Meko AB

STO:MEKO

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the MEKO AB First Quarter Report 2023 Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded.

I would now like to hand the conference over to your speaker, Pehr Oscarson, President and CEO. Please go ahead, sir.

[Pehr Oscarson, executive]

Thank you. Good morning, and welcome to the presentation of the first quarter 2023. I'm here together with our CFO, Asa Kallenius, and we will guide you through the results.

We often say that MEKO's business model is resilient, that we benefit from a strong underlying demand in good times and in bad. And as we know, there is some macroeconomic turbulence around us which also affects MEKO. But I would still say that the first quarter is another sign of our resilience. And to be more specific, we have a solid organic growth, a stable underlying EBIT in the quarter. We are also improving our cash flow which enable us to strengthen our financial position going forward. There is solid market development in most of the markets, and we take several important steps with new launches and successful concepts.

During the quarter, we also updated our financial targets. This is to better reflect our track record in terms of value creation and the strategy going forward. But as I touched upon, we do face a complex environment. The market situations in Denmark and Norway are still challenging. And in addition, we are affected by the currency headwinds in Sweden and Norway. We're taking action to handle the situation. And in sum, we intensify our efforts to increase profitability in Denmark, Sweden and Norway and -- which we will come back to in a few minutes.

But first, let's look closer to the key figures for the first quarter, and we turn to Page 3. Please, Asa, I hand over to you.

[Asa Kallenius, executive]

Thank you, Pehr. As Pehr touched upon, we have a solid organic growth of 6% in the quarter. EBIT is slightly improving, and adjusted EBIT is stable. We are also pleased to see a better cash flow, and this is a sign of a strong business model.

Looking at the margins, EBIT and adjusted EBIT margin are slightly lower compared to the first quarter last year. This is mainly explained by currency effects and challenging market conditions in Denmark and Norway. But as mentioned, we are taking actions to improve profitability. We will get back on that.

Let's have a closer look at the EBIT development on Page 4. As you can see, Finland, Poland and the Baltics are contributing positively to our adjusted EBIT development. The situation in Denmark and Norway is affecting adjusted EBIT in the other direction. And in Sweden, we made strategic marketing investments during the quarter that affect EBIT and really explain the negative development in the quarter. And we will come back on that one in a couple of minutes.

Now we turn to Page 5 and look at the gross margin development. Inflation in the supply chain continues in the quarter. We have adjusted prices as a response and in order to handle currency headwinds. We can already see a positive effect, but the full effect will come later. The negative currency effect is clear, as you can see.

The strategic acquisition of Koivunen is contributing to our stable EBIT development but somehow lower margin in Finland is diluting the total gross margin. Going forward, the margin will improve, thanks to increased synergies. This results in a gross margin of 44.7% in the quarter.

Let's look a bit closer on the specific market. We turn to Page 7 to look at Denmark and the situation we have in Denmark. We have a very strong position in Denmark and we are a clear market leader. At the same time, competition is a bit more intense and the market slightly lower, follow weaker consuming purchasing power. We grew organically in the quarter but are facing a lower EBIT compared to the first quarter last year. And as I just mentioned, we are taking actions to improve profitability. To be more specific, we are reducing the number of employees, we are adjusting prices and other fees and we are reviewing marketing investments. We already see visible effects of these actions, and the situation in this quarter is improving compared to the last quarters.

Turning to next page, Finland. The market in Finland is [ spending ], but our business within Mekonomen and Koivunen has a positive development. Mekonomen is growing organically with a strong 12% in the quarter. Here, we also are extracting synergies between Koivunen and Mekonomen according to plan. One example is the merging of the warehouses and the joint logistics operation. In sum, we are well positioned to leverage on our new position as the market leader in Finland.

Moving over to Poland/the Baltics on Page 9. Poland/the Baltics continued to deliver a robust organic growth and EBIT margin. We are especially pleased to see a positive development in the Baltic operation. Sales and gross margin are improving, and we continue to expect synergies according to plan, with full effect from 2024.

Turning to Sweden/Norway on Page 10. We delivered a solid organic growth of 9% in the quarter. Market conditions are improving in general. However, the EBIT margin is affected by current headwinds and inflation. As touched upon, we have raised prices as a response, but this has no -- not yet had a full effect. Also worth mentioning is an important market investment in Sweden during the quarter, the Gothenburg auto fair. This takes place every 3 years and has a positive long-term return even if it negatively affects EBIT this quarter.

In terms of profitability, we improved margins in Sweden/Norway. We have finalized the first phase of actions in Norway to optimize our network of branches. Now we continue with intensified activities to further strengthen profitability. These activities include closing unprofitable branches and tuning of staff in both Norway and Sweden.

Moving over to Page 11. Sørensen og Balchen is a clear market leader within the retail segment, the segment that is affected by weaker consumer purchasing power. Organic growth was 1%, and the margin was 12.6% in the quarter, a healthy margin compared to competition but lower than last year. The main explanation were weaker sales and lower volumes. Sørensen og Balchen will now increase focus on internal optimization and the B2B segment where the market development is stronger. One good example of the new agreement is the new agreement with Norway's largest independent retailer in the auto aftermarket. We will elaborate on this in just a bit.

Let's look at our market footprint and important events during the quarter. Turning to Page 13 and leaving it to Pehr.

[Pehr Oscarson, executive]

Thank you, Asa. Yes, when we acquired Koivunen last year, we achieved 2 very important goals. First, we strengthened our position as the market leader in Northern Europe. Second, we diversified the business and made it even more resilient against local market changes.

When we look at this page, we see that the net sales is evenly distributed across the 3 Scandinavian markets. Turning to market shares, there is a similar pattern. We have very strong position in Scandinavia and clear growth potential in Sweden, Poland, Finland and the Baltics. Few can compete with our availability, with branches and workshops and large network around the Baltic Sea.

Moving over to Page 14. In March, we updated our financial targets to better reflect our track record of value creation and long-term strategy. We had the pleasure to meet many of you at our Capital Markets Day where we gave more information about MEKO's way forward. Our new growth target is to achieve at least 5% annual sales growth, excluding larger selective acquisitions. We will also grow adjusted EBIT with at least 10% every year. In addition, we clarified the dividend policy and kept the net debt target unchanged.

But we also took another important step during the quarter, a green one, and let's go over to Page 15. MEKO's vision to enable mobility to meet the timeless demand of people to go from A to B with cars that works and that are safe, this is also a model for sustainability and circularity. We prolong the life of cars through service and repair, this is very often better for the climate than making new cars.

During the quarter, we increased our efforts to reduce our climate footprint, and we have now committed to set climate targets in line with the Science Based Target Initiative. This is a framework for companies to limit global warming. For MEKO, this is milestone.

Turning to Page 16. Car glass is a concept with commercial potential but also the potential to reduce the climate footprint. We handle approximately 1 million cars every year only in Sweden, and 15% of them have some car glass damages. Many can be fixed instead of being completely exchanged, which is very good for the climate. At the Gothenburg auto fair in January, we launched a new concept for Sweden, where 400 Swedish workshop will be able to offer car glass service and repair. We already have the same kind of concept in Denmark and Finland.

Then moving on to Page 17. This is a good example of how we leverage on our size and create synergies. We are now expanding the successful concept for heavy vehicles into Denmark. This concept has been growing in other markets. And last year, we made the integration with a similar finish concept when we acquired Koivunen, and we see a clear potential for further growth moving forward.

And finally, let's go to Page #18. As mentioned earlier, Sørensen og Balchen is the clear market leader in its segment and expanding within the business to business. One example of this is the newly announced agreement with Norway's largest independent aftermarket retailer Mjøsbil. Mjøsbil chose Sørensen og Balchen, thanks to its proven level of service, availability and concept development. The stores and the workshops within Mjøsbil will be rebranded to Bilxtra, which is a very strong retail brand within Sørensen og Balchen. This is, of course, very welcome and will have a very positive impact on our Norwegian business going forward.

So that was our presentation for today. Thank you for listening, and we are now open for questions.

[Operator]

[Operator Instructions]

We are now going to proceed with our first question, and the question comes from the line of Mats Liss from Kepler Cheuvreux..

[Mats Liss, analyst]

First, regarding the Finnish performance there. I mean, you indicated that you have been working with the integration process and so on. And it seems that you have come almost -- you improved the earnings anyway. What could we say during the remainder of the year? Are there more to come? Or have you sort of reached the peak the first quarter?

[Pehr Oscarson, executive]

I think that the full effect from the synergies, that is from 2024. So we still have some upside, everything -- like this, of course. But there is some potential upside in the gross margin due to the purchasing synergies. And then we have the effects from merging the warehouses, which will come later this year also. What we also see this quarter is that the old business of Mekonomen has been improved quite strongly.

[Mats Liss, analyst]

Great. And then in Sweden, you mentioned -- Sweden/Norway, you mentioned that price increases have been implemented to balance the cost. Have these sort of supported you gradually during the quarter? Or is it more -- or something that will support you going forward?

[Pehr Oscarson, executive]

A little bit of both. I think we can see some effects already in the quarter, but there is price increases which will have more impact on the next quarters to come.

[Mats Liss, analyst]

Great. And in Denmark, you mentioned that you have implemented cost-efficient measures to balance -- to improve profitability. Is it sort of the same situation there, that it's more of a second and going-forward impact to be expected?

[Pehr Oscarson, executive]

Yes. We -- I think we start to see some effects in Q1, but it would be improved more going forward because there is a -- there has been activities throughout the quarter. So of course, not everything is yet in the P&L.

[Mats Liss, analyst]

Okay. And when I looked at the financial [indiscernible], you mentioned some, well, impact besides the net interest. Could you just explain the impact there of the bank balances? Is it only currency effects? Or how should we see it?

[Asa Kallenius, executive]

Yes. Yes, it's revaluation of bank accounts in the quarter making that effect. It's -- yes, it's onetime in this quarter. And now we do not know the development going forward, but it's only that besides the...

[Mats Liss, analyst]

It's mainly due to the currency development?

[Asa Kallenius, executive]

Yes. Yes.

[Operator]

[Operator Instructions] We are now going to proceed with our next question, and the questions come from the line of Stefan Stjernholm from Nordea.

[Stefan Stjernholm, analyst]

This is Stefan at Nordea. A question on Finland. In the report you mentioned one -- positive one-offs given that you changed the obsolescence model for inventory. Can you quantify that impact, please?

[Asa Kallenius, executive]

No, we are not going to quantify that as it will be some effect also in the coming quarters. So we make it gradually. And it has to do with the merger of the warehouses Finland -- Mekonomen Finland and Koivunen.

[Stefan Stjernholm, analyst]

Okay. So it's not a large part of the improvement, it's minor?

[Asa Kallenius, executive]

Yes, it's part of the improvement but it's more or less minor, yes.

[Stefan Stjernholm, analyst]

Okay. And you also mentioned this fair in Gothenburg, but I guess that's quite small numbers.

[Asa Kallenius, executive]

It's a large fair, so it has impacted our quarter rather much. It's a large amount.

[Pehr Oscarson, executive]

When you look at the deviation on Sweden/Norway on the EBIT bridge from the beginning, I think we had minus SEK 18 million in development. I would say that most of that comes from that fact.

[Asa Kallenius, executive]

Yes. And to add to that, we are expecting to have effects -- positive effects in the coming years through that market investment. So -- and it's only every third year, so, yes.

[Stefan Stjernholm, analyst]

Okay. But if I interpret you right or trying to interpret regarding the one-off positive -- one-off in Finland and the negative, if you call that, for the Gothenburg fair, the combined is slightly negative. Is that right?

[Asa Kallenius, executive]

Yes. That's right.

[Stefan Stjernholm, analyst]

Okay. Good. And then a follow-up on Matt's question regarding price increases. And when do you expect the price increases to fully offset the higher sourcing costs, if you expect that to happen?

[Pehr Oscarson, executive]

A bit difficult question because we don't know the development. But as the trend is now, we should be -- in the end of the year, we should be, let's say, back on track regarding the gross margin. But assumption is made that it has slowed down the inflation from the suppliers. And that could, of course, change tomorrow. Then it starts to increase again. And then we usually are a little bit lagging behind in order to increase the prices. We also need to be sure that we, every time, have a good offer to the customers.

But again, having that said, we still are the cheaper or the more pricey alternative on the market when you compare to [indiscernible] and so on. So we believe that there is good possibilities going forward.

[Operator]

We're now going to proceed with our next question. And we got a follow-up question from Stefan. I'm not sure if your question has been answered, but I'll just reopen your line.

[Stefan Stjernholm, analyst]

I have no further questions.

[Operator]

We're now going to proceed with our next question, and the questions come from the line of Mats Liss from Kepler Cheuvreux.

[Mats Liss, analyst]

Yes. I had another one here on -- you have the net debt to EBIT target, I guess. And you repeat the target or ambition to be within the 2 to 3 at the end of the year. How much of that improvement could you see in reducing our inventories and working capital?

[Asa Kallenius, executive]

Well, we have very good cash flow in our business model. And Q1 is the most pressed quarter when it comes to cash flow. So we will, as we plan to be back on track in the end of this year, to be between 2 and 3 in leverage from own cash flow.

[Mats Liss, analyst]

And then do you see any sort of opportunity to reduce inventories to reach that target also?

[Asa Kallenius, executive]

Perhaps not in inventory right now because of the inflation, because the inflation lifts up the inventory value. But we will keep it stable. I don't see that we will increase. And there will be some decrease in Finland,for example, where we launch the warehouses, Mekonomen Finland and Koivunen. But I can't promise any decrease due to the higher purchasing prices.

[Pehr Oscarson, executive]

Yes. And I think we are decreasing the inventory in terms of items in stock. But since the prices is going up, the value is stable.

[Operator]

We have no further questions at this time. Actually, we just have another one registered. Just one moment. We have the next question coming from the line of Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Pehr, you mentioned a deal in Norway with [ Ferns ]. I might have missed that. Could you explain what it was?

[Pehr Oscarson, executive]

Yes, yes. It's an independent local wholesaler, the biggest one, still independent, 4 something branches/stores. And they own some workshops. And they have also some independent or, let's say, affiliated workshops connected to them. So it's a large account which we just recently signed, taking over from one of our competitors. So that is a very good move from Sørensen og Balchen. We have this fluctuation with the retail market which was very good during the pandemic, but now we've seen -- see the same challenges as we had before the pandemic. So this is both strategically and, of course, business-wise, very good news.

[Andreas Lundberg, analyst]

So you will support those units with auto parts, basically, right?

[Pehr Oscarson, executive]

Yes.

[Andreas Lundberg, analyst]

Okay. And how many units are we talking about Sø og Balchen?

[Pehr Oscarson, executive]

We will do some mergers. So -- but it's 3 branches. And yes, actually, it's not an important number because it's -- one of them is very, very small also. So -- but it's a large account with a good sales opportunity for us. And we expect at least 5 to 10, maybe up to 15, new affiliated workshops, thanks to that. But that's work in progress at the moment.

[Operator]

We have no further questions at this time. I hand back the conference to you. Thank you.

[Pehr Oscarson, executive]

Okay. Then thank you all for listening, and I wish you a great day.

[Asa Kallenius, executive]

Thank you. Bye.

[Pehr Oscarson, executive]

Bye-bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you very much.