories in the central warehouses to gain profit and to ensure future availability for our customers.

Looking forward, the market development is naturally hard to predict, not least due to inflation and availability, but so far, we are confident that we have the tools to balance inflations with increased cost -- gross margin, with continued stable demand, secure inventory and deliver on our strategy for future growth.

Furthermore, we are a leader in the transformation of electric cars when it comes to spare parts, training and certification of workshops. We have now over 2,000 E+ workshops in the group.

All in all, after tackling pandemic, data breach and supply chain insecurities, we are more confident than ever in our ability.

I will now hand over to Asa to take us through the results.

[Asa Kallenius, executive]

Thank you, Pehr. As stated, another strong delivery with best Q1 sales and profitability ever for the group, with an EBIT of SEK 190 million compared to SEK 186 million same period last year. The results should be seen in the light of several challenges. Apart from a mild winter affecting the product mix, with lower sales on high-margin winter products, we are affected by consequences from COVID affecting capacity in branches and in workshops in the beginning of the year. This has affected sales and brought increased personnel costs to our business.

Looking at Page 5 and EBIT, we see that MECA/Mekonomen and Inter-Team stand out positively in the quarter and we are overall developing towards our long-term financial targets.

Over to Page 6. We have increased the gross margin further in the quarter. This is due to price increases to compensate for increased purchasing prices and inflation in general. So far, as stated, we have the tool to continue our journey with a profitable growth.

Moving over to the business areas. Looking at Denmark and FTZ, a continued stable result despite the challenges from COVID effect and mild winter. Stable sales and EBIT continued strong position, with a market share of close to 30%.

Over to Inter-Team on Page 9. A good result for our Polish business area, where we have continued to focus on customer loyalty within strategic customer groups domestically in order to increase profitability. We have had a fantastic development. We are on the right track with improved profitability in the rapidly growing Polish market.

Over to Page 10 and MECA /Mekonomen. In Sweden and Norway, restrictions and sick leaves in connection with COVID have had particular -- were particularly high in the beginning of the year, affecting the organic development negatively. We estimate a lack of around 20% of the workforce in the branches and similar numbers in workshops due to COVID in the beginning of this quarter, that is January and February, which resulted in higher personnel costs and lower sales. Still, a very strong quarter, with -- and we consider the organic growth, a negative growth, as temporary and this will improve going forward.

On Page 11. Sørensen og Balchen had a continued very strong margin compared to our peer inside and outside the group. Due to the large exposure to the consumer market, Sørensen og Balchen is affected by low sales of winter-related premium products. Still, we are pleased to see that we maintain our long-term strong position as a sharp niche player and one of the strongest players in the industry.

I will now hand over back to you, Pehr.

[Pehr Oscarson, executive]

Thank you, Asa. Yes, we are in a good position to continue developing the business according to our strategy, which is also strengthened by the footprint of the group.

We move on to Page 13 and the overview on the number of workshops. We have clarified the numbers by adding white label workshops in Denmark and Sweden. These are workshops that are affiliated but operating on their own brands. Still with high purchase of spare parts and compliance to our quality demand, similar to the group-branded concepts.

In the group now, over half of our 3,800 workshops meets our standard E+, and that ensures the competence and equipment to do maintenance on electrical cars.

Over to Page 14. Looking at the underlying factors in number of cars and kilometers driven, we still see an unchanged solid development long term and there is continued rapid development towards electric transition.

Over to Page 16. A couple of weeks ago, we, together with our minority shareholder LKQ, hosted the next-generation diagnostics event in Norway, inviting the leading suppliers within diagnostics to evaluate and develop optimal portfolio of diagnostic equipment for our workshops. With this, we increased the speed further with our EV ambitions and link to the best partners and technical tools for the future.

Over to Page 17. Our aim to be the #1 to go to for EV owners includes a wide range of short- and long-term initiatives. Due to targeted efforts since beginning of 2020 now, we now have reached a coverage of spare parts on new electric cars which is in line with the coverage of corresponding combustion engine cars.

On Page 18. In collaboration with LKQ and a university in Germany, we have initiated a project to increase technical competence around EV batteries. Our ambition is to develop business model for the future to ensure availability, maintenance of batteries for EV owners. As the EV gets older, there will be challenges around this for the car owners. Today, it's both expensive and time-consuming due to long transportation and security issues around the battery, while we see a large potential in developing this area further.

Moving to Slide 19. During the quarter, we initiated high-tech automatic central warehouse project in Denmark. With our large experience from the central warehouse project in Sweden, we will now develop efficiency and further availability for the customers also in Denmark. We estimate that results will be implemented during 2024 when the facilities, including training academy and the new headquarter, will be finalized.

On Page 20. During the quarter, we invested 20% in the mobile service company Omnicar operating in Denmark. Mobile car service is a rising trend among both companies and private car owners. Omnicar has far developed expansion plans also to Sweden and Norway.

On Page 21. In FTZ, we continue to develop our -- the workshop concept. During the quarter, we have implemented tools for sustainable optimization for workshops. This is done with a collaboration with the Danish environment company ABAS specialized in the car aftermarket.

And ahead of the AGM, which will be on May 20, we suggest that the corporate part of group will change name to MEKO AB.

Since the group was founded almost 50 years ago, we have expanded to Northern Europe with operations in Sweden, Norway, Denmark, Poland and Finland. We have many established brands and concepts covering various markets and customer needs, and this successful journey will continue.

However, in order to show that the group is more than a single important brand and to clearly reflect the width of the operation, we propose an adjustment to the group name. The MEKO name is, of course familiar and builds on the tradition of the established Mekonomen brand and the share is already named MEKO. The name change will not affect existing concepts and brands within the business areas, including Mekonomen Sweden and Norway. We will continue to strengthen and develop our strong brands going forward.

To the last, Page 23. Our vision is clear. We enable mobility today, tomorrow and in the future. We delivered the most profitable Q1 ever in the group's history, with a good development in all business areas despite negative effects from global challenges. We are well equipped for the future electric car fleet. And we have a good financial position to continue our journey of developing our core business expansion through acquisition and reinstate of the dividend.

So this concludes our report for the first quarter 2022, and we now look forward to your questions.

[Operator]

[Operator Instructions] We have a first question from Mats Liss from Kepler Cheuvreux.

[Mats Liss, analyst]

Mats Liss, Kepler Cheuvreux. A couple of questions. First, I guess you mentioned cost increases you have experienced, and I was just wondering if you have been able to compensate fully during the quarter for -- with price increases or if there are sort of some remaining effects to be certain benefit from going forward.

[Pehr Oscarson, executive]

You can see on the increased gross margin that we have actually managed to increase that, and that is to be able to push back price increases from suppliers but, on the same time, be bold to increase prices to the market. And that has so far compensated for the other inflation, like transports and energy and so on.

[Mats Liss, analyst]

Okay. Yes. Great. And then -- then -- well, have been some questions about the second quarter now. I guess it's still early days. But I mean the Easter holiday is a big event in Norway. Should we expect some extra sort of impact of that in the second quarter year-over-year? Or is it sort of nothing that is material?

[Pehr Oscarson, executive]

No, it shouldn't be that material effect from that.

[Mats Liss, analyst]

Then you also mentioned the negative impact there in January of the COVID and people having to, well, stay at home to take care of things. What kind of impact did you experience from that? Or was it something that was balanced out throughout the quarter, that you had a better performance in February and March that compensated for that? Or could you say something about that?

[Pehr Oscarson, executive]

Yes. But you need to look at the different markets. I would say, in Poland, it was maybe no effect from this. And in Denmark, very small. But in especially Sweden and a quite large effect also in Norway. We suffered both from that we have -- I mean, where people get -- being sick, which means that we need to get in extra personnel and so on, leading to higher costs.

But I think the most difficult thing for us was that there was a lot of mechanics in the workshops that was actually home or quarantine, and that reduces the capacity in the workshops, both one which we own ourselves, where we can see it indirectly week by week, day by day, but that also with all the affiliated workshops. And if we don't have any mechanics, then of course that will impact our sales. And that was January and at least half of February it was impacting. Then it was a little bit, I wouldn't say bounce back, but it was -- in March, it was maybe no effect from that. But that's also the reason why you see that it's no organic growth during that period.

[Mats Liss, analyst]

Yes. Okay. Great. And then about the working capital, you grow some inventories to secure deliveries. And are you sort of -- well, have you taken the measures necessary? Or do you feel that you need to increase inventories even more to do that, to be ready?

[Pehr Oscarson, executive]

There is -- I would say we don't have space to increase inventory much more because we have filled up the warehouses as much as we can. So even if we would like to increase the inventory more, we simply cannot do it. So we think that this level will be stable going forward. And hopefully, at some point, we can go back to normal levels. And then you can just see the inventory turnover. And we think that we can quite quickly come back to a lower level, if that is possible, due to market situation.

[Mats Liss, analyst]

Okay. Great. Then I guess you have seen quite a substantial increase in fuel prices and so on. Do you expect to see some sort of impact there on the mileage driven? Or is it sort of something -- well, we are approaching the driving season and so on. Could you say something about the impact of higher fuel prices?

[Pehr Oscarson, executive]

We don't see any effect still, and this is -- this, -- here, we don't -- I mean the statistics, it's quite slow with early statistics when we can see miles driven and so on.

I'm just looking out the window, and looking at the traffic here in Stockholm seems to be as normal. So I get a feeling, but that's a personal feeling, I get a feeling that people seem to be having been used to this level of diesel and petrol prices at the moment. And -- but of course, it's something that we also should monitor closely in the future.

[Operator]

[Operator Instructions] We have a new question from Mats Liss from Kepler Cheuvreux.

[Mats Liss, analyst]

2

Just -- well, another one on the -- well, interest rates have sort of increased somewhat. And could you give some sort of indication of the impact on your net financial items going forward?

[Asa Kallenius, executive]

Well, yes, we -- of course, there will be increased interest rates going forward, but we have not done that exact calculation. So I guess you need to wait some quarter to see that.

[Operator]

Thank you very much. We have no further questions for the moment. [Operator Instructions] We have no further questions it seems.

[Pehr Oscarson, executive]

Okay. But then I would like to thank you for listening and participating in this conference and wish you all a wonderful day. Thank you.

[Asa Kallenius, executive]

Thank you.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's web conference. Thank you all for your participation. You may now disconnect.