Meko AB

STO:MEKO

Earnings Call Analysis

Company Sees Strong Growth and Cash Flow

The company reported a quarter of robust growth, especially in Sweden and Norway, with heightened revenue, enhanced EBIT, and substantial cash flow, strengthening the financial position. Currency volatility and inflation affected pricing, with a rebound in purchasing prices, yet there's room for improvement including in pricing power. A company-wide initiative is underway to boost profitability. Significant costs arose from integrating operations in Finland, impacting the quarter's expenses. Continued efforts to optimize working capital are in place, maintaining necessary inventory levels. Operating cash flow remained strong at approximately SEK 600 million, unaffected by divestments, with normal CapEx and debt repayment. An undisclosed investment in a new Norwegian warehouse is expected to further enhance profitability and margins.

Expanding Success Amid Market Challenges

Meko's third quarter of 2023 heralded robust progress with a notable 13% total revenue growth and 9% organic growth. The company enjoyed sustained demand for its offerings and celebrated improvements, particularly in the Swedish and Norwegian markets. This phase of development brought a twofold increase with a 28% rise in EBIT and a commendable 39% surge in earnings per share, primarily amplified by a property sale in Denmark. The company's leverage streamed well within their target range thanks to these outcomes and a substantial cash flow, providing financial agility and stability.

Strengthening Financial Position and Shareholder Value

A stronger cash flow trajectory allowed Meko to decrease its net debt, aligning well within the strategic net debt target range. This financial headroom not only brings security but also enables the company to proceed with the payment of its second dividend installment scheduled for November, highlighting the resilience of its business model and its capacity to generate stable cash flow over time.

Targets Set to Enhance Profitability

Despite showing progress, Meko's gross margin reflected a dip when compared to the previous year, settling at 43.5% for the quarter. The company encountered price adjustment challenges, grappling with inflation and unfavorable currency exchange impacts. To address margin improvements, Meko unveiled an initiative concentrating on three main areas: cost reduction, supplier optimization, and the implementation of a new business system aimed at leveraging cross-group synergies. This initiative is expected to amplifiy EBIT margins by at least 1 percentage point by 2025, translating to an EBIT improvement of approximately 15% overall.

Uneven Growth Dynamics Across Regions

A mixed performance bag was apparent across various markets. While Sweden and Norway exhibited strong development, Denmark, Poland, and the Baltic regions faced challenges, and Finland saw costs associated with integration projects. Recognizing this variance, Meko is poised to deploy further initiatives, including cost optimization and boosting gross margins to ensure uniform growth and performance enhancements across all geographic locations.

Investments in Automation and Efficiency

A strategic investment was announced, marking the commencement of a new fully automated warehouse in Norway, which will streamline logistics and drive down costs, with the facility expected to be fully operational by 2025. This move is anticipated to not only boost efficiency and service levels but is also seen as a vital modernization effort within an essential market for Meko.

Summary: Consistent Performance with Strategic Initiatives for Growth

Meko's narrative for the quarter is one of consistent performance marked by organic growth and improvement across key metrics, including EBIT and cash flow. The company is set to embark on strategic initiatives targeted at bolstering profitability, with a focus on system upgrades and operational efficiency to maintain market leadership and drive sustainable long-term success.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to Meko Q3 Earnings Call. [Operator Instructions] Now I will hand the conference over to CEO, Pehr Oscarson, and Interim CFO, Anders Lindén. Please go ahead.

[Pehr Oscarson, executive]

Thank you. Good morning, and welcome to the presentation of the third quarter for 2023.

Today, I will guide you through the results, but let me also present our interim CFO, Anders Lindén, who I have by my side. Anders have had several leading roles in finance, especially at Atlas Copco for many years and later as CFO for Epiroc listed at Nasdaq Stockholm.

As previously communicated, we are in the process of recruiting a permanent CFO, and Anders will be our interim CFO until this process is finalized. So welcome, Anders.

[Anders Lindén, executive]

Thank you, Pehr.

[Pehr Oscarson, executive]

Now let me start to summarize the highlights of Q3. Let's look at Slide #2. In short, we have a strong growth in the quarter, and we have made significant improvements in the key markets like Sweden and Norway. Overall, we continue to see a solid underlying demand for our products and services, and we increased our revenue, improved EBIT and generated strong cash flow. This also enabled us to continue to strengthen our financial position.

Our leverage is now clearly within our target range. In short, this development is fully in line with our plan. That said, we do see a clear potential to improve our margins. And that's why we will launch a company-wide initiative to improve profitability, which I will talk about more in a few minutes.

So now let's look at the key figures for the quarter. Looking at net sales, we have a strong performance. We grew by 13% in total and 9% organically in the quarter. The EBIT is also improving, up by 28%, supported by the sale of properties in Denmark.

Results is going up. Adjusted EBIT rose 4% compared to Q3 last year. I'm also pleased with a significantly stronger cash flow and the fact that earnings per share is up by 39%.

Let's look at our stronger financial position, and we move over to Slide 4. We continue to reduce our net debt, thanks to strong cash flow from operations and the sale of property in Denmark and we are now well within our net debt target range, which gives us financial headroom and security.

Moreover, we can confidently pay the second installment of our dividend later in November with a record date set for November 23. To summarize, this curve again demonstrates our strong business model and ability to generate cash flow over time.

So now let's move on to the next slide and our gross margin development. As you can see, the gross margin is at 43.5% in the quarter. It's an improvement from Q2, but lower than Q3 last year. And there is various reasons behind this.

We have made significant price adjustments, but they do not fully offset the effect of inflation and the weaker Swedish and Norwegian currencies against euro. We will continue to focus on improving gross margin.

And let's look closer on adjusted EBIT, and now we are on Slide 6. Adjusted EBIT is improving. We are a larger company today than a few years ago and with a presence in more markets reflected in this picture. As you can see, the performance varies between markets, and I'm especially pleased with the strong development in Sweden/Norway and Sørensen og Balchen.

The situation is a bit more challenging in Denmark and Poland and the Baltics. In Finland, we have booked costs for the integration of Mekonomen and Koivunen. This is according to plan and will lead to synergy gains that we have communicated earlier. The item other relates mainly to added resources for increased ambition in sustainability and improvements in IT to improve our governance systems.

So now let's elaborate on our new initiative to improve profitability and move over to Slide 7. This initiative is about improving our adjusted operating margin noticeably and sustainably. We will work within 3 focus areas: cost reduction and efficiency, supplier optimization and implement a new business system that will increase synergies across the group.

To be a bit more specific, this means that we will do more of what we have done successfully in Norway recently, closing branches, optimizing our network. We also aim to create stronger partnerships with preferred suppliers and thereby achieve more attractive purchasing prices.

In addition, we will increase our revenue share from private label of our exclusive brands, as we call it. The new business system will lead to increased efficiency and a wider assortment, and that will also open for further revenue synergies.

These initiatives will also cost along the way, but the long-term net effect is clearly positive. Financially, we estimate that this initiative will improve our EBIT margin with at least 1 percentage point with full effect during 2025. In other words, this means improved EBIT of at least 15%.

In sum, the initiative will strengthen our position as the market leader. And to be clear, this is an initiative on top of all the other EBIT improvement initiatives we are undertaking.

Now let's move on to the business areas and start with Denmark on Slide 9. In Denmark, we are the clear #1 in this market and managed to grow despite a very intense competition. The EBIT improved, thanks to the sale of the property. The adjusted EBIT is stabilized, but is affected by a lower gross margin, as I touched upon earlier. We will intensify our activities to improve performance in Denmark as a part of our new plans for higher profitability.

Then we turn to Finland on Page 10. Operations is progressing in a good pace with a solid organic growth of 7% in the quarter. The margin is affected by temporary costs, mainly related for extraction synergies, and this is fully according to plan, as I have mentioned.

Then we move to Poland and the Baltics on Page 11. Here, we have organic growth of 5% in the quarter, driven mainly by a positive development of export sales and operations in the Baltics. The EBIT margin was impacted by a slower Polish markets and we will address this with more initiatives to increase gross margin.

Turning to Sweden/Norway on Page 12, and we are very pleased to see that Sweden/Norway's strong performance in the quarter. Organic growth was 11% and EBIT margin improved significantly despite currency headwinds. The margin of 10.8% is the highest during a separate quarter for many years.

This is partly effect of our many activities to improve profitability and partly an effect of a strong market. We will now continue in the same pace and in line of our initiative we just mentioned.

Then we can move to Page 13. And Sørensen og Balchen reported strong organic growth of 15%, mainly a result of successful effort to gain market shares within B2B. The EBIT margin is stable around 17%, way up over the industry average. Sørensen og Balchen will continue their activities to gain market shares within B2B to compensate for the weaker retail market in Norway.

And this was a brief overview of the development in our business areas, and now let's have a look on our footprint on Slide 15. And this picture confirms that Meko has a broad geographical presence. This makes us more stable as a company and opens growth opportunities. Our largest markets are, as you can see, Sweden, Norway and Denmark with equal shares of revenue. Looking at market shares, Meko is #1 in several markets, but still with room to grow.

So let's turn to Page 16 and highlight an important investment that we announced this morning. And as you might have seen, we have built a new fully automated warehouse in -- will be the fully automated warehouse in Norway. This means that we will consolidate our logistic activities to 1 common facility in the Oslo region, and it will be fully operational by the end of 2025.

And this is a crucial step for us in the important Norwegian market, and it will mean improved service level, better availability and lower costs. We are now future-proofing our logistics activities in one of our key markets and optimizing operational efficiency, which is a strategic focus area for us.

So let's turn page for summary. In the quarter, we had a robust organic growth, we performed exceptionally well in key markets, we are increasing EBIT, we have a strong cash flow from operations, which improves our financial position and not at least, we will launch a company-wide initiative to improve profitability. And one important step in this process is the new automated warehouse in Norway announced earlier today.

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

[Operator]

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

[Mats Liss, analyst]

Mats Liss, Kepler Cheuvreux. A couple of questions. First, regarding price increases, you're a bit behind there and should we expect that to continue throughout the balance of the year? Or are you sort of -- have you already done measures here for the fourth quarter? Or is it more of a year-end measure?

[Pehr Oscarson, executive]

It's a little bit of a moving target due to currency and then of course, inflation in new products. But we do see stabilization when it comes to purchasing prices in general, which means that we should be more or less back on track from that perspective. Then I'm not the one who predict how the currency will continue to develop. But we're closing the gap, so to say.

[Mats Liss, analyst]

Great. Then if you could sort of spread a bit more color on the strong performance there in Sweden/Norway. I guess it's -- is it more -- well, have you been able to pass forward prices more? Or is it also volumes that are improving?

[Pehr Oscarson, executive]

I think it's volumes, it's market shares. I mean, we do the right things that is appreciated by our customers both areas. And that is, of course, due to hard work in all possible ways. We have a stronger market in Sweden and Norway also. Maybe a little bit -- if we reflect to the same period last year, then Sweden and Norway was a little bit slow.

So I think maybe it was some demand that is coming later, so to say, but it's a very normalized market. We have very low sales of new cars, which means that the car park is getting older. So there's a lot of activities. When it comes to pricing, it's actually Sweden and Norway who are most hurt by the weak currency. So there is also still room for improvement.

[Mats Liss, analyst]

Okay. Great. And then Finland then, you mentioned that you had some -- well, you have a process integrating Mekonomen with Koivunen. And could you say something about the cost that you had during the quarter?

[Pehr Oscarson, executive]

We don't disclose the exact number, but to give you an idea, I mean, we had a warehouse in Mekonomen also that we are merging. So it's cost for extra personnel during that time, it's cost for cleaning up the inventory, it's new shelves, it's transport costs and it's double rent and a lot of different things connected to that transformation. So it is a significant burden this quarter.

[Mats Liss, analyst]

And is it -- well, will it be about the same in the fourth quarter or have -- will sort of peak in the third?

[Pehr Oscarson, executive]

I can't rule out that it might be some more costs coming in the next quarter also, but maybe in the same area.

[Mats Liss, analyst]

Okay. And finally, I guess, the cash flow is strong and your working capital is helping somewhat. But do you expect -- is there more to be done in working capital? Or is it sort of positive development there in the third quarter?

[Pehr Oscarson, executive]

You can also have ambitions, and I think that we do have strong ambitions in improving working capital, that should also be balanced through the very important inventory available to the customers. But if you remember, we had -- during the pandemic, we increased the inventory to compensate for disturbed business in the supply chains whatever.

And then it went down to a little bit more normal level. I don't see any big changes, but we were working in all areas to get better payment terms, optimize inventory and so on. But in general, I would say that it's a level we have now.

[Mats Liss, analyst]

And finally, if I may, just about this company-wide initiative to improve profitability. You mentioned some costs reflected. Then again, it's a good improvement to be seen in 2025. Is it more cost during 2024 than to implement these measures? Could you...

[Pehr Oscarson, executive]

We will be back on that when we actually start to do what we should do. So I need to put some hold on that question.

[Operator]

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

[Andreas Lundberg, analyst]

Just a quick question on the cash flow. You had operating cash flow of around SEK 600 million. Is that a clean number? Or are there any effects from the divestments included there or not?

[Pehr Oscarson, executive]

Anders can answer.

[Anders Lindén, executive]

No, that is not anything included from divestments...

[Andreas Lundberg, analyst]

You have that on the investment side of cash flow statement, right?

[Anders Lindén, executive]

Well, it's actually -- the fact is that if you mean with divestments the real estate in Denmark, which is the big ticket item, that money was derived in Q3.

[Andreas Lundberg, analyst]

Yes. But that was not included in operating cash flow, right?

[Anders Lindén, executive]

No, and it will not be included in the operating cash flow, no. It's in the investment part of the cash flow statement.

[Andreas Lundberg, analyst]

Okay. And what was the underlying investments or CapEx in the quarter?

[Anders Lindén, executive]

Yes. Let me come back on that in a moment.

[Andreas Lundberg, analyst]

Maybe one on the gross margin bridge here. You have 10 bps as a positive impact on price adjustments. Is that the, so to say, the sole price effect that you have taken, so to say? Or is there price effects also included in the other parts of the bridge because it seems very small if you just look at the price effect?

[Pehr Oscarson, executive]

You mean, yes, but that is -- I mean, it looks like almost nothing when you compare it, but it's -- then again, this is -- since it's a consolidated number, when we have price pressure, for example, in Denmark driving the prices down and we might increase with 3%, 4%, 5% in another market. So it's more relevant to look at the price adjustments market-by-market than on a consolidated level.

[Anders Lindén, executive]

To come back on the cash flow, then you were asking about the investment, right?

[Andreas Lundberg, analyst]

Yes.

[Anders Lindén, executive]

I mean it's not was there something in particular. I mean it's just normal, it's nothing major in there.

[Andreas Lundberg, analyst]

No, I think is that -- the cash flow statement includes many things.

[Anders Lindén, executive]

I didn't remember it to be a big number. So I would -- I had to double check. But, no, it's nothing major in there. I mean in the financing part, then obviously, we paid off some loans.

[Operator]

The next question comes from Stefan Stjernholm from Nordea. Please go ahead.

[Stefan Stjernholm, analyst]

Most of my questions have been asked, but I have one. Regarding the new warehouse in Norway, did you say how much the investment will be?

[Pehr Oscarson, executive]

No, we haven't disclosed that number.

[Stefan Stjernholm, analyst]

Maybe you can do that or is it substantial?

[Pehr Oscarson, executive]

No. No, we will not do that because that depends a bit how we will be financed also in the end. So it's long term or maybe not even long term, but it's a very positive business case. And it will improve our profitability and margins.

[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]

All right. Then thank you very much for listening, and goodbye.