Meko AB

STO:MEKO

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Meko Q3 2024 report. [Operator Instructions] Now I will hand the conference over to the speakers, President and CEO, Pehr Oscarson; and CFO, Christer Johansson. Please go ahead.

[Pehr Oscarson, executive]

Thank you. Good morning, everyone, and welcome to Meko's third quarter results presentation. I'm here with our CFO, Christer Johansson, and together, we'll talk you through our performance and current position. We often say that our business model is resilient. There is this always stable demand for cars that function properly. Compared to other industries, we're largely buffered from economic fluctuations even though we still feel their impact.

Our experience so far shows that our business hasn't been fundamentally affected by technology shifts if we adapt to the changes. As we all know, the electric vehicle transformation has slowed, but it won't stop. We've been in Norway for a long time, the country where the transformation is the most advanced. We're still in the early stage of this shift, and electric vehicles continue to evolve.

However, our experience in Norway suggests that the total repair cost over electric cars' lifetime seems to be quite comparable to those for gasoline and diesel cars. We are putting a significant effort into staying at the forefront of this transformation, adapting our offerings. In other words, Meko's role shall remain the same. We aim to be the most complete partner for everyone who drives, maintains or repairs vehicles in Northern Europe. We are committed to doing this at the same time as we continue our efforts to become a stronger and more profitable company. Looking at Q3, I see that we are on track to achieve what we are set out to do.

Let's move to Slide 2. We're seeing a mixed market conditions. Sweden and Norway are showing strength, while Denmark is somewhat softer. In Finland, demand is weaker, and in Poland, the competition remains intense. This quarter, we integrated Elit Polska into Meko. In total, we reached a growth of 7%, with a 2% organic growth. I'm especially pleased with the strong progress in Sweden, Norway business area. Price increases helped drive up the gross margin this quarter, and we are improving efficiency.

In short, we are continuing to strengthen our underlying profitability according to plan. We raised our adjusted EBIT margin compared to the same quarter last year, and our EBIT also improved. The large increase in EBIT is mainly due to accounting effects related to the Elit Polska acquisition. Christer will go into details on this in a few minutes.

It's also encouraging that we are maintaining a solid financial position, where our leverage level is right in our target range. This puts us in a good position as we enter the fourth quarter, which usually by season is a little bit softer. We've kept -- we certainly kept up a high pace this year and expect an intense year ahead. We are preparing for the launch of several new warehouses in 2025, an important part of our initiative, building a stronger Meko.

Let's have a closer look on Slide 3. During this year, we've been preparing for the launch of the new central warehouses in Norway, Denmark and Poland by 2025. We have also been working on the renovation of our central warehouse in Finland. In total, these are major projects in 4 of our 8 markets, and they are progressing according to plan. To highlight one example, the project in Denmark is now more than 80% complete.

This high-tech facility will combine central and regional warehouses, administration and a training academy located in the heart of Denmark. This center, like the others, will provide us with more efficiency -- efficient inventory management and improved service for our customers. So 2025 will be an intense and challenging year, but it will also mark a significant leap forward for us.

Now let's move on to Slide 4 and a positive announcement we made this morning. I'm very pleased that we are now seeing recognition for our sustainability work. For the first time, we have been awarded the highest ESG rating, AAA by Morgan Stanley Capital International. Only 11% on comparable companies worldwide achieved this level. This upgrade is driven in part by our dedicated effort in employee relations and in corporate governance, which is considered to be well aligned with investor interests.

We work broadly with sustainability and have raised our ambitions in recent years. There's still much to be done, but this recognition inspire us to keep moving in the right direction. Before we go into details on our financials, I'd like to briefly highlight an important part of our development efforts.

So let's take a look at Slide 5. And as I mentioned earlier, we always stay focused on adapting to technology changes and evolving consumer behavior. Stay ahead, we conduct the mobility barometer every year. the most comprehensive study in Nordics tracking mobility habits. The latest addition was released in the third quarter and relieved many interesting results. And let me highlight just 2 of them.

First, the car remains the clear #1 mode of transportation for all groups in society. Despite tough economic times, car users has remained at the same level in 2023, nearly 8 out of 10 people use their car at least once a week. Second, a clear majority believe that the car will continue to play a major role in the future. 62% hold this view which is the highest number since we started the survey 3 years ago.

So now let's take a closer look at the key events from third quarter, the integration of Elit Polska. So over to you, Christer.

[Christer Johansson, executive]

Thank you, Pehr. So as mentioned already in the Q3 report, we are consolidating Elit from August 1, and this added around 50 branches, 2 warehouses and 480 colleagues to the end of Q3 numbers. And this operation is now run under joint leadership across Inter-Team and Elit. Financially speaking, the acquisition added circa SEK 220 million of revenue in 2 months or roughly SEK 1.2 billion on a full year basis.

However, gross margins are lower in Poland. And hence, this acquisition is dilutive to gross margins for the group. The impact here from was 0.7 percentage points in Q3 or just north of 1 percentage point on a run rate basis.

As communicated all along, purchase price was very low despite significant assets changing hands. And the reason is that the company has been operating with a loss, and there is a restructuring need. That situation, which is a bit unusual, comes with a few accounting effects that I would like to comment upon on the next page.

So essentially, we have 3 separate financial effects directly or indirectly linked to the transaction. To start, the purchase price was far below the fair value of assets that were in Elit. And this comes with negative goodwill, which is unwinding through the P&L in Q3. That item, which amounted to a positive SEK 176 million as part of other operating revenue in the quarter.

Separately, the acquisition changes many aspects of Meko's business in the Poland/Baltics business area. In light of this triggering event, we have conducted an impairment test on the business area as a whole, which resulted in a SEK 101 million write-down of intangibles, mainly goodwill. After this impairment, there is essentially no remaining goodwill relating to the Poland/Baltics business area. Both these acquisition-related items are excluded when we present adjusted EBIT. And so while they increase reported EBIT by a net SEK 75 million, they have no impact on adjusted EBIT.

Finally, I said earlier that the price was below fair value of assets for a reason, and this reason is that there is anticipated costs for restructuring and integration of the 2 entities. These costs, the dashed bar here sit in future periods. So they have not been incurred, nor provisioned for in Q3. We estimate them to be in the range of SEK 70 million to SEK 100 million, and we expect that to be incurred during the rest of 2024 and 2025.

In the context of those costs, I also wish to point out that Elit at the time of acquisition had SEK 123 million of cash. So in practice, you can say that this restructuring is prefinanced. Before we leave the topic of the Elit, let's just recap the strategic rationale.

On Page 8. So the Polish market is large, but our share is small. Hence, this represents a major long-term growth opportunity for Meko. It's also so that Elit's store network in Poland has a good geographic fit. In fact, we were considering to establish warehouses in areas where we can now instead tap into Elit's existing infrastructure, so here, this is faster, it's cheaper and it reduces future investment needs.

By combining the best of these 2 companies, we will become a more relevant participant in the market.

So with that, let's move into overall financials for the group on Page 9. Looking at the underlying financial development, we are fairly satisfied with the development in the third quarter. And to pick out a few things, net sales continue to grow at a healthy rate, 7%. On the one hand, organic growth was slower, 2%. On the other hand, there was a meaningful contribution to top line from acquisitions. As we will come back to on a later page, gross margins improved, and that is easing, of course, also considering that growth in a low-margin market like Poland is pushing in the opposite direction. With help from better gross margins, adjusted EBIT margin also grew from 6.9% to 7.2%.

And if we were to exclude the impact from Elit's ongoing business, adjusted EBIT margin grew from 6.9% to 7.7%. So broadly speaking, a 1 percentage point uplift year-over-year, much in line with the midterm improvement potential we guided on in the Q4 earnings call.

Our financial target, as you may recall, is to grow adjusted EBIT at a rate of 10%, and we are delivering on this both in the quarter and the year-to-date. Looking at cash flow from operating activities, this has been strong in 2024. On top of improving profitability, we have had support from reduced working capital. In Q3 specifically, that was not the case. And we have instead been stocking up a bit ahead of the important winter season.

Lastly, when it comes to reported EBIT, I already described in some detail how events Poland had a positive net effect, but then offset in the form of future integration costs. It makes sense to also mention that our business system rollout continues at a steady pace. And that will continue throughout 2025 and 2026. Furthermore, I should also mention that Q3 2023 contained the SEK 37 million profit from sales of real estate in Denmark.

Looking at gross margins on Page 10. The improvement is clear and stand in contrast to recent years. So this is not currency, and this is not mix effect. This is due to actions that we have taken within pricing and procurement. And on procurement specifically, we can see that our increasing scale matters in global tenders. As already mentioned, were it not for the inclusion of Elit, the improvement would have been 0.7 percentage points higher.

Moving to Page 11, adjusted EBIT. So it's pleasing, of course, to see a total growth of 10%, but there is no denying that this was unevenly spread. Sweden, Norway and Sorensen og Balchen was strong in Q2 and remained strong in Q3. Finland is improving, but from a very low level. Poland is, of course, affected by the ongoing business within Elit, which is running at a loss.

Moving on to Page 12 and our financial position. So this remains strong. Net debt now stands at SEK 2.4 billion compared to SEK 2.9 billion a year ago. We can also see this on net interest expense, which is down 14% compared to a year ago. In this quarter alone, we amortized loans by SEK 300 million. Leverage experienced as net debt to EBITDA is at 2.5, if you leave the positive one-off out, which we believe one should. On a reported basis, leverage comes out even lower.

This stronger position also brings flexibility. To put this into perspective, one can mention that Meko's available cash and unutilized credit facilities totaled SEK 2.4 billion at the end of the quarter. Adjusting for dividends, which we will pay in 2 weeks time, it's still SEK 2.3 billion.

So with that said on the totality, let's have a brief look at the various markets, starting with Denmark on Page 13. In Denmark, we have directed both attention and money towards developing the organization and getting ready for the upcoming warehouse move. And in the midst of this internal work, our performance was not quite up to last year's. The comparison period benefited from a realistic gain as I mentioned, where we also note that the market has been somewhat slower this fall compared to last year.

And as we've mentioned before, Denmark is a very competitive market, but obviously, price is not the only component of customer offering. By working on all parts, we strive to defend our gross margins, which actually improved in the quarter.

Turning to Finland on Page 14. We note that the macro environment remained weak and this had an effect on sales, which was down 4% on a year earlier. Despite this, our financial performance actually improved, but from low levels. Contributing factors here include extended participation in group supplier agreements. And nevertheless, this is certainly not a level that we are content with so a long way to go. But we note that several initiatives have been set in motion and this goes beyond what has hit the numbers at this point.

Next page. In Poland and the Baltics, the development is somewhat divergent in the Baltics, which is the smaller parts, the development is broadly speaking, okay. We've also conducted a smaller acquisition, AutoMester. Poland, on the other hand, is struggling with tougher market conditions. We've mentioned runaway salary inflation before. Another less-known aspect is a slowdown of exports from Poland into other European markets, which in our industry is not insignificant.

When it comes to the Elit transaction, we've already covered this. I will not repeat it here, but we can note that Poland/Baltics is now actually our second biggest business area, after only Sweden and Norway. Furthermore, one can note that Elit is dilutive to margins also in the business area. Without Elit, the business area would have seen adjusted EBIT margins of 3% compared to 3.7% in the previous year.

Moving to Page 16. Sweden and Norway performed very well as I mentioned. 5% sales growth is good. But perhaps the real achievement here is the higher margin. 13.2% is strong, it's in fact, stronger than we've seen in years. And there are no large exceptional items involved as such, and this comes down to pricing and efficiency. At the same time, I don't view this margin level as the new normal.

Finally then, Sorensen og Balchen on Page 17. This is our smallest business area, but only if we measure our revenue because, in fact, due to the attractive margins, it's a very meaningful contribution to adjusted EBIT. This business area is also growing, and that has been one of the factors behind our decision to build a new combined central warehouse in Norway. And for Sorensen og Balchen, the upcoming move will take place in 2026.

So with that, I hand back to Pehr.

[Pehr Oscarson, executive]

Thank you, Christer. Well, to sum up, we have just completed a strong quarter. We improved profitability, solidified our financial position and began the integration of Elit Polska, a strategic milestone. Price increases helped drive up our gross margin this quarter, and we are improving efficiency.

In short, we are continuing to strengthen our underlying profitability, which is completely according to plan. It's also encouraging that we are maintaining a solid financial position where our leverage level is right in our target range. This puts us in a good position as we enter the fourth quarter, which is typically a bit slower seasonally. But we are indeed maintaining a high tempo with a tense year ahead. We're preparing for the launch of several new warehouses in 2025, an important part of our initiative, building a strong Meko.

So that will be all for me. Thank you for listening, and now we'll open up for questions.

[Operator]

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

[Mats Liss, analyst]

And congrats on a good quarter. A couple of questions there. First, well, starting with cash flow, I guess, it's, well, pretty good number. But the working capital at some of the sort of improvement or cash flow.

Is this an impact of the work you do in upgrading the inventories, I mean, do you need to have double units and it's sort of have an impact. And we should expect that to continue going forward. I mean, you are having 5 projects start -- well, to be implemented next year, if I heard you right.

[Pehr Oscarson, executive]

Well, I would say that the inventory level is more of a seasonal effect that we're building up for the winter season. And -- but you are right that we -- I don't think you should expect that it will go down because we need also to have some buffer when we enter into the warehouse project. So looking forward, this level more likely will be stable, I would guess.

[Mats Liss, analyst]

And regarding this integration process in Poland, I guess there are one-offs there and you mentioned the costs involved. So I guess it's not too much to add there. But going forward then, do you see the Polish market is, well, integrated fully? Or I mean, do you see more acquisitions to be done in that market to strengthen further or fully invested there?

[Pehr Oscarson, executive]

I would say that the Polish market still needs consolidation. And so there will be M&A activities in the market. In what way we will be part of that in the future, we'll see. We will focus now on the integration with Elit Polska. And when that is done, then we will have a new situation and look further. But it will be more consolidation in the Polish market, definitely the next coming 2, 3 years, I would guess.

[Mats Liss, analyst]

Then -- well, you mentioned the pricing increases or -- well, that you have support there in Sweden, Norway, especially. Will this sort of continue going forward? Or are you sort of in balanced position there. Do you see more opportunity to change. I mean it's probably a mix change also. It's not only price increases. Could you give some more color on that.

[Pehr Oscarson, executive]

Yes. But I think that it's -- I mean, we had the last couple of years, a little bit difficult to increase prices enough to cover for inflation, especially for the currency effects in Sweden, Norway. And that has stabilized and it's also kind of balanced out. I don't see that there is much room for price increases. That's more of what's happened in the competition area. We -- in this gross margin improvement, there is also purchasing prices, which is a part of that when we see that we probably can use even more of the size and scale, which we have. So that work will continue.

It will be seen further on how much effect we can have there. But we're working quite intensively with the purchasing part as well.

[Operator]

The next question comes from Andreas Lundberg from SEB.

[Andreas Lundberg, analyst]

Andreas here from SEB. If I start with the 4 planned new warehouses for next year. How do you make sure you can run your business without any meaningful disruptions or interruptions.

[Pehr Oscarson, executive]

Yes. It's complicated. But first of all, it's 4 very separate projects. So they are not connected to each other, which means that there is local project organization and local plans. And then what we're doing is to build up, let's say, plans for if there will be some disturbances in logistics, in one or 2 of the warehouse projects, meaning that we will help from some other area. We will probably be able to use Sweden as [ stainless ] if there will be some disturbances. So we have a couple of plan B and Cs to try to cover as much as possible from that.

[Andreas Lundberg, analyst]

Okay. Got you. And how will these launches be spread during 2025, will it come at the same time or is it different times.

[Pehr Oscarson, executive]

It's quite concentrated. I think they are April, March, May, June, those 4 months, it's one launch each month. If everything -- I mean, these plans is still not yet that kind of hammered in stone. There is still that they can move. But during the spring and beginning of summer, we have most of the activities.

[Christer Johansson, executive]

And of course, they do not happen overnight, as you can imagine. So there is an overlap between the old warehouse and the new one, and it's in the range of 6 months.

[Andreas Lundberg, analyst]

Okay. Got you. And maybe you can talk a little bit about the status of your various efficiency programs.

[Pehr Oscarson, executive]

Yes. But we have talked about, especially we have the big -- let's say, distribution program in Norway, where we -- and now we have a couple of few branches still to be merged, but we start to be in the end of that. So more or less check on that. Then we announced this more a cost-saving program in Sweden of SEK [ 50 ] million. I would say that, that is mostly done even though we always search for more. We did a reorganization in Denmark in the spring.

And we're looking for more efficient performance in Denmark, and not at least connected to the new [ Dara ] project in Denmark when we are on the other side of that. So yes, all in all, it continues with a lot of activities.

[Andreas Lundberg, analyst]

On the Denmark area, I think you said you launched it during the spring or announced it at least. Have you seen any effect so far? Or is that still to come?

[Pehr Oscarson, executive]

We have seen some effects, yes, but that is probably not 100% in the P&L yet.

[Andreas Lundberg, analyst]

Okay. And also lastly, I think maybe you mentioned it, but just to make sure. You said size and scale are the things to drive the gross margins from here?

[Pehr Oscarson, executive]

Yes. And we're doing a little bit, let's say, retake on the product changing strategy where we have seen that there probably will be some opportunities to get even better conditions.

[Christer Johansson, executive]

I think what I can add is if you look at Finland in the quarter, one of the contributing factors was participating in group agreements that was already in place. So it's also so that we have more to do in terms of really realizing the benefit of what's already in place.

[Andreas Lundberg, analyst]

As a final one, actually in Finland, I think you mentioned some extraordinary costs also in the third quarter, but you didn't quantify it. Could you do that.

[Christer Johansson, executive]

So there is nothing that's material enough to kind of warrant item affecting comparability adjustment. What we are doing is that we're kind of cleaning up a little bit on items, which some of them relate back to the operations we had in Mekonomen company years ago.

[Operator]

[Operator Instructions] 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 all for listening, and that will be all for us. So I wish you a very, very nice day. Thank you.

[Christer Johansson, executive]

Thank you.