Meko AB

STO:MEKO

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the MEKO Q2 2024 Presentation. [Operator Instructions] Now, I will hand the conference over to the speakers, CEO, Pehr Oscarson; and CFO, Christer Johansson. Please go ahead.

[Pehr Oscarson, executive]

Thank you. Hello, and a warm welcome to MEKO's second quarter results presentation. I'm here today with our CFO, Christer Johansson and we'll talk you through our performance and where we stand today.

As you know, our goal is to be the most complete partner for everyone who drives, repairs, or services cars in Northern Europe. [ We've ] made it clear that we want to reinforce our leadership position. We're also committed to build a stronger, more profitable MEKO. Since November last year, we launched the Building a Stronger MEKO initiative and this has been our top priority. The second quarter shows that our efforts are paying off.

So let's move to the highlights on Slide 2. It's been a solid quarter. We are improving profitability. We have a strong cash flow and are also improving our financial position. Our adjusted operating profit has seen a clear increase, while our operating profit has been impacted by one-off effects from the comparison period. This improvement in adjusted EBIT margin is largely due to our work to streamline and optimize, especially in Sweden. We'll come back to this in a moment. In fact, this is the best quarter for MEKO so far in terms of adjusted EBIT.

We've also achieved a solid growth this quarter driven by both rising volumes and our own price adjustments. Our strong cash flow has allowed us to reduce our debt [ ratio ], bringing us well within our target range. This gives us stability and flexibility.

We're not satisfied, so we're taking additional steps, including actions in Finland to strengthen our performance. In parallel, our efforts to streamline and optimize will continue across the company.

As a final highlight, we strengthened our position in one of Europe's largest markets by announcing and completing the acquisition of Elit Polska.

Let's go more into detailing on Slide 3. Elit Polska is a well-established wholesaler with a large network of branches across Poland. Strategically, it's a perfect fit for MEKO. As you can see from this slide, Elit's branch network complements our existing footprint very well. And with this acquisition, we will become the third largest player in Poland, a market with 38 million people and 26 million cars. This means there is significant growth potential.

We also see opportunities for synergies, a crucial advantage in Poland's competitive market. Optimization of warehouses has started, [ early ] decisions, including co-locating capacity in the Warsaw region. In addition, overlap in branch network is being analyzed and this will be ongoing for some time. But the most obvious [ case is ] we have already reached decisions.

On the short-term, the acquisition will cause some margin dilution, and Christer will come back to this in a minute. But in short, we're making a strategic move today to strengthen our business for tomorrow.

We have also taken several other steps this quarter, including in Denmark. Let's look at Slide 4. We acquired the Danish operation in 2018, and since then, we have been running a successful business with strong profitability. We are the market leader in the country and our strategy is working well. This is confirmed by the solid profitability in the second quarter, which Christer will discuss in a minute.

We have 6 years behind us, but many more ahead. One reflection of this is our decision to restructure the organization in preparation for the launch of the new automated central warehouse next year, a long-term and extensive project that will further strengthen our position in this market.

We are also taking similar actions in Finland, as you can see on Slide 5. We want to improve our performance in Finland. As a part of this plan, we have made an important decision to modernize and automate our central warehouse in Helsinki. This was communicated in April. Just like in Denmark, this will increase efficiency and service levels and strengthen our profitability over time. The modernized warehouse will be fully operational in the second half of 2025.

This summer, we took another next logical step in Finland with a reorganization. The new structure will enhance our customer offering and strengthen our long-term profitability in this market.

This and much more was covered during our Capital Markets update, which we had in May, shown on Slide 6. And yes, it was a pleasure to meet many of you and others to share more about our efforts to build a stronger company. We focused on various activities as well as our financial situation. And one key takeaway is that our financial targets remain unchanged.

Lastly, before I turn over to Christer, I want to briefly highlight a smaller but strategic important acquisition we made this summer. So let's move on to Estonia on Slide 7. Automeister is an established wholesaler that also owns the parts of workshop concept with 14 locations across Estonia. We're now integrating this well-managed business into our existing operations, which means that we'll be running 2 workshop concepts in Estonia, that will be [ Fixus ] and Carstop. This expands our market shares and provide opportunities to realize synergies in our Baltic operations. We are excited to welcome both Elit Polska and Automeister to the MEKO family.

With that, I hand over to Christer to go through the quarter's developments in more detail. So over to you, Christer.

[Christer Johansson, executive]

Thanks, Pehr. So Q2 came with healthy net sales growth and all markets contributed to this total. And we see net sales up 9% for the quarter, with 5% being organic growth and some of the residual growth coming from more work days. And some of you may recall the comments we made about Easter in our last earnings presentation.

Adjusted EBIT margin is improving if you compare Q2 to Q2. It's up by 1.3 percentage points from 6.2% to 7.5%. If you instead compare the first half of '24 to the full year of '23, the improvement is approaching 1 percentage point, which aligns well to the midterm improvement potential I [ had ] communicated in the Q4 earnings call.

Reported EBIT include items affecting comparability, and those items, which totaled SEK 48 million in the quarter, are no surprise. We have in Q2 accounted for [ SEK 14 million ] of transaction costs relating to Elit. And we have also continued our investment into a common business system. That part amounted to SEK 26 million in the quarter, bringing the total investment to date to SEK 76 million.

And here, we have started this project in Poland. We aim to sequentially cover at least 3 of the other big markets, meaning this investment will carry on at about this pace throughout '25 and '26. For a fair comparison, one should also remember that Q2 last year included a SEK 59 million windfall profit from selling real estate in Finland.

Looking at cash flow from operating activities, this amounted to almost SEK 1 billion in the first 6 months. The margin improvement, of course, helps here and the internal focus we put on reducing working capital also helps, but must from this point be balanced against availability for customers. For reference, cash flow for the full year of '23 was SEK 1.25 billion, so a very satisfying step-up here. This cash flow has allowed us to reduce net debt, and I will come back to this later.

Moving on to gross margins. [ Net ] aggregated situation is stable. Effects from pricing, currency and mix are small and offsetting each other. The residual net movement ends up being explained primarily by effects coming from aligning accounting practices in Finland to the group obsolescence model. And just to be clear, this technical effect does not reflect an actual change in [ scrapping ] rates or anything like that.

Next slide. As Pehr mentioned, adjusted EBIT was better than in any previous quarter despite overall economic conditions being mixed. We are in a robust line of business. Furthermore, we also have a well-balanced geographic mix.

That said, we are, of course, not immune to individual market dynamics, and you can see signs of that here. Sweden, Norway on the left, contributed strongly to growth in adjusted EBIT. In the middle of the pack, you find Sorensen [ and ] Balchen which continued to perform very well. And in Poland, and Finland to the right, we did experience tougher conditions and the overall market development was weaker, [ was ] also [ fed ] into a more fierce competition on price. As previously noted, Poland is also seeing wage inflation at an unhelpful rate.

Turning to Page 11 and leverage. I said earlier that operation has generated a healthy cash flow, close to SEK 1 billion in the first 6 months, as illustrated here on the left-hand side, with some support coming from improved working capital efficiency.

As covered on this call, we are certainly investing for the future. We have the next payment of dividends coming up in November. But we are also using this cash flow to reduce net debt and leverage, where we are now passing the midpoint of our 2 to 3 target range.

So with that said, on the totality, I wanted to give a few more detailed comments by market, starting with Denmark. Denmark is our second biggest business area. We saw net sales growing by 8% to almost SEK 1.2 billion in the quarter. It's also a competitive market. And given that we are satisfied with delivering 7.9% adjusted EBIT margin in the quarter, which is, in fact, better than any of the comparison periods shown here.

Reorganization and cost reduction, which was highlighted earlier on this call, came with a SEK 9 million restructuring charge in the second quarter and that was reported as an item affecting comparability.

Pehr also mentioned the new central warehouse. This investment is well underway. We are now working on the final 1/3 of the total [ scope ]. You don't see it as CapEx as it's being built for us by partners, but it does amount to a major upgrade, not only operationally, but also in terms of [ HSE ], for example, through better fire protection to reduce risk and through solar cell roofing, helping us to reach our sustainability targets.

Turning to Finland on Page 13. We did in Q1 state that: one, we were not pleased with the development; and two, the actions we saw [ as required ] would lead to a gradual improvement. So both those statements still stand. We have several actions in progress. There is a gradual improvement. In fact, now we're back in positive adjusted EBIT after 2 quarters in negative territory, but there is much left to do here, and I know that our Finnish management team are addressing these challenges head on.

I did already mention last year's real estate sale, which affects comparability. It's also fair to mention that we perceive current macro conditions in Finland to be less helpful, nevertheless, certainly in our hands to improve from here.

Next page. Similar to Finland, the current macroenvironment at the Baltics and Poland is less supportive than in Scandinavia. Poland is, on the one hand, a large market with solid growth. In our case, we saw 14% total sales growth, of which around half is organic growth. On the other hand, we see pricing in the market being competitive. Inflationary cost and salary increases have not yet been passed on to customers, at least not to the extent that we see as eventually inevitable.

These factors impacted EBIT margins, which were down compared to a year earlier. A key event in Poland was, of course, the acquisition of Elit Polska and Pehr covered the strategic rationale. I would like to add 3 financially oriented comments here.

So first, the only effect on our Q2 results is SEK 14 million in transaction costs. This is the full transaction cost and it was reported in Q2 as an item affecting comparability. Secondly, we are consolidating Elit's results from August 1st, so a 5-month effect on '24 financials. In those 5 months I expect Elit to contribute with approximately [ SEK 0.5 million ] in revenues.

On EBIT level, for the same period I expect a negative contribution of circa SEK 40 million, including restructuring. And this uphill start is as planned. It has been fully considered in the overall terms and conditions of the transaction.

The third and final comment on Elit, looking beyond 2024, in 2025, we expect a positive run rate contribution to EBIT. And by 2026, we will be at full synergy realization.

Moving to Page 15. Sweden and Norway continued to perform very well. 9% sales growth and EBIT margins north of 11% is a testament to the strong position we hold in these markets. And obviously, 80% increase in EBIT would not be possible if it were not for the hard work of a lot of colleagues. But if I were to call out 2 areas, it would be the structural changes undertaken in our Norwegian branch network and the cost savings captured in Sweden.

[ One ] can also note that one of our competitors in Norway has struggled a bit in '24. And while we are happy to focus on our business and the things we can affect, one cannot exclude that there would be a degree of temporary tailwind benefiting business areas, Sweden, Norway and Sorensen and Balchen here.

Finally, Sorensen [ and ] Balchen on Page 16. Again, also here, strong growth and very healthy margins, organic growth of 10%, EBIT margin close to 20%. In fact, here, we are closing in on operating at full capacity. In the long run, we take comfort in the new central warehouse coming along. This will eventually serve all our business in Norway. In the shorter term, high capacity utilization means we are also more sensitive to disruptions.

With that, I would like to hand back to Pehr.

[Pehr Oscarson, executive]

Thank you, Christer. [ Yes ], to sum up our second quarter, it's clear that our efforts to improve profitability are paying off. It has been a strong quarter, in fact, the best so far in terms of adjusted EBIT. We are improving profitability. We have a strong cash flow and improving our financial standing. Our adjusted operating profit has improved significantly, and thanks to our initiatives to streamline and optimize especially in Sweden.

We've seen a robust growth in this quarter and our strong cash flow is enabling us to reducing our net debt ratio. We now have a solid financial position that provides us with greater stability and flexibility. At the same time, we are addressing unsatisfactory performance in Finland and taking steps to improve.

I'm also pleased that we have advanced our position in one of Europe's large markets with the acquisition of Elit Polska. This will strengthen us over time.

That's all from me. Thank you, all, for listening, and we will now open up for questions.

[Operator]

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

[Mats Liss, analyst]

Congrats on solid quarter. I guess, it's improper to say -- I had a couple of questions. First, I mean, Sweden is sort of surprising positively [ here ]. And you mentioned the measures starting to pay off. But could you be more specific regarding the sort of internal [ the ] measures? And well, maybe also somewhat how you see markets going forward? I mean, it's pretty late in the third quarter now.

[Pehr Oscarson, executive]

Yes. We start with Sweden, I mean, the activities or the measures which we have done has been so far mostly on cost savings and there will probably be more to come. But we are also looking into, let's say, more organizational possibilities and analysis and to see if we can find more synergies, [indiscernible] more efficiency. But it's mostly cost cuts, I would say, which we see in Sweden. In the other markets, it's a combination of merger of branches and optimizing of logistics and so on.

[Mats Liss, analyst]

And regarding -- I mean, we are pretty late in the third quarter now and do you have any sort of -- I mean, it seems that things are moving along quite well. But is this the general view so far in the third quarter?

[Pehr Oscarson, executive]

Yes, we don't guide ahead of that, but we have -- everything that we control, [ there ] we, of course, have the ambition to continue and the concept of Building a Stronger MEKO is still not finished. So there is a lot of activity still to come to improve our profitability. There is for example, coming, next year's 3 warehouses that will be automated, so that will be [ effect ] [ which ] comes next year. So there is still a lot of work to be done.

[Mats Liss, analyst]

I mean, yes, that's quite substantial changes you implemented, but is it sort of scalable? I mean, is it the similar measures that you already have implemented in Sweden, so we shouldn't be too worried about these changes?

[Pehr Oscarson, executive]

No, you shouldn't be worried about it, because we have good control. And there is very good business cases and the projects, as Christer mentioned, in Denmark, for example, the warehouse project and the new head office. So that's quite a big project, but that's already in the third phase. And we will get the [ keys ] already somewhere in February and March. So we are very, let's say, comfortable with those projects.

[Mats Liss, analyst]

Then, well, in Finland and Poland belt, things are not sort of, well, strong in Sweden, Norway. But do you see the same upside potential there in Sweden? Or is it more of a special situation here with a different structure and so on? So we should be -- expect that kind of improvement?

[Pehr Oscarson, executive]

I expect -- let's say, we have the ambition to have the same increase in profitability here. But to be very honest, we've not reached the number which we have in Sweden. But we can definitely make the same move in terms of percentage points.

[Christer Johansson, executive]

And maybe I can add there, Mats. So in Poland, specifically, then, of course, the upcoming, call it 2 years, 18 months, will, of course, also be characterized by integrating Elit [ into ] [ team ].

[Operator]

[Operator Instructions] The next question comes from Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Andreas here with SEB. Maybe for you Christer, how should we think about working capital going forward? That's my first question.

[Christer Johansson, executive]

Andreas, yes, as I mentioned, we're --actually, there's some bit of background noise so if you could unmute. So as I said, we are happy with the reduction in net working capital up to this point, although I don't see it as a sort of a path that we could continue on forever and ever with no negative consequences. At some point, availability to customers will be a countering force. So for the second half of the year, I don't expect a continued improvement in the working capital situation.

[Andreas Lundberg, analyst]

But could it be where you are or should we think that you need to increase it in line with top line over the coming years?

[Christer Johansson, executive]

I would say from here, I would expect it to grow with sales, getting that relationship at or [ above ] this level. Of course, there could always be a little bit of seasonality here as well, but yes.

[Andreas Lundberg, analyst]

And on cash flow, in general, I mean you -- now you have a financial gearing in line with your target. And I think you could generate maybe up to SEK 1 billion in free cash flow annually or maybe substantially higher than that. So the question is how will you spend the free cash flow going forward?

[Christer Johansson, executive]

Yes. I think I have said it before that we would like to first to be in the down area of the range, closer to the SEK 2 billion than to the SEK 3 billion. So that will be the first step. And then we'll see. But there is of course investments that we could do. There is possible acquisitions. But it could also be extra dividend or share buyback or more. But that's still nothing which -- the first plan is to get closer to the SEK 2 billion, and then we'll leave with that problem at that moment.

[Pehr Oscarson, executive]

And maybe I can just add here. So as we've covered before, of course, our dividend policy is to pay out roughly half, which I think is a balanced position. And there are also investments that we are progressing, for example, on the IT systems side.

[Andreas Lundberg, analyst]

And did you say that on the acquisition side, that's -- most interesting is to step up in some of your, let's call them weaker markets or where you have a weaker market position, [ like ] now in Poland, for instance?

[Pehr Oscarson, executive]

And we don't -- I mean, we want to be prepared if possibilities pops up. And there is nothing on the table at the moment. But as you said, Poland is still a market where we could grow even more, and maybe the Baltics, even in [ the ] small countries. The rest of the markets we [ are ] -- we have had such a high market share that it will be difficult due to antitrust.

But then you can [ also ] think about acquisitions, it's more sideways, of course. So there's -- we have a, let's say, constant look on that. But the focus now is profitability and it's also to reduce that a little bit more to the -- closer to the 2 in leverage.

[Andreas Lundberg, analyst]

And last, on the market in -- especially in Sweden, perhaps, what's driving the market at the moment, would you say? And how do you view potential interest rate cuts and implications from new core markets, et cetera?

[Pehr Oscarson, executive]

I don't see any direct impact [ when ] -- we have had low new car sales for a while now. And if interests go down, maybe that will pop up. But that has a very limited impact and a very long-term, because it's still -- we service the full car park, which is about 5 million cars. So it doesn't move that much. So I expect the market to be very stable in Scandinavia. And then we have a [ bit ] other situations in Poland and Finland.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Pehr Oscarson, executive]

Yes. Thank you. And it's very nice to present a very strong quarter, best ever. Thank you all for listening, and have a very good day.